PRELIM ANSWER KEY

1. Which of the following is not one of the essential characteristics for an item to be reported as a
liability on the balance sheet?
a. it is a present obligation of a particular entity
b. it is payable to specifically identifiable payees
c. it involves a future sacrifice of economic benefits
d. it is reasonably measurable in terms of money

2. A retail store received cash and issued gift certificates that are redeemable in merchandise. The
gift certificates lapse two years after they are issued. How would the balance of deferred revenue
be affected by each of the following transactions?
Redemption of certificates Lapse of certificates
a. Decrease No effect
b. Decrease Decrease
c. No effect No effect
d. No effect Decrease

3. Which of the following instruments would not be classified as a financial liability?

a. A preference share that will be redeemed by the issuer for cash on a future date (i.e., the
entity has an outstanding share that it will repurchase at a future date).
b. A contract for the delivery of as many of the entity’s ordinary shares as are equal in value to
₱100,000 on a future date (i.e., the entity will issue a variable number of own shares in return
for cash at a future date).
c. A written call option that gives the holder the right to purchase a fixed number of the
entity’s ordinary shares in return for a fixed price (i.e., the entity would issue a fixed number
of own shares in return for cash, if the option is exercised by the holder, at a future date).
d. An issued perpetual debt instrument (i.e., a debt instrument for which interest will be paid
for all eternity, but the principal will not be repaid).

4. VENERABLE RESPECTED Co. has the following liabilities as of December 31, 20x1.
a. Trade accounts payable, net of debit balance in supplier’s account of ₱10,000, net of
unreleased checks of ₱8,000, and net of postdated checks of ₱4,000. ₱600,000

b. Credit balance in customers’ accounts 4,000

c. Financial liability designated at FVPL 100,000

d. Bonds payable maturing in 10 equal annual installments of ₱200,000 2,000,000

e. 12%, 5-year note payable issued on Oct. 1, 20x1 200,000

f. Deferred tax liability 10,000

g. Unearned rent 8,000

 h. Contingent liability 20,000

i. Reserve for contingencies 50,000

How much is the total current liabilities?

a. 896,000 b. 918,000 c. 940,000 d. 960,000
C
a. Trade accounts payable gross of debit balance, unreleased check, and postdated check
(600,000 + 10,000 + 8,000 + 4,000).
622,000
b. Advances from customers (Credit balance in customers’ accounts) 4,000
c. Financial liability designated at FVPL 100,000
d. Current portion of bonds payable 200,000
e. Interest payable on note payable 6,000
(200,000 x 12% x 3/12)
g. Unearned rent 8,000
Total current liabilities 940,000

5. PALLID DULL PALE Co. has a 10%, ₱2,000,000 loan payable as of December 31, 20x1 which will
be maturing on July 1, 20x2. Interest on the loan is due every July 1 and December 31 and all the
interests that have accrued in 20x1 were paid on these scheduled dates. On February 1, 20x2,
PALLID Co. entered into a refinancing agreement with a bank to refinance the loan on a long-
term basis. Both parties are financially capable of honoring the agreement's provisions. The
contract on the ₱2,000,000 loan payable does not state any refinancing or roll over option.
PALLID’s 20x1 financial statements were authorized for issue on March 15, 20x2. In PALLID’s
20x1 financial statements, how much is presented as current liability in relation to the loan
payable?
a. 2,100,000 b. 2,000,000 c. 100,000 d. 0

B – the refinancing agreement is disregarded because it does not meet the conditions under PAS 1

6. Eliot Corporation’s liabilities at December 31, 2008 were as follows:

Accounts payable and accrued interest 2,000,000
5-year 10% Notes payable – due December 31, 2011 5,000,000

Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits
and losses annually until the amount of appropriation has equaled the face amount of the obligation.
Non-compliance will render the note as payable on demand by the lender. As of December 31, 2008,
Elliot Corporation has not yet complied with the loan agreement. What amount of current liabilities
should Elliot Corporation report in its December 31, 2008 statement of financial position?
a. 2,000,000 b. 5,000,000 c. 7,000,000 d. 0

C (2M + 5M) = 7,000,000

7. On December 31, 20x1, THESPIAN ACTOR Co. has accounts payable of ₱2,000,000 before
possible adjustment for the following:
a) Goods in transit from a vendor to THESPIAN on December 31, 20x1, with an invoice cost of
₱100,000 and purchased FOB shipping point, was not yet recorded.
b) Goods shipped FOB shipping point from a vendor to THESPIAN was lost in transit. The invoice
cost of ₱40,000 was not yet recorded.
c) Goods shipped FOB shipping point from a vendor to THESPIAN on December 31, 20x1
amounting to ₱16,000 was recorded and included in the year-end physical count as “goods in
transit.”
d) Goods in transit from a vendor to THESPIAN on December 31, 20x1 with an invoice cost of
₱20,000 purchased FOB destination was not yet recorded. The goods were received in January
20x2.
e) Goods with invoice cost of ₱30,000 was recorded and included in the year-end physical count as
“goods in transit.” It was found out that the goods were shipped from a vendor under FOB
destination.
f) Checks drawn but not yet released to payees amounted to ₱24,000 while checks drawn and
released to payees but were postdated amounted to ₱10,000.
g) On December 28, 20x1, a vendor authorized THESPIAN to return for full credit goods shipped
and billed at ₱50,000 on December 14, 20x1. THESPIAN shipped the returned goods on
December 31, 20x1 but the credit memo was received and recorded only on January 3, 20x2.
h) Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 20x1 was
recorded at invoice cost at shipment date. The invoice cost is ₱28,000, while the freight cost is
₱6,000.
i) Goods shipped FOB destination, freight collect were received on December 29, 20x1. The invoice
cost of ₱80,000 was credited to accounts payable on date of receipt and the related freight of
₱10,000 was debited to an expense account.

How much is the adjusted accounts payable on December 31, 20x1?

a. 2,090,000 c. 2,270,000
b. 2,130,000 d. 2,330,000

A
Unadjusted accounts payable 2,000,000
a. Purchases on FOB shipping point not yet recorded 100,000
b. Purchases on FOB shipping point lost in transit, not
yet recorded 40,000
e. Purchases on FOB destination inappropriately recorded (30,000)
f. Unreleased checks and postdated checks (12,000 + 5,000) 34,000
g. Purchase return (50,000)
h. Unrecorded freight on FOB SP, freight prepaid 6,000
i. Freight shouldered on behalf of the seller (10,000)
Adjusted accounts payable 2,090,000

8. Offset Co. sells gift certificates as part of its sales promotion. During the year, Offset Co. sells gift
certificates worth ₱500,000, of which ₱360,000 were redeemed. Based on Offset Co.’s past
 experience, 10% of gift certificates sold are never redeemed. Under PFRS 15, what amounts of (1)
total revenue and (2) liability should be reported in Offset Co.’s 20x1 financial statements?
a. 400,000; 100,000 c. 410,000; 90,000
b. 360,000; 90,000 d. 360,000; 100,000

A
Redemption 360,000
Breakage (500,000 x 10% x 80%*) 40,000
Total revenue in 20x1 400,000

* 360,000 ÷ (500,000 x 90%) = 80%

Gift cards sold 500,000

Redemption (360,000)
Breakage (40,000)
Gift card liability - 12/31/x1 100,000

9. FLUNK TO FAIL Co. requires advance payments for custom-built guitar effects, gadgets, and
racks. The records of FLUNK show the following:
 Unearned revenue, January 1, 20x1 ₱ 2,000,000
 Advances received during 20x1 20,000,000
 Advances applied to orders shipped in 20x1 16,000,000
 Advances pertaining to orders cancelled in 20x1 600,000

How much is presented as current liability assuming the advance payments received are non-
refundable?
a. 4,500,000 b. 5,400,000 c. 6,000,000 d. 6,600,000

B
Unearned income
2,000,000 Jan. 1, 20x1
Advances earned 16,000,000 20,000,000 Advances received
Orders cancelled 600,000
Dec. 31, 20x1 5,400,000

10. WAIVE TO GIVE UP Co. maintains escrow accounts and pays real estate taxes for its customers.
Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to
the mortgagee’s account and used to reduce future escrow payments. Information on escrow
accounts are shown below:
Escrow accounts liability, January 1, 20x1 400,000
Escrow payments received during 20x1 3,000,000
Real estate taxes paid during 20x1 1,000,000
Interest on escrow funds during 20x1 200,000

How much is the current liability for the escrow accounts on December 31, 20x1?
a. 2,580,000 b. 2,600,000 c. 2,400,000 d. 2,420,000
A
Escrow accounts
400,000 Jan. 1, 20x1
3,000,000 Escrow payments received
Interest on escrow funds net of 10% service
Taxes paid 1,000,000 180,000 fee (200,000 x 90%)
Dec. 31, 20x1 2,580,000

11. A short-term, non-trade, note payable with no stated rate of interest issued in a transaction that
contains a significant financing component should be

a. recorded at maturity value.

b. recorded at the face amount.
c. discounted to its present value.
d. reported separately from other short-term notes payable.

12. On August 1, 20x1, an entity acquired a new machine that it does not have to pay for until
September 1, 20x5. The total payment on September 1, 20x5 will include both principal and interest.
The initial measurement of the note and the machine is equal to the

a. payment for the principal multiplied by PV of ₱1

b. payment for interest multiplied by PV of ordinary annuity of ₱1
c. a plus b
d. total payment on the note multiplied by PV of ₱1

13. On January 1, 20x1, BLATANT NOISY Co. acquired a piece of equipment by paying cash of ₱400,000
and issuing a noninterest-bearing note of ₱4,000,000 due on January 1, 20x4. There is no cash price
equivalent for the equipment. The effective interest rate on the note is 12%. How much is the carrying
amount of the note on initial recognition?

a. 2,847,120 c. 3,247,120
b. 2,000,000 d. 2,786,309

A (4,000,000 x PV of 1 @12%, n=3) = 2,847,121

14. On January 1, 20x1, Sunday Calm Co. issued a ₱4,800,000, 3-year, noninterest-bearing note due in
equal semi-annual payments starting July 1, 20x1. The effective interest rate is 10%. How much interest
expense should Sunday Calm Co. recognize in 20x1?

a. 203,028 c. 350,780

b. 279,830 d. 376,207

Initial measurement:
(4,800,000 ÷ 6 semiannual payments) = 800,000 x PV of ordinary annuity @5%, n=6 = 4,060,554
Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 4,060,554
July 1, 20x1 800,000 203,028 596,972 3,463,582
Dec. 31, 20x2 800,000 173,179 626,821 2,836,761
Interest expense in 20x1: (203,028 + 173,179) = 376,207

15. On January 1, 20x1, Beautiful Morning Co. acquired a machine in exchange for a ₱4,800,000
noninterest-bearing note due as follows:

Date Amount
December 31, 20x1 ₱ 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total ₱ 4,800,000
The effective interest rate is 10%. How much is the carrying amount of the note on initial recognition?

a. 4,105,184 c. 3,980,134
b. 4,100,341 d. 3,086,394

  Cash flows PV of 1 @10% PVF PV

Dec. 31, 20x1 2,400,000 n=1 0.909091 2,181,818
Dec. 31, 20x2 1,600,000 n=2 0.826446 1,322,314
Dec. 31, 20x3 800,000 n=3 0.751315 601,052
4,105,184

16. On January 1, 20x1, Unforgiven Co. purchased an inventory with a list price of ₱4,400,000 and a cash
selling price of ₱4,000,000 in exchange for a ₱4,800,000 noninterest-bearing note due on December 31,
20x3. The effective interest rate on the note is most approximately equal to

a. 5.2659%. b. 6.2695%. c. 8.7893%. d. 9.2625%.

B
Choice (a): 4.8M x PV of 1 @ 5.2659%, n=3 = 4,115,078
Choice (b): 4.8M x PV of 1 @ 6.2695%, n=3 = 3,999,589
Choice (c): 4.8M x PV of 1 @ 8.7893%, n=3 = 3,728,058
Choice (d): 4.8M x PV of 1 @ 9.2625%, n=3 = 3,679,831

17. On January 1, 20x1, DWINDLE DECREASE Co. acquired a vehicle in exchange for cash of ₱400,000 and
a noninterest-bearing note of ₱4,000,000 due in 4 equal annual installments starting on December 31,
20x1. The prevailing rate of interest for this type of note is 12%. How much is the current portion of the
note on December 31, 20x1?

a. 613,409 c. 814,342
b. 711,780 d. 718,324
B
Initial measurement: (1,000,000 x PV of ordinary annuity @12%, n=4) = 3,037,349
Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 3,037,349
Dec. 31, 20x1 1,000,000 364,482 635,518 2,401,831
Dec. 31, 20x2 1,000,000 288,220 711,780 1,690,051

18. On January 1, 20x1, VELVETY SMOOTH Co. acquired an intangible asset by paying cash of ₱400,000
and issuing a noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments. The
first installment is due on January 1, 20x1. The prevailing rate of interest for this type of note is 12%.
How much is the interest expense in 20x1?

a. 0 c. 334,357
b. 288,220 d. 432,000

B
Initial measurement: (1,000,000 x PV of an annuity due @12%, n=4) = 3,401,831
Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 3,401,831
Jan. 1, 20x1 1,000,000 - 1,000,000 2,401,831
Dec. 31, 20x1 1,000,000 288,220 711,780 1,690,051

19. STUNTED Co. issued a 3-year, noninterest-bearing note of ₱4,000,000 to DWARFISH, Inc., a related
party. The proceeds from the issuance of the note were ₱2,847,120. The note matures on December 31,
20x3. The prevailing interest for similar type of obligation is 12%. The entry on initial recognition of the
note includes a

a. credit to notes payable for ₱2,847,120.

b. debit to discount on notes payable for ₱1,152,880.
c. credit to discount on notes payable for ₱1,152,880.
d. a and b

Future cash flow 4,000,000

Multiply by: PV of ₱1, @12%, n=3 0.71178
Present value 2,847,120

Jan. 1, Cash 2,847,120

20x1
Discount on N/P (4M – 2,847,120) 1,152,880
Note payable 4,000,000
20. On January 1, 20x1, SHABBY WORN OUT Co. acquired a machine by issuing a 3-year, 3%, ₱4,000,000
note payable. Principal and interest are due on January 1, 20x4. The prevailing interest rate for this
type of note is 12%. How much is the carrying amount of the note on initial recognition?

a. 3,114,884 c. 3,111,126
b. 4,370,908 d. 3,114,879

 (PV = Future cash flows x PV factor)

 Future cash flows (principal plus compounded interest) = (4,000,000 x 103% x 103% x 103%) =
4,370,908
 PV = 4,370,908 x PV of 1 @12%, n=3 = 3,111,126

END