Name: _____________________________________Class Schedule: ___________________Course & Year______________ Date: _______________

MIDTERM EXAM IN ACCOUNTING 222

READ THE INSTRUCTIONS: Multiple Choice Questions. On a separate answer sheet (Yellow Pad), write the letter of the correct answer for each question.
No erasures allowed. Use ballpen only. If you are caught “cheating” or “talking” during the examination, your scores will be null and void. For
computational problem, show a complete solution. No solution, no points. DO NOT OPEN ANY OTHER FILE/ INTERNET BROWSER. LATE SUBMISSION
OF PAPER IS PROHIBITED.

1. On January 1, 20x1, PAGEANT SHOW Co. issued 10%, ₱12,000,000 bonds at a yield to maturity interest of 18%. Principal and interest are due on
December 31, 20x3. How much is the carrying amount of the bonds on initial recognition?

2. On January 1, 20x1, VIGILANT WATCHFUL Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds for the face amount of ₱4,000,000. Each
₱4,000 bond is convertible into 8 shares with par value of ₱400 per share. When the bonds were issued, they were selling at 98 without the
conversion option. VIGILANT incurred ₱200,000 transaction costs on the issue of the bonds. How much is the equity component of the compound
instrument?

3. On January 1, 20x1, CRYSTALLINE TRANSPARENT Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds at 105. Each ₱4,000 bond is convertible
into 8 shares with par value per share of ₱400. Principal is due on December 31, 20x3 but interests are due annually at each year-end. When the
bonds were issued, they were selling at a yield to maturity market rate of 12%without the conversion option. On December 31, 20x2, all of the
bonds were converted into equity. Conversion costs incurred amounted to ₱80,000.
How much is the net increase in equity on December 31, 20x2 due to the conversion of the bonds?

Use the following information for the next three questions:

On January 1, 20x1, ELABORATE COMPLICATED Co. issued 3-year, 10%, ₱4,000,000 convertible bonds for ₱4,400,000. Principal is due at maturity but
interest is payable every year-end. The bonds are convertible into 6,000 ordinary shares with par value of ₱400. At issuance date, the prevailing market
rate of interest for similar debt without conversion feature is 12%.

On December 31, 20x2, all the convertible bonds were retired for ₱4,000,000. The prevailing rate of interest on a similar debt instrument as of
December 31, 20x2 is 11% without the conversion feature.

4. How much is gain (loss) on the extinguishment of the bonds on December 31, 20x2?

5. How much is the net credit to “share premium” account on December 31, 20x2?

6. How much is the net increase (decrease) in equity due to the retirement of the bonds on December 31, 20x2?

Use the following information for the next three questions:

On January 1, 20x1, KISMET FATE Co., purchased inventory with a list price of ₱4,400,000 and a cash price of ₱4,000,000 by issui ng a noninterest-
bearing note of ₱4,800,000 due on December 31, 20x3.

7. How much is the carrying amount of the note on initial recognition?

8. How much is the interest expense in 20x1?

9. How much is the carrying amount of the note on December 31, 20x1?

10. On January 1, 20x1, ABC Co., acquired transportation equipment in exchange for cash of ₱100,000 and ₱1,000,000 noninterest-bearing note
payable due in 4 equal annual installments starting December 31, 20x1. The prevailing rate of interest for this type of note is 12%. How much is
the current portion of the note on December 31, 20x2?

11. Entity A purchases a TV set on a 6-month installment basis. The installment price is ₱120,000. However, if the TV set is purchased outright in cash,
the cash price would have been ₱100,000. The payable will be initially recognized at

12. Entity A purchases goods for ₱250,000 under a special credit period of 1 year. The seller normally sells the goods for ₱220,000 with a credit period
of one month or with a ₱5,000 discount for cash basis (i.e., outright payment in cash). The initial measurement of the payable is

13. On January 1, 20x1, ABC Co. acquired transportation equipment in exchange for ₱100,000 cash and ₱1,000,000, noninterest-bearing note payable
due in 4 equal annual installments. The first installment is due on January 1, 20x1. The succeeding installment payments are due every December
31. The prevailing rate of interest for this type of note is 12%. How much is the interest income in 20x1?

14. On January 1, 20x1, ABC Co. acquired machinery by issuing a 3-year, ₱1,200,000 noninterest-bearing note payable due as follows:
Date Amount of installment
December 31, 20x1 600,000
December 31, 20x2 400,000
December 31, 20x3 200,000
Total 1,200,000

The prevailing rate of interest for this type of note is 10%.

How much is the carrying amount of the note on December 31, 20x1?
15. On January 1, 20x1, ABC Co. issued a ₱1,200,000 noninterest-bearing note due on December 31, 20x1 in exchange for inventory with a list price
of ₱1,100,000 and a cash price of ₱1,000,000. How much is the carrying amount of the note on December 31, 20x1?
16. On January 1, 20x1, ABC Co. issued a 3-year, ₱1,000,000 noninterest-bearing note payable to XYZ, Inc., a related party. The prevailing interest for
similar type of obligation is 12%.The proceeds received from the note is ₱1,000,000, equal to the face amount. How much is the “Day 1”
difference? Gain (Loss)

17. On January 1, 20x1, ABC Co. issued a 3-year, 3%, ₱1,000,000 note payable in exchange for a machine. Principal is due on January 1, 20x4 but
interest is due annually every January 1. The prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note on
December 31, 20x1?

18. On December 1 a company borrowed ₱100,000 at 12% per year. The interest will be paid quarterly, with the first payment due on March 1. What
should the company report on its income statement for December?
a. Interest expense of ₱12,000
b. Interest expense of ₱10,000
c. Interest expense of ₱1,000
d. Nothing
19. On May 1, year 1, a company borrowed ₱3,000 cash and signed a 13 percent note payable due April 30, year 3. Interest is paid each April 30. The
accounting period ends December 31.the adjusting entry at December 31,year 1 would include:
a. debit notes payable,₱390
b. credit interest payable ₱130
c. debit interest expense ₱390
d. credit interest payable ₱260
20. Unamortized bond discount should be reported on the financial statements of the issuer as a
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the issue costs

21. For a bond issue which sells for less than its face amount, the market rate of interest is
a. Dependent on the rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond.
d. Higher than rate stated on the bond.

22. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.

23. Which of the following is not a relevant consideration when evaluating whether to derecognize a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of the obligation have been transferred.

24. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e., similar remaining maturity, cash flow pattern,
currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through the expected life of the debt instrument or,
when appropriate, a shorter period to the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.

25. Which of the following statements is false?

a. Bonds carry no corporate ownership privileges.
b. A bond is a financial contract.
c. Bond prices remain fixed over time.
d. A bond issuer must pay periodic interest.

26. Most bonds:

a. are money market securities.
b. are floating-rate securities.
c. give bondholders a voice in the affairs of the corporation.
d. are interest-bearing obligations of governments or corporations.

27. In an “asset swap,” where a liability is settled through the transfer of noncash asset,
a. the gain or loss on settlement is computed as the difference between the carrying amount of the liability extinguished and the fair value of
the noncash asset transferred.
b. the gain or loss on settlement is computed as the difference between the carrying amount of the liability extinguished and the carrying
amount of the noncash asset transferred.
c. the gain or loss on settlement is computed as the difference between the carrying amount of the liability extinguished and the more clearly
determinable between the fair value of the liability extinguished and the carrying amount of the noncash asset transferred.
d. no gain or loss is recognized

28. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000 bond is convertible into 10 shares with par value
of ₱60 per share. On issuance date, the bonds are selling at 102 without the conversion option. What is value allocated to the equity component
on initial recognition?
29. An entity is the defendant in a patent infringement lawsuit. The entity’s lawyers believe there is a 30% chance that the court will dismiss the case
and the entity will incur no outflow of economic benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a
 20% chance that the entity will be required to pay damages of ₱800,000 (the amount sought by the claimant) and an 80% chance that the entity
will be required to pay damages of ₱400,000 (the amount that was recently awarded by the same judge in a similar case). Other outcomes are
unlikely.

The court is expected to rule in late December 20x2. There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the
probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount
rate is 10% per year. How much is the provision for lawsuit at December 31, 20x1?

30. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract of sale, the manufacturer
undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the
basis of experience, it is probable (i.e., more likely than not) that there will be some claims under the warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold in 20x1 are expected to be made 50% in 20x1 and
50% in 20x2. Assume for simplicity that all the 20x2 outflows of economic benefits related to the warranty repairs and replacements take place on
June 30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold require minor repairs costing 10% of the sale price;
and 2% of products sold require major repairs or replacement costing 90% of sale price. The entity has no reason to believe future warranty claims will
be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30, 20x2 is 0.95238. Furthermore, an appropriate risk
adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

31. As of December 31, 20x1, ROUSE AWAKEN Co. has adopted a detailed formal plan to close one of its toys divisions and put up a new division to
manufacture warfare weapons. The plan was communicated through a public announcement and all of those affected by the closure were
informed. ROUSE estimates the following costs in relation to the closure of the division:

Termination benefits of employees terminated as a

result of the closure ₱4,000,000
Costs of retraining and relocating retained employees 8,000,000
Payment for unpaid purchases made by the division 16,000,000
New systems and distribution networks for the weapons
division 80,000,000
Marketing costs for the weapons to be manufactured by
the new division 24,000,000
Expected losses during the first year of operations of
the weapons division 80,000,000

How much is the provision to be recognized?

Use the following information for the next two questions:

RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that warranty costs ₱400 per unit sold. As of January 1, 20x1,
the liability for warranty has a balance of ₱800,000 for units sold in 20x0. During the year RISIBLE sold 5,000 units and actual warranty costs incurred
were ₱1,240,000.

32. How much is the warranty expense to be recognized in 20x1?

33. How much is the balance of the warranty obligation as of December 31, 20x1?

34. PROFUSE EXTRAVAGANT Co. launched a sales promotion in 20x1. For every ten empty packs returned to PROFUSE plus ₱200, customers will
receive a set of kitchen knives. PROFUSE estimates that 40% of the packs sold will be redeemed. Information on transactions during the year is as
follows:
Units Amount
Sales 500,000 3B
Sets of kitchen knives purchased (₱800 per set) 300,000 240M
Number of packs redeemed 45,000

How much is the premium expense in 20x1?

35. On January 1, 20x1, CONFOUND Co. guaranteed a ₱4,000,000 loan obtained by CONFUSE, Inc. from a bank. On December 31, 20x1, CONFUSE
defaulted on its loan and it became probable that CONFOUND will be held liable to the bank for the ₱4,000,000 loan taken by CONFUSE. How
much is the provision to be recognized?

36. OBTUSE DULL Co. is involved in a tax dispute. OBTUSE has wrongfully paid taxes and is claiming for refund of the taxes it has previously paid. As
of December 31, 20x1, OBTUSE’s legal counsel was very confident that OBTUSE will be able to recover the tax refund amounting to ₱40M in the
coming year. The entry to recognize the probable receipt of the tax refund includes
a. a debit to receivable d. a and b
b. a credit to gain e. none of these
c. a debit to prepaid asset