Cash and Cash Equivalent

Problem 1

Timex Company reported petty cash fund which comprised the following:
Coins and currency 3,300
Paid vouchers:
Transportation 600
Gasoline 400
Office Supplies 500
Postage stamps 300
Due from employees 1,200 3,000
Manager’s check returned by the bank marked “NSF” 1,000
Check drawn by the entity to the order of petty cash custodian 2,700

What is the correct amount of petty cash fund for statement presentation purposes?
a. 10,000
b. 7,000
c. 6,000.
d. 9,000
Answer: C
Coins and currency 3,300
Check drawn by the entity to the order of petty cash custodian 2,700
Correct amount of petty cash 6,000

Problem 2

At year-end, Myra Company reported cash and cash equivalents which compromised the following:
Cash on hand 500,000
Demand deposit 4,000,000
Certificate of deposit 2,000,000
Postdated customer check 300,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000
What total amount should be reported as “cash” at year end?
a. 7,000,000
b. 4,800,000
c. 6,800,000
d. 5,000,000.
Answer: D
Cash on hand 500,000
Demand deposit 4,000,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000
Total cash 5,000,000

Problem 3

On December 31, 2018, West Company had the following cash balances:
Cash in bank 1,800,000
Petty cash fund (all funds were reimbursed at year-end) 50,000
Time deposit (due February 1, 2019) 250,000
Time deposit in bank closed by BSP 1,000,000

Cash in bank included 600,000 of compensating balance against short term borrowing arrangement on December 31 2018. The
compensating balance is legally restricted as to withdrawal.

On December 31 2018, What total amount should be reported as cash and cash equivalents?
a. 2,500,000
b. 1,250,000
c. 2,100,000
d. 1,500,000.
Answer: D
Cash in bank (1,800,000-600,000 compensating balance) 1,200,000
Petty cash fund (all funds were reimbursed at year-end) 50,000
Time deposit (due February 1, 2019) 250,000

Total cash 1,500,000

Problem 4

Thor Company provided the following data on December 31 2018:

Checkbook Balance 4,000,000

Bank Statement balance 5,000,000
Check drawn on Thor’s account, payable to supplier, dated and recorded
on December 31 2018 but not mailed until January 15, 2019 500,000
Cash in sinking fund 2,000,000

On December 31 2018, what amount should be reported as “cash” under current assets?
a. 4,500,000.
b. 5,500,000
c. 3,500,000
d. 6,500,000
Answer: A
Checkbook Balance 4,000,000
Undelivered check drawn on Thor’s account 500,000

Adjusted cash balance 4,500,000

Problem 5

Pygmalion Company had the following account balance on December 31, 2018:
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank –restricted account for building construction
Expected to be disbursed in 2019 3,000,000
Time deposit purchased December 15, 2016 and due March 15, 2019 2,000,000

The cash on hand includes a P200,000 check payable to Pygmalion, dated January 15, 2019.

What is the cash and cash equivalent balance on December 31, 2018?
a. 6,300,000
b. 8,300,000.
c. 6,500,000
d. 8,700,000
Answer: B

Cash in bank – current account 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand (500,000 - 200,000 postdated customer check) 300,000
Time deposit 2,000,000

Total cash and cash equivalents 8,300,000

Receivables

Problem 1

Jay Company provided the following data relating to accounts receivable for the current year:

Accounts receivable, January 1 650,000

Credit sales 2,700,000
Sales return 75,000
Accounts written of 40,000
Collections from customers 2,150,000
Estimated future sales returns at December 31 50,000
Estimated uncollectible accounts at 12/31 per aging 110,000

What is the amortized cost of accounts receivable on December 31?

a. 1,200,000
b. 1,125,000
c. 1,085,000
d. 925,000.
Answer: D
Accounts receivable, January 1 650,000
Credit sales 2,700,000
Total 3350,000
Less: Collections from customers 2,150,000
Accounts written of 40,000
Sales returns 75,000 2,265,000
Accounts receivable, December 31 1,085,000

Accounts receivable 1,085,000

Less: Allowance for doubtful accounts 110,000
Allowance for sales returns 50,000 160,000
Net Realizable value 925,000

Problem 2

At year-end, Miami Company Reported that the current receivables consisted of the following:

Trade accounts receivable 930,000

Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit in November 30,000
Selling price of unsold goods sent by Miami on consignment at 130% of
cost and not included in Miami’s ending inventory 260,000
Security deposit on lease of warehouse used for storing some inventories 300,000

Total 1,500,000

What total amount should be reported as trade and other receivables under current assets at year-end?\
a. 940,000.
b. 1,200,000
c. 1,240,000
d. 1,500,000
Answer: A

Trade accounts receivable 930,000

Allowance for uncollectible accounts (20,000)
Claim against shipper for goods lost in transit in November 30,000

Total trade and other receivables 940,000

Problem 3

Faith Company provided the following information relating to current operations:

Accounts receivable, January 1 4,000,000

Accounts receivable collected 8,400,000
Cash sales 2,000,000
Inventory, January 1 4,800,000
Inventory, December 31 4,400,000
Purchases 8,000,000
Gross Margin on sales 4,200,000

What is the balance of accounts receivable on December 31?

a. 8,200,000
b. 6,200,000.
c. 2,000,000
d. 4,200,000
Answer: B

Inventory, January 1 4,800,000

Purchases 8,000,000
Goods Available for sale 12,800,000
Inventory, December 31 (4,400,000)
Cost of goods sold 8,400,000
Gross Margin on sales 4,200,000
Gross sales 12,600,000
Cash Sales (2,000,000)
Credit sales 10,600,000
Accounts receivable, January 1 4,000,000
Total 14,600,000
Accounts receivable collected (8,400,000)
Accounts Receivable – December 31 6,200,000

Problem 4

Steven Company provided the following information during the first year operations:

Total Merchandise purchase for the year 7,000,000

Merchandise inventory on December 31 1,400,000
Collections from customers 4,000,000

All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables are collectible.

What is the balance of accounts receivable on December 31?

a. 1,000,000
b. 3,840,000.
c. 5,000,000
d. 5,800,000
Answer: B
Purchases 7,000,000
Inventory - December 31 (1,400,000)
Cost of goods sold 5,600,000
Mark up on cost (40% x 5,600,000) 2,240,000
Sales (140% x 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts Receivable – December 31 3,840,000
Sales ratio (100% + 40%) 140%

Problem 5

Germany Company started a business at the beginning of current year. The entity established an allowance for doubtful accounts
estimated at 5% of credit sales. During the year, the entity wrote of 50,000 of uncollectible accounts.

Further analysis showed that merchandise purchased amounted to 9,000,000 and ending merchandise inventory was 1,500,000. Goods
were sold at 40% above cost.

The total sales comprised 80% sales on account and 20% cash sales, total collections from customers, excluding cash sales, amounted
to 6,000,000.

1. What is the cost of goods sold?

a. 7,500,000.
b. 5,400,000
c. 3,600,000
d. 6,900,000

2. What is the amount of sales on account?

a. 10,500,000
b. 18,750,000
c. 12,000,000
d. 8,400,000.

Answers: 1. A 2. D

Goods available for sale 9,000,000

Ending Inventory (1,500,000)
Cost of Goods sold 7,500,000

Cost of goods sold 7,500,000

Mark up on cost (40% x 7,500,000) 3,000,000
Total sales 10,500,000
Cash sales (20% x 10,500,000) (2,100,000)
Sales on account 8,400,000

Property, Plant and equipment

1. Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600. The
estimated residual value was $400 and the estimated useful life was 4 years. The company uses
straight-line depreciation computed monthly. On July 1, 2012, the company sold the truck for
$1,700 cash.
A. What was the depreciation expense amount per month?
a. $212.50 per month.
b. $224.50 per month
c. $312.50 per month
d. $232.50 per month

Computation: ($10,600 $400) 48 = $212.50 per month

B. What was the amount of accumulated depreciation at July 1, 2012?

a. $2,275
b. $1,275.
c. $1,267
d. $1,375

Computation: 212.50 x 6 months = $1,275

2. Benson Mining Company purchased a site containing a mineral ore deposit in 2008. The
purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable
ore. Benson Mining Company constructed a building at the site, at a cost of $500,000, to be used
while the ore is being extracted. When the ore reserves are gone, the building will have no further
value.

What is the depreciation rate per ton of ore for this deposit.
a. $2.05/ton.
b. $3.05/ton
c. $2.75/ton
d. $3.75/ton

Computation: $820,000/400,000 tons = $2.05/ton

3. Waterloo Corporation purchased factory equipment for a cost of $1,800,000. It cost $100,000
for its delivery, $220,000 for its installation and modifications to the production building, and cost
$60,000 in interest costs on borrowed funds used to acquire the equipment. What is the
acquisition cost of the new equipment?
a. $2,120,000.
b. $2,220,000
c. $2,130,000
d. $2,220,000

Computation: 2,120,000 ($1,800,000 + 100,000 + 220,000). Interest is not capitalized because

the equipment was purchased and not self-constructed.

4. Worthington Chandler Company purchased equipment for $10,000. Sales tax on the
purchase was $500. Other costs incurred were freight charges of $200, repairs of $350 fordamage
during installation, and installation costs of $225. What is the cost of the
equipment?
a. $10,000
b. $10,500
c. $10,925
d. $11,275

c $10,000 + $500 + $200 + $225 = $10,925.

5. Fogelberg Company purchased equipment for $12,000. Sales tax on the purchase was$600.
Other costs incurred were freight charges of $240, repairs of $420 for damage during installation,
and installation costs of $270. What is the cost of the equipment?
a. $12,000.
b. $12,600.
c. $13,110.
d. $13,530.
 c $12,000 + $600 + $240 + $270 = $13,110

c $10,000 + $500 + $200 +

$225 = $10,925.
75. c $12,000 + $600 + $240 +
$270 = $13,110

Intangible Assets
1.Lynne Corporation acquired a patent on May 1, 2010. Lynne paid cash of $30,000 to the seller.
Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to
the patent account?
a. $1,000
b. $29,000
c. $30,000
d. $31,000

1. d $30,000 + $1,000 = $31,000.

2. Contreras Corporation acquired a patent on May 1, 2010. Contreras paid cash of $25,000 to
the seller. Legal fees of $900 were paid related to the acquisition. What amount should be
debited to the patent account?
a. $900
b. $24,100
c. $25,000
d. $25,900
2. d $25,000 + $900 = $25,900.
3. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5
par value common stock and $75,000 cash. When the patent was initially issued to Maxi
Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the patent,
its stock was selling for $9 a share. Mini Corp. should record the patent at what amount?
a. $87,500
b. $93,750
c. $97,500
d. $75,000
3. c (2,500 X $9) + $75,000 = $97,500.
4. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $360,000. The patents were
carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC:
$3,000. When Alonzo acquired the patents their fair market values were: Patent AA:
$20,000; Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo
record Patent BB?
a. $120,000
b. $240,000
c. $2,000
d. $270,000
4. d $360,000 X ($240,000 / $320,000) = $270,000.

5. Jef Corporation purchased a limited-life intangible asset for $120,000 on May 1, 2008. It has
a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2010?
a. $ -0-
b. $24,000
c. $32,000
d. $36,000

5. c ($120,000 ÷ 10) × 2 2/3 = $32,000.

Inventories
1. The following information is available for Manning Company:
Beginning inventory $ 60,000
Cost of goods sold 600,000
Ending inventory 100,000
Sales 750,000
What is the inventory turnover?
a. 6.5
b. 7
c.7.5
d. 8
Computation:

2. At the end of an accounting period, the cost of a company's inventory

is £450,000. This includes damaged items with a cost of £25,000 which are
expected to be sold for only £10,000 (less selling expenses of 5%). All other
items of inventory have a net realisable value which exceeds cost.
The amount at which the company's inventory should be recognised at the end
of the period is:

a. £434,500
b. £435,000
c. £425,000
d. £450,000

Correct Answer: £434,500

The NRV of the damaged items is £9,500, which is £15,500 less than cost.
Therefore inventory should be measured at £434,500 (£450,000 – £15,500).

3. On 31 December 2015, a company has partly-completed inventory with a

cost to date of £26,300. It is expected that further costs of £8,900 will be
incurred in order to complete the inventory. It will then be sold for £47,500.
Selling costs will be £2,000.
The cost and the net realisable value of this inventory at 31 December 2015 are:

a. £35,200 and £45,500

b. £26,300 and £36,600
c. £26,300 and £38,600
d. £35,200 and £47,500

Correct Answer: £26,300 and £36,600

Cost is £26,300
NRV = £47,500 – £8,900 – £2,000 = £36,600
4. A retailer has the following information:

The estimated cost of

inventory to be shown on the retailer's January 31, 2019 balance sheet is

a. 15,000
b. 16,000
c. 20,000
 d. 22,000

Solution:

Under the retail method nearly all the amounts are given and you need to sort them into
the cost column or into the retail column. The Goods Available line is very important, as
it is also the average cost to retail ratio.

5. A company purchased merchandise to be resold at increasing costs during the year 2018. The
purchases were made at the following costs...

The company sold 10

items at the end of each
month.

Assuming the LIFO periodic cost flow assumption, what will be the company's cost of goods
sold for the 120 items sold in 2018?

a. 1460
b. 1280
c. 1340
d. 1420

LIFO periodic first matches to current period sales revenues the most recent costs of the period followed by
the next to most recent, etc. In the year 2018 a total of 120 units were sold, so LIFO periodic requires that
we select the last cost of 2018 first and keep 'peeling away' the costs until we reach a total of 120 units. This
means we will expense to the cost of goods sold: 50 units at $13 + 40 units at $12 + 30 units at $11.
This amounts to $650 + $480 + $330 = $1,460 for the 120 units sold.

[The cost remaining in Inventory will be 10 units at $11 + 20 units at $10 = $110 + $200 = $310. This
amount of $310 plus the $1,460 of cost of goods sold shown above = $1,770 the cost of goods available.]
 Investment
1. Kern Company purchased bonds with a face amount of $600,000 between
interestpayment dates. Kern purchased the bonds at 102, paid brokerage costs of
$9,000, andpaid accrued interest for three months of $15,000. The amount to record as
the cost ofthis long-term debt investment is
a. $636,000.
b. $621,000.
c. $612,000.
d. $600,000.

1. b ($600,000 × 1.02) + $9,000 = $621,000.

2. On October 1, 2012, Renfro Co. purchased to hold to maturity, 2,000, $1,000, 9%

bondsfor $1,980,000 which includes $30,000 accrued interest. The bonds, which mature
onFebruary 1, 2021, pay interest semiannually on February 1 and August 1. Renfro uses
thestraight-line method of amortization. The bonds should be reported in the December
31,2012 balance sheet at a carrying value of
a. $1,950,000.
b. $1,951,500.
c. $1,980,000.
d. $1,980,500.78.

2. b $1,950,000 + ($50,000 × 3/100) = $1,951,500.

3. On November 1, 2012, Howell Company purchased 900 of the $1,000 face value,
9%bonds of Ramsey, Incorporated, for $948,000, which includes accrued interest of
$13,500.The bonds, which mature on January 1, 2017, pay interest semiannually on
March 1 andSeptember 1. Assuming that Howell uses the straight-line method of
amortization and thatthe bonds are appropriately classified as available-for-sale, the net
carrying value of thebonds should be shown on Howell's December 31, 2012, balance
sheet at
a. $900,000.
b. $934,500.
c. $933,120.
d. $948,000.

3. c $948,000 – $13,500 = $934,500$934,500 – ($34,500 × 2/50) = $933,120.

4. On November 1, 2012, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a
facevalue of $500,000, for $450,000. An additional $15,000 was paid for the accrued
interest.Interest is payable semiannually on January 1 and July 1. The bonds mature on
July 1,2019. Horton uses the straight-line method of amortization. Ignoring income taxes,
theamount reported in Horton's 2012 income statement as a result of Horton's available-
for-sale investment in Lopez was

a. $8,750.
b. $8,333.
c. $7,500.
d. $6,666.

4. a ($500,000 × .045) + ($50,000 × 2/80) – $15,000 = $8,750

5 . On October 1, 2012, Menke Co. purchased to hold to maturity, 500, $1,000, 9% bonds
for$520,000. An additional $15,000 was paid for accrued interest. Interest is paidsemiannually on
December 1 and June 1 and the bonds mature on December 1, 2016.Menke uses straight-line
amortization. Ignoring income taxes, the amount reported inMenke's 2012 income statement from
this investment should be
a. $11,250.
b. $10,050.
c. $12,450.
d. $13,650.

5. b ($500,000 × .09 × 3/12) – ($20,000 × 3/50) = $10,050.

Investment property
1.Hook Ltd (Hook) purchases an investment property on 1 July 20X0 for $100
000. At 30 June 20X1, Hook determines the fair value of the investment property
to be $150 000. At 30 June 20X2,
the fair value of the investment property had fallen to $80 000. Hook Ltd’s
accounting policy is
to carry investment properties at fair value.

Which one of the following journal entries is processed by Hook Ltd on 30 June
20X2?

A Dr. Asset revaluation reserve $70 000

Cr. Investment property $70 000

B Dr. Asset revaluation reserve $50

000 Dr. Loss on revaluation (profit or loss) $20
000
Cr. Investment property $70 000

C Dr. Loss on revaluation (profit or loss) $50 000

Cr. Investment property $50 000

D. Dr. Loss on revaluation (profit or loss)$70 000

Cr. Investment property $70 000

Correct answer: D

Option D is correct. Paragraph 35 of IAS 40 Investment Properties

requires a gain or loss arising from a change in the fair value of
investment property to be recognised in profit or loss in the period
in which the gain or loss arises. The loss for the period is the
decrease in the fair value of the property from 30 June 20X1 ($150
000) to 30 June 20X2 ($80 000).

2. Cayenne Ltd (Cayenne) purchases a property on 1 July 20X0 for

$100 000. It sells the property on 1 January 20X3 to Snow Ltd
(Snow) in exchange for 10 000 shares in Snow. On that date,
Snow’s share price is $11 and the fair value of the property is
$108 000.

Which one of the following statements is correct?

A Snow initially recognises the

property at $100 000. B Snow initially
recognises the property at $108 000.
C Snow initially recognises the
property at $110 000. D Snow
recognises a decrease in equity of
$110 000.
Correct answer: B

Option B is correct. IFRS 2 Share-based Payment requires equity-

settled share-based payment transactions to be measured at the
fair value of the goods or services received, where the fair value
can be estimated reliably (see IFRS 2, para. 10).

3. The following information relates to the afairs of Funny Money Ltd.

30 June 20X2 30 June

20X3
$000
Trade receivables $000
150 Debit
Allowance for doubtful debts
120
8 Credit Debit
12
Credit

Year ended 30 June 20X3 $

Sales revenue 500 000
Doubtful debts expense 15 000

Bad debts incurred during the year were written of against the
allowance for doubtful debts. What is the amount of cash
collected from trade receivables during 20X3?

A $481 000
B $485 000
C $515 000
D $519 000
$500 000 + $30 000 – $11 000 = $519 000

4. Note: This question provides information on receivables net of

allowance for doubtful debts. There is a need to use the data to
determine the change in gross receivables and bad debt write-of
for the period.

The following information relates to Cashflow Ltd for the year

ended 30 June 20X6.
$
Sales revenue 450 000
Opening balance of trade receivables (net of allowance) 100 000
Closing balance of trade receivables (net of allowance) 132 500
Doubtful debts expense 5 000
Increase in allowance for doubtful debts 2 000
Bad debts are written of against the allowance for doubtful
debts

What is the amount of cash collected from customers during the year ended 30
June 20X6?

A $412 500
B $418 500
C $481 500
D $487 500
Option A is correct as it uses:

$450 000 – $34 500 – $3000 = $412 500

5. Balances of the deferred tax accounts of Taxflow Ltd were as follows.

30 June 20X3 30 June

20X4
$
$
Deferred tax liability 3 200 Credit 2 000 Credit
Deferred tax asset 2 650 Debit 1 900 Debit

Income tax expense for the year ended 30 June 20X4 was
$1750. The current tax payable at 30 June 20X4 is $200 less
than the current tax payable at the preceding year end.

What was the amount of income tax paid during the year ended 30 June 20X4?

A Nil
B $1500
C $2400
D $3900

Correct answer: C

The correct answer is Option C. This is found by reconstructing the

tax payable account. To do this, first the credit (or debit) to tax
payable resulting from the current year tax calculations is found.
This amount, together with the change in the balance of tax payable,
is the tax cash flow.

Any changes in the balances of the deferred tax accounts are the
result of debits or credits to those accounts. Therefore, given that
the tax expense is known, the debit or credit to tax payable can be
found by reconstructing the current year tax journal entry as follows:

$ $
Tax expense
1 750
Deferred tax liability 1 200
Deferred tax asset 750
Tax payable 2 200

The cash outflow is then simply the credit to tax payable plus the decrease in
tax payable as follows:

$
Credit to tax payable 2 200
Plus: Decrease in ta x payable 200
2 400
 Daniela De Paz
BSAIS-2

Current Liabilities

1.On January 1, 2020, Solis Co. issued its 10% bonds in the face amount of
$3,000,000, which mature on January 1, 2030. The bonds were issued for
$3,405,000 to yield 8%, resulting in bond premium of $405,000. Solis uses
the efective-interest method of amortizing bond premium. Interest is payable
annually on December 31. At December 31, 2020, Solis's adjusted
unamortized bond premium should be
a. $405,000.
b. $377,400.
c. $364,500.
d. $304,500.

b $405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400.

2.On July 1, 2019, Noble, Inc. issued 9% bonds in the face amount of $5,000,000,
which mature on July 1, 2025. The bonds were issued for $4,695,000 to yield
10%, resulting in a bond discount of $305,000. Noble uses the efective-
interest method of amortizing bond discount. Interest is payable annually on
June 30. At June 30, 2021, Noble's unamortized bond discount should be
a. $264,050.
b. $255,000.
c. $244,000.
d. $215,000.

a 2019–2020: $4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]

= $4,714,500.
2090–2021: $4,714,500 + ($471,450 – $450,000) = $4,735,950
$5,000,000 – $4,735,950 = $264,050.

3.On January 1, 2020, Huf Co. sold $1,000,000 of its 10% bonds for $885,296 to
yield 12%. Interest is payable semiannually on January 1 and July 1. What
amount should Huf report as interest expense for the six months ended June
30, 2020?
a. $44,266
b. $50,000
c. $53,118
d. $60,000
c $885,296 × .06 = $53,118.
4.On January 1, 2021, Doty Co. redeemed its 15-year bonds of $2,500,000 par value
for 102. They were originally issued on January 1, 2009 at 98 with a maturity
date of
January 1, 2024. The bond issue costs relating to this transaction were
$150,000. Doty amortizes discounts, premiums, and bond issue costs using
the straight-line method. What amount of loss should Doty recognize on the
redemption of these bonds (ignore taxes)?
a. $90,000
 Daniela De Paz
BSAIS-2

b. $60,000
c. $50,000
d. $0

  $200, 000 
 $2, 300, 000   12 
 15  
a ($2,500,000 × 1.02) –  = $90,000.

5. On its December 31, 2020 balance sheet, Emig Corp. reported bonds payable of
$6,000,000 and related unamortized bond issue costs of $320,000. The
bonds had been issued at par. On January 2, 2021, Emig retired $3,000,000 of
the outstanding bonds at par plus a call premium of $70,000. What amount
should Emig report in its 2021 income statement as loss on extinguishment of
debt (ignore taxes)?
a. $0
b. $70,000
c. $160,000
d. $230,000

d ($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000.

Notes Payable and debt structuring

Problem 1
Dean Company had a 2,000,000 note payable due June 30, 2019. On December 31, 2018,
the entity signed an agreement to borrow up to 2,000,000 to refinance the note payable on
a long-term basis.

The financing agreement called for borrowing not to exceed 80% of the value of the
collateral the entity was providing. On December 31, 2018, the value of the collateral was
1,500,000

On December 31,2018, What amount of the note payable should be reported as current
liability
A.2,000,000
B.1,500,000
C.800,000
D.500,000
answer C
Note payable 2,000,000
Refinanced on December 31, 2018-noncurrent
(80% x 1,500,000) 1,200,000
Note payable -not refinanced, current 800,000

Problem 2
Jason Company ofered a contest in which the winner would reveive 1,000,000 payable over
twenty years

On December 31, 2018, Jason Company announced the winner of the contest and signed the
note payable to the winner for 1,000,000 payable in 50,000 installmentS every January 31.
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On December 31, 2018, Jason Company purchase an annuity for 418,250 to provide the
950,000 prize remaining after the first 50,000 installment which was paid on January 31,
2019.

1. What amount should be reported as contest price expense for 2018?

A.500,000
B.418,250
C.468,250
D.0
Answer: C
Contest price (418,250+50,000) 468,250

Problem 3
On December 31, 2018 Largo Company had a 750,00 note oayable due July 31,2019. The
entity planned to refinance the note by ussing long-term bonds.
Because the entity temporarily had ecxess cash, it prepaid 250,000 of the note on January
15, 2019. In February 2019, the entity completed a 1,500,000 bond ofering. On March 31,
2019, the entity issued the 2018 financial statements.

What amount of the note payable should be included in current liability on December 31,
2018?
A.750, 000
B.500, 000
C.250, 000
D.0
Answer: A
The entire amount of 750,000 is reported as current liability because the note payable is due
to be settled within one year regardless of the inssuance of the bonds payable

Problem 4
On july 1, 2018, Justine Company borrowed 1,000,000 on a 10% five year note payable.
On December 31, 2018, the fair value of the note is determined to be 975,000 based on
marlet and interest factors.
The entity has elected the fair value option for reporting the financial liability

1. What amount should be reported as interest expense for 2018?

A.100, 000
B.97, 500
C.50, 000
D.48, 500

2. What is the carrying amount of the note payable on December 31, 2018?
A.1, 000,000
B.975, 000
C.500, 000
D.900, 000

Solution
Question 1 Answer C
Interest expense for 2018 (1,000,000 x 10% x 6/12) 50,000
Question 2 Answer B
Carrying amount equal to fair value 975,000
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5. On January 1, 2018, Jonathan Company borrowed 500,000 8% interest bearing note due in
4 years. The present value of the note on January 1 2018 was 367, 500.

The entity has elected the fair value option for reporting the financial liability. On December
31 2018, the fair value of the note is 408, 150.

1.What is the carrying amount of the note payable on December 31, 2018?

a. 500,000
b. 367,500
c. 408,150
d. 460,000

2. What amount should be reported as interest expense for 2018?

a. 40,000
b. 29,400
c. 32,562
d. 20,000

Solution
Question 1 Answer C
Carrying amount equal to fair value on December 31, 2018 408,150
Question 2 Answer A
Interest expense for 2018 (500,000 x 8%) 40,000

Bonds Payable

Acctg 3600
Session 11
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Bonds Payable
Bonds issued at a
Premium
1. StillGoing Corporation issued 1,000, 4.2% bonds (face value of each bond is
$1,000) at 105.4956 on December 31, 2019. The bonds are due on December 31,
2024, with an interest payment due on December 31st of each year during the 5-
year term. The market rate at the time of the bond issuance was 3%. StillGoing uses
the efective interest method for amortization.
What is the premium balance on December 31 2023?
a. $11,650
b. $22,961
c. $33,943
d. $44,605

2. On January 1, 2018, Mighty Company issued a bond with a face value of

$600,000 and a stated interest rate of 5%. The bond was issued at 97.291. The
bond matures in three years (December 31, 2020) and pays interest every June 30
and December 31, starting June 30, 2018. When the bond was issued, the annual
market rate of interest was 6%.
Mighty uses the efective-interest amortization method.
What is the discount balance on June 30 2018?
a. $16,254
b. $13,742
c. $11,154
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d. $8,489

3. On January 1, 2017, Houston Company issued a $250,000, 5% bond at 103.63.

The bond matures on December 31, 2020 and pays interest every December 31,
beginning December31, 2017. When the bond was issued, the annual market rate
of interest was 4%. Houston uses the efective-interest amortization method.
What should be the premium amortization on December 31 2017?
a. $2,137
b. $2,222
c. $2,311
d. $2,405
Solution:
Face value of bonds = $250,000
Cash received at issue = $250,000 x 1.0363 = $259,075
Premium on bond = $259,075 - $250,000 = $9,075
Interest payment required each December 31 (based on stated rate):
$250,000 x 5% = $12,500

4. On January 1, 2011, Company A issues long-terms bonds which are due on

January 1, 2016. Interest is paid semiannually on January 1 and July 1 each year.
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Face amount of bonds is $500,000 with stated interest rate (coupon rate) of 10%.
At the time of issuance, market interest rate is 12%. What will be the price of
bonds issued by Company A?
a. 36,798
b. 36,788
c. 36,899
d. 36,898

Solution
Market interest rate = 12%
Market interest rate for a semiannual period = 12% / 2 = 6%
r = 0.06 (per semiannual period),
n = 10 (semiannual periods)

Present value of principal

= $500,000 x Present value factor for a single payment (6%, 10 periods)
= $500,000 x 0.5584
= $279,200

Interest payment each semiannual period

= $500,000 x 5%
= $25,000
(Coupon rate for a semiannual period = 10% / 2 = 5%.)

Present value of interest payments

= Interest payment each semiannual period
x Present value factor for an ordinary annuity (6%, 10 periods)
= ($500,000 x 5%) x 7.3601
= $184,002

Price of bonds
= Present value of principal + Present value of interest payments
= $279,200 + $184,002
= $463,202

The bonds will be sold at a $36,798 discount from the face amount.
($500,000 - $463,202 = $36,798)
5. On January 1, 2011, Company A issues long-terms bonds which are due on
January 1, 2016. Interest is paid semiannually on January 1 and July 1 each year.
Face amount of bonds is $500,000 with stated interest rate (coupon rate) of 10%.
At the time of issuance, market interest rate is 8%. What will be the price of
bonds issued by Company A?
a. $40,571
b. $40,572
c. $40,573
d. $40,574

Solution
Market interest rate = 8%
Market interest rate for a semiannual period = 8% / 2 = 4%
r = 0.04 (per semiannual period),
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n = 10 (semiannual periods)

Present value of principal

= $500,000 x Present value factor for a single payment (4%, 10 periods)
= $500,000 x 0.6756
= $337,800

Interest payment each semiannual period

= $500,000 x 5%
= $25,000
(Coupon rate for a semiannual period = 10% / 2 = 5%.)

Present value of interest payments

= Interest payment each semiannual period
x Present value factor for an ordinary annuity (4%, 10 periods)
= ($500,000 x 5%) x 8.1109
= $202,773

Price of bonds
= Present value of principal + Present value of interest payments
= $337,800 + $202,773
= $540,573

The bonds will be sold at a $40,573 premium over the face amount.
($540,573 - $500,000 = $40,573)
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Employees benefit
1. Presented below is pension information related to Woods, Inc. for the year 2013:
Service cost $92,000
Interest on projected benefit obligation 54,000
Interest on vested benefits 24,000
Amortization of prior service cost due to increase in benefits 12,000
Expected return on plan assets 18,000
The amount of pension expense to be reported for 2013 is
a. $128,000.
b. $164,000.
c. $182,000.
d. $140,000.

1. d $92,000 + $54,000 + $12,000 – $18,000 = $140,000.

2. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to
the operation of the plan for the year 2013.
Service cost $ 250,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Projected benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The expected return on plan assets and the settlement rate were both 10%. The
amount of pension expense reported for 2013 is
a. $250,000.
b. $310,000.
c. $330,000.
d. $490,000.

2. c $250,000 + ($2,400,000 × .10) – ($1,600,000 × .10) = $330,000.

3. Presented below is information related to Jensen Inc. pension plan for 2013.
Service cost $1,100,000
Actual return on plan assets 210,000
Interest on projected benefit obligation 390,000
Amortization of net loss 90,000
Amortization of prior service cost due to increase in benefits 165,000
Expected return on plan assets 180,000
What amount should be reported for pension expense in 2013?
a. $1,565,000
b. $1,535,000
c. $1,715,000
d. $1,355,000

3. a $1,100,000 + $390,000 + $90,000 + $165,000 – $180,000 = $1,565,000.

4. Presented below is pension information for Green Company for the year 2013:
Expected return on plan assets $24,000
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Interest on vested benefits 15,000

Service cost 40,000
Interest on projected benefit obligation 21,000
Amortization of prior service cost due to increase in benefits 18,000
The amount of pension expense to be reported for 2013 is
a. $103,000.
b. $79,000.
c. $60,000.
d. $55,000.

4. d $40,000 + $21,000 + $18,000 – $24,000 = $55,000.

5. Rathke, Inc. has a defined-benefit pension plan covering its 50 employees. Rathke
agrees to amend its pension benefits. As a result, the projected benefit obligation
increased by $1,800,000. Rathke determined that all its employees are expected to
receive benefits under the plan over the next 5 years. In addition, 20% are expected
to retire or quit each year. Assuming that Rathke uses the years-of-service method
of amortization for prior service cost, the amount reported as amortization of prior
service cost in year one after the amendment is
a. $360,000.
b. $600,000.
c. $180,000.
d. $480,000.

5. b 50 + 40 + 30 + 20 + 10 = 150. $1,800,000 ÷ 150 = $12,000/service yr.

$12,000 × 50 = $600,000.

Leases
1. On 1 November 2020, a company entered into a finance lease to acquire a
machine and made its first annual payment of £30,000. Three further payments of
£30,000 are due on 1 November 2021, 2022 and 2023.
The fair value of the machine on 1 November 2020 was £110,000 and the interest
rate implicit in the lease is 6% per annum.
Calculate the current liability relating to this lease that should be recognised in
the company's financial statements for the year to 31 October 2021.
A. £54,800
B. £26,712
C. £30,000
D. £84,800

2. On 1 January 2020, a company which prepares financial statements to 31

December each year acquires a machine on a finance lease. The fair value of the
machine on 1 January 2020 is £50,000 and the company is required to make three
lease payments of £19,753 each. These payments fall due on 31 December 2020,
2021 and 2022. The rate of interest implicit in the lease is 9% per annum.
Assuming that the total finance charge is allocated to accounting periods using
the actuarial method, calculate the liability to the lessor at 31 December 2020
and show how this should be split between current and non-current liabilities.
A. Total £34,747, Non-current £14,994, Current £19,753
B. Total £32,970, Non-current £16,485, Current £16,485
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C. Total £34,747, Non-current £16,626, Current £18,121

D. Total £34,747, Non-current £18,121, Current £16,626
Correct Answer: Total £34,747, Non-current £18,121, Current £16,626
The finance charge for 2020 is £4,500 (9 %of £50,000) so the liability at 31
December 2020 is £34,747 (£50,000 +£4,500 – £19,753). The finance charge for
2021 is £3,127 (9 %of £34,747) so the liability at 31 December 2021 is £18,121
(£34,747 +£3,127 – £19,753). Therefore the liability at the end of 2020 can be
split into a non-current liability of £18,121 and a current liability of the remaining
£16,626.

3. On 1 January 2020 , a company which prepares financial statements to 31

December each year acquires a machine on a finance lease. The fair value of the
machine on 1 January 2020 is £50,000 and the company is required to make three
lease payments of £19,753 each. These payments fall due on 31 December 2020,
2021 and 2022. The rate of interest implicit in the lease is 9% per annum.
Calculate the finance charge which should be shown in the company's financial
statements for the year to 31 December 2020 if the total finance charge is
allocated to accounting periods using the level spread method.
A. £9,259
B. £3,086
C. £4,500
D. £19,753

Correct Answer: £3,086

Total lease payments are £59,259 so the total finance charge is £9,259.
Dividing this by 3 gives an annual finance charge of £3,086 (to the nearest £).

4. On 1 January 2019, a company entered into a finance lease to acquire an item

of equipment and made its first annual payment of £50,000. The fair value of the
item on 1 January 2019 was £215,000 and the interest rate implicit in the lease
was 8% per annum.
On 1 July 2019, the company also made a payment of £12,000 for a one-year lease
of a machine, starting on that date. This lease is an operating lease.
Ignoring depreciation, calculate the amount that should be recognised as an
expense in the year to 31 December 2019 in relation to these two leases.
A. £23,200
B. £10,000
C. £29,200
D. £19,200

Correct Answer: £19,200

The finance charge for 2019 is £13,200 (8 % of £165,000). The operating lease
expense is £6,000 (6/12ths of £12,000). Therefore the total expense for the year
is £19,200.

5. On 1 January 2020, a company which prepares financial statements to 31

December each year acquires a machine on a finance lease. The fair value of the
machine on 1 January 2020 is £50,000 and the company is required to make three
lease payments of £19,753 each. These payments fall due on 31 December 2020,
2021 and 2022. The rate of interest implicit in the lease is 9% per annum.
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Calculate the finance charge which should be shown in the company's financial
statements for the year to 31 December 2020 if the total finance charge is
allocated to accounting periods using the actuarial method.
A. £3,086
B. £4,500
C. £9,259
D. £4,629
Correct Answer: £4,500
The liability throughout 2015 is £50,000. Therefore the finance charge for
2020 is £4,500 (9 %of £50,000).

Accounting for income tax

1. Eckert Corporation's partial income statement after its first year of operations is as
follows:
Income before income taxes $3,750,000
Income tax expense
Current $1,035,000
Deferred 90,000 1,125,000
Net income $2,625,000
Eckert uses the straight-line method of depreciation for financial reporting purposes
and accelerated depreciation for tax purposes. The amount charged to depreciation
expense on its books this year was $1,500,000. No other diferences existed between
book income and taxable income except for the amount of depreciation. Assuming a
30% tax rate, what amount was deducted for depreciation on the corporation's tax
return for the current year?
a. $1,200,000
b. $1,425,000
c. $1,500,000
d. $1,800,000

1. d (30% × Temporary Diference) = $90,000;

Temporary Diference = ($90,000 ÷ 30%) = $300,000;
$1,500,000 + $300,000 = $1,800,000.

2. Cross Company reported the following results for the year ended December 31, 2020,
its first year of operations:
2007
Income (per books before income taxes) $ 750,000
Taxable income 1,200,000
The disparity between book income and taxable income is attributable to a
temporary diference which will reverse in 2021. What should Cross record as a net
deferred tax asset or liability for the year ended December 31, 2020, assuming that
the enacted tax rates in efect are 40% in 2020 and 35% in 2021?
a. $180,000 deferred tax liability
b. $157,500 deferred tax asset
c. $180,000 deferred tax asset
d. $157,500 deferred tax liability

2. b ($1,200,000 – $750,000) × 35% = $157,500.

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3. In 2020, Krause Company accrued, for financial statement reporting, estimated

losses on disposal of unused plant facilities of $1,500,000. The facilities were sold in
March 2021 and a $1,500,000 loss was recognized for tax purposes. Also in 2020,
Krause paid $100,000 in premiums for a two-year life insurance policy in which the
company was the beneficiary. Assuming that the enacted tax rate is 30% in both
2020 and 2021, and that Krause paid $780,000 in income taxes in 2020, the amount
reported as net deferred income taxes on Krause's balance sheet at December 31,
2020, should be a
a. $420,000 asset.
b. $360,000 asset.
c. $360,000 liability.
d. $450,000 asset.

3. d ($1,500,000 × 30%) = $450,000.

4.Horner Corporation has a deferred tax asset at December 31, 2021 of $80,000 due to the
recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates
are as follows: 40% for 2018–2020; 35% for 2021; and 30% for 2022 and thereafter.
Assuming that management expects that only 50% of the related benefits will actually be
realized, a valuation account should be established in the amount of:
a. $40,000
b. $16,000
c. $14,000
d. $12,000

4. a $80,000  .50 = $40,000.

5. Watson Corporation prepared the following reconciliation for its first year of
operations:
Pretax financial income for 2021 $1,200,000
Tax exempt interest (100,000)
Originating temporary diference (300,000)
Taxable income $800,000
The temporary diference will reverse evenly over the next two years at an enacted
tax rate of 40%. The enacted tax rate for 2011 is 28%. What amount should be
reported in its 2021 income statement as the current portion of its provision for
income taxes?
a. $224,000
b. $320,000
c. $336,000
d. $480,000

5. a $800,000  .28 = $224,000.

Equity
1. On July 1, 2022, Ellison Company granted Sam Wine, an employee, an option
to buy 600 shares of Ellison Co. stock for $30 per share, the option
exercisable for 5 years from date of grant. Using a fair value option pricing
model, total compensation expense is determined to be $2,700. Wine
exercised his option on October 1, 2022 and sold his 600 shares on December
1, 2022. Quoted market prices of Ellison Co. stock in 2022 were:
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July 1 $30 per share

October 1 $36 per share
December 1 $40 per share
The service period is for three years beginning January 1, 2022. As a result
of the option granted to Wine, using the fair value method, Ellison should
recognize compensation expense on its books in the amount of
a. $2,700.
b. $900.
c. $675.
d. $0.
1.b $2,700 ¸ 3 = $900.

2.On January 1, 2022, Trent Company granted Dick Williams, an employee, an

option to buy 300 shares of Trent Co. stock for $30 per share, the option
exercisable for 5 years from date of grant. Using a fair value option pricing
model, total compensation expense is determined to be $2,700. Williams
exercised his option on September 1, 2022, and sold his 300 shares on
December 1, 2022. Quoted market prices of Trent Co. stock during 2022
were:
January 1 $30 per share
September 1 $36 per share
December 1 $40 per share
The service period is for two years beginning January 1,2022. As a result of
the option granted to Williams, using the fair value method, Trent should
recognize compensation expense for 2022 on its books in the amount of
a. $3,000.
b. $2,700.
c. $1,350.
d. $0.
2. c $2,700 ¸ 2 = 1,350.

3. On December 31, 2022, Gonzalez Company granted some of its executives

options to purchase 120,000 shares of the company’s $10 par common stock
at an option price of $50 per share. The Black-Scholes option pricing model
determines total compensation expense to be $900,000. The options become
exercisable on January 1, 2023, and represent compensation for executives’
services over a three-year period beginning January 1, 2023. At December
31, 2023 none of the executives had exercised their options. What is the
impact on Gonzalez’s net income for the year ended December 31, 2023 as a
result of this transaction under the fair value method?
a. $300,000 increase.
b. $900,000 decrease.
c. $300,000 decrease.
d. $0.

3. c $900,000 ¸ 3 = $300,000 decrease

4. On January 1, 2023 Reese Company granted Jack Buchanan, an employee, an

option to buy 200 shares of Reese Co. stock for $40 per share, the option
exercisable for 5 years from date of grant. Using a fair value option pricing
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model, total compensation expense is determined to be $2,400. Buchanan

exercised his option on September 1, 2023, and sold his 100 shares on
December 1, 2023. Quoted market prices of Reese Co. stock during 2023
were:
January 1 $40 per share
September 1 $48 per share
December 1 $54 per share
The service period is for two years beginning January 1, 2023. As a result of
the option granted to Buchanan, using the fair value method, Reese should
recognize compensation expense for 2023 on its books in the amount of
a. $0.
b. $1,200.
c. $2,400
d. $2,800

4. b $2,400 ¸ 2 = $1,200.

5. On June 30, 2022, Yang Corporation granted compensatory stock options for
30,000 shares of its $24 par value common stock to certain of its key
employees. The market price of the common stock on that date was $31 per
share and the option price was $28. Using a fair value option pricing model,
total compensation expense is determined to be $96,000. The options are
exercisable beginning January 1, 2024, providing those key employees are
still in the employ of the company at the time the options are exercised. The
options expire on June 30, 2025.
On January 4, 2024, when the market price of the stock was $36 per share, all
options for the 30,000 shares were exercised. The service period is for two
years beginning January 1, 2022. Using the fair value method, what should be
the amount of compensation expense recorded by Yang Corporation for these
options on December 31, 2022?
a. $96,000
b. $48,000
c. $22,500
d. $0

65. b $96,000 ¸ 2 = $48,000.