CURRENT LIABILITIES

SEATWORK
Question 1 b. Noncurrent assets

Unearned rent revenue would normally c. Current liabilities

appear in the statement of financial
d. Current assets
position as
Question 4
a. Current asset
An entity is a retailer of home appliances
b. Current liability
and offers a service contract on each
c. Plant asset appliance sold. The entity sells appliances
on installment contracts but all service
d. Noncurrent liability
contracts must be paid in full at the time of
Question 2 sale. Collections received for service
contracts should be recorded as an increase
The initial fair value of a financial liability is in a
defined as the
a. Shareholders' equity valuation account
a. Amount for which a liability is paid in an
orderly transaction. b. Sales contracts receivable valuation
account
b. Amount for which a liability is paid.
c. Service revenue account
c. Amount for which a liability is paid in an
orderly transaction between market d. Deferred revenue account
participants at the measurement date.
Question 5
d. Amount for which a liability is paid
What is the relationship between present
between market participants.
value and the concept of a liability?
Question 3
a. Present value is used to measure certain
In which section of the statement of liabilities.
financial position should employment taxes
b. Present value is only used to measure
that are due for settlement in 15 months'
noncurrent liabilities.
time be presented?
c. Present value is not used to measure
a. Noncurrent liabilities
liabilities.
d. Present value is used to measure all At December 31, 2016, bonds payable of
liabilities. P10 million are outstanding. The bonds
were issued on September 30, 2016 and
Question 6
mature in annual installments of P2.5
After initial recognition, an entity shall million starting September 30, 2017.
measure a financial liability at Interest of 12% on the outstanding balance
is payable annually every anniversary date
I Amortized cost using the effective the bond.
interest method
At December 31, 2015, customer advances
II Fair value through profit or loss were P2 million. During 2016 FB Company
collected P4 million of customer advances
Select one:
and advances P2.5 million were earned.
a. Either I or II
At December 31, 2016, retained earnings
b. II only appropriated for future inventory losses is
1.5 million.
c. Neither I nor II
How much of the foregoing should be
d. I only
reported as current liabilities at December
Question 7 31, 2016?

FB Company is preparing its December 31, Select one:

2016 statement of financial position. The
a. P6,300,000
following items may be reported as either
current or non-current liability: b. P9,675,000

On December 15, 2016, FB Company c. P8,175,000

declared a cash dividend of P2.50 per share
d. P10,275,000
to shareholders of record on December 31.
The dividend is payable on January 15, Question 8
2017. FB had issued 800,000 ordinary
shares, of which 50,000 shares are held in Jel Company sells its products in reusable
the treasury. On this same date, FB expensive containers. The customer is
declared a 10% bonus issue to shareholders charged a deposit for each container
of record on December 31, 2016. The delivered and receives a refund for each
dividend will be distributed on January 31, container returned within two years after
2017. FB Company's ordinary share has a the year of delivery. Jel Company accounts
par value of P10 and a market value per for any containers not returned within the
share of P28. time limit as being retired by sale at the
deposit amount. Information relating to Jones Company's profit before bonus and
customer deposits follows: income tax for the year ended December
31, 2016 is P8,000,000. Assume an income
tax rate of 30%.

How much is the general manager's bonus

for 2016 under Alternative 1?

Select one:
What amount should Jel Company report as
a. P400,000
a liability for deposits on returnable
containers at December 31, 2016? b. P240,000
Select one: c. P640,000
a. P367,000 d. P320,000
b. P322,000 Question 10
c. P337,000 It is a marketing scheme whereby an entity
grants award credits to customers and the
d. P247,000
entity can redeem the award credits in
Question 9 exchange for free or discounted goods or
services.
The Jones Company enjoys profitable
operations for its past ten years of a. Loyalty award
existence. The company president proposed
b. Marketing program
to the Board of Directors an incentive
compensation plan where the general c. Customer loyalty program
manager would be entitled to a year-end
bonus under the following alternative d. Premium plan
schemes.
Question 11
Alternative 1: 8% bonus based on profit
Marie Hotel collects 15% in city sales taxes
before bonus and income tax in excess of
on room rentals, in addition to a P200; per
P5,000,000.
room, per night, occupancy tax. Sales taxes
Alternative 2: 5% bonus based on profit for each month are due at the end of the
after both bonus and income tax. following month, and occupancy taxes are
due fifteen days after the end of each
Alternative 3: 3% bonus based on profit calendar quarter. On January 3,2014, the
after bonus but before income tax. entity paid the November 2013 sales taxes
and the fourth quarter 2013 occupancy Question 13
taxes. Additional information for the fourth
Burgundy Company follows the 5-day
quarter of 2013 is as follows:
(Monday-Friday) work-week. It pays all
Room rentals Room nights salaried employees on a biweekly basis
every other Friday. Overtime pay, however
October 1,000,000 1,100
is paid in the next biweekly period.
November 1,100,000 1,200 Burgundy Company accrued salaries
expense only at its June 30 fiscal year-end.
December 1,500,000 1,800 Data relating to salaries earned in June
2016 were as follows:
What amount should be reported
respectively as sales taxes payable and • Last payroll was paid on June 24, 2016
occupancy taxes payable on December for the two-week period June 24, 2016
31,2013?
• Overtime pay earned in the two-week
a. 540,000 and 600,000 period ended June 24, 2016 was P63,000
b. 390,000 and 820,000 • The recurring biweekly salaries total
P720,000
c. 540,000 and 820,000
• In the remaining work days of June,
d. 390,000 and 600,000
overtime pay earned amounted P18,000
Question 12
How much should Burgundy Company
An entity sells appliances that include a report as accrued salaries at June 2016?
two-year warranty. Service calls under the
a. P288,000
warranty are performed by an independent
mechanic under contract with the entity. b. P369,000
Based on experience, warranty costs are
estimated at a certain amount for each c. P351,000
appliance sold. When should the entity
d. P297,000
recognize these warranty costs?
Question 14
a. Evenly over the life of the warranty
The accounts payable balance of Jek
b. When payments are made to the
Company at December 31, 2016 was
mechanic
P590,000 before the year-end adjustments
c. When the appliances are sold relating to the following information:

d. When the service calls are performed

• Upon receipt of the invoice on annually and shipped to subscribers on April
December 28, 2016 for goods costing 15 and October 15. Subscriptions received
P30,000, the accounting staff of Jek after the March 31 and September 30 cut-
Company recorded the purchase in the off dates are held for the next publication.
accounts. It was determined that the goods Cash from subscribers is received evenly
were shipped FOB destination on December during the year and is credited to deferred
27, 2016 and were received by Jek revenue from subscriptions. Data relating
Company on January 2, 2017. to 2014 are as follows:

• Goods with an invoice cost of Deferred revenue from subscriptions on

P25,000 which were shipped FOB shipping January 1 1,500,000
point on December 23, 2016 from a vendor
Cash receipts from subscribers
to Jek Company were lost in transit. On
7,200,000
January 4, 2017, Jek Company filed a
P25,000 claim against the transportation What amount should be reported as
company. deferred revenue from subscription on
December 31, 2014?
• Goods costing P9,000 were shipped
FOB shipping point from a vendor to Jek Select one:
Company. Because the vendor's invoice and
the goods were received on January 3, a. 1,800,000
2017, the accounting staff did not include
b. 5,400,000
the goods in its December 31, 2016
inventory nor was the purchase recorded in c. 3,600,000
the accounts in 2016.
d. 3,300,000
What amount should Jek Company report
Question 16
as accounts payable in its December 31,
2016 statement of financial position? Mega Department Store sells gift
certificates that are redeemable only when
a. P590,000
the merchandise is purchased from its
b. P585,000 stores. It is the company's policy to
recognize the amount redeemed as
c. P569,000
realized. During 2016, Mega Department
d. P594,000 Store sold gift certificates amounting to
P1,800,000 and redeemed gift certificates
Question 15 worth P1,560,000. Gift certificates
outstanding at January 1, 2016 is P520,000.
Hart Company sells subscriptions to a
The company's gross profit rate is 40%.
specialized directory that is published semi-
What is the liability for outstanding gift b. P4,600,000
certificates at December 31, 2016?
c. P2,000,000
a. P720,000
d. P2,500,000
b. P760,000
Question 19
c. P520,000
On December 31, 2016, Jupiter Corporation
d. P680,000 has an outstanding liability as follows:

Question 17 12% Mortgage Note Payable, due on

October 1, 2016 P6,000,000
Estimated liabilities are disclosed in
financial statements by The mortgage note originated in 2012 when
Jupiter acquired a piece of land from Pluto
a. Note to the financial statements
Company on October 1, 2012 for P10
b. Appropriately classifying them as regular million by paying P4 million cash and the
liabilities in the statement of financial balance is due on October 1, 2016. Jupiter
position Corporation made timely payments of
annual interest from 2012 through 2015. In
c. An appropriation of retained earnings 2016, however, Jupiter was experiencing
financial difficulty and was unable to pay
d. Showing the amount among the liabilities
the principal and annual interest on
but not extending to the liability total
October 1, 2016. On December 31, 2016,
Question 18 Pluto Company signed an agreement to
provide Jupiter Corporation a grace period
Dexter Company requires advance
of 15 months from that date, during which
payments with special orders for machinery
period, Pluto Corporation will not demand
constructed to customer specifications.
immediate payment in order to give Jupiter
These advances are refundable. Data for
the chance to rectify the breach. The 2016
the year are:
financial statements of Jupiter Corporation
were issued on March 15, 2017.

What amount classified as current liability

in the December 31, 2016 statement of
financial position?
How much is the liability for customer
advances at the end of the year? a. P6,720,000
a. P7,100,000 b. P720,000
c. P6,000,000 d. Estimated liabilities shall be accrued
because these are known to exist and are
d. P0
only uncertain as to amount.
Question 20
Question 22
Which of the following is a characteristic of
The principal classifications of liabilities are
a current liability but not a noncurrent
liability? a. Current liabilities, noncurrent liabilities
and deferred revenue
a. Present obligation requires settlement by
probable future transfer or use of cash, b. Current liabilities and deferred revenue
goods or services.
c. Current liabilities and noncurrent
b. The obligating event creating the liability liabilities
has already occurred.
d. Noncurrent liabilities and deferred
c. Unavoidable obligation. revenue

d. Settlement is expected within the normal Question 23

operating cycle or within 12 months,
An entity received an advance payment for
whichever is longer.
special order goods that are to be
Question 21 manufactured and delivered within six
months. The advance payment is reported
Which of the following statements in
in the statement of financial position as
relation to liabilities is not valid?
a. Noncurrent liability
a. Current liabilities shall not be offset
against assets that are to be applied to their b. Deferred charge
liquidation.
c. Contra asset account
b. Unasserted claims are never accrued
d. Current liability
because to do so would require an entity to
implicitly admit liability. Question 24
c. Commitments to make future purchases Ryan Company sells major household
shall be accrued if losses become probable appliance service contracts for cash. The
and if the amount is reasonably service contracts are for a one-year, two-
measurable. year, or three-year period. Cash receipts
from contracts are credited to unearned
service contract revenue. This account had
a balance of P720,000 on December 31,
2014 before year-end adjustment. Service • The bank notes, issued on August 1,
contract costs are charged as incurred to 2015 are due on July 31, 2017 and pay
the service contract expense account, which interest at a rate of 10% payable at
had a balance of P180,000 on December 31, maturity.
2014. Outstanding service contracts on
• The mortgage note is due on March
December 31, 2014 expire as follows:
1, 2017. Interest at 9% has been paid up to
During 2015 150,000 December 31 (assume 9% is a realistic one).
On March 1, 2017, Hugo issued a new 10-
During 2016 225,000
year mortgage note and paid P250,000 in
During 2017 100,000 cash on the principal balance and
refinanced the remaining P950,000
What amount should be reported as
unearned service contract revenue on • Included in the accounts receivable
December 31, 2014? balance at December 31, 2016 were two
customers' accounts that had been
Select one: overpaid and had credit balances totaling
P18,000. The accounts were of two major
a. 475,000
customers who were expected to order
b. 540,000 more merchandise from Hugo Trading and
apply the overpayment to those future
c. 245,000
purchases,
d. 295,000
• On November 1, 2016, Hugo Trading
Question 25 rented a portion of its factory to a tenant
for P30,000 per year, payable in advance.
The unadjusted trial balance of Hugo The payment for twelve months ended
Trading at December 31, 2016, the end its October 31, 2017 as received as required
accounting period, included, among others, and was credited to rent revenue.
the following balances. Hugo Trading 2016
financial statements were issued on April 1, How much is the total current liabilities of
2017. Hugo Trading as of December 31, 2016?

Accounts receivable P92,500 a. P1,835,000

Accounts payable 35,000 b. P935,000

Bank notes payable 600,000 c. P1,903,000

Mortgage note payable 1,200,000 d. P953,000

Other information;
Question 26 weekly every Friday. Average weekly payroll
of these employees amounts to P15,000
The accountant of Jag Company is in the
and the last wage payment was Friday, June
process of finalizing its financial reports. A
26, 2016. No adjustment was made for
review of the company's selected accounts
accrued wages.
and relevant data reveal the following as of
June 30, 2016, the end of its fiscal year. • On April 1, 2016, a suit was filed by a
dismissed employee against the company.
The company's lawyer believes it is
reasonably possible that the suit will result
in a loss to the company ranging from
• On August 1, 2016, Jag Company
P500,000 to P1,000,000.
issued a new 3-year mortgage note for
P2,000,000, with the intention of using the • The sates account included sales for
proceeds in payment of the mortgage note the month of June 2016 of P3,640,000,
payable of P1,500,000 that is due on August which is inclusive of the 12% value-added
20, 2016. There was no unpaid interest as tax (VAT). The company makes monthly
of June 30, 2016. remittance of VAT to the Bureau of Internal
Revenue on the 20th day of the following
• The bank notes are payable in semi-
month.
annual installments of P50,000 on February
1 and August 1 of each year. The interest • The total income tax due for fiscal
rate of the note is 12% based on the year ended June 30, 2016 amounted to
outstanding balance and payable together P586,500. Quarterly remittances to the BIR
with the principal due. Accrued interest as during the fiscal year for income taxes
of June 30, 2016 has not yet been taken up totaled P345,000. The balance due as of
in the books. June 30, 2016 has not yet been taken up in
the books. (Ignore the tax effect on profit of
• Accounts payable included an
the adjustments based on the foregoing
invoice from a supplier in the amount of
data).
P65,000. No receiving report has been
submitted to the accounting office relating How much is the total current liabilities at
to this purchase. A review of the documents June 30, 2016?
indicated that the goods were shipped by
the supplier under the terms FOB a. P2,804,150
destination and the goods were received on
b. P2,589,150
July 3, 2016.
c. P2,604,150
• The company has some newly hired
casual daily wage employees who are paid d. P1,104,150
Question 27 c. The proportion of the fair value of the
award credits relative to the total
Mazda Company reported the following
consideration received from the initial sale
liability balances on December 31,2014:
of the goods
10% note payable issued on October
d. Fair value of the goods to be received in
1,2013, maturing October 1, 2015
exchange
2,000,000
Question 29
12% note payable issued on March 1, 2013,
maturing on March 1, 2015 4,000,000 Which obligations are classified as current
even if they are expected to be settled after
The 2014 financial statements were issued
more than twelve months from the end of
on March 31,2015. Under the loan
reporting period?
agreement for the 10% note payable, the
entity has the discretion to refinance the a. Income taxes payable
obligation for at least twelve months after
b. Dividends payable
December 31, 2014. On March 1, 2015, the
entire P4,000,000 balance of the 12% note c. Trade payables and accruals for employee
payable was refinanced through issuance of and other operating costs
a long-term obligation payable lump sum.
What amount of the notes payable should d. Bank overdrafts
be classified as current on December 31,
Question 30
2014?
Sonia Company reported gross payroll of
a. 6,000,000
P600,000 for the month of January. The
b. 2,000,000 entity paid the payroll net of the following
deductions:
c. 0
Income tax 70,000
d. 4,000,000
SSS 10,000
Question 28
Philhealth 5,000
The consideration allocated to the award
credits is measured at Pagibig 7,000

a. Carrying amount of goods to be received In addition, the entity recognized its

in exchange additional contributions for the following in
relation to January payroll:
b. Fair value of the award credits
SSS 15,000
Philhealth 6,000

Pagibig 8,000

What is the total payroll tax liability?

Select one:

a. 92,000

b. 29,000

c. 70,000

d. 121,000
 CURRENT LIABILITIES
QUIZ
Question 1 Jones Company's profit before bonus and
income tax for the year ended December
An entity received an advance payment for
31, 2016 is P8,000,000. Assume an income
special order goods that are to be
tax rate of 30%.
manufactured and delivered within six
months. The advance payment is reported How much is the general manager's bonus
in the statement of financial position as for 2016 under Alternative 3?

a. Contra asset account Select one:

b. Deferred charge a. P240,000

c. Noncurrent liability b. P247,423

d. Current liability c. P184,615

Question 2 d. P233,010

The Jones Company enjoys profitable Question 3

operations for its past ten years of
Which of the following circumstances may
existence. The company president proposed
result in the classification of a liability as
to the Board of Directors an incentive
current?
compensation plan where the general
manager would be entitled to a year-end a. Violation of provisions of a debt
bonus under the following alternative agreement
schemes.
b. Short-term obligations refinanced with
Alternative 1: 8% bonus based on profit long-term debt at the end of reporting
before bonus and income tax in excess of period
P5,000,000.
c. Obligations for advance collections that
Alternative 2: 5% bonus based on profit involve long-term deferment of the delivery
after both bonus and income tax. of goods or services
Alternative 3: 3% bonus based on profit
after bonus but before income tax.
d. Debts to be liquidated from funds that b. P32,000
have been accumulated and are reported as
c. P15,000
noncurrent assets
d. P17,000

Question 6
Question 4
What is the relationship between present
Which of the following is not an acceptable
value and the concept of a liability?
presentation of current liabilities?
a. Present value is used to measure all
a. Listing current liabilities according to
liabilities.
amount.
b. Present value is not used to measure
b. Listing current liabilities in the order of
liabilities.
maturity.
c. Present value is only used to measure
c. Showing current liabilities in the order of
noncurrent liabilities.
liquidation preference.
d. Present value is used to measure certain
d. Offsetting current liabilities against assets
liabilities.
that are to be applied to their liquidation.
Question 7
Question 5
Which of the following is a noncurrent
In its 2016 financial statements, Toronto
liability?
Company reported interest expense of
P85,000 in its statement of comprehensive a. Income tax payable
income and cash payments for interest at
P68,000 in its statement of cash flows. b. Unearned interest income related to
There was no prepaid interest or interest noninterest-bearing long-term note
capitalization either at the beginning or end receivable
of 2016. Accrued interest payable at
c. One-year magazine subscription received
December 31, 2016 was P15,000
in advance
What amount should Toronto Company
d. Estimated warranty liability
report as accrued interest payable in its
December 31, 2016 statement of financial Question 8
position?
The fair value of a liability is defined as
a. P2,000
a. The carrying amount of the liability on How much is the president's bonus?
the date of transaction.
a. P210,000
b. The amount that would be paid when
b. P220,000
transferring a liability in an orderly
transaction between market participants. c. P129,888
c. The price that would be received to d. P200,000
assume the liability in an orderly
transaction between market participants. Question 11

d. The appraised value of the liability. The consideration allocated to the award
credits is measured at
Question 9
a. Fair value of the award credits
Aubrey Company has a 12-month
accounting period ending December 31. On b. Carrying amount of goods to be received
April 1, 2013, it introduced a new in exchange
contractual bonus scheme covering the year
c. The proportion of the fair value of the
to March 31 each year. It is reasonably
award credits relative to the total
anticipated that the bonuses for the year to
consideration received from the initial sale
March 31, 2014 will amount to P900,000.
of the goods
What amount of liability for bonuses should
be recorded on December 31, 2013? d. Fair value of the goods to be received in
exchange
a. 900,000
Question 12
b. 0
Cobb Company sells gift certificates
c. 225,000
redeemable only when merchandise is
d. 675,000 purchased. Upon redemption, Cobb
Company recognizes the unearned revenue
Question 10 as realized. Information for the current year
is as follows:
Buffy Company provides an incentive
compensation plan under which its Unearned revenue, January 1 - P650,000
president is to receive a bonus equal to 10%
of the profit in excess of P1,000,000 before Gift certificates sold - P2,250,000
deducting income tax but after deducting
Gift certificates redeemed - P1,950,000
the bonus. Profit after income tax of 30% is
P2,100,000 Gift certificates unredeemed for a long time
- P100,000
Cost of goods sold - 60% Jam Company had P2,000,000 note payable
due on March 1, 2015. The entity borrowed
What amount should be reported as
P1,500,000 on December 31, 2014 which
unearned revenue at year-end?
has a five-year term and used the proceeds
Select one: to pay down the note payable and used
other cash to pay the balance at maturity.
a. 510,000 The financial statements were issued on
March 31, 2015. What amount of the note
b. 950,000
payable should be classified as current on
c. 850,000 December 31, 2014?

d. 570,000 a. 500,000

Question 13 b. 0

What is the classification of debt callable by c. 1,500,000

the creditor?
d. 2,000,000
a. Noncurrent liability
Question 16
b. Current liability
Miyuki Company operates a retail store. All
c. Current liability if the creditor intends to items are sold subject to a 12% value added
call the debt within one year. tax which the entity collects and records as
sales revenue. The entity files quarterly
d. Current liability if it is probable that the
sales tax returns when due by the twentieth
creditor will call the debt within one year.
day following the end of the sales quarter.
Question 14 However, in accordance with state
requirements, the entity remits value added
The award credits granted to customers tax collected by the twentieth day of the
under a customer loyalty program is often month following any month such collections
described as exceed P50,000. The entity takes these
payments as credits on the quarterly sales
a. Awards
tax return. The value added taxes paid are
b. Royalty charged against sales revenue. Following is
a monthly summary appearing in the first
c. Credits
quarter sales revenue for 2014:
d. Points
Debit Credit
Question 15
January - 560,000
February 60,000 392,000 payment for interest and principal was
made in September 1, 2016.
March - 448,000
At December 31, 2016, what amount should
On March 31, 2014, what amount should be
Tom Company report as accrued interest
reported as value added taxes payable?
payable?
Select one:
a. P60,500
a. 168,000
b. P40,333
b. 108,000
c. P66,000
c. 90,000
d. P44,000
d. 150,000
Question 19
Question 17
Which of the following is not considered a
Which of the following is a characteristic of characteristic of a liability?
a current liability but not a noncurrent
a. Results in an outflow of resources
liability?
b. Liquidation is reasonably expected to
a. Present obligation requires settlement by
require use of current assets
probable future transfer or use of cash,
goods or services. c. Arises from past event

b. Unavoidable obligation. d. Present obligation

c. Settlement is expected within the normal Question 20

operating cycle or within 12 months,
Rye Company sells equipment service
whichever is longer.
contracts that cover a two-year period. The
d. The obligating event creating the liability sales price of each contract is P5,000. Rye
has already occurred. Company's past experience shows that of
the total pesos spent for repairs in service
Question 18
contracts, 40% in incurred evenly during the
On September 1, 2015, Tom Company first contract year and 50% evenly during
borrowed on a P1,650,000 note payable the second contract year. Rye Company
from ABN Bank, The note bears interest at sold 1,000 contracts evenly throughout
12% and is payable in three equal annual 2015 and 800 contracts evenly throughout
payments of P550,000. On this date, the 2016.
bank's prime rate is 11%. The first annual
In its December 31, 2015 statement of bonus under the following alternative
financial position, what amount should Rye schemes.
Company report as unearned revenue?
Alternative 1: 8% bonus based on profit
a. P3,000,000 before bonus and income tax in excess of
P5,000,000.
b. P1,500,000
Alternative 2: 5% bonus based on profit
c. P0
after both bonus and income tax.
d. P4,000,000
Alternative 3: 3% bonus based on profit
Question 21 after bonus but before income tax.

Which of the following represents a Jones Company's profit before bonus and
liability? income tax for the year ended December
31, 2016 is P8,000,000. Assume an income
a. The obligation to distribute an entity's tax rate of 30%.
own shares next year as a result of a stock
dividend declared near the end of the How much is the general manager's bonus
current year. for 2016 under Alternative 2?

b. The obligation to provide goods that a. P215,835

customers have ordered and paid for during
b. P262,911
the current year.
c. P290,155
c. The obligation to pay interest on a five-
year note payable that was issued the last d. P270,531
day of the current year.
Question 23
d. The obligation to pay for goods that an
During 2016, Mega Publishing, a newly
entity expects to order from suppliers next
organized magazine publisher, received
year.
payment of P444,000 for the subscriptions
Question 22 of their two high-end magazines that were
being issued monthly (twelve times a year).
The Jones Company enjoys profitable
operations for its past ten years of
existence. The company president proposed
to the Board of Directors an incentive
compensation plan where the general
Of the 100 Universal Time subscriptions,
manager would be entitled to a year-end
effectivity date of the 55 subscriptions was
January 1, 2016 while the remainder had Question 25
April 1, 2016 effectivity. All of the Condo
Which of the following statements best
international magazine subscriptions
describes the term "liability"?
started with the maiden issue published in
May 2016. a. An excess of equity over current assets
What amount should Mega Publishing b. Resources to meet financial
report in its December 31, 2016 statement commitments as they fall due
of financial position as unearned
subscriptions revenue? c. The residual interest in the assets of the
entity after deducting all of the liabilities
a. P89,250
d. A present obligation of the entity arising
b. P81,750 from past events
c. P129,750 Question 26
d. P197,250 Edifice Company provided extended service
contracts on electronic equipment sold
Question 24
through major retailers. The standard
Under a customer loyalty program, if a third contract is for three years. During the
party supplies the awards and the entity is current year, the entity provided 42,000
collecting the consideration for the award such warranty contracts at an average price
credits as principal in the transaction of P81 each. Related to these contracts, the
entity spent P400,000 servicing the
a. The entity shall recognize immediately
contracts during the current year and
revenue equal to the gross consideration
expected to spend P2,100,000 more in the
allocated to the award credits.
future. What amount of net income should
b. The entity shall recognize initially a be recognized in the current year related to
deferred revenue equal to the gross these contracts?
consideration allocated to the award
a. 902,000
credits.
b. 3,402,000
c. The entity shall not recognize revenue
from the award credits. c. 1,134,000

d. The entity shall recognize initially a d. 734,000

deferred revenue equal to the difference
Question 27
between the consideration for the award
credits and the amount paid by the entity to
the third party.
Apachi Company must determine the Cash receipts from service contracts sold -
December 31, 2016 year-end accrual for 480,000
advertising rent expenses. On January 3,
Service contracts revenue recognized in
2017, Apachi Company receive P100,000
profit or loss - 390,000
advertising bill, comprising of P37,500 for
newspaper advertisements in December What amount should Dan Company report
2016 and P62,500 for magazine as unearned service contract revenue in its
advertisements that will be published December 31, 2016 statement of financial
monthly in the year 2017. position?
The store lease effective August 1, 2016 a. P360,000
calls for fixed rent of P120,000 per month
payable on or before the 5th day of the b. P195,000
current month. Included in the lease
c. P120,000
contract is contingent rent equal to 3% of
net sales over P2,000,000 per month that is d. P275,000
required to be paid on the 20th day of the
Question 29
following month. Net sales for December
2016 were P5,500,000. On December 31,2014, Ace Company had
P40,000,000 note payable due on February
In its December 31, 2016 statement of
28,2015. On December 31, 2014, the entity
financial income, Apachi Company should
arranged a line of credit with City Bank
report accrued liabilities of
which allows the entity to borrow up to
a. P142,500 P35,000,000 at one percent above the
prime rate for three years. On February
b. P262,500
15,2015, the entity borrowed P25,000,000
c. P167,500 from City Bank and used P5,000,000
additional cash to liquidate P30,000,000
d. P105,000 note payable. The financial statements
were issued on March 31,2015. What
Question 28
amount of note payable should be reported
Dan Company sells contracts agreeing to as current liability on December 31,2014?
service air-conditioners for a three year
a. 0
period. Information for the year ended
December 31, 2016 is as follows: b. 10,000,000
Unearned service contracts revenue, c. 5,000,000
January 1 - P270,000
d. 40,000,000
Question 30

At the end of the current year, an entity

received an advance payment of 60% of the
sales price for special order goods to be
manufactured and delivered within five
months. At the same time, the entity
subcontracted for production of the special
order goods at a price equal to 40% of the
main contract price. What liabilities should
be reported in the year-end statement of
financial position?

a. No deferred revenue but payable to

subcontractor is reported at 40% of the
main contract price

b. None

c. Deferred revenue equal to 60% of the

main contract price and no payable to
subcontractor

d. Deferred revenue equal to 60% of the

main contract price and payable to
subcontractor equal to 40% of the main
contract price
 PROVISIONS AND CONTINGENCIES
SEATWORK
Question 1 purchased and there were 800 coupons
redeemed in 2016.
With the end goal of attracting as much
customers as possible in the NCR region, The accrual method is used by Abeson to
Abeson Appliance Company engaged in a account for the warranty and premium
customer satisfaction program and costs for financial reporting purposes. The
marketing strategy for two of their major balances in the accounts related to
lines of products: (1) electrical appliances warranties and premiums on January 1,
and (2) household and office furniture. All 2016 were as follows:
branches in the region are participating in
Inventory of "hot and cold" water
the company's promotions.
dispensers - 30 units,
In the customer satisfaction program,
Estimated premium claims outstanding -
Abeson Company provides one-year
P17,500, and
warranty for replacement of parts and labor
of the electrical appliances sold. Based on Estimated liability for warranty - P80,000.
past experience, the estimated warranty
cost is 3% of sales. During 2016, total sales How much is the estimated premium claims
of electrical appliances was P7,200,000. outstanding at December 31, 2016
Replacement parts and labor for warranty
a. P72,800
work totaled P184,000 during 2016.
b. P60,000
In the company's marketing strategy for the
household and office furniture section, c. P34,300
customers are given a coupon for every
d. P27,800
P1,000 spent on these items. Customers
may exchange 10 coupons plus P500 for a Question 2
"hot and cold" water dispenser. Each water
dispenser cost Abeson Company P1,200 and Dubai Company purchased an oil rig for
estimates that 40% of the coupons given to P5,000,000 on January 1, 2014. The life of
the customers will be redeemed. During the rig is 10 years and the expected cost to
2016, sales of household and office dismantle the rig at the end of 10 years is
furniture totaled P2,600,000. A total of 100 P1,000,000. The appropriate discount rate
water dispensers used in the promo were for the entity is 10%. The present value of
the dismantling cost at 10% is P385,000. d. The entity must have no realistic
What expense should be recorded in the alternative to settling the obligation,
current year as a result of these events?
Question 5
a. Depreciation expense of P538,500 and
It is a possible asset that arises from past
interest expense of P38,500.
event and whose existence will be
b. Depreciation expense of P500,000 and confirmed only by the occurrence or
interest expense of P38,500. nonoccurrence of one or more uncertain
future events not wholly within the control
c. Depreciation expense of P500,000 and
of the entity.
interest expense of P100,000.
a. Contingent asset
d. Depreciation expense of P600,000.
b. Asset in suspense
Question 3
c. Possible asset
Pending litigation would generally be
considered d. Contingent gain

a. Contingent liability Question 6

b. Current liability Which of the following statements is

incorrect where some or all of the
c. Estimated liability
expenditure required to settle a provision is
d. Nonmonetary liability expected to be reimbursed by another
party?
Question 4
a. The reimbursement shall be recognized
In relation to provisions, for a present only when it is virtually certain that the
obligation to exist, which one of the reimbursement will be received if the entity
following factors must be present? settles the obligation.
a. The entity must have a legal obligation b. The amount of the reimbursement shall
that can be enforced by law. not exceed the amount of the provision.
b. The obligation must be capable of being c. In the income statement, the expense
reliably measured. relating to the provision may be presented
net of the reimbursement.
c. It must be more likely than less likely that
there will be a future flow of economic d. The reimbursement shall be "netted"
benefits. against the estimated liability for the
provision.
 a. Record 90% of the claim as a receivable
as it is virtually certain that the contingent
Question 7
asset will be received.
In May 2014, Cherry Company relocated an
b. Disclose the contingent asset in the
employee from the Manila head office to a
footnotes.
branch in Zamboanga City. As of the end of
the reporting period on June 30, 2014, the c. Wait until next year when the settlement
costs were estimated to be P350,000 check is actually received and not recognize
analyzed as follows: this receivable at all since at year-end it is a
contingent asset.
What amount should be reported as
provision for relocation costs on June 30, d. Record 100% of the claim as a receivable
2014? at year-end as it is virtually cetain that the
contingent asset will be received, arid
a. 250,000
adjust the 10% next year when the
b. 140,000 settlement check is actually received.

c. 160,000 Question 9

d. 240,000 When the occurrence of a contingent asset

is probable and the amount can be
Question 8 reasonably estimated, the contingent asset
should be
A factory owned by an entity was destroyed
by fire. The entity lodged an insurance claim a. Disclosed but not recognized in the
for the value of the factory building and statement of financial position.
plant, and an amount equal to one year's
net profit. During the year, there were a b. Classified as an appropriation of retained
number of meetings with the earnings.
representatives of the insurance company.
c. Recognized in the statement of financial
Finally, before year-end, it was decided that
position and disclosed.
the entity would receive compensation for
90% of its claim. The entity received a letter d. Neither recognized in the statement of
that the settlement check for that amount financial position nor disclosed.
had been mailed but it was not received
Question 10
before year-end. How should the entity
treat this in the financial statements? A constructive obligation is an obligation.
Select one: I. That is derived from an entity's action that
the entity will accept certain responsibilities
because of past practice, published policy or What is the warranty expense to be
current statement. recognized in 2017?

II. The entity has created a valid expectation a. 498,200

in other parties that it will discharge those
b. 530,000
responsibilities.
c. 514,100
a. Both I and II
d. 500,000
b. Neither I nor II
Question 12
c. II only
Iriga Company issued the 2013 financial
d. I only
statements on March 1,2014. The following
Question 11 data are provided by the entity for the year
ended December 31,2013:
Electro Company gives warranties at the
time of sale to purchasers of its product. What amount should be recognized as
The entity undertakes to make good by provision on December 31, 2013?
repair or replacement, manufacturing
a. 1,300,000
defects that become apparent within one
year from the date of sale. Sales of b. 1,750,000
P5,000,000 were made evenly throughout
2017. The expenditures for warranty repairs c. 1,200,000
and replacements for the products sold in
d. 1,600,000
2017 are expected to be made 50% in 2017
and 50% in 2018. The 2018 outflows of Question 13
economic benefits related to the warranty
When the provision involves a large
will take place on December 31, 2018. The
population of items, the estimate of the
entity estimated that 75% of products sold
amount
require no warranty repairs, 15%o of
products sold require minor repairs costing a. Is determined as the individual most
P100,000 and 10% of products sold require likely outcome.
major repairs costing P400,000. The
appropriate discount factor for cash flows b. Reflects the weighting of all possible
expected to occur on December 31, 2018 is outcomes by their associated probabilities.
0.94. An appropriate risk adjustment factor c. May be the individual most likely
to reflect the uncertainties in the cash flow outcome adjusted for the effect of other
estimates is an increment of 6% to the possible outcomes.
probability weighted expected cash flows.
d. Midpoint of the possible outcomes. c. Minimum

Question 14 d. Maximum

William Company operates a customer Question 16

loyalty program. The entity grants loyalty
Sam Company started business in 2015. It
points for goods purchased. The loyalty
sells printers with a three-year warranty.
points can be used by the customers in
Sam Company estimates its warranty cost
exchange for goods of the entity. The points
as a percentage of peso sales. Based on past
have no expiry date. During 2017, the entity
experience, it is estimated that 2% will be
issued 100,000 award credits and expects
repaired during the first year of warranty,
that 80% of these award credits shall be
4% will be repaired during the second year
redeemed. The total stand-alone selling
of warranty and 6% will be repaired in the
price of the award credits granted is reliably
third year.
measured at P2,000,000. In 2017, the entity
sold goods to customers for a total In 2015 and 2016, the company was able to
consideration of P8,000,000 based on sell 7,500 units and 8,400 units, respectively
stand-alone selling price. The award credits at a selling price of P5,000 per unit. The
redeemed and the total award credits company also incurred actual repair costs of
expected to be redeemed each year are as P53,000 and P1,176,000 in 2015 and 2016,
follows: respectively.
What is the revenue from points for 2017? What amount should Sam Company report
as warranty expense in 2015?
a. 480,000
a. P3,970,000
b. 1,500,000
b. P5,040,000
c. 1,600,000
c. P4,500,000
d. 600,000
d. P7,834,000
Question 15
Question 17
Where there is a continuous range of
possible outcomes, and each point in that Which is the correct definition of a
range is as likely as any other, the range to provision?
be used is the
a. A possible obligation arising from past
a. Summation of the minimum and events
maximum

b. Midpoint
b. A liability which cannot be easily a. P2,000,000
measured
b. P0
c. An obligation to transfer funds to an
c. P3,000,000
entity
d. P2,500,000
d. A liability of uncertain timing or amount
Question 19
Question 18
On December 17, 2016, an explosion
Snoopy Company is engaged in the
occurred at Action Fireworks plant in
manufacture of chemicals that it exports
Bulacan causing extensive property damage
other countries. On December 20, 2016,
to area buildings. Although no claims had
one of its storage tanks in the plant
yet been asserted against Action Fireworks
exploded. Unfortunately, one of its
by March 10, 2017, the management and
employees was caught by the accident and
counsel concluded that it is reasonably
suffered severe burns all over his body. For
possible that Action Fireworks will be
damages sustained because of the
responsible for damages and that
explosion, the employee sued Snoopy
P2,500,000 would be a reasonable estimate
Company and claimed an amount totaling
of its liability. Action Fireworks P10 million
P3 million for physical injuries sustained.
comprehensive public liability policy has a
The lawyer of Snoopy Company expects
P500,000 deductible clause.
that the company will probably lose the
lawsuit and estimates that the company In Action Fireworks' December 31, 2016
may have to pay amount of P2.5 million. financial statements that were issued on
March 25, 2017, how should this item be
On March 10, 2017, upon advice of the
reported?
lawyer, the injured employee offered to
have an out-of-court settlement of P2 a. As an accrued liability of P2,500,000.
million. The offer was tendered on the same
date and Snoopy accepted the offer on b. As a footnote disclosure indicating the
March 12, 2017 upon advice of its legal possible loss of P500,000.
counsel. The financial statements for the
c. As an accrued liability of P500,000.
year 2016 were issued on March 31, 2017.
d. As a footnote disclosure indicating the
What amount should be reported by
possible loss of P2,500,000.
Snoopy Company as liability from the legal
case at December 31, 2016?

Select one:
Question 20 • Costs of P300,000 are expected to be
incurred in transferring the remaining
The likelihood that the future event will or
employees to their new work in Factory B.
will not occur can be expressed by a range
The transfer is planned for January 15,2014.
of outcome. Which range means that the
future event occurring is very slight? • One employee, Juan Cruz, remains in
order to complete administrative tasks
a. Probable
relating to the closure of Factory A and the
b. Reasonably possible transfer of employees to Factory B. Juan
Cruz is expected to stay until January
c. Remote 31,2014. His salary for January will be
P50,000 and his retrenchment package will
d. Certain
be P150,000, all of which will be paid on the
Question 21 day he leaves. Juan Cruz would spend 60%
of his time administering the closure of
Helen Company decided on November
Factory A, 30% on administering the
1,2013 to restructure the entity's
transfer of employees to Factory B, and the
operations as follows:
remaining 10% on general administration.
• Factory A would be closed down and
What total amount should be recognized as
put on the market for sale.
restructuring provision on December
• Employees working in Factory A would 31,2013?
be retrenched on November 30,2013, and
a. 1,480,000
would be paid their accumulated
entitlements plus six months' wages. b. 1,180,000

• Some employees working in Factory A c. 1,500,000

would be transferred to Factory B, which
d. 1,200,000
would continue operating.
Question 22
On December 31,2013, the following
transactions and events had occurred: An entity sells goods that carry two-year
warranty. If minor repairs were be required
• The retrenched employees have left
on all goods sold in 2016, the repair cost
and their accumulated entitlements have
would be P100,000. If major repairs were
been paid. However, an amount of
needed on all goods sold, the cost would be
P1,000,000, representing a portion of the
P500,000. It is estimated that 80% of the
six months' wages for the retrenched
goods sold in 2016 will have no defects,
employees, has still not been paid.
15% will have minor defect and 5% will Sales and actual warranty expense for the
have major defects. year ended December 31, 2015 are
P3,000,000 and P45,000, respectively, and
The provision for repairs required on
for the year ended December 31, 2016 are
December 31, 2016 is
P5,000,000 and P150,000, respectively.
a. P100,000
Des Moines Company should report an
b. P300,000 estimated warranty liability in its December
31, 2016 statement of financial position of
c. P40,000
a. P285,000
d. P500,000
b. P50,000
Question 23
c. P225,000
Which of the following is required to be
disclosed regarding risk and uncertainties d. P85,000
that exist?
Question 25
a. The potential impact of estimate when it
An entity did not record an accrual for a
is reasonably possible that the estimate will
present obligation but disclose the nature
change in the future.
of the obligation and the range of the loss.
b. A description of operations both within How likely is the loss?
and outside of the home country.
a. Certain
c. The potential impact of estimate when it
b. Probable
is remotely possible that the estimate will
change in the future. c. Reasonably possible

d. Factor causing an estimate to be d. Remote

sensitive.
Question 26
Question 24
Which of the following is a characteristic of
Des Moines Company introduced during the accrual of warranty but not the sale of
2015, a new television model with a two- warranty?
year warranty against defects. Des Moines
a. Warranty liability
Company estimates the warranty costs at
2% of peso sales within 12 months following b. Warranty expense
the sale and at 4% in the second 12 months
following the sale. c. Unearned warranty revenue
d. Warranty revenue require no warranty repairs, 15%o of
products sold require minor repairs costing
Question 27
P100,000 and 10% of products sold require
For an event to be an obligating event, it is major repairs costing P400,000. The
necessary that the entity has no realistic appropriate discount factor for cash flows
alternative but to settle the obligation expected to occur on December 31, 2018 is
created by the event and this is the case 0.94. An appropriate risk adjustment factor
only: to reflect the uncertainties in the cash flow
estimates is an increment of 6% to the
I. Where the settlement of the obligation probability weighted expected cash flows.
can be enforced by law.
What is the warranty liability on December
II. Where the event creates valid 31, 2017?
expectation in other parties that the entity
will discharge the obligation as in the case a. 250,000
of a constructive obligation.
b. 249,100
a. Either I or II
c. 265,000
b. II only
d. 235,000
c. Neither I nor II
Question 29
d. I only
Which of the following statements is true in
Question 28 relation to recognition of a provision?

Electro Company gives warranties at the I. No provision is recognized for costs that
time of sale to purchasers of its product. need to be incurred to operate in the
The entity undertakes to make good by future.
repair or replacement, manufacturing
II. A provision for the decommissioning of
defects that become apparent within one
an oil installation or a nuclear plant station
year from the date of sale. Sales of
shall be recognized to the extent that an
P5,000,000 were made evenly throughout
entity is obliged to rectify damage already
2017. The expenditures for warranty repairs
caused.
and replacements for the products sold in
2017 are expected to be made 50% in 2017 a. Neither I nor II
and 50% in 2018. The 2018 outflows of
b. II only
economic benefits related to the warranty
will take place on December 31, 2018. The c. Both I and II
entity estimated that 75% of products sold
d. I only

Question 30

On November 1, 2016, Corn Company was

awarded judgment of P3 million in
connection with a lawsuit. The decision is
being appealed by the defendant, and it is
expected that the appeal process will be
completed by the end of 2017. Com
Company's attorneys feel that it is highly
probable than an award will be upheld on
appeal, but the judgment may be reduced
by an estimated 40%.

In addition to a footnote, what amount

should be reported as a receivable in Corn
Company's statement of financial position?

a. P0

b. P1,200,000

c. P1,800,000

d. P3,000,000
 PROVISIONS AND CONTINGENCIES
QUIZ
Question 1 of the electrical appliances sold. Based on
past experience, the estimated warranty
An outflow of resources embodying
cost is 3% of sales. During 2016, total sales
economic benefits is regarded as
of electrical appliances was P7,200,000.
"probable" when
Replacement parts and labor for warranty
a. The probability that the event will not work totaled P184,000 during 2016.
occur is greater than the probability that
In the company's marketing strategy for the
the event will occur.
household and office furniture section,
b. The probability that the event will occur customers are given a coupon for every
is the same as the probability that the event P1,000 spent on these items. Customers
will not occur. may exchange 10 coupons plus P500 for a
"hot and cold" water dispenser. Each water
c. The probability that the event will occur dispenser cost Abeson Company P1,200 and
is greater than the probability that the estimates that 40% of the coupons given to
event will not occur. the customers will be redeemed. During
2016, sales of household and office
d. The probability that the event will occur
furniture totaled P2,600,000. A total of 100
is 90% likely.
water dispensers used in the promo were
Question 2 purchased and there were 800 coupons
redeemed in 2016.
With the end goal of attracting as much
customers as possible in the NCR region, The accrual method is used by Abeson to
Abeson Appliance Company engaged in a account for the warranty and premium
customer satisfaction program and costs for financial reporting purposes. The
marketing strategy for two of their major balances in the accounts related to
lines of products: (1) electrical appliances warranties and premiums on January 1,
and (2) household and office furniture. All 2016 were as follows:
branches in the region are participating in
Inventory of "hot and cold" water
the company's promotions.
dispensers - 30 units,
In the customer satisfaction program,
Estimated premium claims outstanding -
Abeson Company provides one-year
P17,500, and
warranty for replacement of parts and labor
Estimated liability for warranty - P80,000. a. Reflects the weighting of all possible
outcomes by their associated probabilities.

b. Is determined as the individual most

How much is the premium inventory
likely outcome.
(prepaid expense) reported at December 31
2016? c. Midpoint of the possible outcomes.

a. P120,000 d. Is the individual most likely outcome

adjusted for the effect of other possible
b. P60,000
outcomes.
c. P35,000
Question 5
d. P124,800
Helen Company decided on November
Question 3 1,2013 to restructure the entity's
operations as follows:
An entity operates a plant in a foreign
country. It is probable that the plant will be • Factory A would be closed down and
expropriated. However, the foreign put on the market for sale.
government has indicated that the entity
• Employees working in Factory A would
will receive a definite amount of
be retrenched on November 30,2013, and
compensation for the plant. The amount of
would be paid their accumulated
compensation is less than the fair value but
entitlements plus six months' wages.
exceeds the carrying amount of the plant.
The contingent asset should be reported • Some employees working in Factory A
would be transferred to Factory B, which
a. As a valuation allowance as part of
would continue operating.
shareholders' equity
On December 31,2013, the following
b. As a fixed asset valuation allowance
transactions and events had occurred:
account
• The retrenched employees have left
c. In the notes to the financial statements
and their accumulated entitlements have
d. In the statement of financial position been paid. However, an amount of
P1,000,000, representing a portion of the
Question 4 six months' wages for the retrenched
employees, has still not been paid.
When the provision arises from a single
obligation, the estimate of the amount • Costs of P300,000 are expected to be
incurred in transferring the remaining
employees to their new work in Factory B. d. As a disclosure only
The transfer is planned for January 15,2014.

• One employee, Juan Cruz, remains in

order to complete administrative tasks
relating to the closure of Factory A and the Question 7
transfer of employees to Factory B. Juan
Cruz is expected to stay until January Mother, Inc. is being sued for illness caused
31,2014. His salary for January will be to local residents as a result of negligence
P50,000 and his retrenchment package will on the company's part in permitting the
be P150,000, all of which will be paid on the local residents to be exposed to highly toxic
day he leaves. Juan Cruz would spend 60% chemicals from its plant. Mother, Inc.'s
of his time administering the closure of lawyer states that it is probable, that
Factory A, 30% on administering the Mother, Inc. will lose the suit and be found
transfer of employees to Factory B, and the liable for a judgment costing Mother,, Inc.
remaining 10% on general administration. anywhere from P400,000 to P2,000,000.
However, the lawyer states that the most
What total amount should be recognized as probable cost is P1,200,000.
restructuring provision on December
31,2013? As a result of the given facts, Mother, Inc.
should accrue
a. 1,180,000
a. a loss contingency of P1,200,000 and
b. 1,480,000 disclose an additional contingency of up to
P800,000.
c. 1,200,000
Probable; amount is the most probable cost
d. 1,500,000
of P1,200,000 which is between the lowest
Question 6 and highest range; excess of P800,000 (2M
- 1.2M) is disclosed as a contingent liability.
How should a contingent liability be
reported in the financial statements when it b. a loss contingency of P400,000 and
is reasonably possible that the entity will disclose an additional contingency of up to
have to pay the liability at a future date? P1,600,000.

a. As an account payable with an additional c. no loss contingency but disclose a

disclosure explaining the nature of the contingency of P400,000 to P2,000,000.
transaction
d. a loss contingency of P1,200,000 but not
b. As an accrued liability disclose any additional contingency.

c. As a deferred liability Question 8

Villa Company estimated annual warranty What is the estimated warranty liability on
expense at 8% of net sales. The following December 31, 2015?
data relate to the current year:
a. 390,000

b. 490,000
What is the amount of net sales for the
c. 440,000
current year?
d. 840,000
a. 5,500,000
Question 11
b. 6,750,000
Mile Company sells washing machines that
c. 1,250,000
carry a three-year warranty against
d. 8,000,000 manufacturer's defects. Based on entity
experience, warranty costs are estimated at
Question 9
P300 per machine. During the current year,
Provisions shall be discounted if the effect is the entity sold 2,400 washing machines and
material. Which of the following is paid warranty costs of P170,000. What
incorrect regarding the discount rate? amount should be reported as warranty
expense for the current year?
a. Is a post-tax discount rate
a. 170,000
b. Does not reflect risk for which future
cash flow estimates have already been b. 240,000
adjusted.
c. 720,000
c. Reflects risk specific to the liability.
d. 550,000
d. Reflects current market assessment of
Question 12
the time value of money.
At year-end, an entity was suing a
Question 10
competitor for patent infringement. The
In 2014, Dubious Company began selling award from the probable favorable
new line of products that carry a two-year outcome could be reasonably estimated.
warranty against defects. Based upon past The entity's financial statements should
experience with other products, the report the expected award as
estimated warranty costs related to peso
a. Receivable and reduction of patent
sales are as follows:
b. Receivable and deferred revenue
c. Disclosure only a. The ability to make a reliable estimate of
the amount of the loss.
d. Receivable and revenue
b. Time period in which the underlying
cause of action occurred.

c. The probability of an unfavorable

Question 13 outcome.

A provision shall be recognized when d. The type of litigation involved.

a. There is a legal obligation arising from a Question 15

past obligating event, the probability of the
A contingent liability is
outflow of resources is more than remote
but less than probable, and a reliable a. An event which is not recognized because
estimate can be made of the amount of the it is not probable that an outflow will be
obligation. required or the amount cannot be reliably
estimated.
b. There is a possible obligation arising from
a past event, the outflow of resources is b. An estimated liability.
probable, and an approximate, amount can
c. A potential small liability.
be set aside toward the obligation.
d. A potential large liability.
c. Management decides that it is essential
that a provision be made for unforeseen Question 16
circumstances and keeping in mind this year
the profits were enough but next year there It is an event that creates a legal or
may be losses. constructive obligation because the entity
has no other realistic alternative but to
d. There is a constructive obligation as a settle the obligation.
result of a past obligating event, the
outflow of resources is probable, and a a. Obligating event
reliable estimate can be made of the
b. Subsequent event
amount of the obligation.
c. Past event
Question 14
d. Current event
Which of the following is not considered
when evaluating whether or not to record a Question 17
liability for pending litigation?
A legal obligation is an obligation that is
derived from all of the following, except
a. Other operation of law counsel believes it is probable that Jayson
will be awarded an estimated amount in the
b. A contract
range between P200,000 and P450,000 and
c. Legislation that P300,000 is a best estimate of potential
liability. Tim Truck's accounting year ends
d. An established pattern of past practice on December 31 and the 2016 financial
statements were issued on March 2, 2017.

What amount of loss should Tim Truck

Question 18
Rental Company accrue at December 31,
In an effort to increase sales, Mills Company 2016?
inaugurated a sales promotional campaign
a. P450,000
on June 30, 2014. The entity placed a
coupon redeemable for a premium in each b. P0
package of cereal sold. Each premium cost
P20 and five coupons must be presented by c. P300,000
a customer to receive a premium. The
d. P200,000
entity estimated that only 60% of the
coupons issued will be redeemed. For the Question 20
six months ended December 31, 2014, the
In May 2014, Cherry Company relocated an
following information is available:
employee from the Manila head office to a
What is the estimated liability for premium branch in Zamboanga City. As of the end of
claims outstanding on December 31, 2014? the reporting period on June 30, 2014, the
costs were estimated to be P350,000
a. 169,000
analyzed as follows:
b. 384,000
What amount should be reported as
c. 288,000 provision for relocation costs on June 30,
2014?
d. 224,000
a. 140,000
Question 19
b. 160,000
On November 5, 2016, Tim Truck Rental
Company was in an accident with an c. 240,000
automobile driven by Jayson. Tim Truck
d. 250,000
received notice on January 12, 2017 of a
lawsuit for P700,000 damages for personal Question 21
injuries suffered by Jayson, Tim Truck's
Hay Company won a litigation for P45,000 c. 202,500
tripled to P135,000 to include punitive
d. 337,500
damages during January 2016. Only the
P90,000 punitive damages were appealed
by the defendant. In an unrelated suit it
filed, which is still on appeal by the
defendant, Hay was awarded P145,000. The
Question 23
outcome of these appeals could not
estimated by the counsel. Sam Company started business in 2015. It
sells printers with a three-year warranty.
How much should Hay Company report as
Sam Company estimates its warranty cost
pretax gain in its 2016 financial statements?
as a percentage of peso sales. Based on past
a. P285,000 experience, it is estimated that 2% will be
repaired during the first year of warranty,
b. P150,000 4% will be repaired during the second year
of warranty and 6% will be repaired in the
c. P135,000
third year.
d. P45,000
In 2015 and 2016, the company was able to
Question 22 sell 7,500 units and 8,400 units, respectively
at a selling price of P5,000 per unit. The
At the beginning of current year, Daisy
company also incurred actual repair costs of
Company began marketing a new beer
P53,000 and P1,176,000 in 2015 and 2016,
called "Serbesa". To help promote the
respectively.
product, the management is offering a
special Serbesa beer mug to each customer What is the amount of liability for warranty
for every 20 specially marked bottle caps of reported in Sam Company's December 31,
Serbesa. The entity estimated that out of 2016 statement of financial position?
the 300,000 bottles of Serbesa sold during
a. P7,834,000
the year, only 50% of the marked bottle
caps would be redeemed. During the year, b. P3,024,000
the entity purchased 8,000 beer mugs at a
total cost of P360.000 or P45 each and had c. P5,040,000
already distributed 4,500 mugs to
d. P4,500,000
customers. What is the estimated premium
liability at year-end? Question 24

a. 360,000 Toyo Company owns a car dealership that it

uses for servicing cars under warranty. In
b. 135,000
preparing its financial statements, the P80,000 related to warranties for sales
entity needs to ascertain the provision for made in 2014. The increase during 2014 in
warranty that it would be required to the discounted amount recognized as a
provide at the end of the year. provision on December 31,2013 arising
from the passage of time is P2,000.
The entity's experience with warranty
claims is as follows: 60% of all cars sold in a On December 31, 2014, the entity
year have zero defect, 25% of all cars sold in estimated that it would incur expenditures
a year have normal defect, and 15% of all in 2015 to meet its warranty obligations on
cars sold in a year have significant defect. December 31, 2014 as follows:

The cost of rectifying a "normal defect" in a • 5% probabihty of P400,000

car is P10,000. The cost of rectifying a
• 20% probability of P200,000
"significant defect" in a car is P30,000. The
entity sold 500 cars during the year. • 50% probability of P 80,000
What is the "expected value" of the • 25% probability of P 20,000
warranty provision for the current year?
Assume for simplicity that the 2015 cash
a. 4,000,000 flows for warranty repairs and
replacements take place on June 30,2015.
b. 1,400,000
An appropriate discount rate is 10% per
c. 3,500,000
year. The PV of 1 at 10% for one year is 0.91
d. 1,750,000 and the PV of 1 at 10% for 6 months is 0.95.
An appropriate risk adjustment factor to
Question 25
reflect the uncertainties in the cash flow
Humanizer Company gives warranties at the estimates is an increment of 8% to the
time of sale to purchasers of its product. probability-weighted expected cash flows.
Under the terms of the sale, the entity
What is the warranty expense to be
undertakes to make good, by repair or
recognized in 2014?
replacement, manufacturing defects that
become apparent within one year from the a. 107,730
date of sale.
b. 187,730
On December 31,2013, the entity
c. 185,000
appropriately recognized P50,00C warranty
provision. The entity incurred and charged d. 195,730
P140,000 against the warranty provision in
2014. Out of the PI 40,000, an amount of Question 26
Which of the following is the proper d. P7,834,000
accounting treatment of a probable
contingent asset?

Select one:
Question 28
a. An account receivable with an additional
disclosure explaining the nature of the Which of the following statements is true
transaction concerning the measurement of a
provision?
b. Deferred earnings
I The amount recognized as a provision
c. An accrued account
should be the best estimate of the
d. A disclosure only expenditure required to settle the present
obligation at the end of reporting period.
Question 27
II The best estimate of the expenditure
Sam Company started business in 2015. It
required to settle the present obligation is
sells printers with a three-year warranty.
the amount that an entity would rationally
Sam Company estimates its warranty cost
pay to settle the obligation at the end of
as a percentage of peso sales. Based on past
reporting period or to transfer it to a third
experience, it is estimated that 2% will be
party at that time.
repaired during the first year of warranty,
4% will be repaired during the second year a. I only
of warranty and 6% will be repaired in the
b. Neither I nor II
third year.
c. II only
In 2015 and 2016, the company was able to
sell 7,500 units and 8,400 units, respectively d. Both I and II
at a selling price of P5,000 per unit. The
company also incurred actual repair costs of Question 29
P53,000 and P1,176,000 in 2015 and 2016,
Contingent assets are usually recognized
respectively.
when
What amount should Sam Company report
a. Occurrence is reasonably possible and
as warranty expense in 2015?
the amount can be reasonably estimated
a. P3,970,000
b. Realized
b. P4,500,000
c. Occurrence is probable and the amount
c. P5,040,000 can be reasonably estimated
d. The amount can be reasonably estimated

Question 30

Disclosure usually is not required for

a. Contingent losses that are remote and

can be reasonably estimated.

b. Contingent losses that are probable and

cannot be reasonably estimated.

c. Contingent losses that are reasonably

possible and cannot be reasonably
estimated.

d. Contingent gains that are probable and

can be reasonably estimated.
 NOTES PAYABLE & DEBT RESTRUCTURING
SEATWORK
Question 1 1,2013, First Bank agreed to the following
provisions:
Under a debt restructuring involving
substantial modification of terms, the • The principal obligation is reduced to
future cash flows under the new terms P7,000,000.
should be discounted using
• The accrued interest of P640,000 is
a. Market rate of interest forgiven.

b. Original effective interest rate • The date of maturity is extended to

December 31,2016.
c. Prime interest rate
• Annual interest of 10% is to be paid for
d. Interest rate under the new terms
4 years every December 31.
Question 2
The present value of 1 at 8% for 4 periods is
The gain or loss from extinguishment of a 0.735 and the present value of an ordinary
financial liability by issuing equity annuity of 1 at 8% for 4 periods is 3.31.
instruments shall be presented in the
What is the gain on extinguishment of debt
statement of comprehensive income as
to be recognized for 2013?
a. Other income or other expense
a. 1,178,000
b. Component of finance cost
b. 1,640,000
c. Component of other comprehensive
c. 538,000
income
d. 1,000,000
d. Separate line item in profit or loss
Question 4
Question 3
An entity issued a note solely in exchange
Granada Company had an overdue 8% note
for cash. Assuming that the items listed
payable to First Bank at P8,000,000 and
below differ in amount the present value of
accrued interest of P640,000. As a result of
the note at issuance is equal to
a restructuring agreement on January
a. Face amount
b. Proceeds received Question 7

c. Face amount discounted at the prevailing Seal Company is experiencing financial

interest rate difficulty and is negotiating debt
restructuring with its creditor to relieve its
d. Proceeds received discounted at the
financial stress. Seal has a P2,500,000 note
prevailing interest rate
payable to United Bank. The bank accepted
Question 5 an equity interest in Seal Company in the
form of 200,000 ordinary shares quoted at
The discount resulting from the P12 per share. The par value is P10 per
determination of the present value of a share. The fair value of the note payable on
note payable should be reported in the the date of restructuring is P2,200,000.
statement of financial position as
What amount should be recognized as gain
a. Direct deduction from the face amount of from debt extinguishment as a result of the
the note. "equity swap"?
b. Deferred credit separate from the note. a. 400,000
c. Deferred charge separate from the note. b. 500,000
d. Addition to the face amount of the note. c. 100,000
Question 6 d. 200,000
Mann Company reported a 10% note Question 8
payable of P3,600,000 on June 30, 2013.
The note is dated October 1, 2012 and What is the amortized cost of note payable?
payable in three equal annual payments of
a. The amount at which the note payable is
P1,200,000 plus interest. The first interest
initially recognized minus principal
and principal payment was made on
repayment, plus or minus the cumulative
October 1, 2013. On June 30, 2014, what
effective interest amortization of the
amount should be reported as accrued
difference between the initial carrying
interest payable for this note?
amount and maturity amount.
a. 270,000
b. The amount at which the note payable is
b. 90,000 initially recognized minus principal
repayment.
c. 60,000
c. The amount at which the note payable is
d. 180,000 initially recognized plus or minus the
cumulative effective interest amortization
of the difference between the initial d. 432,000
carrying amount and maturity amount.
Question 11
d. The amount at which the note payable is
Due to adverse economic circumstances
initially recognized.
and poor management, Tagaytay Highlands
Question 9 Company had negotiated a restructuring of
its 9% P6,000,000 note payable to Second
When an entity issued a note solely in
Bank due on January 1, 2013. There is no
exchange for cash, the present value of the
accrued interest on the note. The bank has
note at issuance is equal to
reduced the principal obligation from
a. Face amount P6,000,000 to P5,000,000 and extend the
maturity to 3 years or on December
b. Proceeds received discounted at the 31,2015. However, the new interest rate is
market interest rate 13% payable annually every December 31.
The present value of 1 at 9% for those
c. Face amount discounted at the market
periods is .77 and the present value of an
interest rate
ordinary annuity of 1 at 9% for three
d. Proceeds received periods is 2.53. What is the gain on
extinguishment of debt to be recognized for
Question 10
2013?
On January 1, 2014, Pares Company
a. 350,000
borrowed P3,600,000 from a major
customer evidenced by a noninterest b. 505,500
bearing note due in three years. The entity
c. 0
agreed to supply the customer's inventory
needs for the loan period at an amount d. 1,000,000
lower than market price. At the 12%
imputed interest rate for this type of loan, Question 12
the present value of the note is P2,550,000
If the present value of a note issued in
at the date of issuance.
exchange for a property is less than its face
What amount of interest expense should be amount, the difference should be
reported in the income statement for 2014?
a. Amortized as interest expense over the
a. 350,000 life of the note

b. 306,000 b. Included in the cost of the asset

c. 0 c. Amortized as interest expense over the

life of the asset
d. Included in interest expense in the year 8% note, due in 11 equal annual principal
of issuance payments, plus interest beginning
December 31, 2014 - P1,100,000; 7%
guaranteed debentures, due 2015 -
Question 13 P1,000,000.

Witt Company reported the following The annual sinking-fund requirement on the
liability account balances on December 31, guaranteed debentures is P40,000 per year.
2014: What amount should be reported as
current maturities of long-term debt on
6% note payable issued October 1, 2013 December 31,2013?
maturing October 1, 2015 - P500,000.
a. 70,000
8% note payable issued April 1, 2013
maturing April 1,2015 - P800,000. b. 100,000

The 2014 financial statements were issued c. 40,000

on March 31, 2015. On March 1, 2015, the
d. 130,000
entire P800,000 balance of 8% note was
refinanced by issuance of a long-term Question 15
obligation payable lump sum. On December
When a note payable is exchanged for
31, 2014, what amount of the notes
property, the stated interest rate is
payable should be classified as current?
presumed to be fair when
a. 800,000
a. The stated interest rate is unreasonable.
b. 500,000
b. The stated interest rate is equal to the
c. 1,300,000 market rate.

d. 0 c. No interest rate is stated.

Question 14 d. The face amount of the note is materially

different from the cash sale price for similar
Able Company had the following amounts
property.
of long-term debt outstanding on
December 31,2013: Question 16

14% term note, due 2014 - P30,000; Versatile Company, after having
experienced financial difficulties in 2014,
11 % term note, due 2016 - P1,070,000;
negotiated with a major creditor and
arrived at an agreement to restructure a
note payable on December 31, 2014. The c. 100,000
creditor was owed principal of P3,600,000
d. 200,000
and interest of P400,000 but agreed to
accept equipment worth P700,000 and note
receivable from a Versatile Company's
customer with carrying amount of
P2,700,000. The equipment had an original
Question 18
cost of P900,000 and accumulated
depreciation of P300,000. What amount On January 1, 2014, Jonathan Company
should be recognized as gain from borrowed P500,000 8% noninterest-bearing
extinguishment of debt on December 31, note due in four years. The present value of
2014? the note on the date of issuance was
P367,500. The entity has elected the fair
a. 700,000
value option. On December 31, 2014, the
b. 600,000 fair value of the note is P408,150. At what
amount should the discount on note
c. 0 payable be presented on December 31,
2014?
d. 400,000
a. 0
Question 17
b. 132,500
Seal Company is experiencing financial
difficulty and is negotiating debt c. 103,100
restructuring with its creditor to relieve its
financial stress. Seal has a P2,500,000 note d. 91,850
payable to United Bank. The bank accepted
Question 19
an equity interest in Seal Company in the
form of 200,000 ordinary shares quoted at On January 1, 2014, Solemn Company sold
P12 per share. The par value is P10 per land to Glory Company. There was no
share. The fair value of the note payable on established market price for the land. Glory
the date of restructuring is P2,200,000. gave Solemn a P2,400,000 noninterest
bearing note payable in three equal annual
What amount should be recognized as
installments of P800,000 with the first
share premium from the issuance of the
payment due December 31, 2014. The note
shares?
has no ready market. The prevailing rate of
a. 500,000 interest for a note of this type is 10%. The
present value of a P2,400,000 note payable
b. 400,000 in three equal annual installments of
P800,000 at a 10% rate of interest is
PI,989,600. What is the carrying amount of
the note payable on December 31, 2014?

a. 2,126,400

b. 1,989,600

c. 2,400,000

d. 1,388,560

Question 20

Due to extreme financial difficulties,

Armada Company had negotiated a
restructuring of a 10% P5,000,000 note
payable due on December 31, 2014. The
unpaid interest on the note on such date
was P500,000. The creditor agreed to
reduce the face value to P4,000,000, forgive
the unpaid interest, reduce the interest rate
to 8% and extend the due date three years
from December 31, 2014. The present value
of 1 at 10% for three periods is 0.75 and the
present value of an ordinary annuity of 1 at
10% for three periods is 2.49.

What is the gain on extinguishment for

2014?

a. 540,000

b. 1,203,200

c. 2,000,000

d. 1,703,200
 NOTES PAYABLE & DEBT RESTRUCTURING
QUIZ
Question 1 • Reduced the principal obligation to
P700,000. Forgave P120,000 of accrued
Under a debt restructuring involving
interest.
substantial modification of terms, the
future cash flows under the new terms • Extended the maturity date from
should be discounted using January 1,2013 to December 31, 2014.

a. Original effective interest rate • Reduced the interest rate from 12% to
8%. Interest is payable annually on
b. Prime interest rate
December 31,2013 and 2014.
c. Interest rate under the new terms
Relevant present value factors:
d. Market rate of interest
Single sum, two years at 8% .857
Question 2
Single sum, two years at 12% .797
After initial recognition, an entity shall
Ordinary annuity, two years at 8% 1.783
measure a note payable at
Ordinary annuity, two years at 12% 1.690
a. Either amortized cost or fair value
through other comprehensive income What is the interest income for 2013?

b. Either amortized cost or fair value a. 56,000

through profit or loss
b. 81,155
c. Fair value through profit or loss
c. 80,000
d. Amortized cost
d. 78,305
Question 3
Question 4
On January 1,2013, Mara Company entered
Jam Company had P5,000,000 note payable
into a debt restructuring agreement with
due on March 1,2014. The entity borrowed
Clara Company which was experiencing
P3,500,000 on February 1, 2014 which had
financial difficulties. Mara Company
a five-year term and used the proceeds to
restructured a P1,000,000 note receivable
pay down the note and used other cash to
as follows:
pay the balance. The December 31, 2013
financial statements were issued on March
Question 7
31,2014. What amount of the note payable
should be classified as noncurrent on On October 1, 2014, an entity borrowed
December 31,2013? cash and signed a three-year interest
bearing note in which both the principal
a. 1,500,000
and interest are payable on October 1,
b. 0 2017. On December 31, 2014, accrued
interest should
c. 3,500,000
a. Be reported as current liability
d. 5,000,000
b. Not be reported
Question 5
c. Be reported as part of the note payable
In a debt restructuring that is considered an
asset swap, the gain on extinguishment is d. Be reported as noncurrent liability
equal to the
Question 8
a. Excess of the fair value of the asset over
What is the amortized cost of note payable?
the carrying amount of the debt
a. The amount at which the note payable is
b. Excess of the carrying amount of the debt
initially recognized minus principal
over the carrying amount of the asset
repayment, plus or minus the cumulative
c. Excess of the fair value of the asset over effective interest amortization of the
its carrying amount difference between the initial carrying
amount and maturity amount.
d. Excess of the carrying amount of the debt
over the fair value of the asset b. The amount at which the note payable is
initially recognized plus or minus the
Question 6
cumulative effective interest amortization
Under the fair value option, an entity shall of the difference between the initial
measure the 'note payable initially at carrying amount and maturity amount.

a. Fair value minus transaction cost c. The amount at which the note payable is
initially recognized.
b. Fair value plus transaction cost
d. The amount at which the note payable is
c. Fair value initially recognized minus principal
repayment.
d. Face amount
 receivable from a Versatile Company's
customer with carrying amount of
Question 9
P2,700,000. The equipment had an original
On December 31, 2014, Bart Company cost of P900,000 and accumulated
purchased a machine from Fell Company in depreciation of P300,000. What amount
exchange for a noninterest bearing note should be recognized as gain from
requiring eight payments of P200,000. The extinguishment of debt on December 31,
first payment was made on December 31, 2014?
2014 and the others are due annually on
a. 600,000
December 31. At date of issuance, the
prevailing rate of interest for this type of b. 0
note was 11%. Present value factors are as
c. 400,000
follows:
d. 700,000
PV of an ordinary annuity of 1 at 11% for 8
periods - 5.146. Question 11
PV of an annuity of 1 in advance at 11% for At issuance date, the present value of a
8 periods - 5.712. promissory note is equal to the face
amount if the note
In the December 31, 2014 statement of
financial position, what is the carrying a. Bears a stated rate of interest which is
amount of the note payable? less than the pervading market rate for
similar notes.
a. 1,029,200
b. Is noninterest bearing and the implicit
b. 942,400
interest rate is less than the prevailing
c. 1,142,400 market rate for similar notes.

d. 1,046,200 c. Bears a stated rate of interest which is

realistic.
Question 10
d. Is noninterest bearing and the implicit
Versatile Company, after having
interest rate is equal to the prevailing
experienced financial difficulties in 2014,
market rate for similar notes.
negotiated with a major creditor and
arrived at an agreement to restructure a Question 12
note payable on December 31, 2014. The
Due to extreme financial difficulties,
creditor was owed principal of P3,600,000
Armada Company had negotiated a
and interest of P400,000 but agreed to
restructuring of a 10% P5,000,000 note
accept equipment worth P700,000 and note
payable due on December 31, 2014. The ordinary annuity of 1 at 9% for three
unpaid interest on the note on such date periods is 2.53.
was P500,000. The creditor agreed to
What is the gain on extinguishment of debt
reduce the face value to P4,000,000, forgive
to be recognized for 2014?
the unpaid interest, reduce the interest rate
to 8% and extend the due date three years a. 1,000,000
from December 31, 2014. The present value
of 1 at 10% for three periods is 0.75 and the b. 505,500
present value of an ordinary annuity of 1 at
c. 350,000
10% for three periods is 2.49.
d. 0
What is the interest expense for 2015?
Question 14
a. 400,000
An entity shall initially measure equity
b. 379,680
instruments issued to extinguish all or part
c. 500,000 of a financial liability at

d. 320,000 a. Fair value of the liability extinguished

Question 13 b. Fair value of the equity instruments

issued
Due to adverse economic circumstances
and poor management, Tagaytay Highlands c. Carrying amount of the liability
Company had negotiated a restructuring of extinguished
a 9% P6,000,000 note payable to Second
d. Par value of the equity instruments
Bank due on January 1, 2014. There was no
issued
accrued interest on the note on January 1,
2014. Question 15

The bank reduced the principal obligation When a note payable is exchanged for
from P6,000,000 to P5,000,000 and property, the stated interest rate is
extended the maturity to three years on presumed to be fair when
December 31, 2016. However, the new
a. The stated interest rate is equal to the
interest rate is 13% payable annually every
market rate.
December 31. Considering these terms, the
new effective rate is 5.58%. b. The face amount of the note is materially
different from the cash sale price for similar
The present value of 1 at 9% for three
property.
periods is .77 and the present value of an
c. No interest rate is stated.
d. The stated interest rate is unreasonable. b. 6,000,000

Question 16 c. 2,000,000

A note payable with no ready market is d. 5,000,000

exchanged for property whose fair value is
Question 18
currently indeterminable. When such a
transaction takes place If both the fair value of the equity
instruments issued and the fair value of the
a. The note payable should not be recorded
financial liability extinguished cannot be
until the fair value of the property becomes
measured reliably, the equity instruments
evident.
issued shall be measured at
b. The present value of the note payable
a. Carrying amount of the liability
must be approximated using an imputed
extinguished
interest rate.
b. Par value of equity instruments issued
c. The entity receiving the property should
estimate a value for the property. c. Value assigned by the Board of Directors
d. Both entities involved in the transaction d. Book value of the equity instruments
should negotiate a value to be assigned to issued
the property.
Question 19
Question 17
On January 1, 2014, Jonathan Company
On December 31,2013, Ace Company had borrowed P500,000 8% noninterest-bearing
P6,000,000 note payable due on February note due in four years. The present value of
28,2014. On December 31,2013, the entity the note on the date of issuance was
arranged a line of credit with City Bank P367,500. The entity has elected the fair
which allows the entity to borrow up to value option. On December 31, 2014, the
P5,000,000 at 6% per annum for three fair value of the note is P408,150. At what
years. On February 1, 2014, the entity amount should the discount on note
borrowed P4,000,000 from City Bank and payable be presented on December 31,
used P2,000,000 additional cash to liquidate 2014?
the note payable. The 2013 financial
statements were issued on March 15, 2014. a. 132,500
What amount of note payable should be
b. 0
reported as current on December 31,2013?
c. 103,100
a. 4,000,000
d. 91,850
 Some borrowing agreements incorporate
covenants which have the effect that the
Question 20
liability becomes payable on demand if
On January 1, 2014, Wisconsin Company certain conditions related to the covenants
lent P1,780,000 cash to Stone Company. are breached. In such a case, the liability is
The promissory note made by Stone for classified as:
P2,000,000 did not bear explicit interest
I. Current even if the lender has agreed,
and was due on December 31, 2015. The
after the reporting period and before the
prevailing interest rate for a loan of this
statements are authorized for issue, not to
type was 6%. The present value of 1 for two
demand payment as a consequence of the
periods at 6% is .89. What amount of
breach.
interest expense should be recognized for
2014? II. Noncurrent when the lender has agreed
on or before the end of the reporting period
a. 110,000
to provide a period of grace ending at least
b. 120,000 twelve months after that date.

c. 106,800 a. Either I or II

d. 0 b. Neither I nor II

Question 21 c. I only

If the fair value of the equity instruments d. II only

issued cannot be reliably measured, the
Question 23
equity instruments issued to extinguish a
financial liability shall be measured at On January 1, 2014, Solemn Company sold
land to Glory Company. There was no
a. Fair value of the liability extinguished
established market price for the land. Glory
b. Carrying amount of the liability gave Solemn a P2,400,000 noninterest
extinguished bearing note payable in three equal annual
installments of P800,000 with the first
c. Par value of the equity instruments payment due December 31, 2014. The note
issued has no ready market. The prevailing rate of
interest for a note of this type is 10%. The
d. Book value of the equity instruments
present value of a P2,400,000 note payable
issued
in three equal annual installments of
Question 22 P800,000 at a 10% rate of interest is
PI,989,600. What is the carrying amount of d. Less than 10% of the carrying amount of
the note payable on December 31, 2014? the old liability

Select one:

a. 2,400,000

b. 1,989,600

c. 2,126,400

d. 1,388,560

Question 24

For a debt restructuring involving

substantial modification of terms, it is
appropriate for a debtor to recognize a gain
when the carrying amount of the debt

a. Is less than the total future cash

payments specified by the new terms.

b. Exceeds the total future cash payments

specified by the new terms.

c. Exceeds the present value of the future

cash payments specified by the new terms.

d. Is less than the present value of the

future cash payments specified by the new
terms.

Question 25

There is substantial modification of terms of

an old financial liability if the gain or loss on
extinguishment is

a. Less than 10% of the new liability

b. At least 10% of the carrying amount of

the old liability

c. At least 10% of the new liability

 BONDS PAYABLE & COMPOUND FINANCIAL
INSTRUMENT
SEATWORK
Question 1 shareholders' equity arising from the
issuance of the convertible bonds on
On January 1, 2014, Wolf Company issued
January 1, 2013?
10% bonds in the face amount of
P5,000,000, which mature on January 1, a. 350,000
2024. The bonds were issued for
b. 150,000
P5,675,000 to yield 8%, resulting in bond
premium of P675,000. The entity used the c. 500,000
interest method of amortizing bond
premium. Interest is payable annually on d. 0
December 31. On December 31, 2014, what
Question 3
is the balance of the unamortized bond
premium? Which of the following is true of accrued
interest on bonds that are sold between
a. 629,000
interest dates?
b. 675,000
a. The accrued interest is computed at the
c. 607,500 effective rate.

d. 507,500 b. The accrued interest is extra income to

the buyer.
Question 2
c. None of the above
Moriones Company issued P5,000,000 face
value 12% convertible bonds at 110 on d. The accrued interest will be paid to the
January 1, 2013, maturing on January seller when the bonds mature.
1,2018 and paying interest semiannually on
Question 4
January 1 and July 1. It is estimated that
the bonds would sell only at 103 without When interest expense is calculated using
the conversion feature. Each P 1,000 bond the effective interest method, interest
is convertible into 10 ordinary shares with expense equals
PI00 par value. What is the increase in
a. Carrying amount of the bonds multiplied When bonds are issued with share
by the stated interest rate. warrants, a portion of the proceeds should
be allocated to equity when the bonds are
b. Actual amount of interest paid.
issued with
c. Maturity value of the bonds multiplied by
I. Detachable share warrants
the effective interest rate.
II. Nondetachable share warrants
d. Carrying amount of the bonds multiplied
by the effective interest rate. a. II only

Question 5 b. I only

An entity neglected to amortize the c. Both I and II

premium on outstanding bonds payable.
d. Neither I nor II
What is the effect of the failure to record
premium amortization on interest expense Question 8
and bond carrying amount, respectively?
<Interest expense><Bond carrying amount> If bonds are issued at a premium, this
indicates that
a. Overstated, Overstated
a. The nominal rate of interest exceeds the
b. Understated, Understated yield rate
c. Understated, Overstated b. The yield rate of interest exceeds the
nominal rate
d. Overstated, Understated
c. The yield and nominal rates coincide
Question 6
d. No necessary relationship exists between
It is any contract that gives rise to both a
the two rates
financial asset of one entity and a financial
liability or equity instrument of another Question 9
entity.
A bond issued on June 1 of the current year
a. Equity instrument has interest payment dates of April 1 and
October 1. Bond interest expense for the
b. Derivative instrument
current year ended December 31 is for a
c. Debt instrument period of

d. Financial instrument a. Three months

Question 7 b. Six months

c. Four months c. Stated rate

d. Seven months d. Coupon rate

Question 10 Question 12

On December 31, 2014, Armada Company When bonds are retired prior to maturity
issued P5,000,000 face value, 5-ypar bonds with proceeds from a new bond issue, any
at 109. Each P1,000 bond was issued with gain or loss from the early extinguishment
10 share warrants, each of which entitled of debt should be
the bondholder to purchase one share of
a. Recognized in income from continuing
P100 par value at P120. Immediately after
operations.
issuance, the market value of each warrant
was P5. The stated interest rate on the b. Amortized over the life of the new bond
bonds is 11% payable annually every issue.
December 31. However, the prevailing
market rate of interest for similar bonds c. Recognized in retained earnings.
without warrants is 12%. The present value
d. Amortized over the remaining original life
of 1 at 12% for 5 periods is 0.57 and the
of the retired bond issue.
present value of an ordinary annuity of 1 at
12% for 5 periods is 3.60. Question 13

On December 31, 2014, what amount Costs incurred in connection with the
should be recorded as increase in issuance of ten-year bonds which sold at a
shareholders' equity as a result of the bond slight premium shall be
issuance?
a. Expensed in the year in which incurred
a. 620,000
b. Capitalized as organization cost
b. 440,000
c. Charged to retained earnings when the
c. 250,000 bonds are issued

Question 11 d. Reported as a deduction from bonds

payable and amortized over the ten-year
What is the interest rate written on the face
bond term
of the bond?
Question 14
a. Nominal rate
Clay Company had P600,000 convertible 8%
b. Coupon rate, nominal rate or stated rate
bonds payable outstanding on June 30,
2014. Each PI,000 bond was convertible into A ten-year term bond was issued at a
10 ordinary shares of P50 par value. On July discount with a call provision to retire the
1, 2014, the interest was paid to bond. When the bond issuer exercised the
bondholders, and the bonds were call provision on an interest date, the
converted into ordinary shares which had a carrying amount of the bond was less than
fair value of P75 per share. The the call price. The amount of bond liability
unamortized premium on these bonds was removed from the accounts should have
P12,000 at the date of conversion. No equaled the
equity component was recognized when
a. Face amount less unamortized discount
the bonds were originally issued. What is
the increase in the share capital and share b. Call price
premium, respectively, as a result of the
bond conversion? c. Face amount plus unamortized discount

a. 450,000 and 162,000 d. Call price less unamortized discount

b. 306,000 and 306,000 Question 17

c. 300,000 and 312,000 Bond issue costs should be

d. 600,000 and 12,000 a. Deferred and amortized over the life of

the bonds.
Question 15
b. Expensed in the period when incurred.
Which of the following statements is true
for a bond maturing on a single date when c. Recorded as a reduction in the carrying
the effective interest method of amortizing amount of bonds payable.
bond discount is used?
d. Expensed in the period when the bonds
a. Interest expense increases each six- are retired.
month period
Question 18
b. Nominal interest rate exceeds effective
On December 1, 2014, Lancaster Company
interest rate
issued at 103, five thousand of 9%, P1,000
c. Interest expense as a percentage of the face value bonds. Attached to each bond
bond carrying amount varies from period to was one share warrant entitling the holder
period to purchase 10 ordinary shares of the
entity. On December 1, 2014, the fair value
d. Interest expense remains constant each of the bonds without the share warrants
six-month period was 95, and the fair value of each share
warrant was P50. What amount of the
Question 16
proceeds from the bond issuance should be b. 540,000
accounted for as the initial carrying amount
c. 480,000
of the bonds payable?
d. 440,000
a. 4,750,000
Question 21
b. 5,000,000
How are the proceeds from issuing a
c. 5,150,000
compound financial instrument allocated
d. 4,892,500 between the liability and equity
components?
Question 19
a. First, the fair values of both the equity
An entity neglected to amortize the
component and the liability component are
discount on outstanding bonds payable.
estimated. Then, the proceeds are allocated
What is the effect of the failure to record
to the liability and equity components
discount amortization on interest expense
based on the relation between the
and bond carrying amount, respectively?
estimated fair value.
Interest expense><Bond carrying amount>
b. First, the equity component is measured
a. Overstated, Understated
at fair value, and then the remainder of the
b. Understated, Understated proceeds is allocated to the liability
component.
c. Overstated, Overstated
c. The equity component is measured at its
d. Understated, Overstated intrinsic value. The liability component is
measured at the face amount less the
Question 20
intrinsic value of the equity component.
At the beginning of the current year, Ria
d. First, the liability component is measured
Company issued 10,000 ordinary shares of
at fair value, and then the remainder of the
P20 par value and 20,000 convertible
proceeds is allocated to the equity
preference shares of P20 par value for a
component.
total of P800,000. At this date, the ordinary
share was selling for P36, and the Question 22
convertible preference share was selling for
P27. What amount of the proceeds should When the cash proceeds from bonds issued
be allocated to the convertible preference with share warrants exceed the fair value of
shares? the bonds without the warrants, the excess
should be credited to
a. 600,000
a. Retained earnings
b. Share premium - share warrants On January 1, 2013, Carrow Company
issued 10% bonds in the face amount of
c. Share premium - ordinary
P1,000,000 that mature on January 1, 2023.
d. Liability account The bonds were issued for P886,000 to yield
12%, resulting in bond discount of
Question 23 P114,000. The entity used the interest
method of amortizing bond discount.
An entity issued a bond with a stated rate of
Interest is payable on January 1 and July.
interest that is less than the effective
interest rate on the date of issuance. The For the year ended December 31,2013,
bond was issued on one of the interest what amount should be reported as bond
payment dates. What should the entity interest expense?
report on the first interest payment date?
a. 53,160
a. A debit to the unamortized bond
premium. b. 106,510

b. An interest expense that is greater than c. 100,000

the cash payment made to bondholders.
d. 50,000
c. An interest expense that is less than the
Question 26
cash payment made to bondholders.
In 2014, Hyatt Company issued for P110 per
d. A debit to the unamortized bond
share, 15,000 convertible preference shares
discount.
of P100 par value. One preference share
Question 24 may be converted into three ordinary
shares with P25 par value at the option of
The issuer of a 10-year bond sold at par the preference shareholder. On December
three years ago with interest payable 31, 2015, all of the preference shares were
February 1 and August 1 should report in converted into ordinary shares. The market
the year-end statement financial position value of the ordinary share at the
conversion date was P40. What amount
a. An addition to bonds payable
should be credited to ordinary share capital
b. Increase in deferred charge on December 31, 2015?

c. Liability for accrued interest a. 1,800,000

d. Contingent liability b. 1,650,000

Question 25 c. 1,500,000

d. 1,125,000
 Bonds that pay no interest unless the issuer
is profitable are known as

Select one:
Question 27
a. Junk bonds
How would the amortization of discount on
bonds payable affect each of the following? b. Registered bonds
<Carrying amount of bond><Net income>
c. Mortgage bonds
a. Increase, Increase
d. Income bonds
b. Decrease, Increase
Question 30
c. Decrease, Decrease
On January 1, 2014, Rizal Company issued
d. Increase, Decrease 4-year bonds with face value of P4,000,000
at P4,395,800. The 12% stated rate is
Question 28
payable semiannually every June 30 and
Blue Company reported the following December 31. In addition, the entity paid
financial liabilities on December 31, 2014: P137,430 in connection with the issuance of
the bonds. What is the effective rate of
9% debentures, callable in 2015, due in interest on the bonds on the date of issue?
2016 - P3,500,000;
a. 10%
11% collateral trust bonds, convertible into
share capital beginning in 2015, due in 2016 b. 11%
- P3,000,000; and
c. 12%
10% debentures (P300,000 maturing
d. 9%
annually) - P1,500,000.

What is the total amount of term bonds?

a. 6,500,000

b. 3,500,000

c. 3,000,000

d. 5,000,000

Question 29
 BONDS PAYABLE & COMPOUND FINANCIAL
INSTRUMENT
QUIZ
Question 1 The market price of a bond issued at a
discount is the present value of the
On July 1, 2015, Silver Company issued P4
principal amount at the market rate of
million of 16% bonds to yield 14%. Interest
interest
is payable semi-annually on January 1 and
July 1. The bonds mature in five years. Silver a. Less the present value of all future
Company uses the calendar year and the interest payments at the rate of interest
effective interest method of amortization. stated on the bond.

Present value of l at 7% for 10 periods is b. Plus the present value of all future
0.50835 interest payments at the rate of interest
stated on the bond.
Present value of an ordinary annuity of 1 at
7% for 10 periods is 7.02359 c. Plus the present value of all future
interest payments at the market rate of
Present value of 1 at 14% for 5 periods is
interest.
0.51937
d. Less the present value of all future
Present value of an ordinary annuity of 1 at
interest payments at the market rate of
14% for 5 periods is 3.43308
interest.
What is the bond carrying value at
Question 3
December 31, 2016?
If bonds are issued between interest dates,
a. P4,215,578
the entry of the issuer could include a
b. 04,238,858
a. Credit to interest receivable
c. P4,315,318
b. Credit to interest expense
d. P4,000,000
c. Debit to interest payable
Question 2
d. Credit to unearned interest

Question 4
When bonds are sold between interest b. Bond debenture
dates, any accrued interest is credited to
c. Bond coupon
Select one:
d. Bond indenture
a. Interest payable
Question 7
b. Interest receivable
On December 31, 2016, IBM Company had
c. Interest revenue outstanding P20 million face value
convertible bonds maturing on December
d. Bonds payable
31, 2019. Interest is payable annually
Question 5 December 31. Each P1,000 bond is
convertible into 60 shares of IBM
On December 31, 2014, the Compaq Company's P10 par ordinary shares. The
Company issues 20-year bonds of unamortized premium balance from Bond
P5,000,000 for P5,851,160 to yield 10%. Conversion Privilege is P640,000.
Interest is payable annually on December
31 at 12%. On April 1, 2016, Compaq On this date, an individual holding 2,000 of
Company retires 2,000 of its own P1,000 the bonds exercised the conversion
bonds at 98 plus accrued interest. The privilege when the market value of IBM
accounting period for the Compaq Company's ordinary share was P18.
Company is the calendar year. The company
What is the amount credited to share
uses the effective interest method of
premium upon conversion of the bonds?
amortization,
a. None
How much is the gain or loss on the
retirement of bonds b. P1,790,000

a. P40,000 gain c. P899,000

b. P372,873 gain d. P800,000

c. P372,873 loss Question 8

d. P40,000 loss A bond issued on June 1 of the current year

has interest payment dates of April 1 and
Question 6
October 1. Bond interest expense for the
What is the contract between the issuer of current year ended December 31 is for a
bonds and the bondholders? period of

a. Registered bond a. Three months

b. Seven months The following information pertains to Camp
Corporation's issuance of bonds on July 1.
c. Six months

d. Four months

Question 9

The major difference between convertible

bonds and bonds issued with share
warrants is that upon exercise of the a. P864
warrants
b. P807
a. The shares are held by the issuer for a
certain period before they are issued to the c. P700
warrant holder. d. P1,000
b. The holder has to pay a certain amount Question 12
to obtain the shares.
Costs incurred in connection with the
c. No share premium can be part of the issuance of ten-year bonds which sold at a
transaction. slight premium shall be
d. The shares involved are restricted. a. Expensed in the year in which incurred
Question 10 b. Charged to retained earnings when the
On June 30, 2014, Huff Company issued at bonds are issued
99, four thousand of 8% P1,000 bonds. The c. Reported as a deduction from bonds
bonds were issued through an underwriter payable and amortized over the ten-year
to whom the entity paid bond issue cost of bond term
P340,000. On June 30, 2014, what is the
carrying amount of the bonds payable? d. Capitalized as organization cost

a. 3,820,000 Question 13

b. 3,620,000 Bonds for which the bondholders' names

are not registered with the issuer are called
c. 4,000,000
a. Bearer bonds
d. 3,960,000
b. Serial bonds
Question 11
c. Debenture bonds
d. Term bonds a. P4,280,949

b. P3,719,051

Question 14 c. P4,000,000

The "amortized cost" of bonds payable d. P4,274,651

means
Question 16
a. Face amount minus bond issue cost
Bonds that mature on a single date are
b. Face amount plus premium on bonds called
payable
a. Serial bonds
c. Face amount minus discount on bonds
b. Callable bonds
payable
c. Convertible bonds
d. Face amount plus premium on bonds
payable, minus discount on bonds payable d. Term bonds
and minus bond issue cost
Question 17
Question 15
When the interest payment dates of a bond
On July 1, 2015, Silver Company issued P4 are May 1 and November 1, and a bond
million of 16% bonds to yield 14%. Interest issue is sold on June 1, the amount of cash
is payable semi-annually on January 1 and received by the issuer will be
July 1. The bonds mature in five years. Silver
Company uses the calendar year and the a. Decreased by accrued interest from May
effective interest method of amortization. 1 to June 1

Present value of l at 7% for 10 periods is b. Increased by accrued interest from May 1

0.50835 to June 1

Present value of an ordinary annuity of 1 at c. Increased by accrued interest from June 1

7% for 10 periods is 7.02359 to November 1

Present value of 1 at 14% for 5 periods is d. Decreased by accrued interest from June
0.51937 1 to November 1

Present value of an ordinary annuity of 1 at Question 18

14% for 5 periods is 3.43308
What is the interest rate written on the face
How much was the issue price of the bond? of the bond?
a. Stated rate Present value of 1 at 14% for 5 periods is
0.51937
b. Coupon rate, nominal rate or stated rate
Present value of an ordinary annuity of 1 at
c. Nominal rate
14% for 5 periods is 3.43308
d. Coupon rate
What is the bond interest expense for the
Question 19 year 2016?

An entity issued a bond with a stated rate of a. P299,666

interest that is less than the effective
b. P594,963
interest rate on the date of issuance. The
bond was issued on one of the interest c. P599,333
payment dates. What should the entity
d. P640,000
report on the first interest payment date?
Question 21
a. An interest expense that is greater than
the cash payment made to bondholders. On July 1, 2016, Twin Head Corporation
issued P5 million of its 10%, 7-year bonds
b. An interest expense that is less than the
with one detachable warrant attached to
cash payment made to bondholders.
each P1,000 bond. Each warrant provides
c. A debit to the unamortized bond for the right to purchase 20 shares of P15
premium. par value ordinary for P20 each The market
value of the ordinary share was P25 each at
d. A debit to the unamortized bond
July 1, 2016. At that time, the bonds
discount.
without the warrants are selling at 97. The
Question 20 compound financial instrument was sold at
104.
On July 1, 2015, Silver Company issued P4
million of 16% bonds to yield 14%. Interest Assuming that all warrants are exercised
is payable semi-annually on January 1 and and recorded in the accounts, how much is
July 1. The bonds mature in five years. Silver the amount credited to share premium?
Company uses the calendar year and the
a. P350,000
effective interest method of amortization.
b. P530,000
Present value of l at 7% for 10 periods is
0.50835 c. P850,000

Present value of an ordinary annuity of 1 at d. P500,000

7% for 10 periods is 7.02359
 Select one:

Question 22 a. 4,850,000

Which of the following statements is true in b. 350,000

relation to the fair value option of
c. 5,200,000
measuring a bond payable?
d. 5,000,000
I At initial recognition, an entity may
revocably designate a bond payable at fair Question 24
value through profit or loss.
When an entity issued bonds payable that
II The bond payable is remeasured at can be converted into ordinary shares, what
every year-end at fair value and any will be the effect on liabilities and equity?
changes in fair value are recognized in other <Liabilities><Equity>
comprehensive income.
a. Increase, No effect
a. II only
b. Decrease, Increase
b. Neither I nor II
c. Increase, Increase
Correct
d. No effect, Increase
c. I only
Question 25
d. Both I and II
What is the effective interest rate of a bond
Question 23 measured at amortized cost?
On July 1, 2016, Twin Head Corporation a. The interest rate currently charged by the
issued P5 million of its 10%, 7-year bonds entity or by others for similar bond.
with one detachable warrant attached to
each P1,000 bond. Each warrant provides b. The interest rate that exactly discounts
for the right to purchase 20 shares of P15 estimated future cash payments through
par value ordinary for P20 each The market the expected life of the bond or when
value of the ordinary share was P25 each at appropriate, a shorter period to the net
July 1, 2016. At that time, the bonds carrying amount of the bond.
without the warrants are selling at 97. The
c. The basic risk-free interest rate that is
compound financial instrument was sold at
derived from observable government bond
104.
prices.
What is the bond issue price allocated to
d. The stated rate of the bond.
the debt?
 Select one:

Question 26 a. Share warrants outstanding

The proceeds from an issue of bonds with b. Fair value of the bonds ex-warrant
share warrants should not be allocated
c. Proceeds received from sale of the bonds
between the liability and equity
components when d. Face value of the bonds
a. The warrants issued are nondetachable. Question 29
Incorrect On December 31, 2014, the Compaq
Company issues 20-year bonds of
b. The proceeds should be allocated
P5,000,000 for P5,851,160 to yield 10%.
between liability and equity under all of
Interest is payable annually on December
these circumstances.
31 at 12%. On April 1, 2016, Compaq
c. The fair value of the warrants is not Company retires 2,000 of its own P1,000
readily available. bonds at 98 plus accrued interest. The
accounting period for the Compaq
d. The exercise of the warrants within the
Company is the calendar year. The company
next reporting period seems remote.
uses the effective interest method of
Question 27 amortization,

Convertible bonds What is the carrying value of the bonds

retired on April 1, 2016?
a. Are separated into their components
based on relative fair value. a. P2,134,500

b. All of the choices are correct. b. P2,000,000

c. Are separated into the liability c. P2,334,510

component and the expense component.
d. P2,332,873
d. Allow an entity to issue debt financing at
Question 30
lower rate.
If bonds are issued at a premium, this
Question 28
indicates that
An entity issued bonds payable with non-
a. No necessary relationship exists between
detachable share warrants. In computing
the two rates
interest expense for the first year, the
effective interest rate is multiplied by the b. The yield and nominal rates coincide
c. The nominal rate of interest exceeds the
yield rate

d. The yield rate of interest exceeds the

nominal rate