1. Which of the following is not considered a characteristic of a liability?

A. Present obligation
B. Arises from past events
C. Result in an outflow of resources
D. Liquidation is reasonably expected to require use of existing resources classified as current asset

2. Which of the following describes a liability?

Statement I – It is a present obligation of an entity arising from past transactions.
Statement II – The settlement of a liability is expected to result in an outflow of resources embodying
economic benefits.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

3. Under PAS 37, liabilities are present obligations which represent

A. Legal obligations only
B. Constructive obligations only
C. Both legal and constructive obligations
D. Neither legal nor constructive obligations

4. A liability shall be classified as current when it satisfies any of the following criteria, except
A. It is expected to be settled in the entity’s normal operating cycle
B. It is held primarily for the purpose of being traded
C. It is due to be settle within twelve months after the balance sheet date
D. The entity has an unconditional right to defer settlement of the liability for at least twelve months after
the balance sheet date

5. Which of the following should not be classified as a current liability?

A. Current maturities of long-term debt
B. Value added taxes payable
C. Short-term obligations refinanced at the end of reporting period
D. Unearned revenue

6. What is the relationship between current liabilities and an entity’s operating cycle?
A. Liquidation of current liabilities is reasonably expected within the operating cycle or one year, whichever
is longer.
B. Current liabilities are the result of operating transactions.
C. Current liabilities cannot exceed the amount incurred in one operating cycle.
D. There is no relationship between the two.

7. Which statement is incorrect regarding a liability?

A. An essential characteristic of a liability is that the entity has a present obligation.
B. A liability may be legally enforceable as a consequence of a binding contract or statutory requirement.
C. A liability may arise from normal business practice, custom and a desire to maintain good business
relations or act in an equitable manner.
D. A decision by the management of an entity to acquire assets in the future gives rise to a present
obligation.

8. Which of the following is true about amortization of premium or discount on the part of the bondholder?
A. Amortization of discount decreases interest income
B. Amortization of premium increases interest income
C. Amortization of discount increases interest income
D. Amortization of premium decreases interest income
 9. The proceeds from the sale of a bond with be equal to
A. The face amount of the bond.
B. The present value of the face amount of the bond plus the present value of the interest payment to be
made during the life of the bond.
C. The face amount of the bond plus the present value of the interest payments.
D. The sum of the face amount of the bond and the periodic interest payments.

10. Which is true when the effective interest method of amortizing bond discount is used?
A. Interest expense varies from period to period.
B. Interest expense remains constant for each period.
C. Interest expense increases each period.
D. The interest rate decreases each period.

11. Under the effective interest amortization, the periodic interest expense is equal to
A. The stated rate of interest multiplied by the face value of the bonds.
B. The market rate of interest multiplied by the face value of the bonds.
C. The stated rate multiplied by the beginning carrying amount of bonds payable.
D. The market rate multiplied by the beginning carrying amount of bonds payable.

12. If a bond was sold at 105, then the stated rate of interest was:
A. Equal to market rate
B. Not related to market rate
C. Higher than market rate
D. Lower than market rate

13. The bond interest expense for a period is more than interest paid when bonds are sold at
A. A premium
B. Par
C. A discount
D. A yield

14. For bonds payable, the cash interest paid in each interest period is:
A. The same amount regardless of whether the bonds were sold at a discount or a premium
B. Not the same amount when the stated and yield interest rates are different
C. Dependent on the initial amount of accrued interest
D. Different depending upon the date of sale

15. Costs incurred in issuing ten-year bonds which sold at a slight premium should be
A. Capitalized as organization cost
B. Expensed in the year in which incurred
C. Charged to retained earnings when the bonds are issued
D. Reported on the balance sheet as a deduction from bonds payable and amortized over the bond term

16. When interest payment dates of a bond are May 1 and November 1, and a bond issue is sold June 1, the
amount of cash received by the issue will be
A. Decreased by accrued interest from June 1 to November 1
B. Increased by accrued interest from June 1 to November 1
C. Decreased by accrued interest from May 1 to June 1
D. Increased by accrued interest from May 1 to June 1

17. A troubled debt restructuring will generally result in a

A. Loss by both the debtor and the creditor
B. Gain by both the debtor and the creditor
C. Loss by the debtor and a gain by the creditor
D. Gain by the debtor and a loss by the creditor
18. Under the application guidance of PAS 39, there is substantial modification of terms of an old financial
liability if the gain or loss extinguishment is?
A. At least 10% of the carrying amount of the old liability.
B. Less than 10% of the carrying amount of the old liability.
C. At least 10% of the new liability.
D. Less than 10% of the new liability.

19. Under PAS 39, the difference between the carrying amount of a financial liability extinguished and the
consideration given shall
A. Be recognized in profit or loss
B. Be included in equity
C. Be included in retained earnings
D. Not be recognized

20. In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the
date of settlement whenever the
A. Carrying amount of the debt is less than the total future cash flows.
B. Carrying amount of the debt is greater than the present value of the future cash flows.
C. Present value of the debt is less than the present value of the future cash flows.
D. Present value of the debt is greater than the present value of the future cash flow.

PROBLEMS:

1. Lakers Company provided the following information on December 31, 2019:

Accounts payable, net of creditors’ debit balances P200,000 2,000,000

Accrued expenses 800,000
Bonds payable due December 31, 2020 2,500,000
Premium on bonds payable 300,000
Deferred tax liability 500,000
Income tax payable 1,100,000
Cash dividend payable 600,000
Share dividend payable 400,000
Note payable – 6%, due March 1, 2020 1,500,000
Note payable – 8%, due October 1, 2020 1,000,000

The financial statements for 2019 were issued on March 31, 2020. On December 31, 2019, the 6% note
payable was refinanced on a long-term basis. Under the loan agreement for the 8% note payable, the entity
has the discretion to refinance the obligation for at least twelve months after December 31, 2019.

What amount should be reported as total current liabilities?

A. 7,500,000
B. 9,000,000
C. 8,000,000
D. 6,900,000

2. On January 1, 2017, Nets Company issued 7% term bonds with a face amount of P1,000,000 due January 1,
2025. Interest is payable semi-annually on January 1 and July 1. On the date of issue, investors were willing
to accept an effective interest of 6%.

The carrying value of the bonds on July 1, 2018 is:

A. 1,056,578
B. 1,056,484
C. 1,053,276
D. 1,053,179
3. During the current year, Bucks Company issued 3,000,000, 9% face value bonds at 110 at interest date. In
connection with the issue of the bonds, the entity paid the following costs:
Promotion cost 20,000
Engraving and printing cost 25,000
Underwriters’ commission 200,000
Legal fees 100,000
Fees paid to accountants for registration 55,000

What amount should be recorded as bond issue costs to be amortized?

A. 400,000
B. 380,000
C. 300,000
D. 0

4. On May 1, 2019, Clippers Company issued P2,000,000, 10 years, 9% bonds at 105 including accrued interest.
These bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and July 1.
Transaction costs of P10,000 were paid by Raiders. What is the net cash receipt from the bond issuance?
A. 2,090,000
B. 2,100,000
C. 2,150,000
D. 2,160,000

5. On April 1, 2019, Sixers Corporation issued at 99, 2,000 of its 8%, P1,000 bonds. The bonds are dated April
1, 2019, to mature on April 1, 2029, and pay interest on April 1 and November 1. Sixers paid transaction cost
of P20,000. From the issuance, how much net cash did Sixers receive?
A. 1,960,000
B. 1,980,000
C. 2,000,000
D. 2,020,000

6. On March 1, 2019, Madine Corporation issued at 103 plus accrued interest, 1,000 of its 9%, P1,000 bonds.
The bonds are dated January 1, 2019 and mature on January 1, 2019. Interest is payable semi-annually on
January 1 and July 1.Madine paid transaction costs of P5,000. Based on the given information, how much
would Madine realize as net cash receipts from the bond issuance?
A. 1,025,000
B. 1,030,000
C. 1,040,000
D. 1,045,000

7. RCM Corporation, a calendar-year firm, is authorized to issue P200,000 of 10 percent, 20-year bonds dated
January 1, 2014, with interest payable on January 1, and July 1 of each year. If the bonds were issued on
April 1, 2014, the amount of accrued interest on the date of sale is
A. 2,500
B. 5,000
C. 10,000
D. 20,000

8. On March 1, 2019, Harbour Corporation issued 10% debentures dated January 1, 2019, in the face amount of
P1,000,000, with interest payable on January 1 and July 1. The debentures were sold at face and accrued
interest. How much should Harbour debit to cash on March 1, 2019?
A. 966,667
B. 983,333
C. 1,016,667
D. 1,033,333

9. On March 1, 2017, Ellen Company issued 5,000 of P1,000 face value bonds at 110 plus accrued interest. The
entity paid bond issue cost of P300,000. The bonds were dated November 1, 2016, mature on November 1,
 2026, and bear interest at 12% payable semi-annually on May 1 and November 1. What net amount was
received from the bond issuance on March 1, 2017?
A. 5,700,000
B. 5,200,000
C. 5,400,000
D. 5,500,000

10. In its 2020 financial statements, Toronto Company reported interest expense of P85,000 in its statement of
comprehensive income and cash payments for interest at P68,000 in its statement of cash flow. There was no
prepaid interest or interest capitalization either at the beginning or end of 2020. Accrued interest payable at
December 31, 2019 was P15,000. What amount should Toronto Company report as accrued interest payable
in its December 31, 2020 statement of financial position?
A. 32,000
B. 17,000
C. 15,000
D. 2,000

11. On January 1, 2019, Seahawks Company issued 4,000 of its 8%, P1,000 bonds when the prevailing rate of
interest was 9%. The bonds are dated January 1, 2019, and mature on January 1, 2023. Interest is payable
annually every December 31. The following are the present value factors:
Present value of 1 for 4 periods at 9% 0.7084
Present value of annuity of 1 for 4 periods at 9% 3.2397

What amount of proceeds did the company receive on the issue of debt instrument?
A. 3,800,000
B. 3,870,304
C. 3,883,000
D. 3,920,000

12. On September 1, 2019, Tom company borrowed on a P1,650,000 note payable from ABN Bank. The note
bears interest at 12% and is payable in three equal annual payments of P550,000. On this date, the bank’s
prime rate is 11%. The first annual payment for interest and principal was made in September 1, 2020. At
December 31, 2020, what amount should Tom company report as accrued interest payable?
A. 66,000
B. 60,500
C. 44,000
D. 40,333

13. On December 31, 2016, Dawin Company acquired a piece of equipment from Dessert Company by issuing a
P1,200,000 note, payable in full on December 31, 2020. Dawin’s credit rating permits it to borrow funds
from its several lines of credit at 10%. What is the carrying amount of the note at December 31, 2018? (PVF
= 5 decimal places)
A. 1,200,000
B. 1,090,909
C. 991,730
D. 819,612

14. On October 1, 2019, Boxer Company acquired land by issuing a two-year note, 12%, P4,000,000 note
payable. Principal is due on October 31, 2021 but interests are due annually every October 1. Boxer uses the
calendar year as its accounting period. How much is the interest expense recognized in 2019?
A. 480,000
B. 85,413
C. 336,734
D. 120,000

15. VTS Company is experiencing financial difficulty and is negotiating a debt restructuring with its creditors.
VTS Company has an outstanding financial liability of P2,500,000. BBB Financing Company accepted an
 equity interest in VTS Company in the form of 400,000, P5 par value ordinary shares which at the time of
restructuring was quoted at P6.00 per share. the fair value of the obligation at the time of the restructuring
was P2,450,000. The amount of gain to be recognized arising from the debt restructuring by way of an
“equity swap” is
A. 0
B. 50,000
C. 100,000
D. 500,000

16. Purity Company owes P1,998,000 to Sanctity, Inc. The debt is a 10-year, 11% note. Because Purity
Company is in financial trouble, Sanctity, Inc. agrees to accept some property and cancel the entire
debt. The property has a book value of P800,000 and fair market value of 1,200,000. What amount of gain
or loss on the settlement of the liability should Purity Company recognize?
A. 0
B. 400,000
C. 798,000
D. 1,198,000

17. Due to adverse economic circumstances and poor management, Lyka had negotiated a restructuring of the
8% P7,000,000 note payable to a bank on January 1, 2023. There is no accrued interest on the note. Lyka has
reduced the principal obligation from P7,000,000 to P6,000,000 and extend the maturity to 3 years on
December 31, 2025. However, the new interest rate is 11% payable annually every December 31. The
present value of 1 at 8% for three periods is 0.79 and the present value of an ordinary annuity of 1 at 8% for
three periods is 2.58.

What is the gain on modification of debt for 2023?

A. 557,200
B. 577,200
C. 980,000
D. -0-

18. Viator Company had bonds payable with face amount of P10,000,000 and a carrying amount of P9,600,000.
In addition, unpaid interest on the bonds was accrued in the amount of P500,000. The creditor had agreed to
the settlement of the bonds payable in exchange for P50,000 shares of P100 par value. The shares have no
reliable measure of fair value. However, the bonds are quoted at P7,000,000

What is the gain on the extinguishment of the bonds payable?

A. 3,000,000
B. 3,500,000
C. 3,100,000
D. 2,000,000

19. Due to adverse economic circumstances and poor management, Guava Bank negotiated a restructuring of
the 8% P7,000,000 note payable to a bank on January 1, 2023. There is no accrued interest on the note. The
bank has reduced the principal obligation from P7,000,000 to P6,000,000 and extend the maturity to 3 years
on December 31, 2025. However, the new interest rate is 11% payable annually every December 31. Use 2-
decimal place present value factor.

What is the interest expense for 2023?

A. 538,128
B. 515,424
C. 480,000
D. 708,708

20. Andy Company records its purchases at gross but wishes to change to recording purchases at net. Discounts
available on purchases recorded from October 1, 2022 to September 30, 2023 totalled P400,000. Of this
amount P50,000 is still available in the accounts payable balance. The balances in the accounts before
conversion are:
Purchases 8,000,000
Purchase discounts taken 100,000
Accounts payable 3,000,000

The adjusted accounts payable on September 30, 2023 should be

A. 2,950,000
B. 2,900,000
C. 2,600,000
D. 3,000,000

SOLUTIONS:

1)
Accounts payable (creditors’ debit bal. P200,000 is added back) 2,200,000
Accrued expenses 800,000
Bonds payable due December 31, 2020 2,500,000
Premium on bonds payable 300,000

Income tax payable 1,100,000

Cash dividend payable 600,000
TOTAL CURRENT LIABILITIES 7,500,000

2)
Present value of principal (1,000,000 x 0.6231669…) 623,170
Present value of interest (1,000,000 x 7% x 6/12) x 12.5611020… 439,639
Carrying amount 1/1/17 1,062,809
Effective interest 1.03
Nominal interest (35,000)
Effective interest 1.03
Nominal interest (35,000)
Effective interest 1.03
Nominal interest (35,000)
Carrying amount 7/1/18 1,053,179

3)
Promotion cost 20,000
Engraving and printing cost 25,000
Underwriters’ commission 200,000
Legal fees 100,000
Fees paid to accountants for registration 55,000
Total bond issue costs 400,000

4)
Fair value of bonds including the interest (2,000,000 x 1.05) 2,100,000
Transaction cost (10,000)
Net cash receipt 2,090,000

5)
Fair value of bonds (2,000,000 x .99) 1,980,000
Transaction cost paid (20,000)
Net cash received 1,960,000

6)
Fair value of bonds (1,000,000 x 1.03) 1,030,000
 Accrued interest (1,000,000 x 9% x 2/12 Jan 1 to Mar 1) 15,000
Transaction cost (5,000)
Net cash received 1,040,000

7)
Face amount 200,000
Nominal interest 10%
Last interest date to date of issuance January 1 to April 1 3/12
Accrued interest 5,000

8)
Fair value – sold at face 1,000,000
Accrued interest (1,000,000 x 10% x 2/12) 16,667
Total cash received 1,016,667

9)
Fair value of bonds (5,000,000 x 1.10) 5,500,000
Accrued interest (5,000,000 x 12% 4/12 Nov 1 to Mar 1) 200,000
Transaction cost (300,000)
Net cash received 5,400,000

10)
Interest payable, 1/1/20 15,000
Interest expense – 2020 85,000
Interest payment – 2020 (68,000)
Interest payable, 12/31/20 32,000

11)
PV of principal (P4M x 0.7084) 2,833,600
PV of interests [(P4M x 8%) x 3.2397] 1,036,704
Proceeds/Issue price 3,870,304

12)
Principal amount 9/1/19 1,650,000
First principal payment 9/1/20 (550,000)
Unpaid principal 1,100,000
Nominal interest 12%
Months unpaid, last interest date to December 31 9/1/20 – 12/31/20 4/12
Unpaid interest 44,000

13)
Initial measure of the note 1,200,000 x 0.6830 819,616
Effective interest 1.10
Effective interest 1.10
Carrying amount 12/31/18 991,730

14)
Initial carrying amount (face amount) 4,000,000
Nominal/effective rate 12%
3/12
Interest expense 120,000

15)
Book value of liability settled 2,500,000
 Fair value of shares issued (400,000 x P6) 2,400,000
Gain from restructuring 100,000

16)
Book value of liability settled 1,998,000
Fair value of property 1,200,000
Gain from restructuring 798,000

17)
Book value of liability settled 7,000,000
PV of restructured liability:
Principal (6M x 0.79) 4,740,000
Interests [(6M x 11%) x 2.58] 1,702,800 6,442,800
Gain from restructuring 557,200

18)
Book value of liabilities retired:
Bonds 9,600,000
Interest 500,000 10,100,000
Quoted price of bonds 7,000,000
Gain from restructuring 3,100,000

19)
PV of restructured liability, 1/1/23:
Principal (6M x 0.79) 4,740,000
Interests [(6M x 11%) x 2.58] 1,702,800 6,442,800
X Market rate 8%
Interest expense for 2023 515,424

20)
Accounts payable 3,000,000
Available discount (50,000)
Net amount 2,950,000