CHAPTER QUIZ: CURRENT LIABILITIES

Problem 1.
An entity sells equipment service contracts that cover a two-year period. The sale price of each contract is P800. The entity sold 1 000 contracts
evenly throughout 2021. The past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the
first contract year and 60% evenly during the second contract year.

Contracts Sold 1 000 1st Contract Year 800 000 x 40% = 320 000 / 2 = 160 000 Jan 1, 2021
Sale Price 800 160 000 July 1, 2021
Sales 800 000 2nd Contract Year 800 000 x 60% = 480 000 / 2 = 240 000 Jan 1, 2022
240 000 July 1, 2022
➢ What is the contract revenue for 2021? • 160 000
➢ What is the unearned contract revenue on December 31, 2021? • 640 000 (160 000 + 240 000 + 240 000)
➢ What is the contract revenue for 2022? • 400 000 (160 000 + 240 000)
➢ What is the unearned contract revenue on December 31, 2022? • 240 000

Problem 2.
An entity sells magazine subscriptions for a 1-year, 2-year or 3-year period. Cash receipts from subscribers are credited to unearned subscription
revenue and this account had a balance of P1 700 000 on January 1, 2021. The entity provided the following information for the year ended
December 31, 2021:
Cash receipts from subscribers P 2 300 000
Subscription revenue credited on December 31, 2021 1 500 000

➢ On December 31, 2021, what amount should be reported as unearned subscription revenue?
Unearned subscription revenue balance 1 700 000
Cash receipts from subscribers 2 300 000
Subscription revenue credited on 12/31/21 (1 500 000)
Unearned subscription revenue, December 31, 2021 2 500 000

Problem 3.
An entity includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to customers who send in 10 coupons and a
remittance of P10. Distribution cost of premium is P5. Experience indicates that only 30% of the coupons will be redeemed.
2020 2021
Boxes of soap sold P2 000 000 P2 500 000
Number of towels purchased at P50 each 50 000 80 000
Coupons redeemed 400 000 700 000

Cost of towel P50 Coupons to be redeemed in 2021 (2 500 000 x 30%) 750 000
Distribution Cost 5
Remittance (10) Coupons outstanding - December 31, 2020 200,000
Net Premium Cost 45 Coupons to be redeemed in 2021 (2 500 000 x 30%) 750 000
Total coupons to be redeemed 950 000
Coupons to be redeemed in 2020 (2 000 000 x 30%) 600 000 Coupons redeemed in 2021 (700 000)
Coupons redeemed in 2020 (400 000) Coupons outstanding - December 31, 2021 250 000
Coupons outstanding - December 31, 2020 200 000

➢ What is the premium expense for 2020? • (600 000 / 10 x 45) = 2 700 000
➢ What is the estimated premium liability on December 31, 2020? • (200,000 / 10 x 45) = 900 000
➢ What is the premium expense for 2021? • (750 000 / 10 x 45) = 3 375 000
➢ What is the estimated premium liability on December 31, 2021? • (250 000 / 10 x 45) = 1 125 000

Problem 4.
During 2021, an entity introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to peso sales
are 4% within 12 months following sale and 6% in the second 12 months following sale. The entity reported sales of P5 000 000 for 2021 and P6
000 000 for 2022. The actual expenditures incurred and paid amounted to P150 000 for 2021 and P550 000 for 2022.

➢ What is the warranty expense for 2022?

Sales, 2022 6 000 000
Rate (4% + 6%) 10%
Warranty Expense for 2022 600 000
➢ What is the estimated warranty liability on December 31, 2022?
Warranty Expense:
2021 (5 000 000 x 10%) 500 000
2022 (6 000 000 x 10%) 600 000 1 100 000
Actual Expenditures:
2021 150 000
2022 550 000 (700 000)
Estimated Warranty Liability on 2022 400 000
 CHAPTER QUIZ: BONDS PAYABLE AND EFFECTIVE INTEREST METHOD

TRUE OR FALSE

TRUE 1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.
FALSE 2. A mortgage bond is referred to as a debenture bond.
TRUE 3. Bond issues that mature in installments are called serial bonds.
FALSE 4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.
FALSE 5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate.
TRUE 6. The stated rate is the same as the coupon rate.
FALSE 7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.
FALSE 8. A bond may only be issued on an interest payment date.
FALSE 9. The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.
TRUE 10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.
TRUE 11. The replacement of an existing bond issue with a new one is called refunding.
FALSE 12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.
TRUE 13. The implicit interest rate is the rate that equates the cash received with the amounts received in the future.

MULTIPLE CHOICE THEORIES

14. An example of an item which is not a liability is

a. dividends payable in stock. c. accrued estimated warranty costs.
b. advances from customers on contracts d. the portion of long-term debt due within one year.
15. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
a. bond indenture. c. registered bond.
b. bond debenture. d. bond coupon.
16. The term used for bonds that are unsecured as to principal is
a. junk bonds. c. indebenture bonds.
b. debenture bonds. d. callable bonds.
17. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds. c. debenture bonds.
b. term bonds. d. secured bonds.
18. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds. c. revenue bonds.
b. debenture bonds. d. income bonds.
19. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will
a. greater than if the straight-line method were used. c. the same as if the straight-line method were used.
b. greater than the amount of the interest payments. d. less than if the straight-line method were used.
20. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate. c. stated rate.
b. nominal rate. d. coupon rate, nominal rate, or stated rate.
21. The rate of interest actually earned by bondholders is called the
a. stated rate. c. effective rate.
b. yield rate. d. effective, yield, or market rate.
22. Theoretically, the costs of issuing bonds could be
a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
23. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
24. Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
25. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest
dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
PROBLEM SOLVING
Problem 1.
On January 1, 2021, Ellison Co. issued eight-year bonds with a face value of P2 000 000 and a stated interest rate of 6%, payable semiannually
on June 30 and December 31. The bonds were sold to yield 8%.
PV of 1 at 4% for 16 periods 0.53390817561
PV of an ordinary annuity of 1 at 4% for 16 periods 11.6522956097

The present value of the principal (2 000 000 x 0.53390817561) 1 067 816.35122
The present value of the interest is (2 000 000 x 3% x 11.6522956097) 699 137.736582
Total present value of bonds payable 1 766 954.0878

➢ The present value of the principal is 0.53390817561.

➢ The present value of the interest is 11.6522956097.
➢ The issue price of the bonds is 1 766 954.09.

Problem 2.
On January 1, 2022, Huber Co. sold 12% bonds with a face value of P800 000. The bonds mature in five years, and interest is paid
semiannually on June 30 and December 31. The bonds were sold for P861 600 to yield 10%.
➢ Using the effective interest method of amortization, interest expense for 2022 is P 85 914.
IP (6%) IE (5%) PA CA
January 1, 2022 P861 600
June 30, 2022 48 000 43 080 4 920 856 680
December 31, 2022 48 000 42 834 5 166 851 514
Interest Expense for 2022 85 914

Problem 3.
Feller Company issues P10 000 000 of 10-year, 9% bonds on March 1, 2021 at 97 plus accrued interest. The bonds are dated January 1, 2021,
and pay interest on June 30 and December 31.
➢ What is the total cash received on the issue date?
Issue Price (10 000 000 x 97%) P9 700 000
Accrued interest from Jan. 1 – Feb 28, 2021 (10 000 000 x 9% x 2/12) 150 000
Total cash received P9 850 000

Problem 4.
On January 2, 2022, a calendar-year corporation sold 8% bonds with a face value of P900 000. These bonds mature in five years, and interest is
paid semiannually on June 30 and December 31. The bonds were sold for P830 400 to yield 10%.
➢ Using the effective interest method of computing interest, how much should be charged to interest expense in 2022? P 83 316.
IP (4%) IE (5%) DA CA
January 2, 2022 830 400
June 30, 2022 36 000 41 520 5 520 835 920
December 31, 2022 36 000 41 796 5 796 841 716
Interest Expense for 2022 83 316

Problem 5.
Farmer Company issues P20 000 000 of 10-year, 9% bonds on March 1, 2021 at 97 plus accrued interest. The bonds are dated January 1, 2021,
and pay interest on June 30 and December 31.
➢ What is the total cash received on the issue date?
Issue Price (20 000 000 x 97%) P19 400 000
Accrued interest from Jan. 1 – Feb 28, 2021 (20 000 000 x 9% x 2/12) 300 000
Total cash received P19 700 000

Problem 6.
On January 1, 2023, Piper Co. issued ten-year bonds with a face value of P4 000 000 and a stated interest rate of 10%, payable semiannually on
June 30 and December 31. The bonds were sold to yield 12%.
➢ Calculate the issue price of the bonds.
PV of 1 at 6% for 20 periods 0.31180472682
PV of an ordinary annuity of 1 at 6% for 20 periods 11.4699212196

The present value of the principal (4 000 000 x 0.31180472682) 1 247 218.90728
The present value of the interest is (4 000 000 x 5% x 11.4699212196) 2 293 984.24392
Issue price of bonds payable 3 541 203.1512

➢ Without prejudice to your solution in part (a), assume that the issue price was P3 536 000. Prepare the amortization table for 2023, assuming
that amortization is recorded on interest payment dates.
IP (5%) IE (6%) DA CA
January 3, 2023 3 536 000
June 30, 2023 200 000 212 160 12 160 3 548 160
December 31, 2023 200 000 212 889.6 12 889.6 3 561 049.6
Problem 7. Prepare journal entries to record the following retirement.

Problem 8. Hurst, Incorporated sold its 8% bonds with a maturity value of P4 500 000 on August 1, 2021 for P4 419 000. At the time of the
sale, the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds
are callable at 104 at any time after August 1, 2023. By October 1, 2023, the market rate of interest has declined and the market price of Hurst's
bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to
reacquire its 8% bonds in the market and is able to purchase P750 000 worth at 101. The remainder of the outstanding bonds is reacquired by
exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds?
(Assume the firm used straight-line amortization.)
 CHAPTER QUIZ: LEASE ACCOUNTING

I. MULTIPLE CHOICE
1. The accounting concept that is principally considered to classify leases operating or finance is
a. Substance over form c. Neutrality
b. Prudence d. Completeness
2. Under PAS 17, the classification of a lease as either operating or finance lease is based on
a. Length of the lease c. The transfer of the risks and rewards of ownership
b. The economic life of the asset d. The minimum lease payments being at least 50% of the fair value
3. Under both PAS 17 and PFRS 16, the classifications of leases from the standpoint of the lessor, are:
a. Operating or sales type c. Operating, direct financing or sales type
b. Operating and direct financing d. Financing or sale-and-leaseback
4. Lessors are required to account for lease receipts under operating leases as
a. Revenue, at the end of the lease term c. Income, on a straight-line basis over the lease term
b. Income, on inception date of the lease d. Revenue, on a reducing balance basis over the lease term
5. All of the following conditions would qualify under finance lease, except
a. The lease term is for the major part of the asset's life
b. Option to purchase the underlying asset at a value sufficiently below its fair value
c. Transfer of ownership of the underlying asset to the lessee at the end of the lease term
d. The present value of the minimum lease payments is 50% of the fair value of the asset
6. Under PAS 17, the classifications of leases, from the standpoint of the lessee are:
a. Operating or sales-type c. Direct financing, sales type or operating
b. Operating or direct financing d. Finance or operating
7. Under PAS 17, the lessee at the commencement of the lease term shall recognize finance leases as assets and liabilities in the statement of
financial position at amounts equal to
I. Fair value of the leased property
II. Present value of the minimum lease payments
a. I only c. I or II, whichever is lower
b. II only d. I or Il whichever is higher
8. Under PFRS 16, lessee may apply the operating lease model under what condition (s)?
a. Low value lease c. Low value lease and short-term lease
b. Short-term lease d. Under all circumstances
9. Under PFRS 16, which of the following is not included in the cost of right of use asset?
a. Present value of lease payments
b. Initial direct cost incurred by the lessor
c. Lease payments made to lessor on or before commencement date
d. Estimated cost of dismantling/restoring the asset for which lessee has a present obligation
10. Under PFRS 16, if a lease contains a purchase option that is reasonably certain to be exercised, then the lessee shall depreciate the right of
use asset over
a. The lease term c. The lease term or the useful life of the asset, whichever is longer
b. The useful life of the asset d. The lease term or the useful life of the asset, whichever is shorter

II. PROBLEM SOLVING

Problem 1.
On April 1, 2023, Golden State Company leased a delivery truck from Warriors Company under a five-year operating lease. Total rent for the
term of the lease will be payable as follows:

First 9 months at P200,000/mo.

Next 18 months at P100,000/mo.
Next 12 months at P80,000/mo.
Last 14 months at P50,000/mo.
Last 7 months at P70,000/mo.
➢ How much should Golden State report as rent expense for the year ended December 31, 2023?
200,000 x 9 months = 1 800 000
100,000 x 18 months = 1 800 000
80,000 x 12 months = 960 000
50,000 x 14 months = 700 000
70,000 x 7 months = 490 000
Total Rent 5 750 000

Total Rent 5 750 000

Lease Term ÷ 5 years
Apr. 1-Dec. 31 x 9/12
Rent Expense for December 31, 2023 862 500
Problem 2.
Miami Company leased equipment from Heat Inc. on July 1, 2023, for an 8-year period. Equal payments under the lease are P600,000 and are
due on July 1 of each year. The first payment was made on July 1, 2023. The interest rate contemplated by Miami and Heat is 10%. The carrying
value of the equipment on Heat's accounting records is P2,800,000. Residual value of P100,000 at the end of the lease term is guaranteed by
Miami.

PV of an annuity of 1 in advance for 8 periods at 10% 5.87

PV of an ordinary annuity of 1 for 8 periods at 10% 5.33
PV of 1 for 8 periods at 10% 0.47

➢ How much is the profit that should be recognized by Heat Inc.?

PV of Equal Payments (600 000 x 5.87) 3 522 000
PV of Residual Value (100 000 x 0.47) 47 000
Cost of Right of Use Asset 3 569 000

Cost of Right of Use Asset 3 569 000

Carrying Value (2 800 000)
Heat Inc. Profit 769 000

Problem 3.
On January 1, 2023, an entity entered a 5-year lease with a lessor. Annual lease payments of P1,200,000 including annual executory cost of
P200,000 are payable at the end of the year. The entity knows that the lessor expects an 8% implicit rate on the lease. The entity has 10%
incremental borrowing rate. The equipment is expected to have a useful life of 10 years. In addition, a third party has guaranteed to pay the lessor
a residual value of P500,000 at the end of the lease.

➢ On December 31, 2023, what is the principal amount of the lease obligation?
PV of an ordinary annuity of 1 at 8% for 5 periods 3.9927100375
PV of 1 at 8% for 5 periods 0.680583197

Present value of lease payments (1 000 000 x 3.9927100375) 3 992 710.0375

Present value of residual value (500 000 x 0.680583197) 340 291.5985
Cost of Right of Use Asset 4 333 001.636

Payment Interest (8%) Principal Present Value

3 992 710.0375
1 000 000 319 416.803 680 583.197 3 312 126.8405

Problem 4.
At the beginning of the current year, an entity entered into an 8-year finance lease for an equipment. The entity accounted for the acquisition of
the finance lease at P5,000,000 which included a P500,000 bargain purchase option that is reasonably certain to be exercised. The expected fair
value of the equipment is P400,000 at the end of the 10-year useful life.

➢ What amount of straight-line depreciation should be recognized for the current year?
Equipment 5 000 000
Residual Value (400 000)
Carrying Amount 4 600 000
Useful Life (purchase option that is reasonably certain to be exercised) ÷ 10 years
Depreciation for the Current Year 460 000

Problem 5.
At the beginning of the current year, an entity entered into an 8-year finance lease for an equipment. The entity accounted for the acquisition of
the finance lease at P6,000,000 which included a P600,000 residual value guarantee. At the end of the lease, the asset will revert back to the
lessor. It is estimated that the fair value of the asset at the end of the 10-year life would be P400,000.

➢ What amount should be recognized as straight-line depreciation on the leased asset for the current year?
Equipment 6 000 000
Residual Value (600 000)
Carrying Amount 5 400 000
Lease Term (the asset will revert back to the lessor) ÷ 8 years
Depreciation for the Current Year 675 000