INTERMEDIATE ACCOUNTING 2

FINAL GRADING EXAMINATION

1. C = initial payments (500 x 15) + 200 x 12)= 9,900 x 8/12 = 6,600

2. B

Solution:
Accounts payable 2,000
Utilities payable 7,000
Accrued interest expense 6,000
Obligation to deliver a variable number of own shares
worth a fixed amount of cash 10,000
Cash dividends payable 4,000
Finance lease liability 35,000
Bonds payable 120,000
Discount on bonds payable (15,000)
Security deposit 2,000
Redeemable preference shares 14,000
Total financial liabilities 185,000

3. A
4. C
Normal purchase price with credit period of one month 220,000
Discount for cash on delivery (5,000)
Cash price equivalent of the goods purchased 215,000

5. C
Future cash flows – annual installments (₱1M ÷ 4) 250,000 Multiply by: PV of an annuity due of ₱1
@12%, n=4 3.401830

Present value of note payable - Jan. 1, 20x1 850,458

Amortization table: (Installment)

Interest
Date Payments expense Amortization Present value
Jan. 1, 20x1 850,458

Jan. 1, 20x1 250,000 - 250,000 600,458

Dec. 31, 20x1 250,000 72,055 177,945 422,513
 Dec. 31, 20x2 250,000 50,702 199,298 223,214
Dec. 31, 20x3 250,000 26,786 223,214 0

Date Collections PV of ₱1 @ 10%, n= 1 to 3* Present value

Dec. 31, 20x1 600,000 0.90909 545,455
Dec. 31, 20x2 400,000 0.82645 330,579
Dec. 31, 20x3 200,000 0.75131 150,263
Totals 1,200,000 1,026,296

6. C
Date Payments Interest expense Amortization Present value * PV of ₱1
@10%: n=1 is
Jan. 1, 20x1 1,026,296
0.90909; n=2
Dec. 31, 20x1 is 0.82645;
600,000 102,630 497,370 528,926
and n=3 is
Dec. 31, 20x2 400,000 52,893 347,107 181,818 0.75131
Dec. 31, 20x3 200,000 18,182 181,818 0

Amortization table: (Installment)

7. C
First trial: (at 10%)
Future cash flows x PV factor at x% = PV of note
 1,200,000 X PV of ₱1 @ 10%, n=3 = 1,000,000
 (1,200,000 x 0.751315) = 901,578 is not equal to 1,000,000

We need a substantially higher amount of present value. Therefore, we need to decrease

substantially the interest rate. Let’s try 6%.

Second trial: (at 6%)

Future cash flows x PV factor at x% = PV of note
 1,200,000 X PV factor at 6%, n=3 = 1,000,000
 (1,200,000 x 0.839619) = 1,007,543 is not equal to 1,000,000

We need a slightly lower amount of present value. Therefore, we need to increase slightly the
interest rate. Let’s try 7%.

Third trial: (at 7%)

Future cash flows x PV factor at x% = PV of note
 1,200,000 X PV factor at 7%, n=3 = 1,000,000
 (1,200,000 x 0.816298) = 979,558 is not equal to 1,000,000
 In here, we need to perform interpolation. Looking at the values derived above, we can
reasonably expect that the effective interest rate is a rate between 6% and 7%.

To perform the interpolation, we will use the following formula:

x% - 6%

7% - 6%

Where: x% again is the effective interest rate.

1,000,000 - 1,007,543 (7,543) 0.269

= =
979,558 - 1,007,543 (27,985) 5
The amount computed is added to 6% to derive the effective interest rate. The effective
interest rate is 6.2695% (6% + .2695%).

Date Interest income Unearned interest Present

value
Jan. 1, 20x1 200,000 1,000,000

Dec. 31, 20x1 62,695 137,305 1,062,695

Dec. 31, 20x2 66,626 70,679 1,129,321
Dec. 31, 20x3 70,803 (124) 1,200,124

8. A
Future cash flow 1,000,000
Multiply by: PV of ₱1, @12%, n=3 0.71178
Present value 711,780
The entry to record the note is as follows:
Jan. 1, Cash 1,000,000
20x1 288,220
Discount on note payable (1M – 711,780)
Note payable 1,000,000
Unrealized gain – “Day 1” Difference 288,220

9. C
Future cash flows Present value factors @12%, n=3 Present value
Principal 1,000,000 0.71178 a
711,780
Annual interest (1M x 3%) 30,000 2.40183 b
72,055
Total 783,835

a
(PV of ₱1 @12%, n=3)
 Payments for
Date interests Interest expense Amortization Present value
Jan. 1, 20x1 783,835
b
Jan. 1, 20x2 30,000 94,060 64,060 847,895
(PV
Jan. 1, 20x3 30,000 101,747 71,747 919,643
of Jan. 1, 20x4 30,000 110,357 80,357 1,000,000

ordinary annuity of ₱1 @12%, n=3 Amortization table:

(Installment)

10. C Solution: 100,000 x 12% x 1 month/12 = 1,000

11. D
12. A
13. D
14. C
15. D
16. C
17. C
18. D
19. B
20. C
Solution:
Issue price 2,600,000
Fair value of debt instrument without equity feature (2M x 102%) (2,040,000)
Equity component 560,000
21. C
Solution:
At twenty per cent chance: (800K x 20%) 160,000
At eighty per cent chance: (400K x 80%) 320,000
Total 480,000
Multiply by: PV of P1 @10%, n=1 0.90909
Total 436,363
Multiply by: Risk adjustment (100% + 7%) 107%
Total 466,909
Multiply by: Probability of settlement (100% - 30%) 70%
Provision for lawsuit – Dec. 31, 20x1 326,836

22. A
Solution:
The amount of the provision is estimated as follows:

Minor repairs (40M x 3% x 10%) 120,000

Major repairs (40M x 2% x 90%) 720,000
Total 840,000
Multiply by: Present value factor (given) 0.95238
Total 800,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 848,000
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,000

23. A 4,000,000 – termination benefits of employees terminated as a result of the closure.

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24. A (5,000 units sold x ₱400) = 2,000,000

25. A

Solution:
Estimated warranty liability
Jan. 1, 20x1 (given) 800,000
Actual warranty 1,240,000 2,000,000 costsWarranty expense
Dec. 31, 20x1 1,560,00
0

Sales in units 500,000

Multiply by: Estimate of wrappers to be redeemed 40%

26. B

Estimated wrappers to be presented for redemption 200,000

Divide by: Required number of wrappers for redemption
Estimated number of premiums to be distributed 20,000
Multiply by: Net cost of premium
(₱800 purchase cost less ₱200 cash requirement from customer) 600
Premium expense 12,000,000
10
27. A
28. E
29. D
30. D

[(20 employees x 1 day x 12 months) – 150 days] x ₱1,000 x 105% = 94,500. The 20% employee
turnover rate is irrelevant because the employee benefits are monetized.

31. D
32. C

Solution: [(20 employees x 1 day x 12 months) – 150 days] x ₱1,000 x 105% x 80%* = 75,600
* The paid absences are non-vesting.

33. D
34. C
35. B Solution: 2,900,000 PV of DBO – 2,600,000 FVPA = 300,000 deficit
36. B Solution: 400,000 service cost + 20,000 net interest (see computations below) =
420,000
37. C

Solution:
Service cost:
(a) Current service cost 400,000
(b) Past service cost -
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(c) Any (gain) or loss on settlement -

400,000
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the DBO (2M, beg. x 10%) 200,000
(b) Interest income on plan assets (1.8M, beg. x 10%) (c) Interest on (180,000)
the effect of the asset ceiling -
20,000
Remeasurements of the net defined benefit liability (asset):
(a) Actuarial (gains) and losses 200,000
(b) Difference between interest income on plan assets and
return on plan assets (180,000 – 120,000) 60,000
(c) Difference between the interest on the effect of the asset -
ceiling and change in the effect of the asset ceiling

Total Defined Benefit Cost

38. C
Solution:
Net defined benefit liability, beg. (1.5M – 1.2M) = 300,000
Net defined benefit liability, end. (1.8M – 1.310M) = 490,000
Increase = 190,000

39. C
40. B
41. C
260,000
42. C
43. C 680,000
44. B

Solution:
Annual rent 100,000
PV of ordinary annuity of 1 @10%, n=10 6.15
PV of minimum lease payments 615,000
45. B

B (100,000 x PV of ordinary annuity of 1 @10%, n=10) = 614,500

46. A

Solution:
Total consideration 52,000
Less: Payment for non-lease component (2,000)
Lease payments 50,000
Multiply by: PV of annuity due @9%, n=9 6.5348
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Total 326,740
First payment due in advance (50,000)
Lease liability – Dec. 31, 20x1 276,740
*Answer choice is rounded-off

47. C

C
Solution:
Cash flows PV factors PV
Annual rent 10,000 PV annuity due @12%, n=10 6.3282 63,282
PO 10,000 PV of 1 @12%, n=10 0.3220 3,220
66,502

48. A
Solution:
Cash flows PV factors PV
Annual rent 13,000 PV annuity due @9%, n=5 4.2397 55,116
Guaranteed RV 10,000 PV of 1 @9%, n=5 0.6499 6,499
Total 61,615
First payment due immediately (13,000)
Lease liability – initial recognition 48,615
49. D Solution:

20x1 10,000
20x2 (10K x 110%) 11,000
20x3 (11K x 110%) 12,100
20x4 (12.1K x 110%) 13,310
Lease bonus 5,000
Total 51,410
Divide by: 4

ANNUAL LEASE EXPENSE 12,853

50. C

Fixed lease payments 100,000

Multiply by: Lease term 3
Total lease payments 300,000
Add: Unguaranteed residual value -

Gross investment in the lease 300,000

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51. C
Fixed lease payments 100,000
Multiply by: PV of ordinary annuity of ₱1 @10%, n=3 2.48685
Net investment in the lease 248,685

52. A

Gross investment 300,000

Less: Net investment (248,685)
Unearned interest income 51,315

53. B
54. A
55. A
56. A
57. A
58. D

Excess of carrying amount of software over its tax base 500,000

Excess of carrying amount of machinery over its tax base 400,000
Taxable temporary difference (TTD) 900,000
Multiply by: Tax rate 30%
Deferred tax liability – Dec. 31, 20x1 270,000

59. D
Excess of carrying amount of accrued liability over its tax base 200,000
Deductible temporary difference (DTD) 200,000
Multiply by: Tax rate 30%
Deferred tax asset – Dec. 31, 20x1 60,000

60. A

Increase in DTL* (270,000)

Increase in DTA* 60,000
Deferred tax expense (210,000)
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*Amounts are taken from the table below.

61. C
Multiply by
Description of items Description of items
Tax rate

Pretax income 1,000,000

Permanent differences -

Acctg. profit subj. to tax 1,000,000 30% Income tax expense 300,000
Less:  TTD (900,000) 30% Less:  DTL (270,000)
Add:  DTD 200,000 30% Add:  DTA 60,000
Taxable profit 300,000 30% Current tax expense 90,000
62. D
Solution:
Pretax income (squeeze) 86,000
Add: Non-deductible expense:
Goodwill impairment loss not tax deductible 35,000 Less: Interest income subject to final tax (6,000)
Accounting profit subject to tax 115,000
Less:  Taxable temporary difference (TTD) 'FI>TI':
Revenues accrued but taxed on cash basis (40,000)
Add:  Deductible temporary difference (DTD) 'FI<TI'
Excess of depreciation 10,000
Bad debts recognized under allowance method 15,000
Taxable profit (start) 100,000

63. B
64. D
65. C
66. D
67. A
68. B
69. B
70. C
Solution:
Jan. 2, Share capital (100,000 x ₱10) 1,000,000
20x3 Sh. premium – orig. issuance (2.7M x 100K/900K) 300,000
Retained earnings 500,000
Cash 1,800,000
Share premium Retained earnings
Dec. 31, 20x2 2,700,000 1,300,000
Debit (300,000) (500,000)
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Jan. 2, 20x3 2,400,000 800,000

71. D
Solution:
Jan. 5, Cash (20,000 x 15) 300,000
20x1
Ordinary share (20,000 x 10) 200,000
Share premium 100,000
July Treasury shares (5,000 x 17) 85,000
14,
Cash
20x1 85,000
Dec. Cash (5,000 x 20) 100,000
27,
Treasury shares (5,000 x 17) 85,000
20x1
Share premium – Treasury shares 15,000
100,000 + 15,000 = 115,000

72. B
Solution:
Dec. Cash (3,000 x 25) 75,000
27,
Treasury shares (3,000 x 18) 54,000
20x1
Share premium – Treasury shares 21,000

73. D
74. A
75. A
Solution:
Issued Outstanding
Issued as of Dec. 31, 20x1 100,000 100,000
Treasury shares as of Dec. 31, 20x1 (5,000)

20x2 transactions:
May 3 - reissuance of treasury shares 1,000
Aug. 6 - issuance of new shares 10,000 10,000
Totals 110,000 106,000
Nov. 18 - 2-for-1 share split 2 2
Ending balances 220,000 212,000

76. B
Solution
Total cash dividends declared
44,000
(36,000)
Dividends to preference sh. [(4,000 x 100 x 6%) +
12,000]
8,000
Dividends to ordinary sh.

77. C
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Solution:
Total dividends declared 100,000
Allocation:
Basic allocation to preference shares: (30,000 x 10 x 5%) 15,000
Basic allocation to ordinary shares: (200,000 x 1 x 5%) 10,000
Excess subject to participation (100,000 – 15,000 – 10,000) 75,000
Participation of preference sh. (75,000 x 3/5) 45,000
Participation of ordinary sh. (75,000 x 2/5) 30,000
Balance -
Total dividends to ordinary shareholders = 10,000 + 30,000 = 40,000

78. B
Solution:
10% ('small' dividend) - at fair
value 15,000
28% ('large' dividend) - at par value 30,800
Total debit to retained earnings 45,800

79. A
80. D
81. D
82. B
83. C
C
20x4: (600 x 100 x 100) x 95% x 1/3 = 1,900,000;
20x5: (600 x 100 x 100) x 94% x 2/3 = 3,760,000 - 1,900,000 = 1,860,000

84. C

85. D
86. C
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87. C (3,600 + 4,400) = 8,000

88. B

Total shareholders' equity, excldg.

4,740,000
subscription receivable (4.68M + 60K)
Preference shareholders' equity:
Liquidation value (10,000 shares x ₱120) 1,200,000
Dividends in arrears (1M x 10% x 3 yrs.) 300,000 (1,500,000)
Ordinary shareholders' equity 3,240,000

Preference shareholders' equity 1,500,000

Divide by: No. of preference shares outstanding 10,000
Book value per share (Preference shares) 150.00

3,240,000
Ordinary shareholders' equity 29,000
Divide by: No. of ordinary shares outstanding a Book 111.72
value per share (Ordinary shares)
30,000
a
Ordinary shares issued (3M / 100par) 1,000
Subscribed shares (100K / 100par) (2,000)
Treasury shares 29,000
Outstanding ordinary shares

89. A

Solution:

Total shareholders' equity, excldg.

subscription receivable (4.68M + 60K) 4,740,000
Preference shareholders' equity:
Liquidation value (10,000 shares x ₱120) 1,200,000
Dividends in arrears (1M x 10% x 1 yr.) 100,000 (1,300,000)
Ordinary shareholders' equity
3,440,000
Preference shareholders' equity 1,300,000
Divide by: No. of preference shares outstanding 10,000
Book value per share (Preference shares) 130.00

3,440,000
Ordinary shareholders' equity 29,000
Divide by: No. of ordinary shares outstanding 118.62
Book value per share (Ordinary shares)

90. D

Solution:

Total shareholders' equity, excldg.

subscription receivable (4.68M + 60K) 1,200,000 4,740,000
Preference shareholders' equity: -
Liquidation value (10,000 shares x ₱120)
Dividends in arrears
(1,200,000)
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Ordinary shareholders' equity 3,540,000

1,200,000
Preference shareholders' equity
10,000
Divide by: No. of preference shares outstanding
120.00
Book value per share (Preference shares)
Ordinary shareholders' equity 3,540,000
Divide by: No. of ordinary shares outstanding a 29,000
Book value per share (Ordinary shares) 122.07

91. B

Solution:
Total shareholders' equity 20,600,000
8% PS (aggregate par value) (3,000,000
8% PS (dividends) - (3M x 8% x 3 yrs.) )
10% PS (aggregate par value) (720,000)
10% PS (dividends) - (4.5M x 10% x 1 yr.) (4,500,000)
Ordinary shares (aggregate par value) (450,000)
Ordinary shares (dividends) - (7.5M x 8% x 1 yr.) (7,500,000)
Amount for allocation (600,000)
8% PS (3.83M x 3/15)
10% PS (3.83M x 4.5/15)
3,830,000
Ordinary shares (3.83M x 7.5/15)
(766,000)
As allocated (1,149,000)
(1,915,000)
Ordinary shareholders' equity: -
Aggregate par value 7,500,000
Dividends 600,000
Participation 1,915,000
Total 10,015,000
Divide by: Outstanding shares 50,000
Book value per ordinary share 200.30

92. C
93. B

Solution:

Date No. of sh. Months outstanding Weighted average

(a) (b) (c) = (a) x (b)

1/1/20x1 120,000 12/12 120,000

3/1/20x1 42,000 10/12 35,000
9/30/20x1 20,000 3/12 5,000
11/1/20x1 (12,000) 2/12 (2,000)
158,000

Basic Profit (Loss) less Preferred dividends

EPS =
Weighted average number of outstanding ordinary shares
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Basic 2,800,000 – (100,000 x ₱10 x 10%)

=
EPS 158,000

Basic EPS = ₱ 17.09

94. B
Solution:
Profit (Loss) plus After tax interest expense on convertible bonds

Diluted EPS = Weighted average number of outstanding ordinary shares plus Incremental
shares arising from the assumed conversion or exercise of dilutive potential
ordinary shares
800,000 + (2,000,000 x 12% x 70%*)
Diluted EPS =
100,000 + [(2,000,000 ÷ 1,000) x 30]
*70% = 1 – 30% tax rate
Diluted EPS = (968,000 ÷ 160,000) = 6.05
95. A
96. C
97. D
98. A Solution: [(-1M) – 50K] ÷ 100,000 = -1,050,000 ÷ 100,000 = -10.5
99. C
Solution:
The weighted average number of ordinary shares outstanding are adjusted retrospectively as
follows:
20x1 20x2

1/1 (200,000 x 110% x 2) 440,000 (200,000 x 110% x 2 x 12/12) 440,000

4/1 (20,000 x 110% x 2 x 9/12) 33,000

9/30 -

11/1 -
Weighte
d average 440,000 473,000

20x2 20x1
Profit after tax 2,200,000 1,800,000
Adjusted weighted ave. no. of outstanding sh. 473,000 440,000
Basic EPS 4.65 4.09
100. A
Solution:
Aggregate mkt. value of shares before exercise of rts.
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(200,000 sh. x ₱180) 36,000,000

Add: Proceeds from exercise of rts. [(200,000 rts. ÷ 5) x ₱120] 4,800,000

Total 40,800,000
Divide by: Outstanding shares after exercise of rts.
[200,000 sh. before exercise + (200,000 rts. ÷ 5 rts. per sh.)] 240,000
Theoretical ex-rights fair value per share 170

Adjustment
factor Fair value of stocks immediately before the exercise of rights
=
Theoretical ex-rights fair value per share

The adjustment factor is 180/170.

Jan. 1: (200,000 x 180/170 x 4/12) 70,588
May. 1: (240,000 x 8/12) 160,000
Weighted average no. of outstanding ordinary shares 230,588

Profit for the year 2,900,000

Divide by: Weighted average no. of outstanding sh. 230,588
Basic earnings per share 12.58

“Do not be deceived: God cannot be mocked. A man reaps what he sows.” - Galatians 6:7

- END –