Lyceum of the Philippines University – Manila

2nd Semester, A.Y. 2021-2022

ACCL56B - Intermediate Accounting, P2

Midterm Period Exam

1. To compute the price for issuance of a bond, what present value concept is used?

a. The present value of 1

b. The present value of an ordinary annuity of 1
c. The present value of 1 and present value of an ordinary annuity of 1
d. The future value of 1

Natasha Company reported net income of P700,000 for 2022. The entity declared and paid
dividend of P150,000 in 2022. In the financial statements for the year ended December 31,
2021, the entity reported retained earnings of P1,100,000 on January 1, 2021. The net income
for 2021 was P600,000 and the entity declared and paid dividend of P300,000 in 2021. In 2022,
after the 2021 financial statements were approved for issue, the entity discovered an error in the
December 31, 2020 financial statements. The net effect of the error was a P650,000
overstatement of net income for the year ended December 31, 2020 due to underdepreciation.

2. What amount should Natasha Company report as retained earnings on December 31, 2022?

a. 1,300,000 c. 1,650,000
b. 1,400,000 d. 1,950,000

Spare Company had outstanding share capital with par value of P50,000,000 and a 12%
convertible bond payable in the face amount of P10,000,000. Interest on the bonds is payable
annually on December 31. The conversion clause entitled the bondholders to receive 50 shares
of P20 par value in exchange for each P1,000 bond. On December 31, 2021, the holders of
5,000 bonds exercised the conversion privilege. The entity incurred P200,000 in connection with
the bond conversion. The market price of the bonds on that date was P1,100 per bond and the
market price of the share was P30. The unamortized bond discount at the date of conversion
was P500,000. The paid in capital from conversion privilege had a balance P2,000,000 on
December 31, 2021.

3. What amount should Spare Company credit to share premium as a result of the bond
conversion?

a. 1,250,000 c. 750,000
b. 1,050,000 d. 550,000

For Numbers 4 and 5:

On January 1, 2021, Rolex Company reported 9% bond payable of P8,000,000 less unamortized
discount of P640,000. Further examination revealed that these bonds were issued at a 10%
yield. The discount amortization was recorded using the effective interest method. Interest is
paid semiannually on June 30 and December 31. On July 1, 2021, the entity retired bonds with
face amount of P2,000,000 at 103 before maturity.

4. What amount should Rolex recognize as loss on retirement of bonds payable in 2021?

a. 218,000 c. 216,000
b. 220,000 d. 240,000

5. What should Rolex report as carrying amount of the remaining bonds on December 31,
2021?

a. 5,526,000 c. 6,000,000
b. 5,532,300 d. 5,520,000

For Numbers 6-8:

Kalinga Company reported the following shareholders’ equity at the beginning of the current
year:
Preference share capital, 400,000 shares, P10 par 4,000,000
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium – Preference 2,000,000
Share premium – Ordinary 1,500,000
Retained earnings 3,000,000

During the current year, the following transactions were completed:

Retirement of 50,000 preference shares at P25 per share.

Purchase of 10,000 ordinary shares of treasury at P120 per share.
Share split, ordinary share 2 for 1.
Reissue of 5,000 shares of treasury at P100 per share.
Net income for the year, P4,000,000.
Payment of dividend to preference shareholders at the 10% preference rate.
Payment of dividend to ordinary shareholders at P20 per share.

6. What amount should Kalinga Company report a share premium at year-end?

a. 3,450,000 c. 2,500,000
b. 2,700,000 d. 1,950,000

7. What amount should Kalinga Company report as unappropriated retained earnings at year-
end?

a. 3,550,000 c. 5,050,000
b. 4,450,000 d. 5,650,000

8. What amount should Kalinga Company report as shareholders’ equity at year-end?

a. 16,400,000 c. 15,500,000
b. 14,500,000 d. 17,450,000

9. An entity issued ten-year P1,000,000 debenture bonds at the beginning of the current year.
The bonds pay interest semiannually on June 30 and December 31. The entity used the
effective interest method to amortize bond premium and discount. The carrying amount of the
bonds on this date was P886,000. A journal entry was recorded for the first interest payment on
June 30, debiting interest expense for P53,160 and crediting cash for P50,000. What is the
annual stated interest rate for the debenture bond?

a. 12% c. 6%
b. 10% d. 5%

Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2021.
Each P1,000 bond was convertible into 10 ordinary shares of P50 par value. Only July 1 2021,
the interest was paid, and the bonds were converted into ordinary shares which had a fair value
of P75 per share. The unamortized premium on these bonds was P12,000 at the date of
conversion. The equity component recognized when the bonds were originally issued was
P50,000.
10. What amount should Clay credit to share premium as result of the bond conversion?

a. 312,000 c. 162,000
b. 306,000 d. 362,000
11. The actual interest spent by the bond issuer is

a. Effective rate c. Market rate

b. Yield rate d. Effective, yield, or market rate

12. Bonds issued with scheduled maturities at various dates are called

a. Term bonds c. Serial bonds

b. Debenture bonds d. Callable bonds

On November 1, 2021, Mason Company issued P8,000,000 of 10-year, 8% term bonds dated
October 1, 2021. The bonds were sold to yield 10% with total proceeds of P7,000,000 plus
accrued interest. Interest is paid every April 1 and October 1.

13. What amount should Mason report as accrued interest payable on December 31, 2021?

a. 175,000 c. 116,667
b. 160,000 d. 106,667

On December 31, 2021, Glimmer Company had outstanding P3,000,000 8% convertible

bonds that mature on December 31, 2023. Interest is payable annually every December 31
and each P1,000 bond is convertible into 30 ordinary shares with a P20 par value per share.
The unamortized discount was P200,000 and the equity component when the bonds were
sold was P700,000. On the same date, 1,200 bonds were converted when the fair value of
Glimmer’s share was P40.

14. What amount of share premium should Glimmer recognize as a result of the conversion?

a. 400,000 c. 700,000
b. 680,000 d. 760,000

For Numbers 15 and 16:

At the beginning of the current year, Holt Company was authorized to issue 100,000 shares with
a P50 par value. The entity had the following share capital transactions during the year:
January 1 Sold 80,000 shares at P60 per share
April 1 Reacquired 4,000 treasury shares at P75 per share
May 1 Approved a 5-for 1 share split
September 30 Issued a 10% share dividend when the market value of a share was P30
November 30 Reissued 4,000 treasury shares at P40 per share
December 31 Net income for the year was P4,000,000

15. What amount should Holt report as additional paid in capital?

a. 1,560,000 c. 1,420,000
b. 1,660,000 d. 1,700,000

16. What amount of unrestricted retained earnings should Holt report at year-end?

a. 2,800,000 c. 2,620,000
b. 2,560,000 d. 2,860,000

17. An entity issued bonds that pay interest semiannually. The interest rate to be used in
computing the cash payment is the

a. Nominal interest rate

b. Market interest rate
c. Effective yield
d. Nominal interest rate or market interest rate, whichever is lower

For Numbers 18-20:

The entity issued 5,000 convertible bonds on January 1, 2020. The bonds have a three-year
term and are issued at 110 with a face amount of P1,000 per bond. Interest is payable annually
at a nominal 6% interest rate. Each bond is convertible at anytime up to maturity into 100 shares
with par value of P5.

When the bonds are issued, the prevailing market interest rate for similar debt instrument
without conversion option is 9%.

The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of
1 at 9% for 3 periods is 2.53. On December 31, 2020, all bonds were converted into ordinary
shares.
18. What is the equity component on the issue of the convertible bonds payable?

a. 391,000 c. 1,150,000
b. 891,000 d. 1,650,000

19. What is the carrying amount of the convertible bonds payable

on December 31, 2020?

a. 4,723,810 c. 4,494,190
b. 5,000,000 d. 4,885,190

20. What amount of share premium should be

recognized as a result of the conversion?

a. 1,218,000 c. 2,223,810
b. 2,109,000 d. 3,114,810

Glow Company declared and distributed a 15% share dividend with fair value of P2,500,000 and
par value of P2,000,000 and a 30% share dividend with a fair value of P5,000,000 and par value
of P3,500,000.

21. What amount of share premium should be recognized by Glow?

a. 2,000,000 c. 500,000
b. 1,500,000 d. 0

22. The term “deficit” refers to

a. An excess of current assets over current liabilities.

b. An excess of current liabilities over current assets.
c. A debit balance in retained earnings.
d. A loss that is reported as a prior period adjustment.

23. Gains and losses on the purchase and resale of treasury shares may be reflected only in

a. Share premium accounts

b. Share premium and retained earnings accounts
c. Income, share premium, and retained earnings accounts
d. Income and share premium accounts

For Numbers 24-26:

On January 1, 2019, an entity issued P8,000,000 of 12% bonds payable maturing in 5 years.
The bonds pay interest semiannually every June 30 and December 31. The bonds included
nondetachable share warrants giving the bondholders the right to purchase 16,000 P100 par
value ordinary shares for P150 per share within the next three years. The bonds and warrants
were issued at 120. The value of the warrants at the time of issuance was P1,500,000. The
market rate of interest for similar bonds without the warrants is 10%. The PV of 1 at 5% for ten
periods is .61, and the PV of an ordinary annuity of 1 at 5% for ten periods is 7.72. On
December 31, 2019, all warrants were exercised.

24. What is the carrying amount of the bonds payable on January 1, 2019?

a. 8,598,400 c. 9,600,000
b. 8,585,600 d. 8,100,000

25. What is the interest expense for 2019?

a. 960,000 c. 857,336
b. 858,560 d. 856,024

26. What amount of share premium should be

recorded as a result of the exercise?

a. 2,400,000 c. 1,814,400
b. 1,014,400 d. 800,000

For Numbers 27 and 28:

An entity reported the following shareholders’ equity on December 31, 2019:

Ordinary share capital, 400,000 shares, P50 par 20,000,000

Share premium – Ordinary 8,500,000
Retained earnings 30,000,000

During 2020, the following transactions were completed:

Feb. 1 12,000 ordinary shares were sold for P80 per share.
March 16 Declared and paid a cash dividend of P2 per share on the ordinary shares.
March 20 20,000, 10% P100 par value cumulative preference shares were sold for P120
per share. The preference shares have a liquidation price of P110 per share.
March 31 30% ordinary share dividend was issued. Fair value per share is currently P90.
April 15 A 2-for-1 split was carried out on the ordinary shares.
July 1 30,000 preference shares were sold for P140 per share.
October 1 50,000 ordinary shares were sold for P60 per share.
December 31 Net income for the year was P5,500,000

27. What amount of ordinary share capital should be reported on December 31, 2020?

a. 35,530,000 c. 28,030,000
b. 30,530,000 d. 33,030,000

28. What amount of total shareholders’ equity should be reported on December 31, 2020?

a. 73,736,000 c. 68,386,000
b. 74,986,000 d. 67,136,000

29. If 20, P1,000 convertible bonds with a carrying amount of P25,000 are converted into 3,000
shares of P5 par value ordinary shares, the journal entry to record the conversion is

a. Bonds Payable 20,000

Premium on Bonds Payable 5,000
Ordinary Share Capital 25,000

b. Bonds Payable 20,000

Premium on Bonds Payable 5,000
Ordinary Share Capital 15,000
Share Premium 10,000

c. Bonds Payable 25,000

Discount on Bonds Payable 5,000
Ordinary Share Capital 15,000
Share Premium 5,000

d. Bonds Payable 25,000

Ordinary Share Capital 25,000

30. The 12% bonds payable of Graphics Co. had a carrying amount of P832,000 on December
31, 2020. The bonds, which had a face value of P800,000, were issued at a premium to yield
10%. Graphics Co. uses the effective-interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2021, several years before their maturity, Graphics Co. retired
the bonds at 104 plus accrued interest. The loss on retirement

a. P9,920 c. P6,400
b. P32,000 d. P0
31. When bonds mature, a corporation will pay the bondholders

a. Current market value of the bonds

b. The face amount of the bonds
c. The face amount plus the interest accrued since the date the bonds were issued
d. The face amount plus the original premium or minus the discount

32. Radeon Company issues P20,000,000 of 10-year, 9% bonds on March 1, 2020 at 97 plus
accrued interest. The bonds are dated January 1, 2020, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?

a. P19,400,000
b. P20,450,000
c. P19,700,000
d. P19,100,000

On January 2021, an entity issued 5-year 5,000 bonds face amount of P1,000 per bond for
P5,380,000 to yield 10%. Interest 12% is payable annually every December 31. On June 30,
2022, the entity retired 2,000 bonds at 96 plus accrued interest.

33. What amount should be recognized as gain or loss on bond retirement on June 30, 2022?

a. 193,560 gain c. 179,920 gain

b. 193,560 loss d. 179,920 loss

For Numbers 34 and 35:

On January 1, 2021, an entity had 125,000 shares issued which included 25,000 shares held as
treasury.

January 1 through October 31 – 13,000 treasury shares were distributed to officers as part of a
share compensation plan.
November 1 – A3 for-1 share split took effect.
December 1 – The entity purchased 5,000 of its own shares to discourage an unfriendly
takeover. These shares were not retired.

34. On December 31, 2021, how many shares were issued?

a. 375,000 c. 450,000
b. 300,000 d. 125,000

35. On December 31, 2021, how many shares were outstanding?

a. 334,000 c. 300,000
b. 324,000 d. 285,000
For Numbers 36 and 37

At the beginning of current year, S Company issued 100,000 ordinary shares. Of these, 5,000
shares were held as treasury.

During the current year, the entity reported the following transactions:

May 1 1,000 shares of treasury shares were sold.

Aug. 1 10,000 unissued shares were sold.
Nov. 15 A 2-for-1 share split took effect.

36. How many shares were issued at year-end?

a. 220,000 c. 222,000
b. 110,000 d. 106,000

37. How many shares were outstanding at year-end?

a. 212,000 c. 214,000
b. 216,000 d. 218,000

For Numbers 38-40:

During the year ending December 31, 2021, the entity had the following transactions affecting
shareholders’ equity:
Number of shares Price per share
Issue of preference shares 5,000 P140
Issue of ordinary shares 20,000 70
Retirement of preference shares 1,000 150
Purchase of treasury ordinary shares 5,000 80
Share split, par value reduced to P5 2 for 1
Reissue of treasury ordinary shares 5,000 50

The shareholders’ equity on January 1, 2021 comprised the following:

Preference share capital P100 par, 30,000 shares, 10% 3,000,000

Ordinary share capital, 100,000 shares, P10 par 1,000,000
Preference share premium 1,200,000
Ordinary share premium 4,000,000
Retained earnings 5,000,000

On December 31, 2021, dividends were paid an ordinary shares at P10 per share and on the
preference shares at the 10% preference rate. Net income for the year is P3,000,000.

38. What is the balance of additional paid in capital on December 31, 2021?

a. 6,610,000 c. 6,600,000
b. 6,650,000 d. 6,500,000

39. What is the balance of retained earnings on December 31, 2021?

a. 5,300,000 c. 5,310,000
b. 5,260,000 d. 5,650,000

40. What is the total shareholders’ equity on December 31, 2021?

a. 16,310,000 c. 16,300,000
b. 16,510,000 d. 16,500,000
For Numbers 41-44:

On January 1, 2022, L Company issued convertible bonds with a face amount of P5,000,000
for P6,000,000. The bonds are convertible into 50,000 shares with P100 par value. The bonds
have a 5-year life with a 10% stated interest rate payable annually every December 31. The
fair value of the convertible bonds without conversion option is computed at P5,399,300 on
January 1, 2022.

On December 31, 2024, the convertible bonds were not converted but fully paid for P5,550,000.
On such date, the fair value of the bonds without conversion privilege is P5,400,000 and the
carrying amount is P5,178,300.

41. What is the carrying amount of the bonds payable on January 1, 2022?

a. 5,000,000 c. 5,399,300
b. 6,000,000 d. 5,500,000

42. What is the premium on bonds payable on January 1, 2022?

a. 1,000,000 c. 399,300
b. 500,000 d. 0

43. What amount should be recorded as equity component arising from issuance of bonds
payable on January 1, 2022?

a. 500,000 c. 450,000
b. 600,700 d. 0

44. What amount should be reported as loss on the extinguishment of the convertible bonds
payable on December 31, 2024?

a. 221,700 c. 150,000
b. 371,700 d. 0
For Numbers 45-48:

On January 1, 2022, E Company received the fair value of 1,077,200 for 12% bonds with face
amount of P1,000,000. The bonds were sold to yield 10%. Interest is payable semiannually
every January 1 and July 1.
The entity has elected the fair value option for reporting the financial liability.
On December 31, 2022, the fair value of the bonds is determined to be P1,064,600 due to
market and interest factors.

45. What is the carrying amount of the bonds payable on January 1, 2022?

a. 1,000,000 c. 500,000
b. 1,077,200 d. 538,600

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

a. 120,000 c. 107,720
b. 100,000 d. 129,264

47. What amount should be reported as gain or loss from change in fair value in 2022?

a. 64,600 gain c. 12,600 gain

b. 64,600 loss d. 12,600 loss

48. What is the carrying amount of the bonds payable on December 31, 2022?

a. 1,064,600 c. 1,000,000
b. 1,077,200 d. 1,064,920

49. An entity had retained earnings of P3,500,000 at the of beginning of 2021. Throughout
2021, the entity had 40,000 ordinary shares of P100 par value that are issued and
outstanding. During 2021, the entity reported net income of P5,500,000, purchased 5,000
treasury shares for P600,000, declared cash dividends of P2,000,000, reissued all treasury
shares at a gain of P200,000, and declared and issued a 10% ordinary share bonus issue
when the market value was P150 per share. What amount should be reported as retained
earnings on December 31, 2021?
 a. 7,200,000 c. 6,600,000
b. 6,800,000 d. 6,400,000

50. An entity reported the following shareholders’ equity on January 1, 2021:

Share capital 1,500,000

Share premium 3,000,000
Retained earnings 2,000,000

The entity had 400,000 authorized shares of P5 par value, of which 300,000 shares were
issued and outstanding. On March 1, 2021, the entity acquired 50,000 shares for P10 per share
to held as treasury. The shares were originally issued at P8 per share. On December 31, 2021,
the entity declared and distributed a property dividend of inventory. The inventory had a
P750,000 carrying amount and P1,000,000 fair value. The net income for 2021 was
P2,500,000. What amount should be reported as unappropriated retained earnings on
December 31, 2021?

a. 3,500,000 c. 3,350,000
b. 3,250,000 d. 3,000,000