BM2403

MULTIPLE CHOICE – PROBLEM-SOLVING

Instruction: Encircle the letter of the correct answer and provide a complete solution for each.
Scoring: 1 point for each correct answer and 2 points for complete solution.

For no.s 1 to 2, refer to this given information: Joshua Company bought a new machine and agreed to pay in
equal annual installments of P600,000 at the end of each of the next five (5) years. The prevailing interest rate
for this type of transaction is 12%.
The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an ordinary
annuity of 1 at 12% for five periods is 6.35. The present value of 1 at 12% for five (5) periods is 0.567.
1. What amount should be reported as notes payable if financial statements were prepared today?
a. P1,700,000 c. P3,000,000
b. P2,160,000 d. P3,810,000
2. What amount should be reported as interest expense for the first year?
a. P259,200 c. P360,000
b. P187,200 d. P457,200
3. Mann Company reported a 10% notes payable of P3,600,000 on June 30, 2022. The note is dated October
1, 2020, and is payable in three (3) equal annual payments of P1,200,000 plus interest.
The first interest and principal payment was made on October 1, 2021.
On June 30, 2022, what amount should be reported as accrued interest payable for this note?
a. P270,000 c. P90,000
b. P180,000 d. P60,000
4. On December 31, 2022, Bart Company purchased a machine from Fell Company in exchange for non-
interest-bearing notes payable, requiring eight (8) payments of P200,000.
The first payment was made on December 31, 2022, and the others are due annually on December 31.
At the issuance date, the prevailing interest rate for this type of note was 11%.
PV of an ordinary annuity of 1 at 11% for 8 periods 5.146
PV of an annuity of 1 in advance at 11% for 8 periods 5.712
On December 31, 2022, what is the carrying amount of the notes payable?
a. P1,142,400 c. P1,046,200
b. P1,029,200 d. P942,400
5. At the beginning of the current year, Pares Company borrowed P3,600,000 from a major customer,
evidenced by a non-interest-bearing notes payable in three (3) years.
The entity agreed to supply the customer’s inventory needs for the loan period at an amount lower than
the market price.
At the 12% imputed interest rate for this type of loan, the note's present value is P2,550,000 at the date of
issuance.
What amount of interest expense should be reported for the current year?
a. P432,000 c. P306,000
b. P350,000 d. P0
6. At year-end, Roth Company issued a P1,000,000 face amount notes payable in exchange for services
rendered.

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The notes payable, made at usual trade terms, are due in nine (9) months and bear interest, payable at
maturity at the annual rate of 3%.
The market interest rate is 8%. The compound interest factor of 1 due in nine months at 8% is .944.
At what amount should the notes payable be reported at year-end?
a. P1,030,000 c. P965,240
b. P1,000,000 d. P944,000

7. On September 1, 2021, Pine Company issued notes payable of P1,800,000, bearing interest at 12%, and
payable in three (3) equal annual principal payments of P600,000. On this date, the prime rate was 11%.
The first interest and principal payment was made on September 1, 2022.
On December 31, 2022, what amount should be reported as accrued interest payable?
a. P44,000 c. P66,000
b. P48,000 d. P72,000
8. On March 1, 2021, Alpha Company borrowed P1,000,000 and signed 2-year notes payable bearing interest
at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2023.
What amount should be reported as accrued interest payable on December 31, 2022?
a. P100,000 c. P232,000
b. P120,000 d. P240,000
9. On January 1, 2022, Solemn Company sold land to Glory Company. There was no established market price
for the land.
Glory Company gave Solemn Company P2,400,000 noninterest-bearing notes payable in three equal
annual installments of P800,000, with the first payment due on December 31, 2022.
The note had no ready market. The prevailing interest rate for a note of this type is 10%.
The present value of P2,400,000 notes payable in three equal annual installments of P800,000 at a 10%
interest rate is P1,992,000.
What is the carrying amount of the notes payable on December 31, 2022?
a. P1,992,000 c. P1,391,200
b. P1,192,000 d. P1,600,000
10. On January 1, 2022, Easy Company reported a notes payable of P1,200,000.
The note is dated October 1, 2021, bears interest at 15%, and is payable in three equal annual payments
of P400,000.
The first interest and principal payment was made on October 1, 2022.
What amount should be reported as interest expense for 2022?
a. P165,000 c. P135,000
b. P180,000 d. P30,000

For no.s 11 to 13, refer to this information: On January 1, 2022, Davao Company borrowed P4,000,000 on a
6% 4-year interest-bearing note. The net proceeds from the borrowing amounted to P3,677,600. Interest is
payable annually every December 31.

The entity elected the fair value option. On December 31, 2022, the bonds are quoted at 95.

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11. What amount should be reported as interest expense for 2022?

a. P240,000 c. P294,208
b. P120,000 d. P220,656

12. What amount should be reported as gain or loss from a change in fair value for 2022?
a. P322,400 gain c. P122,400 gain
b. P322,400 loss d. P122,400 loss

13. What is the carrying amount of the notes payable on December 31, 2022?
a. P3,677,600 c. P3,493,720
b. P3,800,000 d. P4,000,000

For no.s 14 to 15, refer to this given information: On September 30, 2023, World Company borrowed
P1,000,000 on a 9% notes payable. The entity paid the first of four (4) quarterly payments of P264,200, due
on December 31, 2023.

14. What amount should be reported as interest expense for 2023?

a. P90,000 c. P67,500
b. P22,500 d. P30,000

15. On December 31, 2023, what is the carrying amount of the notes payable?
a. P758,300 c. P825,800
b. P750,000 d. P735,800

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