FINANCIAL ACCOUNTING & REPORTING 2

LONG QUIZ 1 – SET A

1) Nieva Company had the following liabilities on December 31, 2019:
Accounts payable 500,000
Accrued expenses 50,000
Note payable – due March 31, 2020 1,000,000
Note payable – due May 1, 2020 800,000
Bonds payable – due December 31, 2021 2,000,000
Bonds payable – due December 31, 2020 (net of discount P100,000) 4,900,000

On March 1, 2020 before the 2019 financial statements were issued, the note payable of P1,000,000 was replaced by
an 18-month note for the same amount. The company is considering a similar action on the P800,000 note due on May
1, 2019. The bond redemption fund established five years ago for the bonds maturing on December 31, 2019 is equal
to the face value of the issue.
A. 2,350,000 B. 1,350,000 C. 6,250,000 D. 7,250,000

SOLUTIONS: D
Accounts payable 500,000
Accrued expenses 50,000
Note payable – due March 31, 2020 – refinanced after December 31 1,000,000
Note payable – due May 1, 2020 800,000
Bonds payable – due December 31, 2021 – due beyond 12 months --
Bonds payable – due December 31, 2020 (net of discount P100,000) 4,900,000
Total current liabilities 7,250,000

2) 49ers Company provided the following information on December 31, 2019:
Accounts payable, net of creditors’ debit balances P200,000 2,000,000
Accrued expenses 800,000
Bonds payable due December 31, 2020 2,500,000
Premium on bonds payable 300,000
Deferred tax liability 500,000
Income tax payable 1,100,000
Cash dividend payable 600,000
Share dividend payable 400,000
Note payable – 6%, due March 1, 2020 1,500,000
Note payable – 8%, due October 1, 2020 1,000,000

The financial statements for 2019 were issued on March 31, 2020. On December 31, 2019, the 6% note payable was
refinanced on a long-term basis. Under the loan agreement for the 8% note payable, the entity has the discretion to
refinance the obligation for at least twelve months after December 31, 2019. What amount should be reported as total
current liabilities?
A. 7,500,000 B. 9,000,000 C. 8,000,000 D. 6,900,000

SOLUTION: A
Current Non-current
Adjusted accounts payable (2,000,000 + 200,000) 2,200,000 --
Accrued expenses 800,000 --
Bonds payable currently maturing (2,500,000 + 300,000) 2,800,000 --
Deferred tax liability -- 500,000
Income tax payable 1,100,000 --
Cash dividend payable 600,000 --
Share dividend payable -- --
6% note payable – refinanced before year end -- 1,500,000
8% note payable – discretion -- 1,000,000
Total 7,500,000 3,000,000

3) An analysis of Browns Company’s liabilities disclosed the following:
Accounts payable, after deducting debit balances in suppliers’ accounts amounting to
P22,500 (accounts payable included non trade liabilities of P32,500) 105,000
Accrued expenses 15,000
Credit balances of customer’s account 13,500
Stock dividends payable 70,000
Claims for increase in wages and allowances by employees of the company’s covered in a

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 pending lawsuit 125,000
Estimated liabilities for premium 60,000

How much should be presented as total current liabilities in the statement of financial position?
A. 6,000 B. 168,500 C. 183,500 D. 216,000

SOLUTIONS: D
Accounts payable – trade and non trade (105,000 + 22,500) 127,500
Accrued expenses 15,000
Credit balances of customer’s account 13,500
Stock dividends payable – equity account --
Claims for increase in wages and allowances by employees of the company’s covered in a
pending lawsuit – contingent liability, disclosure only --
Estimated liabilities for premium 60,000
Total 216,000

4) Caramilk has the following liabilities as of December 31, 2019:
Trade accounts payable, including cost of goods received on consignment of P10,000 300,000
Held for trading financial liabilities 50,000
Bank overdraft 10,000
Income tax payable 50,000
Accrued expenses 5,000
Share dividend payable 12,000
Advances from affiliates payable in 15 months after year-end 23,000
Loan of Mumshi, Inc. guaranteed by Caramilk – it is possible that Caramilk will be held liable 45,000

How much is the total current liabilities?

A. 425,000 B. 405,000 C. 415,000 D. 460,000

SOLUTIONS: B
Trade accounts payable (300,000 – 10,000) 290,000
Held for trading financial liabilities 50,000
Bank overdraft 10,000
Income tax payable 50,000
Accrued expenses 5,000
405,000

5) The Friends Company records its trade accounts payable net of any cash discounts. At the end of 2019, Friends had a
balance of P300,000 in its trade accounts payable account before any adjustments related to the following items:
• Goods shipped to Friends FOB shipping point were in transit on December 31. The invoice price of the goods was
50,000, with a 2% discount allowed for prompt payment.
• Goods shipped to Friends FOB destination on December 29 arrived on January 2, 2020. The invoice price of the
goods was P8,000, with a 4% discount allowed for payment within 20 days.
• On December 10, Friends had recorded a shipment received. The recorded invoice price was P24,750, net, with a
1% discount allowed for payment within 14 days. At the end of the year, payment had not been made.

At what amount should Friends report trade accounts payable on its December 31, 2019 balance sheet?
A. 349,000 B. 349,250 C. 356,680 D. 356,930

SOLUTIONS: B
Accounts payable – unadjusted 300,000
1. Unrecorded purchase – (assume not recorded until received) 50,000 x 98% 49,000
2. No adjustment --
3. Reversal of discount – exceeded the discount period (24,750 /99%) x 1% 250
Adjusted accounts payable 349,250

6) Kerr Company accounts payable balance at December 31, 2019 was P1,500,000 before considering the following
transactions:
• Goods were in transit from a vendor to Kerr on December 31, 2019. The invoice price was P70,000, and the goods
were shipped FOB shipping point on December 29, 2019. The goods were received on January 4, 2020.
• Goods shipped to Kerr FOB shipping point on December 20, 2019, from a vendor were lost in transit. The invoice
price was P50,000. On January 5, 2020, Kerr filed a P50,000 claims against the common carrier.

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 In its December 31, 2019 statement of financial position, Kerr should report accounts payable of
A. 1,620,000 B. 1,570,000 C. 1,550,000 D. 1,500,000

SOLUTIONS: A
Accounts payable – unadjusted 1,500,000
1. Unrecorded purchase 70,000
2. Unrecorded purchase 50,000
Accounts payable – adjusted 1,620,000

7) The balance in Cowboy Corporation’s accounts payable at December 31, 2019 was P1,350,000 before any necessary
year-end adjustment relating to the following:
• Goods were in transit to Cowboy from a vendor on December 31, 2019. The invoice cost was P75,000. The goods
were shipped FOB shipping point on December 29, 2019 and were received on January 2, 2020.
• Goods shipped FOB destination on December 21, 2019, from a vendor to Cowboy, were received on January 6,
2020. The invoice cost was P37,500.
• On December 27, 2019, Cowboy wrote and recorded checks totaling P60,000 which were mailed on January 10,
2020.

In Cowboy’s December 31, 2019 statement of financial position, how much should be the accounts payable?
A. 1,410,000 B. 1,425,000 C. 1,462,500 D. 1,485,000

SOLUTIONS: D
Unadjusted Accounts payable 1,350,000
1. Unrecorded purchases, goods in transit 75,000
2. No adjustment --
3. Reversal of unreleased check 60,000
Adjusted Accounts payable 1,485,000

8) On December 31, 2021, Cell Company has accounts payable of P4,000,000 before possible adjustment for the
following:
• Goods in transit from a vendor to Cell on December 31, 2021 with an invoice cost of P200,000 purchased FOB
shipping point was not yet recorded.
• Goods shipped FOB shipping point from a vendor to Cell was lost in transit. The invoice cost of P80,000 was not
yet recorded.
• Goods shipped FOB shipping point from a vendor to Cell on December 31, 2021 amounting to P32,000 was
recorded and included in the year-end physical count as “goods in transit.”
• Goods in transit from a vendor to Cell purchased FOB destination was not yet recorded. The goods were received
in January 2022.
• Goods with invoice cost of P60,000 was recorded and included in the year-end physical count as “goods in
transit.” It was found out that the goods were shipped from a vendor under FOB destination.
• Checks drawn but not yet released to payee amounted to P48,000, while checks drawn and released to payees
but were postdated amounted to P20,000.
• On December 28, 2021, a vendor authorized Cell to return for full credit goods shipped and billed at P100,000 on
December 14, 2021. Cell shipped the returned goods on December 31, 2021 but the credit memo was received
and recorded on January 3, 2022.
• Goods shipped FOB shipping point, freight prepaid from a vendor December 28, 2021 was recorded at invoice
cost at shipment date. The invoice cost is P56,000 while the freight cost is P12,000.
• Goods shipped FOB destination, freight collect were received on December 29, 2021. The invoice cost of
P160,000 was credited to accounts payable on date of receipt and the related freight of P20,000 was debited to an
expense account.

How much is the adjusted accounts payable on December 31, 2021?

A. 4,220,000 C. 4,168,000
B. 4,180,000 D. 4,148,000

SOLUTION: B
Unadjusted 4,000,000
1. Unrecorded purchase 200,000
2. Unrecorded purchase 80,000
3. No adjustment --
4. No adjustment --

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 5. Recorded purchase but should not be recorded (60,000)
6. Reversal of unreleased and postdated check 68,000
7. Unrecorded purchase return (100,000)
8. Unrecorded unpaid freight 12,000
9. Debited to expense instead of accounts payable (20,000)
Adjusted 4,180,000

9) In its statement of comprehensive income for the year ended December 31, 2013, Ethan Company showed bonus
expense of P466,428 and income after deducting tax and bonus is P6,196,822. Income tax rate is 35% and bonus is
computed as percentage of the income after deducting income tax but before deducting bonus. What was the bonus
rate?
A. 7.53% B. 7.00% C. 5.00% D. 5.67%

SOLUTION: B
466,428 / (6,196,822 + 466,428) = 7%

10) Washington Corporation provides an incentive compensation plan under which its president is to receive a bonus equal
to 10 percent of Washington’s income in excess of P100,000 before deducing income tax but after deducting bonus. If
income before income tax and bonus is P320,000 and the effective tax rate is 40 percent, the amount of the bonus
should be
A. 20,000 B. 22,000 C. 32,000 D. 44,000

SOLUTION: A
B = 10% (320,000 – 100,000 – B)
B = 10% (220,000 – B)
B = 22,000 – 0.1B
1.1B = 22,000
B = 20,000

11) Generous Company pays bonuses to its chief operating officer (COO) and sales manager. According to the incentive
agreement, the COO gets 10% and the sales manager gets 8%. The basis for computing bonuses would be the net
income after tax and bonuses. Income tax rate is 35%. The net income before tax and bonuses is P5,000,000 for the
year 2019. How much is the bonus for the sales manager?
A. 274,262 B. 223,724 C. 294,450 D. 232,766

SOLUTION: D
T = 0.35 (5,000,000 – B)
B = 0.18 (5,000,000 – B – T)
B = 0.18 [5,000,000 – B – (0.35 (5,000,000 – B)]
B = 0.18 [5,000,000 – B – 1,750,000 + 0.35B]
B = 900,000 – 0.18B – 315,000 + 0.063B
B = 585,000 – 0.117B
1.117B = 585,000
B = 523,724
523,724 x 8/18 = 232,766

12) Popo Company pays its outside salespersons fixed monthly salaries and commissions based on net sales. Sales
commissions are computed and paid on a monthly basis (in the month following the month of sale) and the fixed
salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales
commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of December
for the three salespersons are as follows:
Salesperson Fixed Salaries Net Sales Commission Rate
A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Totals 42,000 1,200,000

What should Popo Company accrue for sales commissions at December 31?
A. 70,000 B. 68,000 C. 28,000 D. 26,000

SOLUTIONS: C
Commission A (200,000 x 4%) 8,000
Payment to A (10,000)

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 Excess payment to A (2,000)

Commission B (400,000 x 6%) 24,000

Payment to B (14,000)
Payable to B 10,000

Commission C (600,000 x 6%) 36,000

Payment to C (18,000)
Payable to C 18,000

Total commission payable (10,000 + 18,000) 28,000

13) Green Bay Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly
period. Green Bay Company accrues salaries expenses only at its December 31 year-end. Data relating to salaries
earned in December 31, 2021 are as follows:
• Last payroll paid on December 26, 2021 for the 2-week period ended December 26, 2021.
• Overtime pay earned in the 2-week period ended December 26, 2021 was P10,500.
• Remaining work days in 2021 were December 29, 30, and 31, on which days, there was no overtime.
• The recurring biweekly salaries totaled P187,500.

Assuming a five-day workweek, what amount should Green Bay Company record as accrued salaries at December 31,
2021?
A. 56,250 B. 66,750 C. 112,500 D. 123,000

SOLUTIONS: B
10 days salaries 187,500
10 days 10
Daily salaries 18,750
Days unpaid 29, 30, 31 3
Total unpaid 56,250
Overtime 10,500
Total unpaid 66,750

14) Vanny’s Video Mart sells 1 and 2-year mail order subscriptions for its video-of-the-month business. Subscriptions are
collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:
2016 2017
Sales 17,000,000 21,000,000
Less cancellations 1,000,000 1,000,000
Net sales 16,000,000 20,000,000

Subscriptions expiration:
2016 4,000,000
2017 7,000,000 5,000,000
2018 5,000,000 11,000,000
2019 4,000,000

In Vanny’s December 31, 2017, balance sheet, the balance of unearned subscription revenue should be
A. 20,000,000 B. 15,000,000 C. 11,000,000 D. 4,000,000

SOLUTION: A
Subscription not yet expired as of December 31, 2017 (subscription that will expire beyond
2017 i.e., 2018 and up):
Sold 2016 expire in 2018 5,000,000
Sold 2017 expire in 2018 11,000,000
Sold 2017 expire in 2019 4,000,000
Total unexpired as of 12/31/18 20,000,000

15) Delta Company sells equipment service contracts that cover a two-year period. The sale price of each contract is P600.
Delta’s past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during
the first contract year and 60% evenly during the second contract year. Delta sold 1,000 contracts evenly throughout
2019. In its December 31, 2019 balance sheet, what amount should Delta report as deferred service contract revenue?
A. 300,000 B. 360,000 C. 480,000 D. 540,000

SOLUTION: C

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 Selling price of contract (1,000 x 600) 600,000
Revenue recognized in 2019 (600,000 x 20%) 120,000
Unearned revenue at December 31, 2019 480,000

16) Brave Company sells appliance service contract, agreeing to repair appliances for two-year period. Brave’s past
experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first
contract year and 60% evenly during the second contract year. Receipts from service contract sales for the two years
ended December 31, 2019, are as follows:
2018 1,500,000
2019 1,800,000

Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales are made
evenly during the year. What amount should Brave report as service contract revenue at December 31, 2019?
A. 1,080,000 B. 1,110,000 C. 1,440,000 D. 1,890,000

SOLUTION: B
Revenue recognized from contract sold in 2018 (1,500,000 x 20%) + (1,500,000 x 30%) 750,000
Revenue recognized from contract sold in 2019 (1,800,000 x 20%) 360,000
Total revenue recognized in 2019 1,110,000

17) Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a P2 per room, per night, occupancy tax.
Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the
end of each calendar quarter. On January 3, Year 2, Hudson paid its November Year 1 sales taxes and its fourth
quarter Year 1 occupancy taxes. Additional information pertaining to Hudson’s operations is
Year Room Rentals Room Nights
October 100,000 1,100
November 110,000 1,200
December 150,000 1,800

What amount should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, Year 1
statement of financial position?
A B C D
Sales taxes 39,000 39,000 54,000 54,000
Occupancy taxes 6,000 8,200 6,000 8,200

SOLUTION: C
Room rentals for November and December (110,000 + 150,000) 260,000
Sales tax 15%
Sales taxes paid on January 2, Year 2, - therefore unpaid as of December 31, Year 1 39,000

Room nights for 3 months (fourth quarter) – 1,100 + 1,200 + 1,800 4,100
Occupancy tax 2
Total occupancy tax unpaid 8,200

18) Perez Company sells products with reusable and expensive containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of delivery.
Containers held by customers on January 1, 2019 from deliveries in:
2017 150,000
2018 430,000 580,000
Containers delivered in 2019 780,000
Containers returned in 2019 from deliveries in:
2017 90,000
2018 250,000
2019 286,000 626,000

What is the liability for deposits on December 31, 2019?

A. 494,000 B. 584,000 C. 674,000 D. 734,000

SOLUTION: C
Liability for container deposit
Cash returned to customers 626,000 580,000 01/01/19 – Beginning balance
Deposit forfeited (150,000 – 90,000) 60,000 780,000 Cash receipt from customers

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 674,000 12/31/19 – Ending balance

19) At December 31, 2018, Dolphins Corporation owed notes payable of P2,000,000 with a maturity of April 30, 2019.
These notes did not arise from transactions in the normal course of business. On February 1, 2019, Dolphins issued
P4,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the P2,000,000 of
notes payable. Dolphins Company’s 2018 financial statements were issued on March 29, 2019. How much of the
P2,000,000 notes payable should be classified as current liabilities in Dolphin Company’s statement of financial position
at December 31, 2018?
A. 6,000,000 C. 2,000,000
B. 4,000,000 D. 0

SOLUTION: C
Currently maturing obligation is classified as current liability – general rule, unless:
1. Refinance on or before December 31 – NO
2. Company as a discretion – NO
3. Grace period to rectify a breach of agreement is received on December 31 – NO

20) Jaguars Candy Company bought 8,000 premiums at P2 each to give away in a box top mail-in contest. Two box tops
entitle a customer to one premium. Past experience indicates that approximately 45 percent of the available box tops
will be redeemed. The number of boxes sold during the current year was 15,200. The amount of premium expenses for
the current year would be:
A. 8,360 B. 6,840 C. 16,000 D. 16,720

SOLUTIONS: B
In Premium Net Cost In Peso
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit 15,200
% of redemption 45%
# of coupons required for each premium /2 3,420 2 6,840
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending


21) Willem Company reported the following liabilities at December 31, Year 1:
Accounts payable – trade 750,000
Short-term borrowings 400,000
Mortgage payable, current portion P100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000

The P1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment
due January 15, Year 3. Willem’s audited financial statements were issued February 28, Year 2. What amount should
Willem report as current liabilities at December 31, Year 1?
A. 850,000 B. 1,150,000 C. 1,250,000 D. 2,250,000

SOLUTIONS: D
Accounts payable – trade 750,000
Short-term borrowings 400,000
Mortgage payable – current portion only 100,000
Other bank loan – refinanced after December 31 1,000,000
Total current liabilities 2,250,000

22) Kansas Company bought 40,000 dolls at P5 each to give away in a proof of purchase promotion. Two proofs of
purchases entitle a customer to one doll. Past experience indicates that approximately 55 percent of the available proof
of purchases will be redeemed. The number of proof of purchases on soup boxes sold during the current year was
76,000. The amount of expense to be recognized during the current year would be:
A. 104,500 B. 110,000 C. 200,000 D. 209,000

SOLUTIONS: A

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 In Premium Net Cost In Peso
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit 76,000
% of redemption 55%
# of coupons required for each premium /2 20,900 5 104,500
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending

23) As part of the company’s strategy to increase sales, Poodle Corporation offered a premium of wig for every 10 bottle
caps of shampoo plus remittance of P2. Each wig costs P10. Information for the company for year 2017 and 2018
follow:
2017 2018
Bottles of shampoo sold 900,000 1,300,000
Number of wig distributed 30,000 75,000
Number of wig expected to be distributed in future periods, as estimated at year-end 20,000 70,000

How much is the premium expense for the year 2018?

A. 1,250,000 C. 1,000,000
B. 1,160,000 D. 400,000

SOLUTIONS: C
In Premium *Net Cost In Peso
Premium Payable – beginning 20,000 8 160,000
Premium Expense:
# of units sold x coupon in each unit 1,300,000
% of redemption ?
# of coupons required for each premium /10 SQUEEZE 125,000 8 1,000,000
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium SQUEEZE (75,000) 8 (600,000)
Premium Payable – Ending 70,000 8 560,000
*10 – 2 = 8

24) Marichu Company manufactures a special product. To promote the sale of the product, a premium is offered to
customers who send in three wrappers and a remittance of P25. The distribution cost per premium is P5. 5,000 and
7,000 premiums were purchased in 2014 and 2015 respectively. Data for the premiums are:
2014 2015
Sales 20,000,000 25,000,000
Premiums purchased P400,000 P560,000
Number of premiums distributed 4,000 5,500
Number of premiums to be distributed next period 300 500

The premium expense for 2015 should be

A. 330,000 B. 342,000 C. 348,000 D. 464,000

SOLUTION: B
In Premium *Net Cost In Peso
Premium Payable – beginning 300 60* 18,000
Premium Expense:
# of units sold x coupon in each unit
% of redemption
# of coupons required for each premium 5,700 60 342,000 Squeeze
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium (5,500) 60 (330,000)
Premium Payable – Ending 500 60 30,000
*400,000/5,000 = 80 + 5 – 25 = 60

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 25) Clandestine Company owns a car dealership that it uses for servicing cars under warranty. In preparing its financial
statements, the entity needs to ascertain the provision for warranty that it would be required to recognized at year-end.
The entity’s experience indicates that 60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have
normal defect and 15% of all cars sold in a year have significant defect. The cost of rectifying a “normal defect” in a car
is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The entity sold 500 cars during the year.
What is the “expected value” of the provision for warranty for the current year?
A. 1,400,000 B. 1,750,000 C. 3,500,000 D. 4,000,000

SOLUTION: C
Normal defect – 500 x 25% x 10,000 1,250,000
Significant defect – 500 x 15% x 30,000 2,250,000
Total 3,500,000

Use the following information for the next two (2) questions:
Sam company started business in 2015. It sells printers with a three-year warranty. Sam company estimates its warranty
cost as a percentage of peso sales. Based on past experience, it is estimated that 2% will be repaired during the first year
of warranty, 4% will be repaired during the second year of warranty and 6% will be repaired in the third year.

In 2015 and 2016, the company was able to sell 7,500 units and 8,400 units, respectively at a selling price of P5,000 unit.
The company also incurred actual repair costs of P530,000 and P1,176,000 in 2015 and 2016, respectively.

QUESTIONS:
26) What amount should Sam Company report as warranty expense in 2015?
A. 7,834,000 B. 5,040,000 C. 4,500,000 D. 3,970,000

27) What is the amount of liability for warranty reported in Sam Company’s December 31, 2016 statement of financial
position?
A. 7,834,000 B. 5,040,000 C. 4,500,000 D. 3,024,000

SOLUTION: D, A
Sales for 2015 7,500 x 5,000 x 12% 4,500,000

Cumulative warranty expense as of 2016 (7,500 + 8,400) x 5,000 x 12% 9,540,000

Cumulative warranty payment as of 2016 (530,000 + 1,176,000) (1,706,000)
Warranty expense unpaid 7,834,000

28) During 2017, Colts Company introduced a new product carrying a two-year warranty against defects. The estimated
warranty costs related to sales are 2% within 12 months following the sale and 4% in the second 12 months following
the sale. Sales and actual warranty expenditures for the year ended December 31, 2017 and 2018, are as followings:
Sales Actual expenditures
2017 150,000 2,250
2018 250,000 7,500
400,000 9,750

What amount should Colts report as estimated warranty liability in the December 31, 2018, balance sheet?
A. 2,500 B. 4,250 C. 11,250 D. 14,250

SOLUTIONS: D
Total cumulative warranty expense as of the date asked 12/31/18 (400,000 x 6%) 24,000
Total actual cumulative warranty paid (9,750)
Warranty not yet paid 14,250

29) Aljur Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an
attorney and determined that there is a 50% chance of losing. The attorney estimated that the amount of any payment
would be between P500,000 and P800,000 with P500,000 as the best estimate. What is the required journal entry as a
result of this litigation?
A. No journal entry is required
B. Debit Litigation expense and credit Litigation Liability P250,000.
C. Debit Litigation expense and credit Litigation Liability P500,000.
D. Debit Litigation expense and credit Litigation Liability P660,000.

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 SOLUTION: A
Since the probability of paying is only possible 50%, the liability should not be recognized.

30) On March 1, 2022, Erik Company issued 10,000 of its P1,000 face value bonds at 95 plus accrued interest. Erik
Company paid bond issue cost of P1,000,000. The bonds were dated November 1, 2021, mature on November
1, 2031, and bear interest at 12% payable semiannually on November 1 and May 1. The net amount that Erik
receive from the bond issuance is
A. 8,900,000 B. 9,000,000 C. 9,500,000 D. 8,500,000

SOLUTION: A
Fair value 10,000,000 x 95 9,500,000
Transaction cost (1,000,000)
Initial carrying amount 8,500,000
Accrued interest 10,000,000 x 12% x 4/12 400,000
Net cash received 8,900,000

31) On July 1, 2022, Spear Company issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds
are dated April 1, 2022 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1.
What amount did Spear received from the bond issuance?
A. 1,015,000 B. 1,000,000 C. 990,000 D. 965,000

SOLUTION: A
Fair value 1,000,000 x 99% 990,000
Accrued interest April 1, 2020 – July 1, 2022 (1,000,000 x 10% x 3/12) 25,000
Total 1,015,000

32) On January 1, 2022, Marimar Company issued 10,000 of its 12%, P1,000 face value 5-year bonds at 105.
Interest on the bonds is payable annually every December 31. In connection with the sale of these bonds, Marimar
paid the following expenses:
Promotion costs 100,000
Engraving and printing 400,000
Underwriter’s commissions 500,000

What is the carrying value of the bonds on January 1, 2022?

A. 9,000,000 B. 9,500,000 C. 10,000,000 D. 10,500,000

SOLUTION: B
Fair value 10,000,000 x 105 10,500,000
Bond issuance cost 100,000+400,000+500,000 (1,000,000)
Initial carrying amount 9,500,000

33) On January 2, 2016, Lucban Company issued 9% bonds in the amount of P10,000,000 which mature on January
2, 2026. The bonds were issued for P9,390,000 to yield 10% resulting in a bond discount of P610,000. Interest is
payable annually on December 31. Lucban uses the interest method of amortizing bond discount. in its December
31, 2016 statement of financial position, what amount should Lucban report as bond payable?
A. 10,000,000 B. 9,451,000 C. 9,390,000 D. 9,429,000

SOLUTION: D
Initial carrying amount 9,390,000
Effective interest 1.10
Nominal interest (900,000)
Carrying amount 12/31/16 9,429,000

34) Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The bonds
pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the
proceeds form the bond issue? (PVF 5 Decimal)
A. 6,531,618 B. 5,216,494 C. 5,218,809 D. 5,217,308

SOLUTION: C
Present value of principal, 5,000,000 x 0.78120 3,906,000

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 Present value of nominal interest 5,000,000 x 3% x 8.75206 1,312,809
Total 5,218,809

35) Mauban Company has outstanding a 7%, 10-year P10,000,000 face value bond. The bond was originally sold to
yield 6% annual interest. Mauan uses the effective internet method to amortize bond premium. On January 1,
2016, the carrying amount of the outstanding bond was P10,500,000. What amount of unamortized premium on
bond should Mauban report in its December 31, 2016, statement of financial position?
A. 430,000 B. 450,000 C. 570,000 D. 550,000

SOLUTION: A
Initial carrying amount 10,500,000
Effective interest 1.06
Nominal interest (700,000)
Carrying amount 12/31/16 10,430,000
Face amount 10,000,000
Premium 12//31/16 430,000

36) The December 31, 2016, statement of financial position of Dodger Corporation includes the following items:
9% bonds payable due December 31, 2024 1,400,000
Unamortized premium on bonds payable 37,800

The bonds were issued on December 31, 2014, at 103, with interest payable on July 1 and December 31 of each
year. Dodger uses straight line amortization. On March 1, 2016, Dodger retired P560,000 of these bonds at 98
plus accrued interest. What should Dodger record as a gain on retirement of these bonds?
A. 26,320 B. 26,040 C. 15,120 D. 28,000

SOLUTION: A
Face amount 1,400,000
1.03
Initial carrying amount 1,442,000
Face amount 1,400,000
Premium at issuance 12/31/14 42,000
Amortization issuance to retirement (12/31/14 – 3/1/16) 14 months 14/120
Amortization issuance to retirement (12/31/14 – 3/1/16) 14 months 4,900
Premium at issuance 12/31/14 42,000
Unamortized at retirement date 37,100
Face amount 1,400,000
Carrying amount at retirement 1,437,100
Portion of retired bonds 560/1,400
574,840
Retirement price 560,000 x 98% 548,800
Gain 26,040

37) On June 30, 2021, Omara Company had outstanding 8%, P3,000,000 face amount, 15-year bonds maturing on
June 30, 2031. Interest is payable on June 30 and December 31. The unamortized amount of bond discount on
June 30, 2021 was P135,000. On June 30, 2021, Omara acquired all of these bonds at 94 and retired them.
What net carrying amount should be used in computing the gain or loss on this early extinguishment of debt?
A. 2,820,000 B. 2,865,000 C. 2,955,000 D. 3,000,000

SOLUTION: B
Face amount 3,000,000
Discount (135,000)
Carrying amount 6/30/21 2,865,000

38) Ajax made an early extinguishment of a P900,000 debt with a net carrying amount of P884,000 to extinguish the debt,
Ajax paid its creditors P887,000 in cash. As a result of this transaction, Ajax will recognize
A. P6,000 ordinary gain C. P6,000 extraordinary gain
B. P3,000 ordinary loss D. P3,000 extraordinary loss

SOLUTION: B
Carrying amount 884,000
Retirement price (887,000)
Loss (3,000)

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 39) Mae Jong Corporation issues 1,000 convertible bonds at the beginning of 2021. The bonds have a four-year term
with a stated rate of interest of 6 percent, and are issued at par with a face value of P1,000 per bond (total
proceeds received from issuance of the bonds are P1,000,000). Interest is payable annually at December 31.
Each bond is convertible into 250 ordinary shares with a par value of P1. The market rate of interest on similar
non-convertible debt is 9 percent. Compute the liability component of Mae Jong’s convertible debt. The following
present value factors are available.
PV of 1 for 4 periods PV of Ordinary Annuity for 4 periods
6% 0.79209 3.46611
9% 0.70843 3.23972

A. 750,000 B. 902,813 C. 916,337 D. 1,000,000

SOLUTION: B
FV of compound instrument 1,000,000
Present value of principal (1,000,000 x 0.70843) 708,430
Present value of nominal interest, (1,000,000 x 6% x 3.23972) 194,383 902,813
Value assigned to equity 97,187

40) On April 7, 2019, Kaiser Corporation sold a P2,000,000 twenty-year, 8 percent bond issue for P2,120,000. Each
P1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation’s
common stock for P30. The stock has a par value of P25 per share. immediately after the sale of the bonds, the
corporation’s securities had the following market values:
8% bonds without warrants P1,008
Warrants 21
Common stock 28

What accounts should Kaiser Credit to record the sale of the bonds?
A B C D
Bond payable 2,000,000 2,000,000 2,000,000 2,000,000
Premium on Bonds payable 77,600 80,000 16,000 35,200
Paid-in Capital – stock warrants 42,400 40,000 104,000 84,800

SOLUTION: C
FV of compound instrument 2,120,000
FV of bonds (2,000,000 / 1,000) x 1,008 2,016,000
Value assigned to share warrants 104,000

Face amount 2,000,000

Carrying amount 2,016,000
Premium 16,000

41) Prescott Corporation issued ten thousand P1,000 bonds on January 1, 2018. They have a ten-year term and pay
interest semiannually. This is the partial bond amortization schedule for the bonds.
Payment Cash Effective interest Decrease in balance Outstanding balance
11,487,747
1 400,000 344,632 55,368 11,432,379
2 400,000 342,971 57,029 11,375,350
3 400,000 341,261 58,739 11,316,611
4 400,000

What is the effective annual rate of interest on the bonds?

A. 3% B. 4% C. 6% D. 8%

SOLUTION: C
344,632/11,487,747 = 3% semiannual 3%
X2
Annual interest 6%

42) On January 1, 2022, Lorry Manufacturing Company purchased equipment from Wales Inc. There was no established
cash market price for the equipment which has an 8 year life and no salvage value. Lorry gave Wales P105,000 zero-
interest-bearing note payable in 3 equal annual installments of P35,000, with the first payment due December 31, 2022.
The prevailing rate of interest for a note of this type is 8%. The present value of the note at 8% was P90,199. Assuming

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 that Lorry uses the straight line method of depreciation, what amount will be reported in the company’s 2022 income
statement for interest expense and depreciation expense for the note and equipment?
43) A B C D
Interest expense 7,216 7,216 8,400 1,750
Depreciation expense 11,275 30,066 13,125 8,750

SOLUTION: A
Initial carrying amount 1/1/22 90,199
Effective interest 8%
Interest expense 7,216

Initial cost of PPE 90,199

Useful life 8 years
Depreciation 11,275

44) The Melaren Company is going through some financial problems in 2020. A group of creditors holding P1,000,000 of
14% debenture bonds issued by Melaren agreed to accept 80,000 shares of P10 par common share in full payment of
the obligation. Interest equivalent to one year period is still outstanding. Melaren share has a market value of P12 per
share in 2020. An unamortized premium of P15,000 for the P1,000,000 bonds is outstanding. What amount of gain on
restructuring of debt should be reported by Melaren in 2020?
A. 0 B. 55,000 C. 195,000 D. 355,000

SOLUTION: C
Face amount 1,000,000
Premium 15,000
Carrying amount of the bonds 1,015,000
Accrued interest 1,000,000 x 14% 140,000
Total carrying amount of the liability 1,155,000
Equity swap priority 1, (80,000 x 12) (960,000)
Gain 195,000

Priority Computation of gain or loss Computation of share premium

1. CA of total liability – Total FV of shares issued = gain (loss) FV of shares issued – Total Par value of shares issued = SP
2. CA of total liability – FV of liability = gain (loss) FV of liability – Total Par value of shares issued = SP
3. CA of total liability – CA of total liability = gain (loss) CA of total liability – Total Par value of shares issued = SP

45) Due to extreme financial difficulties. Ulee Company has negotiated a restructuring of its 12%,P6,000,000 note
payable due on December 31, 2019. The unpaid interest on the note on such date is P720,000. The creditor has
agreed to reduce the face value to P5,000,000, forgive the unpaid interest, reduce the interest rate to 10% and
extend the due date four years from December 31, 2019. Interest will still be payable on December 31 of each
year staring December 31, 2020. The present value of 1 at 12% for four periods is 0.636 and the present value of
an ordinary annuity of 1 at 12% for four periods is 3.037. What is the carrying amount of this note payable on
December 31, 2020?
A. 4,668,350 B. 4,698,500 C. 4,762,320 D. 5,000,000

SOLUTION: C
Present value of new principal, 5,000,000 x 0.636 3,180,000
Present value of nominal interest, 5,000,000 x 10% x 3.037 1,518,500
Total – new carrying amount after restructuring – 12/31/19 4,698,500
Effective interest 1.12
Nominal interest (500,000)
Carrying amount – 12/31/20 4,762,320

46) Sloth Company has an overdue 8% note payable to Rich Bank at P4,000,000 and accrued interest of P320,000. As a
result of a restructuring agreement on January 1, 2018, Rich Bank agreed to the following provisions: Principal
obligation is reduced to P3,500,000, the accrued interest is forgiven, the maturity date is extended to December 31,
2021, and the new interest rate increased to 12% to be paid every December 31. The PV of 1 for 4 periods is 0.74 at
8% and 0.64 at 12%. The PV of an ordinary annuity of 1 for 4 periods is 3.31 at 8% and 3.04 at 12%. What is the gain
on extinguishment to be recognized for 2018?
A. 339,800 B. 803,200 C. 820,000 D. 0

SOLUTION: D
Carrying amount note payable 4,000,000

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 Accrued interest 320,000
Carrying amount of total liability 4,320,000
PV of cash flow:
Principal, (3,500,000 x 0.74) 2,590,000
Interest, [(3,500,000 x 12%) x 3.31] 1,390,200 3,980,200
Gain 339,800

47) Meta Company owes Pod Bank P4,000,000 plus accrued interest of P360,000. The unamortized discount on the loan
is P80,000. The debt is a 10 year, 12% loan. During 2011, Meta’s business deteriorated due to loss of demand for its
services. On December 31, 2011, Pod Bank agrees to accept old equipment and cancel the entire debt. The
equipment has a cost of P12,000,000, accumulated depreciation of P8,800,000, and fair value of P3,600,000. How
much is the gain (loss) on the extinguishment of the debt?
A. 1,800,000 loss B. 1,800,000 gain C. 1,080,000 gain D. 760,000 gain

QUESTIONS: C
Face amount 4,000,000
Discount (80,000)
Carrying amount of the note 3,920,000
Accrued interest 360,000
Total carrying amount of the liability 4,280,000
Carrying amount of asset transferred (12,000,000 – 8,800,000) 3,200,000
Gain 1,080,000

48) On December 31, 2016, Thyro Company shows the following data with respect to its matured obligation.
Note payable P5,000,000
Accrued interest payable 500,000

The company is threatened with court suit if it count not pay its maturing debt. Accordingly, the company enters into an
agreement with the creditor for the issuance of share capital in full settlement of the note payable. The agreement
provides for the issue of 50,000 ordinary shares with par value of P50. The ordinary share is currently quoted at P70.
How much is the share premium arising from the debt restructuring considered as “equity swap”?
A. 3,000,000 B. 1,500,000 C. 2,000,000 D. 1,000,000

QUESTIONS: B
FV of shares issued 50,000 x 70 3,500,000
Total Par value of shares issued 50,000 x 50 2,500,000
Share premium 1,000,000

Priority Computation of gain or loss Computation of share premium

1. CA of total liability – Total FV of shares issued = gain (loss) FV of shares issued – Total Par value of shares issued = SP
2. CA of total liability – FV of liability = gain (loss) FV of liability – Total Par value of shares issued = SP
3. CA of total liability – CA of total liability = gain (loss) CA of total liability – Total Par value of shares issued = SP

49) On April 1, 2019, Anne Corporation issued at 99, 2,000 of its 8%, P1,000 bonds. The bonds are dated April 1, 2019, to
mature on April 1, 2029, and pay interest on April 1 and November 1. Anne paid transaction cost of P20,000. From the
issuance, how much net cash did Anne receive?
A. 1,960,000 B. 1,980,000 C. 2,000,000 D. 2,020,000

SOLUTION: A
Fair value of bonds (2,000,000 x .99) 1,980,000
Transaction cost paid (20,000)
Net cash received 1,960,000

50) When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of
interest expense reported on the December 31 income statement for the year of issue would be for:
A. Four months B. Six months C. Ten months D. Twelve month

SOLUTION: B
July 1 to December 31, date of loan or January 1 (if loaned last year) to December 31 6 months

J END OF LONG QUIZ – SET A SOLUTION J

FAR eastern university FINANCIAL ACCOUNTING 2 LONG QUIZ – SET A J. S. CAYETANO