Chapter 1 LIABILITIES

1.1 Rosete Company had the following amounts of long-term debt outstanding on

December 31, 2013:

13% term note, due 2014 60,000

12% term note, due 2017 126,000

12% term note, due 2014 160,000

8% note, due in 12 annual principal payments, plus

interest beginning December 31, 2014 1,200,000

7% guaranteed debentures, due 2015 6,000,000

Total 7,546,000

The annual sinking fund requirement on the guaranteed debentures is P50,000 per

year. What total amount should be reported as current liabilities in December 31,

2013?

a. 1,260,000 c. 320,000

b. 160,000 d. 220,000

1.2 Gullon Company reported the following information on December 31, 2013:

Accounts Payable 1,200,000

Advances to employees 50,000

Unearned rent revenue 500,000

Estimated liabilities under warranties 150,000

Cash surrender value of officer’s life insurance 35,000

Bonds Payable, due 2014 2,500,000

Discount on bonds payable 300,000

Dividends payable 700,000

Note payable, due 2014 350,000

What total amount should be reported as current liabilities?

a. 5,150,000 c. 5,100,000

b. 5,000,000 d. 5,185,000

Chapter 2 CURRENT LIABILITIES

2.1 Pacio Company offers its customers a cereal bowl if they send in three

boxtops from its products and P10. The entity estimated that 70% of the boxtops will

be redeemed. In 2013, the entity sold 675,000 boxes and customers redeemed

330,000 boxtops receiving 110,000 bowls. The cost of each bowl is P25.

What is the liability for outstanding premiums on December 31, 2013?

a. 475,000

b. 1,187,500

c. 337,500

d. 712,500

2.2 After three profitable years, Onia Company decided to offer a bonus to its

branch manager of 25% of income over P1,000,000 earned by the branch during the

current year. The income for the branch was P1,800,000 before tax and before

bonus for the current year. The bonus is computed on income in excess of

P1,000,000 after deducting the bonus but before deducting tax.

What is the bonus for the current year?

a. 120,000

b. 140,000

c. 150,000

d. 160,000

Chapter 3 PROVISION AND CONTINGENT LIABILITY

3.1 Ian Company sells electrical goods covered by a one-year warranty for any

defects. of the sales of P100,000,000 for the year, the entity estimated that 3% will

have major defect, 5% will have minor defect and 92% will have no defect. The cost

of repairs would be P5,500,000 if all products sold had major defect and P3,300,000

if all had minor defect. What amount should be recognized as a warranty provision?

a. 330,000

b. 300,000

c. 374,000

d. 320,000

3.2 On December 31, 2013, Yam Company was a defendant in a pending lawsuit.

In the opinion of the entity’s attorney, it is probable that Yam Company will have to

pay P600,000 and it is reasonably possible that Yam Company will have to pay

P800,000 as a result of this lawsuit.

What should be reported in the 2013 financial statements?

a. An accrued liability of P600,000 only.

b. An accrued liability of P1,400,000.

c. An accrued liability of P600,000 and disclosure of a contingent liability of

P200,000.

d. An accrued liability of 800,000 only.

Chapter 4 BONDS PAYABLE

4.1 Red Company reported the following on December 31, 2013:

Unsecured

8% debentures, callable in 2014, due in 2015 3,500,000

10% debentures (P500,000 maturing annually) 4,000,000

11% convertible bonds, callable beginning in 2014, due 2015 1,300,000

Secured

12% guaranty security bonds, due in 2015 5,000,000

12% collateral trust bonds, convertible into share

capital beginning in 2014, due in 2015 2,000,000

8% commodity backed bonds (P500,000

maturing annually beginning in 2014) 4,500,000

What total amount of serial bonds, term bonds and debenture bonds should be

reported?

Serial bonds Term bonds Debenture bonds

a. 8,800,000 11,800,000 8,500,000

b. 8,500,000 8,800,000 11,800,000

c. 11,800,000 8,500,000 8,800,000

d. 8,500,000 11,800,000 8,800,000

4.2 The December 31, 2013 statement of financial position of Love Company

included a 9% bonds payable due December 31, 2019 with a carrying amount of

P15,405,000. The bonds were issued on December 31, 2009 and have a face

amount of P15,000,000 with interest payable semi-annually on June 30 and

December 31 of each year. On January 1, 2014, the entity retired P5,000,000 of

these bonds at 99. What amount should be reported in the 2014 income statement

as gain or loss on the retirement of the bonds?

a. 235,000 gain b. 235,000 loss c. 185,000 gain d. 185,000 loss

Chapter 5 EFFECTIVE INTEREST METHOD

5.1 On January 1, 2013, HRGR Company issued its 9% bonds in the face amount

of P4,000,000, which mature on January 1, 2023. The bonds were issued for

P3,756,000 to yield 10%, resulting in bond discount of P244,000. The entity uses the

interest method of amortizing bond discount. Interest is payable annually on

December 31.

On December 31, 2013, what is the balance of the unamortized bond discount?

a. 204,000

b. 208,000

c. 206,440

d. 228,400

5.2 A cash flow of P2,000,000 may be received by Ian Company in one year, two

years or three years, with probabilities of 25%, 45%, and 30% respectively. The rate

of interest on default risk-free investment is 5%. The present value factors are:

PV of 1 at 5% for 1 year .952

PV of 1 at 5% for 2 years .907

PV of 1 at 5% for 3 years .864

What is the expected present value of the cash flow?

a. 1,810,700

b. 1,806,200

c. 1,814,000

d. 1,728,000

Chapter 6 COMPOUND FINANCIAL INSTRUMENT

6.1 On March 1, 2013, Rika Company issued P5,000,000 of 12% nonconvertible

bonds at 103 which are due on February 28, 2018. In addition, each P1,000 bond

was issued 30 share warrants, each of which entitled the bondholder to purchase for

P50 one share of Rika Company, par value P25. Interest is payable annually every

February 28. On March 1, 2013, the market value of the share was P40 and the

market value of the warrant is P4. The market rate of interest for similar bonds ex-

warrant is 14%. The present value of 1 at 14% for 5 periods is 0.52 and the present

value of an ordinary annuity of 1 at 14% for 5 periods is 3.43.

What amount should be recognized on March 1, 2013 as discount or premium on the

issuance of the bonds?

a. 450,000 discount

b. 450,000 premium

c. 342,000 discount

d. 342,000 premium

6.2 On December 1, 2013, IGB Company issued at 105, five thousand of 9%,

P1,000 face value bonds. Attached to each bond was one share warrant entitling the

holder to purchase 10 ordinary shares of the entity. On December 1, 2013, the fair

value of the bonds without the share warrants was 95, and the fair value of the share

warrant was P45.

What amount of the proceeds from the bond issuance should be accounted for as

the initial carrying amount of the bonds payable?

a. 5,250,000

b. 5,150,000

c. 5,000,000

d. 4,750,000

Chapter 7 NOTE PAYABLE AND DEBT RESTRUCTURE

7.1 Hoho Company bought a new machine and agreed to pay in equal annual

instalment of P1,000,000 at the end of each of the next five years. The prevailing

interest rate for this type of transaction is 12% for the 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 periods is 0.567.

What amount should be reported as note payable if financial statements were

prepared today?

a. 567,000

b. 2,160,000

c. 6,350,000

d. 3,600,000

7.2 During 2013, Huhuhu Company experienced financial difficulties and is likely

to default on a P5,000,000, 15% three-year note dated January 1, 2011 payable to

Hahaha Bank. On December 31, 2013, the bank agreed to settle the note and

unpaid interest of P800,000 for 4,200,000 cash payable on January 31, 2014.

What amount should be reported as gain from extinguishment of debt in the 2013

income statement?

a. 800,000

b. 1,600,000

c. 1,700,000

d. 0

Chapter 8 OPERATING LEASE

8.1 On July 1, 2013, Red Company leased office premises for a three-year period

at annual rental of P400,000 payable on July 1 each year. The first rent payment

was made July 1, 2013. Additionally on July 1, 2013, Red Company paid P300,000

as a lease bonus to obtain the three-year lease instead of the lessor’s usual term of

six years.

In the December 31, 2013 statement of financial position, what amount should be

reported as prepaid rent?

a. 450,000

b. 250,000

c. 600,000

d. 380,000

8.2 Mama Company leased a new machine to Papa Company on January 1,

2013. The lease expires on January 1, 2018. The annual rental is P600,000.

Additionally, on January 1, 2013, Papa Company paid P500,000 to Mama Company

as a lease bonus and P250,000 as a security deposit to be refunded upon the

expiration of the lease.

In 2013 income statement, what amount should be reported as rent revenue?

a. 500,000

b. 700,000

c. 1,100,000

d. 1,350,000

Chapter 9 FINANCE LEASE – LESSEE

9.1 ABCD Company leased machinery for 10 years, its useful life, with effect from

January 1, 2013. At that date,, the fair value of the machinery was P5,000,000.

Annual rentals of P700,000 are payable in advance on January 1 of each year,

beginning January 1, 2013 and the interest rate implicit in the lease is 9%.

What total amount of lease liability should be recognized in the statement of financial

position on December 31, 2013?

a. 4,687,000

b. 4,578,000

c. 700,000

d. 0

9.2 Ate Company has leased an asset under a finance lease. The present value

of the minimum lease payments is 676,000 and the fair value of the asset is 700,000.

The asset has a useful life of 5 years and the lease is for a period of 4 years, after

which the asset can be acquired at a near zero cost, which is substantially below the

expected value of the asset at that date. The asset is depreciated on a straight line

basis.

What is the annual depreciation expense?

a. 140,000

b. 169,000

c. 135,200

d. 175,000

Chapter 10 DIRECT FINANCING LEASE –LESSOR

10.1 On January 1, 2013, Ex Company, as a lessor, leased an equipment for ten

years at an annual rental of P1,300,000, payable by Susu Company, the lessee, at

the beginning of each year. The lease is appropriately accounted for as finance

lease. The equipment had a cost of P8,400,000 with an estimated life of 12 years

and no residual value. The straight line depreciation is used. The implicit rate is 9%.

What amount of interest income should be reported in the income statement for

2013?

a. 1,300,000

b. 648,000

c. 620,000

d. 639,000

10.2 Someday Company leased an asset to another entity. The cost of the asset

was P7,884,000. Terms of the lease specify four-year life for the lease, an annual

interest rate of 15%, and four year-end rental payments. The lease qualifies as a

finance lease and is classified as a direct financing lease. The lease provides for a

transfer of title to the lessee at the end of the lease term. After the fourth year, the

residual value is estimated to be P1,000,000. The PV of 1 at 15% for 4 periods

is .572, and the PV of an ordinary annuity of 1 at 15% for 4 periods is 2.855.

What is the annual rental payment?

a. 13,783,220

b. 5, 384,048

c. 2,761,471

d. 1,356,394

Chapter 11 SALES TYPE LEASE – LESSOR

11.1 Myloves Company is a car dealer. On January 1, 2013, the entity entered into

a finance lease with a customer under which the customer would pay P300,000 on

January 1 each year for 5 years, commencing in 2013. The cost of the car is

P750,000 and the cash selling price was P900,000. The entity paid legal fees of

P25,000 to a law firm in connection with the arrangement of the lease. What amount

of gross profit on sale should be recognized for the year ended December 31, 2013?

a. 150,000

b. 125,000

c. 115,000

d. 0

11.2 Rhea Company leased equipment to another entity on January 1, 2013. The

lease is for an eight-year period expiring December 31, 2020. The first of eight equal

annual payments of P900,000 was made on January 1, 2013. Rhea Company had

purchased the equipment on December 29, 2012 for P4,800,000. The lease is

appropriately accounted for as a sales type lease by Rhea Company. The present

value on January 1, 2013 of all rent payments over the lease term discounted at a

10% interest rate was P5,280,000. What amount of interest revenue should be

recorded in 2014?

a. 391,800

b. 438,000

c. 480,000

d. 490,000