ATENEO DE NAGA UNIVERSITY

College of Business and Accountancy

1st Semester – S/Y 2023-2024

Intermediate Accounting 2

Final Examination E.P.Cuadro, CPA

Name: Date: Section: Score:

INSTRUCTIONS: 1. Choose the best option and shade the letter of your choice in the answer sheet
provided.
2. Erasures are not allowed and considered wrong.

GOOD LUCK!
1. Which of the following is not a major characteristic of a property and equipment?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years

2. A change in residual value and useful life should

a. Result in restatement of prior period statements.
b. Be handled in current and future periods.
c. Be handled in the future periods only.
d. Be handled retroactively.

3. Which of the following is true?

a. An asset must be depreciated from the date of purchase to the date of sale.
b. A temporary idle property is still subject to depreciation.
c. The total cost of an asset must be eventually depreciated.
d. If the carrying amount of an asset is less than the residual value, depreciation may still be
charged.

For items 4 and 5:

On March 1, 2020, Legit Company acquired an equipment with a cost of P820,000 and a salvage value of P70,000
at the end of its 10-year useful life. The company adopts straight-line method in depreciating its assets. Also, the
company’s policy is to have full depreciation in the year of acquisition and none in the year of disposal. On
September 30, 2024, the company decided to sell the asset at a net disposal proceeds of P324,000.

4. How much is the accumulated depreciation as of September 30, 2024?

a. P300,000
b. P225,000
c. P375,000
d. P350,000

5. How much is the gain or loss on disposal of the equipment?

a. Loss on disposal of P51,000
b. Gain on disposal of P51,000
c. Loss on disposal of P196,000
d. Gain on disposal of P196,000

6. Which of the following is not a condition that must be satisfied before interest capitalization can begin on
a qualifying asset?
a. Interest cost is being incurred.
b. Activities that are necessary to get the asset ready for its intended use are in progress.
c. Expenditures for the assets have been made.
d. The interest rate is equal to or greater than the company's cost of capital.

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 7. Paolo Builders Company determines that a machine used in its operations has suffered an impairment in
value because of technological changes as of the end of 2023. An entry to record the impairment should:
a. recognize additional depreciation expense for year 2023.
b. include a credit to impairment loss account.
c. Impairment loss should not be made if the machine is still being used.
d. include a credit to the machine’s accumulated depreciation account.

8. Depletion expense is usually computed using

a. Straight-line
b. SYD
c. Units of production
d. All of these

9. The revaluation surplus that is realized because of the use of the asset or disposal of the asset may be
transferred directly to
a. Retained earnings
b. Share premium
c. Share capital
d. Income

For items 10 and 11:

At the beginning of 2019, Fisher Company purchased an equipment costing P2,400,000 with residual value of
P400,000. Subsequently, the equipment is depreciated using straight-line method under cost model. The
estimated useful life of the equipment is eight years. At the end of 2021, the equipment showed evidence of
impairment. The value in use and fair value less cost to sell amounted to P450,000 and P500,000, respectively.

10. What is the impairment loss to be recognized in 2021?

a. 1,000,000
b. 750,000
c. 900,000
d. 1,150,000

11. What is the depreciation expense in 2022?

a. 100,000
b. 90,000
c. 150,000
d. 62,500

12. The asset is not impaired if

a. The carrying amount exceeds recoverable amount
b. The fair value is way above the value in use
c. The recoverable amount is less than the carrying amount
d. The carrying amount is less than the recoverable amount

13. Government assistance in the form of free technical advice should be

a. Added to the cost of property and equipment.
b. Recognized as income over the periods and in proportion to the depreciation of related assets.
c. Disclosed in the financial statements only.
d. Recognized as income for the period it becomes receivable.

14. When a plant asset is acquired by issuance of shares, the cost of the plant asset is properly measured by
the
a. Fair value of plant asset received
b. Fair value of the shares issued
c. Par value of the shares issued
d. Carrying amount of plant asset received

15. Depreciation incurred as part of manufacturing inventories should be reported as

a. Part of operating expenses
b. Part of the cost of the produced inventories
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 c. Part of other comprehensive income
d. Part of cost of goods sold upon production

16. Hersey Company spent P100,000 on research and development cost for an invention during 2021. On
January 1, 2022, the invention was patented at a total cost of P670,000 with and estimated legal life of
the patent was 20 years and the estimated useful life was 10 years. In January 2024, Hersey paid P320,000
for legal fees in a successful defense of the patent.

What should be the amortization expense for 2024?

a. P67,000
b. P33,500
c. P107,000
d. P110,000

17. Which cost associated with trademark should not be capitalized?

a. Attorney fee
b. Consulting fee
c. Research and development fee
d. Design cost

18. Which of the following describes the appropriate accounting for intangible asset with finite useful life?
a. The cost of the asset is not amortized but is periodically tested for impairment.
b. The cost of the asset is amortized over the useful life and the asset is never tested for impairment.
c. The cost of the asset is amortized over 40 years.
d. The cost of the asset is amortized over the useful life and the asset is periodically tested for
impairment.

19. An activity that would be expensed currently as research and development costs is the
a. Engineering follow-through in an early phase of commercial production
b. Legal work in connection with patent application and the licensing of patent
c. Testing in search for or evaluation of product or process alternatives
d. Adaptation of an existing capability to a particular requirement or customer need as a part of
continuing commercial activity.

20. Which of the following statements is correct concerning start-up costs?

a. Costs of start-up activities including organization costs should be expensed as incurred
b. Costs of start-up activities including organization costs should be capitalized and amortized on a
straight-line basis over the economic life of the entity
c. Costs of start-up activities including organization costs should be capitalized and expensed only if
an impairment exists
d. Costs of start-up activities should be capitalized and amortized on a straight-line basis over the
economic life of the entity while organization costs should be expensed as incurred.

21. Liabilities are

a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted
accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

22. Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes
payable totaling P250,000 with the Madison National Bank. These are 90-day notes, renewable for
another 90-day period. These notes should be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

23. A liability for compensated absences such as vacations, for which it is expected that employees will be
paid, should
a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting.
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 c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.

24. 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.

25. Which of the following is not a permissible method of calculating a bonus to an employee?
a. The bonus is based on income before deductions for the bonus and income taxes.
b. The bonus is based on income after deduction of the bonus but before deduction of income taxes.
c. The bonus is based on income after deductions for the bonus and income taxes.
d. All of these are permissible.

26. Laurence Company issued a P100,000, 10% bond at 99. The bond was:
a. sold for P100,000 less P1,000 of accrued interest.
b. sold at a premium because the stated rate was higher than the yield rate.
c. sold at a discount because the stated rate was lower than the market interest rate.
d. sold at a premium because the P1,000 accrued interest is added to the P100,000 face amount.

27. Elijah Company’s December 31, 2022 Statement of Financial Position is to be issued of April 15, 2023. A
long-term obligation contracted in 2020 for settlement on January 15, 2023 was extinguished through
cash payment on its due date. On January 1, 2023, a 5-year note was issued to replace the cash used up
for the payment made on April 15, 2023. Which of the following statements is correct?
a. There should be no liability to be reported in the 2022 statement of financial position since the
original obligation was already extinguished before the date of the authorization for issuance.
b. The new obligation entered into on January 2023 should be reported in the 2022 statement of
financial position as a non-current liability because it is due to be settled beyond twelve months
after the reporting period.
c. The original obligation should be reported in the 2022 statement of financial position as a non-
current liability because the entity has a right to defer settlement of the liability for at least twelve
months after the reporting period.
d. The original obligation should be reported in the 2022 Statement of Financial Position as a current
liability because the entity does not have a right to defer settlement of the liability for at least
twelve months after the reporting period.

28. Which statement is true for a bond maturing on a single date when the effective interest method of
amortizing bond discount is used?
a. Interest expense as a percentage of the bond carrying amount varies from period to period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate

29. Bond issue cost

a. Is included in the measurement of debt measured at fair value through profit or loss
b. Will effectively increase the market rate of interest
c. Will effectively decrease the market rate of interest
d. Is amortized using the straight line method over the life of the bonds

30. Gain or loss in early extinguishment of bonds is equal to

a. Retirement price including accrued interest less carrying amount of the bonds at the date of
retirement
b. Retirement price including accrued interest less carrying amount of the bonds at the balance
sheet date
c. Retirement price excluding accrued interest less carrying amount of the bonds at the date of
retirement
d. Retirement price excluding accrued interest less carrying amount of the bonds at the balance
sheet date

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For items 31 to 33:
On January 1, 2021, Bald Company purchased a machinery amounting to P750,000 with a cash down payment of
P250,000 and issuance of 10%, 5-year non-interest bearing note on the remaining balance. The principal is payable
in installment every December 31 of each year. The present value factor should be rounded to the nearest ten
thousandths or 4 decimal digits.

31. What is the cost of the machinery?

a. P689,539
b. P750,000
c. P560,461
d. P629,079

32. What is the balance of the discount on notes payable as of December 31, 2021?
a. P51,315
b. P62,092
c. P83,013
d. P68,301

33. What is the interest expense to be recognized in the statement of comprehensive income in 2022?
a. P68,301
b. P37,908
c. P62,092
d. P31,699

For items 34 and 35:

BOOMERANG, INC. is a manufacturer and retailer of household furniture. The following are the transactions of
the Company related to its debt obligations as of December 31, 2024. The Company’s financial statements are
authorized for issuance on March 6, 2025.

a. A P150,000 short-term obligation due on March 1, 2025. Its maturity could be extended to March 1,
2027 provided BOOMERANG agrees to provide additional collateral. On February 15, 2025, an agreement
is reached to extend the loan’s maturity to March 1, 2027.
b. A short-term obligation of P3,600,000 in the form of notes payable due on February 5, 2025. The
Company issued 75,000 ordinary shares for P36 per share on January 25, 2025. The proceeds from the
issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2025.
c. A long-term obligation of P2,500,000 on December 1, 2024. On November 10, 2024, BOOMERANG
breaches a covenant on its debt obligation and the loan becomes repayable on demand. An agreement is
reached to provide a waiver of breach on December 11, 2024.
d. A long-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1,000,000
per year. The loan is dated September 1, 2024, and the first maturity date is September 1, 2025.
e. A debt obligation of P1,000,000 maturing on December 31, 2027. The debt is callable on demand by the
lender at any time.

34. What amount of current liabilities should be reported on December 31, 2024?
a. P8,250,000
b. P5,750,000
c. P4,750,000
d. P3,750,000

35. What amount of noncurrent liabilities should be reported on December 31, 2024?
a. P5,500,000
b. P3,000,000
c. P6,500,000
d. P7,500,000

For items 36 to 38:

On March 1, 2023, Cinderella Company issued a 50,000 of its P1,000 face amount bonds. The bonds are dated
January 1 and pay semiannual interest every January 1 and July 1. The bonds will mature in 4 years. The Company
decided to retire the all bonds on May 31, 2025 at 98 plus accrued interest. The Company uses straight-line
method to amortize the bonds.

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 36. Total cash received for the issuance of the bonds
a. P52,000,000
b. P52,750,000
c. P50,000,000
d. P56,500,000

37. Carrying amount of the bonds payable on the date of retirement

a. P50,826,087
b. P51,173,913
c. P50,875,000
d. P51,125,000

38. Gain on early extinguishment of the bonds

a. P1,826,087
b. P2,173,913
c. P1,875,000
d. P2,125,000

For items 39 and 40:

On October 1, 2023, HERON Company issued bonds with total face amount of P4,000,000. These bonds have
maturity date of September 30, 2029 and interest of 12% that is payable every September 30 of each year. Market
rates on the date of issuance averaged 10%.

39. Interest expense for the year 2024 shall be

a. P433,713
b. P431,455
c. P434,842
d. P430,326

40. Carrying amount of the bonds as of December 31, 2025 shall be

a. P4,183,922
b. P4,239,929
c. P4,198,948
d. P4,253,589

41. Which of the following treasury share transactions do not affect the total shareholder’s equity? (15)
[1.] Acquisition of treasury shares.
[2.] Reissuance of treasury shares.
[3.] Declaration of treasury shares as dividends.
[4.] Retirement of treasury shares.
a. Numbers 1 only
b. Numbers 2 and 3 only
c. Numbers 3 and 4 only
d. Numbers 2, 3 and 4 only

42. On December 31, 2023 and 2024, an entity had outstanding 40,000, 6% cumulative and fully participating
preference shares of P100 par value and 200,000 ordinary shares of P10 par value. Preference dividends
have been paid up to December 31, 2022. Cash dividend declared in 2024 totaled P1,500,000. What
amount should be reported as dividend payable to the preference shareholders in 2024?
a. P1,080,000
b. P480,000
c. P420,000
d. P1,380,000

43. On December 31, 2023, an entity issued 8,000 shares of P100 par value in connection with a share
dividend. The market value per share on the date of declaration was P170. The shareholders’ equity
accounts immediately before issuance of share dividend were:

Share capital, P100 par, 70,000 shares authorized, 50,000 issued P5,000,000
Share premium 3,000,000
Retained earnings 3,500,000
Treasury shares at cost, 10,000 shares 1,050,000
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 What amount of share premium should be reported immediately after the share dividend?
a. P3,560,000
b. P2,140,000
c. P2,700,000
d. P3,000,000

44. An entity had sustained heavy losses over a period of time and conditions warrant that the entity should
undergo a quasi-reorganization at year-end. Inventory is recorded at a cost of P5,000,000. The fair value
is P3,500,000. Property, plant and equipment is recorded at a carrying amount of P13,000,000. The fair
value is P9,000,000. The shareholders’ equity before the quasi-reorganization consists of the following:
Share capital, P12,000,000 with P20 par value; Share premium, P2,600,000; Deficit in retained earnings,
P1,500,000. What is the reduction in the share capital account to implement the quasi-reorganization?
a. P7,000,000
b. P1,500,000
c. P4,400,000
d. P6,400,000

For items 45 and 46:

The shareholders' equity section of Peter Corporation as of December 31, 2021, contained the following accounts:

Ordinary share capital, P20 par, 4,500,000 shares authorized; 225,000 shares P4,500,000
issued and outstanding
Share premium 2,500,000
Retained earnings 7,200,000

Peter Corporation’s board of directors declared a 10 percent bonus issue on April 1, 2022, when the market value
of the share was P24 per share. Accordingly, new shares were issued. Another P2.50 per cash dividends were
declared on September 1, 2022 and the equipment with carrying value of P650,000 currently having fair value of
P720,000 was declared as dividends on December 1, 2022. Peter Corporation sustained a net loss of P810,000 for
the year ended December 31, 2022.

45. What amount should Peter Corporation report as retained earnings as of December 31, 2022?
a. P4,657,500
b. P4,567,500
c. P4,511,250
d. P5,321,250

46. How much is the total shareholder’s equity should Peter Corporation in its December 31, 2022 Statement
of Financial Position?
a. P11,511,250
b. P12,051,250
c. P13,151,250
d. P13,671,250

For items 47 and 48:

The following information is related to the shareholder’s equity account of PINEAPPLE CORP. for the current year
2023:

Ordinary share capital (P10 stated value) P2,000,000

Ordinary share premium 500,000
Preference share capital (20 par value) 3,000,000
Preference share premium 1,000,000
Subscribed share capital – preference shares 500,000
Donated capital 300,000
Retained earnings – unappropriated 500,000
Appropriations for plant expansion 50,000
Cumulative translation adjustment – debit 150,000
Ordinary share warrants outstanding 40,000
Subscription receivable – preference shares 100,000

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 47. Contributed capital
a. P6,900,000
b. P7,000,000
c. P6,840,000
d. P7,240,000

48. Legal capital

a. P6,000,000
b. P7,340,000
c. P7,000,000
d. P7,840,000

For items 49 and 50:

On January 1, 2022, PHARSA Company granted 200 share options each to 1,500 employees, conditional upon the
employee’s remaining in the entity’s employ during the vesting period. The share options vest at the end of a four-
year period. On grant date, each share option has a fair value of P10. The par value per share is P40 and the option
(or exercise) price is P50.

On December 31, 2022, 100 employees have left and it is expected that on the basis of the weighted-average
probability, additional 200 employees will leave before the end of the four-year period.

On December 31, 2023, 70 employees have actually left and it is expected that on the basis of weighted average
probability, an additional 80 employees will leave before the end of the remaining vesting period.

On December 31, 2024, no employees have actually left but it is expected that on the basis of the weighted
average probability, 40 employees will leave before the end of the remaining vesting period.

On December 31, 2025, 80 employees actually left and all of the share options are exercised on such date.

49. What is the compensation expense for 2022?

a. P565,000
b. P600,000
c. P650,000
d. P685,000

50. What is the compensation expense for 2023?

a. P565,000
b. P600,000
c. P650,000
d. P685,000

For items 51 and 52:

Information relevant to three different companies follows:
Presented below is the equity section of Coca-Cola Corporation at December 31, 2022:

Share capital – ordinary, par value P20; authorized 75,000 shares; issued and P900,000
outstanding 45,000 shares
Ordinary share premium 250,000
Retained earnings 500,000
Total shareholder’s equity P1,650,000

During 2022, the following transactions occurred relating to equity:

 3,000 shares were reacquired at P28 per share.
 3,000 shares were reacquired at P35 per share.
 1,800 shares of treasury shares were sold at P30 per share.

For the year ended December 31, 2022, Coca-cola reported net income of P450,000.

Blue Corporation has 50,000 shares of P10 par ordinary shares authorized. The following transactions took place
during 2022, the first year of the corporation’s existence:
 Sold 5,000 ordinary shares for P18 per share.

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  Issued 5,000 ordinary shares in exchange for a patent with fair value of P100,000.

51. Assuming Coca-cola accounts for treasury under the cost method, what amount should it report as total
equity on its December 31, 2022, statement of financial position?
a. P1,965,000
b. P1,975,000
c. P1,985,000
d. P1,995,000

52. At the end of the Blue Corporation’s first year of operations, total contributed capital amounted to?
a. P180,000
b. P190,000
c. P200,000
d. P210,000

53. Gains on sale of treasury shares should be credited to

a. Share premium – treasury
b. Share capital
c. Retained earnings
d. Other income

54. Cash dividends are paid on the basis of the number of shares
a. Outstanding
b. Issued
c. Outstanding less treasury shares
d. Authorized

55. An entity shall measure a noncurrent asset classified as held for distribution to owners at
a. Lower of carrying amount and fair value
b. Lower of carrying amount and revalued amount less cost to distribute
c. Lower of carrying amount and cost to distribute
d. Lower of carrying amount and fair value less cost to distribute

56. Appropriations of retained earnings should be reported as

a. Component of equity as part of total retained earnings
b. Component of equity as part of share premium
c. Component of equity as part of other comprehensive income
d. Component of equity as part of contributed capital

57. What amount should be assigned to shares issued for services received?
a. Fair value of such services
b. Fair value of shares issued
c. Par value of shares issued
d. Carrying amount of such services

58. A share dividend

a. Decreases asset
b. Decreases shareholder’s equity
c. Increases liability
d. None of the above.

59. Cash dividends and property dividends should be recorded as liabilities on the
a. Date of issuing check
b. Date of record
c. Date of payment
d. Date of declaration

60. An entity issued a 20% share dividend. At what amount should the retained earnings be reduced?
a. Par value at the date of declaration
b. Fair value at the date of declaration
c. Fair value at the date of issuance
d. Zero
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