1. Interest payment dates of a bond issue are March 1 and September 1, 20x1.

The bond was issued

on June 1, 20x1. Interest expense for the year ended December 31, 20x1 would be for:
a. Four (4) months
b. Six (6) months
c. Seven (7) months
d. Ten (10) months

2. When a note payable is issued for property, goods, or services, the note is initially measured at
a. The fair value of the property, goods, or services.
b. The fair value of the note
c. Using an imputed interest rate to discount all future payments on the note
d. Choice (a) except when this is not determinable, in which case, whichever is the more clearly
determinable between (b) and (c)

3. When a note payable is exchanged for property, goods, or services, the stated interest rate is
presumed to be fair unless
a. No interest rate is stated
b. The stated interest rate is unreasonable
c. The stated face amount of the note is materially different from the current cash sales price of
similar items or from current market value of the note.
d. Any of these.

4. When debt is issued at a discount, interest expense over the term of the debt equals the cash
interest paid:
a. Minus discount
b. Minus discount minus face amount
c. Plus discount
d. Plus discount plus face amount

5. A short-term note payable may include all of the following except:

a. Trade notes payable
b. Nontrade notes payable
c. Unearned revenue
d. A current maturity of a long-term liability

6. Interest expenses are:

a. Incurred only on interest-bearing obligations
b. Incurred due to passage of time
c. Not incurred on redeemable preference shares issued
d. Incurred only when the effective interest rate is stated in the instrument

7. Which of the following is not true about the discount on short-term notes payable?
a. The discount on notes payable account has a debit balance
b. The discount on notes payable account should be reported as an asset on the balance sheet
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.
8. Which of the following statements is not correct?
a. The principal amount of a debt is the cash or cash equivalent amount borrowed.
b. When a noncash asset is acquired and the stated rate of interest is different from the current
market rate of interest, the cost of the asset is the present value of the future cash payments
discounted at the current market rate of interest rather than at the stated interest rate.
c. A company that receives cash in an amount less than the face amount of a noninterest-
bearing note payable should record the note at its discounted present value.
d. The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as
time goes by.

9. On November 1, 20x1m a company purchased a new machine that it does not have to pay for
until November 1, 20x3. The total payment on November 1, 20x3, will include both principal and
interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment
multiplied by what time value of money concept?
a. PV of annuity of P1
b. PV of P1
c. FV of annuity of P1
d. FV of P1

10. Which of the following statements is true?

a. A noninterest-bearing note sometimes is called a discounted note because the cash received
is more than the face amount of the note.
b. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31,
20x2. An obligation with a due date of December 31, 20x6 is also due on demand by the
creditor. At December 31, 20x1, there is no indication that the creditor intends to call in the
debt. The obligation is a current liability.
c. The market rate of interest is the interest rate used to determine the amount of cash interest
that will be paid on the principal.
d. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31,
20x2. An obligation due December 31, 20x6 has a due date which can be accelerated by the
creditor to the present date if the current ratio falls below 2:1. The current ratio on December
31, 20x1 is 2.2:1. The obligation is a current liability.

11. On April 1, 2020, Dei Delivery Service issued a ₱10,800,000 non-interest bearing note due March
31, 2023 for a price of land with a cash price of ₱8,339,760. How much is the interest expense for
the year ended December 31, 2020 (round to nearest peso)? 562,934
12. Michael Company had the following loans at 12% interest payable at maturity. Michael repaid
each loan on scheduled maturity date.
Date Amount Maturity date Term
11/1/2019 ₱550,000 10/31/2020 1 year
2/1/2020 1,650,000 7/31/2020 6 months
5/1/2020 880,000 1/31/2020 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest expense of
₱165,000 was recorded in 2020. If no correction is made, by what amount would 2020 interest
expense be understated? 59,400

13. On January 1, 2020, Victoria Company borrowed ₱600,000 8%, noninterest-bearing note due in
four years. The present value of the note on January 1, 2020 was ₱441,000. The entity elects the
fair value method for reporting financial liabilities. On December 31, 2020, the fair value of the
note is ₱489,780. At what amount should the discount on note payable be presented on
December 31, 2020? 0

14. On January 1, 2020, Sarah Company sold land to Grace Company. There was no established
market price for the land. Grace gave Sarah a ₱2,880,000 noninterest bearing note payable in
three equal annual installments of ₱960,000 with the first payment due December 31, 2020. The
note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present
value of ₱2,880,000 note payable in three equal annual installments of ₱960,000 at a 10% rate of
interest is ₱2,387,520. What is the carrying amount of the note payable on December 31, 2020?
1,666,272

15. On December 31, 2020, Vittorio Company purchased a machine from Stefano Company in
exchange for a noninterest bearing note requiring eight payments of ₱240,000. The first payment
was made on December 31, 2020 and the others are due annually on December 31. At date of
issuance, the prevailing rate of interest for this type of note was 11%. The PV of an ordinary
annuity of 1 at 11% for 8 period is 5.146 and the PV of an annuity of 1 in advance at 11% for 8
periods is 5.712. On December 31, 2020, what is the carrying amount of the note payable?
1,130,880

16. Genesis Company reported liabilities on December 31, 2020 as follows:

Accounts payable and accrued interest 1,200,000
12% note payable issued November 1, 2019 maturing July 1, 2021 2,400,000
10% debentures payable, next annual principal installment of
₱600,000 due February 1, 2021 8,400,000

On December 31, 2020, the entity consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long term-basis. The December 31, 2020 financial statements
was issued on March 31, 2021. In the December 31, 2020 statements of financial position, what
total amount should be reported as current liabilities? 1,800,000

17. ABC Company is threatened with a bankruptcy due to its inability to meet interest payments and
fund requirements to retire P6,000,000 note payable with accrued interest payable of P600,000.
The entity entered into an agreement with the creditor to exchange equity instruments for the
 liability. The terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market
value, and 25,000 preference shares with P10 par value and P60 market value. What amount
should be reported as gain on the extinguishment of the note payable? 2,100,000

18. ABC Company is threatened with a bankruptcy due to its inability to meet interest payments and
fund requirements to retire P6,000,000 note payable with accrued interest payable of P600,000.
The entity entered into an agreement with the creditor to exchange equity instruments for the
liability. The terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market
value, and 25,000 preference shares with P10 par value and P60 market value. What amount
should be reported as total share premium from the issuance of the preference and ordinary
shares? 2,750,000

19. AAA Company entered into a troubled debt restructuring agreement with National Bank. The bank
agreed to accept land with a carrying amount of P800,000 and a fair value of P1,000,000 in
exchange for a note payable with a carrying amount of P1,500,000. Under IFRS, what amount
should be reported as a gain on extinguishment of debt? 700,000

20. Due to adverse economic circumstances and poor management, ABC Company had negotiated a
restructuring of the 9% P6,000,000 note payable to Second Bank due on January 1, 2019. There is
no accrued interest on the note. The bank has reduced the principal obligation from P6,000,000
to P5,000,000 and extend the maturity to 3 years on December 31, 2021. However, the new
interest rate is 13% payable annually every December 31. The present value of 1 at 9% and 13%
for three periods is .77 and .69, respectively, while the present value of an ordinary annuity of 1
at 9% and 13% for three periods is 2.53 and 2.36, respectively. What is the present value of the
modified liability? 5,494,500