SW 1 vendor's invoice and the goods were received on

January 3, 2017, the accounting staff did not include

1. The principal classifications of liabilities are = Current
the goods in its December 31, 2016 inventory nor was
liabilities and noncurrent liabilities
the purchase recorded in the accounts in 2016.
What amount should Jek Company report as accounts
2. An entity received an advance payment for special
payable in its December 31, 2016 statement of financial
order goods that are to be manufactured and delivered
position? =
within six months. The advance payment is reported in
Balance of accounts payable before adjustment
the statement of financial position as = Current liability
P590,000
Goods in transit purchased FOB destination but
3. It is a marketing scheme whereby an entity grants
recorded as purchase (30,000)
award credits to customers and the entity can redeem
Goods in transit purchased FOB shipping point not yet
the award credits in exchange for free or discounted
recorded 9,000
goods or services. = Customer loyalty program
Adjusted balance of accounts payable P569,000

4. The consideration allocated to the award credits is

8. Unearned rent revenue would normally appear in the
measured at = Fair value of the award credits
statement of financial position as = Current liability

5. Which of the following statements in relation to

9. THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
liabilities is not valid? = Unasserted claims are never
The Jones Company enjoys profitable operations for its
accrued because to do so would require an entity to
past ten years of existence. The company president
implicitly admit liability.
proposed to the Board of Directors an incentive
compensation plan where the general manager would
6. On December 31, 2016, Jupiter Corporation has an
be entitled to a year-end bonus under the following
outstanding liability as follows:
alternative schemes.
12% Mortgage Note Payable, due on October 1, 2016
Alternative 1: 8% bonus based on profit before
P6,000,000
bonus and income tax in excess of P5,000,000.
The mortgage note originated in 2012 when Jupiter
Alternative 2: 5% bonus based on profit after both
acquired a piece of land from Pluto Company on
bonus and income tax.
October 1, 2012 for P10 million by paying P4 million
Alternative 3: 3% bonus based on profit after bonus
cash and the balance is due on October 1, 2016. Jupiter
but before income tax.
Corporation made timely payments of annual interest
Jones Company's profit before bonus and income tax
from 2012 through 2015. In 2016, however, Jupiter was
for the year ended December 31, 2016 is P8,000,000.
experiencing financial difficulty and was unable to pay
Assume an income tax rate of 30%. How much is the
the principal and annual interest on October 1, 2016.
general manager's bonus for 2016 under Alternative 1?
On December 31, 2016, Pluto Company signed an
= B=.08 x (8.0M - 5.0M) P240,000
agreement to provide Jupiter Corporation a grace
period of 15 months from that date, during which
period, Pluto Corporation will not demand immediate
10. Hart Company sells subscriptions to a specialized
payment in order to give Jupiter the chance to rectify
directory that is published semi-annually and shipped
the breach. The 2016 financial statements of Jupiter
to subscribers on April 15 and October 15.
Corporation were issued on March 15, 2017.
Subscriptions received after the March 31 and
What amount classified as current liability in the
September 30 cut-off dates are held for the next
December 31, 2016 statement of financial position? =
publication. Cash from subscribers is received evenly
P0
during the year and is credited to deferred revenue
from subscriptions. Data relating to 2014 are as
7. The accounts payable balance of Jek Company at
follows:
December 31, 2016 was P590,000 before the year-end
Deferred revenue from subscriptions on January 1
adjustments relating to the following information:
1,500,000
A Upon receipt of the invoice on December 28, 2016
Cash receipts from subscribers
for goods costing P30,000, the accounting staff of Jek
7,200,000
Company recorded the purchase in the accounts. It was
What amount should be reported as deferred revenue
determined that the goods were shipped FOB
from subscription on December 31, 2014? =
destination on December 27, 2016 and were received
Monthly subscriptions (7,200,000 / 12) 600,000
by Jek Company on January 2, 2017.
The subscriptions after the September 30 cut-off are:
B Goods with an invoice cost of P25,000 which were
October 600,000
shipped FOB shipping point on December 23, 2016
November 600,000
from a vendor to Jek Company were lost in transit. On
December 600,000
January 4, 2017, Jek Company filed a P25,000 claim
Total unearned subscription revenue - December 31,
against the transportation company.
2014 1,800,000
C Goods costing P9,000 were shipped FOB shipping
point from a vendor to Jek Company. Because the
 The above subscriptions will be served in the next
publication in 2015.
11. The unadjusted trial balance of Hugo Trading at
December 31, 2016, the end its accounting period,
included, among others, the following balances. Hugo
Trading 2016 financial statements were issued on April
1, 2017.
Accounts receivable P92,500
Accounts payable 35,000
Bank notes payable 600,000
Mortgage note payable 1,200,000
Other information;
A The bank notes, issued on August 1, 2015 are due
on July 31, 2017 and pay interest at a rate of 10%
payable at maturity.
B The mortgage note is due on March 1, 2017.
Interest at 9% has been paid up to December 31
(assume 9% is a realistic one). On March 1, 2017, Hugo
issued a new 10-year mortgage note and paid P250,000
in cash on the principal balance and refinanced the
remaining P950,000
C Included in the accounts receivable balance at
December 31, 2016 were two customers' accounts that
had been overpaid and had credit balances totaling
P18,000. The accounts were of two major customers
who were expected to order more merchandise from
Hugo Trading and apply the overpayment to those
future purchases,
D On November 1, 2016, Hugo Trading rented a
portion of its factory to a tenant for P30,000 per year,
payable in advance. The payment for twelve months
ended October 31, 2017 as received as required and
was credited to rent revenue.
How much is the total current liabilities of Hugo Trading
as of December 31, 2016?
= accrued salaries expense only at its June 30 fiscal year-
Bank notes payable P 600,000
Accrued interest on notes payable (600,000 x 10% x
5/12) 25,000
Mortgage note payable 1,200,000
Accounts payable 35,000
Credit balances in customers' accounts 18,000
Unearned rent revenue (30,000 x 10/12) 25,000
Total current liabilities, December 31, 2016
P1,903,000
12. FB Company is preparing its December 31, 2016
statement of financial position. The following items
may be reported as either current or non-current
liability:
On December 15, 2016, FB Company declared a cash
dividend of P2.50 per share to shareholders of record
on December 31. The dividend is payable on January
15, 2017. FB had issued 800,000 ordinary shares, of
which 50,000 shares are held in the treasury. On this
same date, FB declared a 10% bonus issue to
shareholders of record on December 31, 2016. The
dividend will be distributed on January 31, 2017. FB
Company's ordinary share has a par value of P10 and a
market value per share of P28.
At December 31, 2016, bonds payable of P10 million
are outstanding. The bonds were issued on September
30, 2016 and mature in annual installments of P2.5
million starting September 30, 2017. Interest of 12% on
the outstanding balance is payable annually every
anniversary date the bond.
At December 31, 2015, customer advances were P2
million. During 2016 FB Company collected P4 million
of customer advances and advances P2.5 million were
earned.
At December 31, 2016, retained earnings appropriated
for future inventory losses is 1.5 million.
How much of the foregoing should be reported as
current liabilities at December 31, 2016?
=
Cash dividends payable (2.50 x 750,000 shares)
P1,875,000
Current portion of bonds payable 2,500,000
Accrued interest on bonds (10M x 12% x 3/12)
300,000
Customer advances (2.0M + 4.0M - 2.5M) 3,500,000
Current liabilities, December 31, 2016 P8,175,000
13. Estimated liabilities are disclosed in financial
statements by = Appropriately classifying them as
regular liabilities in the statement of financial position
14. Burgundy Company follows the 5-day (Monday-Friday)
work-week. It pays all salaried employees on a biweekly
basis every other Friday. Overtime pay, however is paid
in the next biweekly period. Burgundy Company
end. Data relating to salaries earned in June 2016 were
as follows:
• Last payroll was paid on June 24, 2016 for the two-
week period June 24, 2016
• Overtime pay earned in the two-week period ended
June 24, 2016 was P63,000
• The recurring biweekly salaries total P720,000
• In the remaining work days of June, overtime pay
earned amounted P18,000
How much should Burgundy Company report as
accrued salaries at June 2016? =
Accrued wages for June 27-30 (720,000 x 4/10)
P288,000
Overtime pay for two-week ended June 24 63,000
Overtime pay in the remaining days of June 18,000
Accrued salaries, June 30, 2016 P369,000
15. An entity is a retailer of home appliances and offers a
service contract on each appliance sold. The entity sells
appliances on installment contracts but all service
contracts must be paid in full at the time of sale.
Collections received for service contracts should be
recorded as an increase in a = Deferred revenue
account
 returned within the time limit as being retired by sale
16. Dexter Company requires advance payments with at the deposit amount. Information relating to
special orders for machinery constructed to customer customer deposits follows:
specifications. These advances are refundable. Data for Containers held by customers at December 31, 2015
the year are: from deliveries in
Customer advances, January 1 P5,800,000 2014 P75,000
Advances received with orders 12,000,000 2015 215,000
Advances applied to orders shipped 10,700,000 P290,000
Advances applicable to orders cancelled 2,500,000 Containers delivered in 2016
How much is the liability for customer advances at the 390,000
end of the year? Containers returned in 2016 from deliveries in
= 2014 P45,000
Customer advances, January 1 P 5,800,000 2015 125,000
Advances received with orders 12,000,000 2016 143,000
Advances applied to orders shipped (10,700,000) 313,000
Advances applicable to orders cancelled (2,500,000)
What amount should Jel Company report as a liability for
Customer advances, December 31 P 4,600,000
deposits on returnable containers at December 31, 2016? =

17. Mazda Company reported the following liability
balances on December 31,2014:
10% note payable issued on October 1,2013, maturing
October 1, 2015 2,000,000
12% note payable issued on March 1, 2013, maturing
on March 1, 2015 4,000,000
The 2014 financial statements were issued on March
31,2015. Under the loan agreement for the 10% note
payable, the entity has the discretion to refinance the
obligation for at least twelve months after December
31, 2014. On March 1, 2015, the entire P4,000,000
balance of the 12% note payable was refinanced
through issuance of a long-term obligation payable
lump sum. What amount of the notes payable should
be classified as current on December 31, 2014?
= 4,000,000
The 10% note payable is classified as
noncurrent. PAS 1, paragraph 73, provides that
if an entity has the discretion to refinance or
roll over an obligation for at least twelve
months after the reporting period under an
existing loan facility, the obligation shall be
classified as noncurrent, even if it would
otherwise be due within a shorter period.
The 12% note payable is classified as current.
PAS 1, paragraph 72, provides that an
obligation that matures within one year from
the end of reporting period is classified as
current even if it is refinanced on a long-term
basis after the reporting period and before
issuance of the financial statements.
The 12%note payable is refinanced on March
1,2015 and therefore classified as current.
18. In which section of the statement of financial position
should employment taxes that are due for settlement
in 15 months' time be presented? = Current liabilities
19. Jel Company sells its products in reusable expensive
containers. The customer is charged a deposit for each
container delivered and receives a refund for each
container returned within two years after the year of
delivery. Jel Company accounts for any containers not
Liability for deposits on returnable containers
From 2015 deliveries (215,000 - 125,000) P90,000
From 2016 deliveries (390,000 - 143,000) 247,000
Total P337,000
20. Which obligations are classified as current even if they
are expected to be settled after more than twelve
months from the end of reporting period? = Trade
payables and accruals for employee and other
operating costs
21. An entity sells appliances that include a two-year
warranty. Service calls under the warranty are
performed by an independent mechanic under
contract with the entity. Based on experience, warranty
costs are estimated at a certain amount for each
appliance sold. When should the entity recognize these
warranty costs? = When the appliances are sold
22. After initial recognition, an entity shall measure a
financial liability at = either I nor II
I Amortized cost using the effective interest method
II Fair value through profit or loss
23. Marie Hotel collects 15% in city sales taxes on room
rentals, in addition to a P200; per room, per night,
occupancy tax. Sales taxes for each month are due at
the end of the following month, and occupancy taxes
are due fifteen days after the end of each calendar
quarter. On January 3,2014, the entity paid the
November 2013 sales taxes and the fourth quarter
2013 occupancy taxes. Additional information for the
fourth quarter of 2013 is as follows:
Room rentals Room nights
October 1,000,000 1,100
November 1,100,000 1,200
December 1,500,000 1,800
What amount should be reported respectively as sales
taxes payable and occupancy taxes payable on
December 31,2013?
=
 November room rentals 1,100,000 from contracts are credited to unearned service
December room rentals 1,500,000 contract revenue. This account had a balance of
Total 2,600,000 P720,000 on December 31, 2014 before year-end
Sales taxes payable (15% x 2,600,000) 390,000 adjustment. Service contract costs are charged as
incurred to the service contract expense account,
October 1,100 which had a balance of P180,000 on December 31,
November 1,200 2014. Outstanding service contracts on December 31,
December 1,800 2014 expire as follows:
Fourth quarter room nights 4,100 During 2015 150,000
During 2016 225,000
Occupancy taxes payable (4,100 x 200) 820,000 During 2017 100,000
What amount should be reported as unearned service
24. Mega Department Store sells gift certificates that are contract revenue on December 31, 2014? =
redeemable only when the merchandise is purchased Outstanding contracts on December 31, 2014 that will
from its stores. It is the company's policy to recognize expire during
the amount redeemed as realized. During 2016, Mega 2015 150,000
Department Store sold gift certificates amounting to 2016 225,000
P1,800,000 and redeemed gift certificates worth 2017 100,000
P1,560,000. Gift certificates outstanding at January 1, Unearned service contract revenue 475,000
2016 is P520,000. The company's gross profit rate is
40%.
What is the liability for outstanding gift certificates at 30. The accountant of Jag Company is in the process of
December 31, 2016? = finalizing its financial reports. A review of the
Gift certificates outstanding, January 1 P 520,000 company's selected accounts and relevant data reveal
Gift certificates sold during 2016 1,800,000 the following as of June 30, 2016, the end of its fiscal
Gift certificates redeemed (1,560,000) year.
Gift certificates outstanding, December 31 P 760,000 Mortgage Note Payable 1,500,000 Sales
9,675,000
25. Sonia Company reported gross payroll of P600,000 for Bank Notes Payable 300,000 Withholding
the month of January. The entity paid the payroll net of Tax Payable 120,000
the following deductions: Accounts Payable 270,000 SSS Premiums
Income tax 70,000 Payable 18,250
SSS 10,000 Share Dividends Payable 200,000 Philhealth
Philhealth 5,000 Premiums Payable 8,400
Pagibig 7,000
In addition, the entity recognized its additional Supplemental information:
contributions for the following in relation to January a On August 1, 2016, Jag Company issued a new 3-
payroll: year mortgage note for P2,000,000, with the intention
SSS 15,000 of using the proceeds in payment of the mortgage note
Philhealth 6,000 payable of P1,500,000 that is due on August 20, 2016.
Pagibig 8,000 There was no unpaid interest as of June 30, 2016.
What is the total payroll tax liability? = 121,000 b The bank notes are payable in semi-annual
installments of P50,000 on February 1 and August 1 of
26. Which of the following is a characteristic of a current each year. The interest rate of the note is 12% based on
liability but not a noncurrent liability? = Settlement is the outstanding balance and payable together with the
expected within the normal operating cycle or within principal due. Accrued interest as of June 30, 2016 has
12 months, whichever is longer not yet been taken up in the books.
c Accounts payable included an invoice from a
27. What is the relationship between present value and the supplier in the amount of P65,000. No receiving report
concept of a liability? = Present value is used to has been submitted to the accounting office relating to
measure certain liabilities this purchase. A review of the documents indicated
that the goods were shipped by the supplier under the
terms FOB destination and the goods were received on
28. The initial fair value of a financial liability is defined as July 3, 2016.
the = Amount for which a liability is paid in an orderly d The company has some newly hired casual daily
transaction between market participants at the wage employees who are paid weekly every Friday.
measurement date Average weekly payroll of these employees amounts to
P15,000 and the last wage payment was Friday, June
29. Ryan Company sells major household appliance service 26, 2016. No adjustment was made for accrued wages.
contracts for cash. The service contracts are for a one- e On April 1, 2016, a suit was filed by a dismissed
year, two-year, or three-year period. Cash receipts employee against the company. The company's lawyer
believes it is reasonably possible that the suit will result
in a loss to the company ranging from P500,000 to
P1,000,000.
f The sates account included sales for the month of
June 2016 of P3,640,000, which is inclusive of the 12%
value-added tax (VAT). The company makes monthly
remittance of VAT to the Bureau of Internal Revenue on
the 20th day of the following month.
g The total income tax due for fiscal year ended June
30, 2016 amounted to P586,500. Quarterly remittances
to the BIR during the fiscal year for income taxes
totaled P345,000. The balance due as of June 30, 2016
has not yet been taken up in the books. (Ignore the tax
effect on profit of the adjustments based on the
foregoing data).
How much is the total current liabilities at June 30,
2016? =
Mortgage note payable P1,500,000
Bank notes payable (50,000 x 2) 100,000
Accrued interest on notes payable (300,000 x 12% x
5/12) 15,000
Accounts payable (270,000 - 65,000) 205,000
Accrued wages payable (15,000 x 2/5) 6,000
VAT payable (3,640,000/1.12 = 3,250,000; 3,250,000 x
12%) 390,000
Withholding tax payable 120,000
SSS premiums payable 18,250
Philhealth premiums payable 8,400
Income tax payable (586,500 - 345,000) 241,500
Total current liabilities P2,604,150
SW 2
1. William Company operates a customer loyalty
program. The entity grants loyalty points for goods
purchased. The loyalty points can be used by the
customers in exchange for goods of the entity. The
points have no expiry date. During 2017, the entity
issued 100,000 award credits and expects that 80% of
these award credits shall be redeemed. The total
stand-alone selling price of the award credits granted
is reliably measured at P2,000,000. In 2017, the entity
sold goods to customers for a total consideration of
P8,000,000 based on stand-alone selling price. The
award credits redeemed and the total award credits
expected to be redeemed each year are as follows:
What is the revenue from points for 2017? = 600,000
2. It is a possible asset that arises from past event and
whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more
uncertain future events not wholly within the control
of the entity. = Contingent asset
3. Which of the following statements is incorrect where
some or all of the expenditure required to settle a
provision is expected to be reimbursed by another
party? = The reimbursement shall be "netted" against
the estimated liability for the provision.
4. Which of the following statements is true in relation to
recognition of a provision?
I. No provision is recognized for costs that need to be
incurred to operate in the future.
II. A provision for the decommissioning of an oil
installation or a nuclear plant station shall be
recognized to the extent that an entity is obliged to
rectify damage already caused.
= Both I and II
5. Dubai Company purchased an oil rig for P5,000,000 on
January 1, 2014. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10
years is P1,000,000. The appropriate discount rate for
the entity is 10%. The present value of the dismantling
cost at 10% is P385,000. What expense should be
recorded in the current year as a result of these
events?
=
Depreciation expense (5,000,000 + 385,000) / 10
538,500
Interest expense 385,000 x 10% 38,500
Depreciation expense of P538,500 and interest
expense of P38,500
6. When the occurrence of a contingent asset is probable
and the amount can be reasonably estimated, the
contingent asset should be = Disclosed but not
recognized in the statement of financial position
7. Which is the correct definition of a provision? = A
liability of uncertain timing or amount
8. An entity sells goods that carry two-year warranty. If
minor repairs were be required on all goods sold in
2016, the repair cost would be P100,000. If major
repairs were needed on all goods sold, the cost would
 be P500,000. It is estimated that 80% of the goods
sold in 2016 will have no defects, 15% will have minor
defect and 5% will have major defects.
The provision for repairs required on December 31,
2016 is
= 14. Electro Company gives warranties at the time of sale
Minor repairs (100,000 x 15%) P15,000
Major repairs (500,000 x 5%) 25,000
Provision for repairs P40,000
9. In May 2014, Cherry Company relocated an employee
from the Manila head office to a branch in Zamboanga
City. As of the end of the reporting period on June 30,
2014, the costs were estimated to be P350,000
analyzed as follows:
What amount should be reported as provision for
relocation costs on June 30, 2014?
= An appropriate risk adjustment factor to reflect the
Cost for shipping goods 30,000
Airfare 10,000
Temporary accommodation cost for May and June
80,000
Reimbursement for lease break cost 20,000
Reimbursement for cost of living increases for May &
June (120,000 x 2/12) 20,000
Total provision for relocation costs 160,000
10. An entity did not record an accrual for a present
obligation but disclose the nature of the obligation
and the range of the loss. How likely is the loss? =
Reasonably possible
11. Which of the following is required to be disclosed
regarding risk and uncertainties that exist? = The
potential impact of estimate when it is reasonably
possible that the estimate will change in the future
12. For an event to be an obligating event, it is necessary
that the entity has no realistic alternative but to settle
the obligation created by the event and this is the case
only:
I. Where the settlement of the obligation can be
enforced by law.
II. Where the event creates valid expectation in other
parties that the entity will discharge the obligation as
in the case of a constructive obligation.
= Either I or II
13. On December 17, 2016, an explosion occurred at
Action Fireworks plant in Bulacan causing extensive
property damage to area buildings. Although no claims
had yet been asserted against Action Fireworks by
March 10, 2017, the management and counsel
concluded that it is reasonably possible that Action
Fireworks will be responsible for damages and that
P2,500,000 would be a reasonable estimate of its
liability. Action Fireworks P10 million comprehensive
public liability policy has a P500,000 deductible clause.
In Action Fireworks' December 31, 2016 financial
statements that were issued on March 25, 2017, how
should this item be reported?
= As a footnote disclosure indicating the possible loss
of P500,000 (Reasonably possible requiring note
disclosure; the amount is P500,000 which is the
deductible clause. It is the extent of the insured
participation in the amount of the loss.)
to purchasers of its product. The entity undertakes to
make good by repair or replacement, manufacturing
defects that become apparent within one year from
the date of sale. Sales of P5,000,000 were made
evenly throughout 2017. The expenditures for
warranty repairs and replacements for the products
sold in 2017 are expected to be made 50% in 2017 and
50% in 2018. The 2018 outflows of economic benefits
related to the warranty will take place on December
31, 2018. The entity estimated that 75% of products
sold require no warranty repairs, 15%o of products
sold require minor repairs costing P100,000 and 10%
of products sold require major repairs costing
P400,000. The appropriate discount factor for cash
flows expected to occur on December 31, 2018 is 0.94.
uncertainties in the cash flow estimates is an
increment of 6% to the probability weighted expected
cash flows.
What is the warranty expense to be recognized in
2017? = 514,100
15. A factory owned by an entity was destroyed by fire.
The entity lodged an insurance claim for the value of
the factory building and plant, and an amount equal to
one year's net profit. During the year, there were a
number of meetings with the representatives of the
insurance company. Finally, before year-end, it was
decided that the entity would receive compensation
for 90% of its claim. The entity received a letter that
the settlement check for that amount had been
mailed but it was not received before year-end. How
should the entity treat this in the financial
statements? = Record 90% of the claim as a
receivable as it is virtually certain that the contingent
asset will be received.
16. Helen Company decided on November 1,2013 to
restructure the entity's operations as follows:
• Factory A would be closed down and put on the
market for sale.
• Employees working in Factory A would be
retrenched on November 30,2013, and would be paid
their accumulated entitlements plus six months'
wages.
• Some employees working in Factory A would be
transferred to Factory B, which would continue
operating.
On December 31,2013, the following transactions and
events had occurred:
• The retrenched employees have left and their
accumulated entitlements have been paid. However,
an amount of P1,000,000, representing a portion of
the six months' wages for the retrenched employees,
has still not been paid.
• Costs of P300,000 are expected to be incurred in
transferring the remaining employees to their new
work in Factory B. The transfer is planned for January
15,2014.
 • One employee, Juan Cruz, remains in order to repair costs of P53,000 and P1,176,000 in 2015 and
complete administrative tasks relating to the closure 2016, respectively.
of Factory A and the transfer of employees to Factory What amount should Sam Company report as
B. Juan Cruz is expected to stay until January 31,2014. warranty expense in 2015?
His salary for January will be P50,000 and his =
retrenchment package will be P150,000, all of which Warranty expense in 2015 (7,500 x 5,000 x 12%)
will be paid on the day he leaves. Juan Cruz would P4,500,000
spend 60% of his time administering the closure of
Factory A, 30% on administering the transfer of 22. Iriga Company issued the 2013 financial statements on
employees to Factory B, and the remaining 10% on March 1,2014. The following data are provided by the
general administration. entity for the year ended December 31,2013:
What total amount should be recognized as
restructuring provision on December 31,2013?
=
What amount should be recognized as provision on
Unpaid wages of retrenched employees 1,000,000
December 31, 2013?
Retrenchment package of Juan Cruz 150,000
=
Salary for administering closure of Factory A (60% x
1,200,000
P50.000) 30,000
A provision is a present obligation that is uncertain in
Total restructuring provision 1,180,000
amount or timing. The present obligation must be
The amount of restructuring provision includes only
both probable and measurable.
direct expenditures arising from restructuring and not
The amount owing to another entity is a present
associated with the ongoing activities of the entity. For
obligation but technically it is not a provision because
example, salaries and benefits of employees to be
the amount is certain. Of course, it is an accrued
incurred after operations cease and that are
liability.
associated with the closure of the operations are
The estimated cost of relocating the employee is a
included in the restructuring provision.
future cost because it is to be incurred in January
The payment of P300,000 to be incurred in
2014. Thus, it is not included in December 31,2013
transferring the remaining employees to Factory B is
provision.
not included in the restructuring provision because it
The estimated cost of overhaul is not a provision
relates to continuing staff as part of ongoing activities.
because there is no present obligation. The entity may
The restructuring provision does not include cost of
decide to sell the machine or not to repair it.
retraining or relocating continuing staff, and
marketing or advertising program because these
23. On November 1, 2016, Corn Company was awarded
relate to ongoing activities of the entity.
judgment of P3 million in connection with a lawsuit.
The decision is being appealed by the defendant, and
17. A constructive obligation is an obligation.
it is expected that the appeal process will be
I. That is derived from an entity's action that the entity
completed by the end of 2017. Com Company's
will accept certain responsibilities because of past
attorneys feel that it is highly probable than an award
practice, published policy or current statement.
will be upheld on appeal, but the judgment may be
II. The entity has created a valid expectation in other
reduced by an estimated 40%.
parties that it will discharge those responsibilities. =
In addition to a footnote, what amount should be
Both I and II.
reported as a receivable in Corn Company's statement
of financial position? = P0 (No asset is recognized
18. In relation to provisions, for a present obligation to
unless the inflow of economic benefits is virtually
exist, which one of the following factors must be
certain. The decision is still being appealed by the
present? = The entity must have no realistic
defendant.)
alternative to settling the obligation

24. Electro Company gives warranties at the time of sale

19. When the provision involves a large population of
to purchasers of its product. The entity undertakes to
items, the estimate of the amount = Reflects the
make good by repair or replacement, manufacturing
weighting of all possible outcomes by their
defects that become apparent within one year from
associated probabilities
the date of sale. Sales of P5,000,000 were made
20. Pending litigation would generally be considered =
evenly throughout 2017. The expenditures for
Contingent liability
warranty repairs and replacements for the products
21. Sam Company started business in 2015. It sells
sold in 2017 are expected to be made 50% in 2017 and
printers with a three-year warranty. Sam Company
50% in 2018. The 2018 outflows of economic benefits
estimates its warranty cost as a percentage of peso
related to the warranty will take place on December
sales. Based on past experience, it is estimated that
31, 2018. The entity estimated that 75% of products
2% will be repaired during the first year of warranty,
sold require no warranty repairs, 15%o of products
4% will be repaired during the second year of
sold require minor repairs costing P100,000 and 10%
warranty and 6% will be repaired in the third year.
of products sold require major repairs costing
In 2015 and 2016, the company was able to sell 7,500
P400,000. The appropriate discount factor for cash
units and 8,400 units, respectively at a selling price of
flows expected to occur on December 31, 2018 is 0.94.
P5,000 per unit. The company also incurred actual
An appropriate risk adjustment factor to reflect the
uncertainties in the cash flow estimates is an
 increment of 6% to the probability weighted expected
cash flows.
What is the warranty liability on December 31, 2017?
= 249,100
25. With the end goal of attracting as much customers as
possible in the NCR region, Abeson Appliance
Company engaged in a customer satisfaction program
and marketing strategy for two of their major lines of
products: (1) electrical appliances and (2) household
and office furniture. All branches in the region are
participating in the company's promotions.
In the customer satisfaction program, Abeson
Company provides one-year warranty for replacement
of parts and labor of the electrical appliances sold.
Based on past experience, the estimated warranty
cost is 3% of sales. During 2016, total sales of electrical
appliances was P7,200,000. Replacement parts and
labor for warranty work totaled P184,000 during 2016.
In the company's marketing strategy for the
household and office furniture section, customers are
given a coupon for every P1,000 spent on these items.
Customers may exchange 10 coupons plus P500 for a
"hot and cold" water dispenser. Each water dispenser
cost Abeson Company P1,200 and estimates that 40%
of the coupons given to the customers will be
redeemed. During 2016, sales of household and office
furniture totaled P2,600,000. A total of 100 water
dispensers used in the promo were purchased and
there were 800 coupons redeemed in 2016.
The accrual method is used by Abeson to account for
the warranty and premium costs for financial
reporting purposes. The balances in the accounts
related to warranties and premiums on January 1,
2016 were as follows:
Inventory of "hot and cold" water dispensers - 30
units,
Estimated premium claims outstanding - P17,500, and
Estimated liability for warranty - P80,000.
How much is the estimated premium claims
outstanding at December 31, 2016?
= range means that the future event occurring is very
Estimated premium claims outstanding, January 1
P17,500
Premium expense for 2016 72,800
Premiums redeemed (800/10) x 700 56,000
Estimated premium claims outstanding, December 31
P34,300
26. Snoopy Company is engaged in the manufacture of
chemicals that it exports other countries. On
December 20, 2016, one of its storage tanks in the
plant exploded. Unfortunately, one of its employees
was caught by the accident and suffered severe burns
all over his body. For damages sustained because of
the explosion, the employee sued Snoopy Company
and claimed an amount totaling P3 million for physical
injuries sustained. The lawyer of Snoopy Company
expects that the company will probably lose the
lawsuit and estimates that the company may have to
pay amount of P2.5 million.
On March 10, 2017, upon advice of the lawyer, the
injured employee offered to have an out-of-court
settlement of P2 million. The offer was tendered on
the same date and Snoopy accepted the offer on
March 12, 2017 upon advice of its legal counsel. The
financial statements for the year 2016 were issued on
March 31, 2017.
What amount should be reported by Snoopy Company
as liability from the legal case at December 31, 2016?
=
The out-of-court settlement offer on March 10 and
accepted by Snoopy on March 12. = P2,000,000
27. Des Moines Company introduced during 2015, a new
television model with a two-year warranty against
defects. Des Moines Company estimates the warranty
costs at 2% of peso sales within 12 months following
the sale and at 4% in the second 12 months following
the sale.
Sales and actual warranty expense for the year ended
December 31, 2015 are P3,000,000 and P45,000,
respectively, and for the year ended December 31,
2016 are P5,000,000 and P150,000, respectively.
Des Moines Company should report an estimated
warranty liability in its December 31, 2016 statement
of financial position of
=
Total warranty expense for 2015 and 2016 (3.0M +
5.0M) x 6% P480,000
Actual warranty expenditures (45,000 + 150,000)
195,000
Estimated warranty liability, December 31, 2016
P285,000
28. Where there is a continuous range of possible
outcomes, and each point in that range is as likely as
any other, the range to be used is the = Midpoint
29. Which of the following is a characteristic of the accrual
of warranty but not the sale of warranty? = Warranty
liability
30. The likelihood that the future event will or will not
occur can be expressed by a range of outcome. Which
slight? = Remote
SW 3 The gain is less than 10% of the old liability of
P6,000,000. Accordingly, the gain is not recognized
1. Seal Company is experiencing financial difficulty and is
because the modification is not considered an
negotiating debt restructuring with its creditor to
extinguishment of the old liability.
relieve its financial stress. Seal has a P2,500,000 note
payable to United Bank. The bank accepted an equity
The old liability is simply continued as follows:
interest in Seal Company in the form of 200,000
Note payable - old 6,000,000
ordinary shares quoted at P12 per share. The par
Note payable - new 5,000,000
value is P10 per share. The fair value of the note
Premium on note payable 1,000,000
payable on the date of restructuring is P2,200,000.
However, a new effective rate should be computed.
What amount should be recognized as share premium
By means of interpolation or use of a financial
from the issuance of the shares?
calculator, the new effective rate is 5.58%.
= 400,000
Interest paid. ( 13% x 5,000,000) 650,000
Interest expense ( 5.58% x 6,000,000) 334,800
Fair value of shares 2,400,000
Premium amortization 315,200
Par value of shares (200,000 x 10) 2,000,000
Share premium 400,000
Journal entries on December 31, 2013
The excess of the fair value of the equity instruments
Interest expense 650,000
issued over the par value is accounted for as share
Cash 650,000
premium.
Premium on note payable 315,200
Journal entry to record the equity swap
Interest expense 315,200
Note payable 2,500,000
Share capital 2,000,000
6. Able Company had the following amounts of long-
Share premium 400,000
term debt outstanding on December 31,2013:
Gain on debt extinguishment 100,000
14% term note, due 2014 - P30,000;
11 % term note, due 2016 - P1,070,000;
2. The gain or loss from extinguishment of a financial
8% note, due in 11 equal annual principal payments,
liability by issuing equity instruments shall be
plus, interest beginning December 31, 2014 -
presented in the statement of comprehensive income
P1,100,000;
as = Separate line item in profit or loss
7% guaranteed debentures, due 2015 - P1,000,000.
The annual sinking-fund requirement on the
3. Under a debt restructuring involving substantial
guaranteed debentures is P40,000 per year. What
modification of terms, the future cash flows under the
amount should be reported as current maturities of
new terms should be discounted using = Original
long-term debt on December 31,2013?
effective interest rate
=
Total current maturities (30,000+ 100,000) = 130,000
4. What is the amortized cost of note payable? = The
amount at which the note payable is initially
recognized minus principal repayment, plus or minus
7. When an entity issued a note solely in exchange for
the cumulative effective interest amortization of the
cash, the present value of the note at issuance is equal
difference between the initial carrying amount and
to = Proceeds received
maturity amount.
8. On January 1, 2014, Solemn Company sold land to
Glory Company. There was no established market
5. Due to adverse economic circumstances and poor price for the land. Glory gave Solemn a P2,400,000
management, Tagaytay Highlands Company had noninterest bearing note payable in three equal
negotiated a restructuring of its 9% P6,000,000 note annual installments of P800,000 with the first
payable to Second Bank due on January 1, 2013. There payment due December 31, 2014. The note has no
is no accrued interest on the note. The bank has ready market. The prevailing rate of interest for a note
reduced the principal obligation from P6,000,000 to of this type is 10%. The present value of a P2,400,000
P5,000,000 and extend the maturity to 3 years or on note payable in three equal annual installments of
December 31,2015. However, the new interest rate is P800,000 at a 10% rate of interest is PI,989,600. What
13% payable annually every December 31. The is the carrying amount of the note payable on
present value of 1 at 9% for those periods is .77 and December 31, 2014? = 1,388,560
the present value of an ordinary annuity of 1 at 9% for
three periods is 2.53. What is the gain on Note payable 2,400,000
extinguishment of debt to be recognized for 2013? = 0 Present value 1,989,600
Discount on note payable 410,400
PV of principal (5,000,000 x .77) 3,850,000 Amortization for 2014 (10% x 1,989,600)
PV of annual interest payments (650,000 x 2.53) 198,960
1.644.500 Discount on note payable - 12/31/2014 211,440
Total present value of new liability 5,494,500
Note payable - 1/1/2014 2,400,000
Note payable - old 6,000,000 Annual payment (800,000)
Present value of new liability 5,094,500 Note payable 1,600,000
Gain on extinguishment - not recognized 505,500
 Discount on note payable (211,440)
Carrying amount 1,388,560
9. Due to extreme financial difficulties, Armada Company
had negotiated a restructuring of a 10% P5,000,000
note payable due on December 31, 2014. The unpaid
interest on the note on such date was P500,000. The
creditor agreed to reduce the face value to
P4,000,000, forgive the unpaid interest, reduce the
interest rate to 8% and extend the due date three
years from December 31, 2014. The present value of 1
at 10% for three periods is 0.75 and the present value
of an ordinary annuity of 1 at 10% for three periods is
2.49.
What is the gain on extinguishment for 2014? =
1,703,200
Note payable - old 5,000,000
Accrued interest payable 500,000
Carrying amount of old liability 5,500,000
Total present value of new liability
PV of principal (4,000,000 x .75) 3,000,000
PV of annual interest payments (320,000 x 2.49)
796,800 3,796,800
Gain on extinguishment of debt 1,703,200
Note payable - new 4,000,000
PV of new liability 3,796,800
Discount on note payable 203,200
The entry to record the extinguishment of the old
liability and recognition of the new liability on
December 31, 2014 is
Note payable - old 5,000,000
Accrued interest payable 500,000
Discount on note payable 203,200
Note payable - new 4,000,000
Gain on extinguishment of debt 1,703,200
10. Mann Company reported a 10% note payable of
P3,600,000 on June 30, 2013. The note is dated
October 1, 2012 and payable in three equal annual
payments of P1,200,000 plus interest. The first
interest and principal payment was made on October
1, 2013. On June 30, 2014, what amount should be
reported as accrued interest payable for this note? =
180,000
Note payable, October 1, 2012 3,600,000
Payment on October 1, 2013 (1,200,000)
Balance, October 1, 2013 2,400,000
Accrued interest payable from Oct. 1, 2013 - June 30,
2014
(2,400,000 x 10% x 9/12) 180,000
11. Granada Company had an overdue 8% note payable to
First Bank at P8,000,000 and accrued interest of
P640,000. As a result of a restructuring agreement on
January 1,2013, First Bank agreed to the following
provisions:
• The principal obligation is reduced to P7,000,000.
• The accrued interest of P640,000 is forgiven.
• The date of maturity is extended to December
31,2016.
• Annual interest of 10% is to be paid for 4 years
every December 31.
The present value of 1 at 8% for 4 periods is 0.735 and
the present value of an ordinary annuity of 1 at 8% for
4 periods is 3.31.
What is the gain on extinguishment of debt to be
recognized for 2013? = 1,178,000
PV of principal (7,000,000 x .735) 5,145,000
PV of annual interest payments (700,000 x
3.31) 2,317,000
Total present value of new liability 7,462,000
Note payable - old 8,000,000
Accrued interest payable 640,000
Total old liability 8,640,000
Present value of new liability 7,462,000
Gain on extinguishment of debt 1,178,000
Note payable - new 7,000,000
Present value of new liability 7,462,000
Premium on note payable 462,000
12. Versatile Company, after having experienced financial
difficulties in 2014, negotiated with a major creditor
and arrived at an agreement to restructure a note
payable on December 31, 2014. The creditor was
owed principal of P3,600,000 and interest of P400,000
but agreed to accept equipment worth P700,000 and
note receivable from a Versatile Company's customer
with carrying amount of P2,700,000. The equipment
had an original cost of P900,000 and accumulated
depreciation of P300,000. What amount should be
recognized as gain from extinguishment of debt on
December 31, 2014? = 700,000
Note payable 3,600,000
Accrued interest 400,000
Carrying amount of liability 4,000,000
Assets transferred:
Note receivable 2,700,000
Equipment at carrying amount (900,000 -
300,000) 600,000 3,300,000
Gain from debt extinguishment 700,000
13. Seal Company is experiencing financial difficulty and is
negotiating debt restructuring with its creditor to
relieve its financial stress. Seal has a P2,500,000 note
payable to United Bank. The bank accepted an equity
interest in Seal Company in the form of 200,000
ordinary shares quoted at P12 per share. The par
value is P10 per share. The fair value of the note
payable on the date of restructuring is P2,200,000.
What amount should be recognized as gain from debt
extinguishment as a result of the "equity swap"? =
100,000
Note payable 2,500,000
Fair value of shares (200,000 x
12) 2,400,000
Gain on debt extinguishment 100,000
Under IFRIC 19, when equity instruments are
issued to extinguish all or part of a financial
liability, the equity instruments issued shall be
measured initially at the following in the order
 of priority.
a Fair value of the equity instruments
issued
b Fair value of the liability extinguished
c Carrying amount of the liability
extinguished
The difference between the carrying amount
of the liability and the initial measurement of
the equity instruments issued shall be
recognized in profit or loss.
14. The discount resulting from the determination of the
present value of a note payable should be reported in
the statement of financial position as = Direct
deduction from the face amount of the note.
6% note payable issued October 1, 2013 maturing
October 1, 2015 500,000
8% note payable issued April 1, 2013 maturing April
1,2015 800,000
Total current liabilities 1,300,000
20. If the present value of a note issued in exchange for a
property is less than its face amount, the difference
should be = Amortized as interest expense over the
life of the note

15. An entity issued a note solely in exchange for cash.

Assuming that the items listed below differ in amount
the present value of the note at issuance is equal to =
Proceeds received

16. When a note payable is exchanged for property, the

stated interest rate is presumed to be fair when = The
stated interest rate is equal to the market rate.

17. On January 1, 2014, Pares Company borrowed

P3,600,000 from a major customer evidenced by a
noninterest bearing note due in three years. The
entity agreed to supply the customer's inventory
needs for the loan period at an amount lower than
market price. At the 12% imputed interest rate for this
type of loan, the present value of the note is
P2,550,000 at the date of issuance.
What amount of interest expense should be reported
in the income statement for 2014? =
Interest expense (12% x 2,550,000) 306,000

18. On January 1, 2014, Jonathan Company borrowed

P500,000 8% noninterest-bearing note due in four
years. The present value of the note on the date of
issuance was P367,500. The entity has elected the fair
value option. On December 31, 2014, the fair value of
the note is P408,150. At what amount should the
discount on note payable be presented on December
31, 2014?
=0
If the fair value option is elected for reporting
a financial liability, the accounting rules for reporting
discount or premium no longer apply. Thus, the note
payable should be reported on December 31, 2014 at
the fair value of P408,150 and a net gain of P500,000
minus P408,150 or P91,850 is reported in 2015.

19. Witt Company reported the following liability account

balances on December 31, 2014:
6% note payable issued October 1, 2013 maturing
October 1, 2015 - P500,000.
8% note payable issued April 1, 2013 maturing April
1,2015 - P800,000.
The 2014 financial statements were issued on March
31, 2015. On March 1, 2015, the entire P800,000
balance of 8% note was refinanced by issuance of a
long-term obligation payable lump sum. On December
31, 2014, what amount of the notes payable should be
classified as current? = 1,300,000
SW 4 periods is 0.57 and the present value of an ordinary
annuity of 1 at 12% for 5 periods is 3.60.
1. Clay Company had P600,000 convertible 8% bonds
On December 31, 2014, what amount should be
payable outstanding on June 30, 2014. Each PI,000
recorded as increase in shareholders' equity as a result
bond was convertible into 10 ordinary shares of P50
of the bond issuance? = 620,000
par value. On July 1, 2014, the interest was paid to
bondholders, and the bonds were converted into
Issue price (5,000,000 x 1.09) 5,450,000
ordinary shares which had a fair value of P75 per
PV of bonds payable:
share. The unamortized premium on these bonds was
PV of principal (5,000,000 x .57) 2,850,000
P12,000 at the date of conversion. No equity
PV of interest (550,000 x
component was recognized when the bonds were
3.60) 1,980,000 4,830,000
originally issued. What is the increase in the share
Share warrants outstanding 620,000
capital and share premium, respectively, as a result of
the bond conversion? = 300,000 and 312,000
6. When bonds are retired prior to maturity with
proceeds from a new bond issue, any gain or loss from
Bonds payable 600,000
the early extinguishment of debt should be =
Premium on bonds payable 12,000
Recognized in income from continuing operations.
Carrying amount 612,000
Ordinary shares issued at par value (6,000 x shares x
7. A ten-year term bond was issued at a discount with a
50) 300,000
call provision to retire the bond. When the bond issuer
Share premium 312,000
exercised the call provision on an interest date, the
carrying amount of the bond was less than the call
2. If bonds are issued at a premium, this indicates that =
price. The amount of bond liability removed from the
The nominal rate of interest exceeds the yield rate
accounts should have equaled the = Face amount less
unamortized discount
3. When the cash proceeds from bonds issued with share
warrants exceed the fair value of the bonds without
8. On December 1, 2014, Lancaster Company issued at
the warrants, the excess should be credited to = Share
103, five thousand of 9%, P1,000 face value bonds.
premium - share warrants
Attached to each bond was one share warrant
entitling the holder to purchase 10 ordinary shares of
4. In 2014, Hyatt Company issued for P110 per share,
the entity. On December 1, 2014, the fair value of the
15,000 convertible preference shares of P100 par
bonds without the share warrants was 95, and the fair
value. One preference share may be converted into
value of each share warrant was P50. What amount of
three ordinary shares with P25 par value at the option
the proceeds from the bond issuance should be
of the preference shareholder. On December 31,
accounted for as the initial carrying amount of the
2015, all of the preference shares were converted into
bonds payable? = 4,750,000
ordinary shares. The market value of the ordinary
share at the conversion date was P40. What amount
5,000,000 x .95 = 4,750,000
should be credited to ordinary share capital on
December 31, 2015? = 1,125,000
9. Which of the following statements is true for a bond
maturing on a single date when the effective interest
To record the issuance of preference shares:
method of amortizing bond discount is used? =
Cash (15,000 x 110) 1,650,000
Interest expense increases each six-month period
Preference share capital 1,500,000
Share premium - PS 150,000
10. When bonds are issued with share warrants, a portion
To record the conversion of preference shares into
of the proceeds should be allocated to equity when
ordinary shares:
the bonds are issued with
Preference share capital 1,500,000
I. Detachable share warrants
Share premium - PS 150,000
II. Nondetachable share warrants = Both I and II
Ordinary share capital (45,000 x
25) 1,125,000
11. Bonds that pay no interest unless the issuer is
Share premium - ordinary 525,000
profitable are known as = Income bonds
(15,000 preference shares x 3 = 45,000 ordinary
shares)
12. On January 1, 2014, Rizal Company issued 4-year
bonds with face value of P4,000,000 at P4,395,800.
The 12% stated rate is payable semiannually every
5. On December 31, 2014, Armada Company issued
June 30 and December 31. In addition, the entity paid
P5,000,000 face value, 5-ypar bonds at 109. Each
P137,430 in connection with the issuance of the
P1,000 bond was issued with 10 share warrants, each
bonds. What is the effective rate of interest on the
of which entitled the bondholder to purchase one
bonds on the date of issue? = 10%
share of P100 par value at P120. Immediately after
issuance, the market value of each warrant was P5.
Issue price 4,395,800
The stated interest rate on the bonds is 11% payable
Bond issue cost (137,430)
annually every December 31. However, the prevailing
Net proceeds 4,258,370
market rate of interest for similar bonds without
warrants is 12%. The present value of 1 at 12% for 5
 Using an interest rate of 5%, the relevant PV factors
are:
PV of 1 at 5% for 8 periods .6768
PV of an ordinary annuity of 1 at 5% for 8
periods 6.4632
The market price of the bonds is determined as
follows:
PV of principal (4,000,000 x .6768) 2,707,200
PV of semi-annual interest payment (240,000 -
6.4632) - rounded 1,551,170
Market price of bonds 4,257,370
Since the maturity is 4 years and the interest is
payable semi-annually, there are 8 interest
periods. Since the market price of using 5% for 8
periods is equal to the net proceeds, the effective rate
of interest must be 10% annually for 4 years.
13. How are the proceeds from issuing a compound
financial instrument allocated between the liability
and equity components? = First, the liability
component is measured at fair value, and then the
remainder of the proceeds is allocated to the equity
component.
14. Bond issue costs should be = Recorded as a reduction
in the carrying amount of bonds payable.
15. Costs incurred in connection with the issuance of ten-
year bonds which sold at a slight premium shall be =
Reported as a deduction from bonds payable and
amortized over the ten-year bond term
16. The issuer of a 10-year bond sold at par three years
ago with interest payable February 1 and August 1
should report in the year-end statement financial
position = Liability for accrued interest
17. A bond issued on June 1 of the current year has
interest payment dates of April 1 and October 1. Bond
interest expense for the current year ended December
31 is for a period of = Seven months
18. What is the interest rate written on the face of the
bond? = Coupon rate, nominal rate or stated rate
19. An entity neglected to amortize the premium on
outstanding bonds payable. What is the effect of the
failure to record premium amortization on interest
expense and bond carrying amount, respectively?
<Interest expense><Bond carrying amount> =
Overstated, Overstated
20. Blue Company reported the following financial
liabilities on December 31, 2014:
9% debentures, callable in 2015, due in 2016 -
P3,500,000;
11% collateral trust bonds, convertible into share
capital beginning in 2015, due in 2016 - P3,000,000;
and
10% debentures (P300,000 maturing annually) -
P1,500,000.
What is the total amount of term bonds? = 6,500,000
9% debentures, callable in 2015, due in
2016 3,500,000
11% collateral trust bonds 3,000,000
Total term bonds 6,500,000
21. Moriones Company issued P5,000,000 face value 12%
convertible bonds at 110 on January 1, 2013, maturing
on January 1,2018 and paying interest semiannually
on January 1 and July 1. It is estimated that the bonds
would sell only at 103 without the conversion feature.
Each P 1,000 bond is convertible into 10 ordinary
shares with PI00 par value. What is the increase in
shareholders' equity arising from the issuance of the
convertible bonds on January 1, 2013? = 350,000
The issue of convertible bonds payable is also
accounted for as a compound financial
instrument. Accordingly, PAS 32, paragraph
29, mandates that the original issuance of
convertible bonds payable shall be accounted
for as partly liability and partly equity. The
liability component is equal to the market
value of the bonds without the conversion
privilege. The equity component is the
remainder or residual of the issue price of the
bonds with conversion privilege.
Issue price of bonds with conversion
privilege (5,000,000x110) 5,500,000
Market value of bonds without conversion
privilege (5,000,000x103) 5,150,000
Residual amount allocated to conversion
privilege 350,000
Actually, the journal entry to record the
issuance of the convertible bonds payable is:
Cash 5,500,000
Bonds payable 5,000,000
Premium bonds payable 150,000
Share premium - conversion
privilege 350,000
22. When interest expense is calculated using the
effective interest method, interest expense equals =
Carrying amount of the bonds multiplied by the
effective interest rate.
23. An entity neglected to amortize the discount on
outstanding bonds payable. What is the effect of the
failure to record discount amortization on interest
expense and bond carrying amount, respectively?
Interest expense><Bond carrying amount> =
Understated, Understated
24. How would the amortization of discount on bonds
payable affect each of the following? <Carrying
amount of bond><Net income> = Increase, Decrease
25. At the beginning of the current year, Ria Company
issued 10,000 ordinary shares of P20 par value and
20,000 convertible preference shares of P20 par value
for a total of P800,000. At this date, the ordinary share
was selling for P36, and the convertible preference
share was selling for P27. What amount of the
proceeds should be allocated to the convertible
preference shares? = 480,000
 > Market value Fraction Allocated proceeds
Ordinary shares (10,000 x
36) 360,000 36/90 320,000
Preference shares (20,000 x
27) 540,000 54/90 480,000
> 900,000 800,000

26. An entity issued a bond with a stated rate of interest

that is less than the effective interest rate on the date
of issuance. The bond was issued on one of the
interest payments dates. What should the entity
report on the first interest payment date? = An
interest expense that is greater than the cash
payment made to bondholders.

27. It is any contract that gives rise to both a financial

asset of one entity and a financial liability or equity
instrument of another entity. = Financial instrument

28. Which of the following is true of accrued interest on

bonds that are sold between interest dates? = None of
the above

29. On January 1, 2014, Wolf Company issued 10% bonds

in the face amount of P5,000,000, which mature on
January 1, 2024. The bonds were issued for
P5,675,000 to yield 8%, resulting in bond premium of
P675,000. The entity used the interest method of
amortizing bond premium. Interest is payable annually
on December 31. On December 31, 2014, what is the
balance of the unamortized bond premium? = 629,000

Interest expense (5,676,000 x 8%) 454,000

Interest paid (5,000,000 x 10%) 500,000
Premium amortization 46,000

Premium on bonds payable 675,000

Less: Amortization for 2014 46,000
Balance - December 31, 2014 629,000

30. On January 1, 2013, Carrow Company issued 10%

bonds in the face amount of P1,000,000 that mature
on January 1, 2023. The bonds were issued for
P886,000 to yield 12%, resulting in bond discount of
P114,000. The entity used the interest method of
amortizing bond discount. Interest is payable on
January 1 and July.
For the year ended December 31,2013, what amount
should be reported as bond interest expense?
=
> Interest Interest Discount Carrying
Date paid expense* amortization amount
1-1-2013 886,000
7-1-2013 50,000 53,160 3,160 889,160
1-1-2014 50,000" 53,350 3,350 892,510
> 100,000 106,510 6,510
Interest paid (1,000,000 x 10% x 6/12) 50,000
Interest expense for 2013:
> 886,000 x 12% x 6/12 53,160
> 889,160 x 12% x 6/12 (rounded) 53,350
> 106,510