ACC 108: INTERMEDIATE ACCOUNTING 3 12/26/2022

Practice Exercises/Assignment

1. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of
the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.

2. A troubled debt restructuring will generally result in a

a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.

3. In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less
than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the restructuring.
b. a gain on the restructuring.
c. a loss on the restructuring.
d. none of these.

4. In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be
recognized at the date of restructure, but no interest expense should be recognized over the remaining life of
the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future cash flows.

5. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December
31, 2016. Because of a recently proven health hazard in one of its paints, the government has clearly indicated
its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz
estimates that this recall would cost P800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of P800,000 and liability of P800,000
d. Appropriation of retained earnings of P800,000
6. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date
of the financial statements, a liability has been incurred for obligations related to product warranties. The
amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss
contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
7. Espejo Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a rang
of outcomes. No single amount within the range is a better estimate than any other amount. The amount of
loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
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d. the maximum of the range.

8. Danny Company becomes aware of a lawsuit after the date of the financial statements, but before they are
issued. A loss and related liability should be reported in the financial statements if the amount can be
reasonably estimated, an unfavorable outcome is highly probable, and
a. the Danny Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.
9. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable
part of the sale.

10. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

11. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of
the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

On January 1, 2018, Allyssa Co. issued eight-year bonds with a face value of P2,000,000 and a stated interest rate of
6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6%.............................................................. .627
Present value of 1 for 8 periods at 8%.............................................................. .540
Present value of 1 for 16 periods at 3% ........................................................... .623
Present value of 1 for 16 periods at 4% ........................................................... .534
Present value of annuity for 8 periods at 6% ................................................ 6.210
Present value of annuity for 8 periods at 8% ................................................ 5.747
Present value of annuity for 16 periods at 3% ............................................. 12.561
Present value of annuity for 16 periods at 4% ............................................. 11.652

1. The present value of the principal is

a. P1,068,000.
b. P1,080,000.
c. P1,246,000.
d. P1,254,000.

2. The present value of the interest is

a. P689,640.
b. P699,120.
c. P745,200.
d. P753,660.

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3. The issue price of the bonds is

a. P1,767,120.
b. P1,769,640.
c. P1,779,120.
d. P1,999,200.

4. Debit Co. issues P3,000,000, 6%, 5-year bonds dated January 1, 2018 on January 1, 2018. The bonds pay
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the
proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. P3,000,000
b. P3,129,896
c. P3,131,285
d. P3,130,385

5. Feeling Co. issues P10,000,000 of 10-year, 9% bonds on March 1, 2018 at 97 plus accrued interest. The
bonds are dated January 1, 2018 and pay interest on June 30 and December 31. What is the total cash
received on the issue date?
a. P9,700,000
b. P10,225,000
c. P9,850,000
d. P9,550,000

6. Everest Co. issues P15,000,000, 6%, 5-year bonds dated January 1, 2018, on January 1, 2018. The bonds
pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the
proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. P15,000,000
b. P15,649,482
c. P15,656,427
d. P15,651,924

7. Fely Co. issues P20,000,000 of 10-year, 9% bonds on March 1, 2018 at 97 plus accrued interest. The
bonds are dated January 1, 2018 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

8. AC company issues P15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on
June 30 and December 31. The proceeds from the bonds are P14,703,109. Using effective-interest
amortization, how much interest expense will be recognized in 2018?

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a. P585,000
b. P1,170,000
c. P1,176,374
d. P1,176,249

9. AJ company issues P15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on
June 30 and December 31. The proceeds from the bonds are P14,703,109. Using effective-interest
amortization, what will the carrying value of the bonds be on the December 31, 2018, balance sheet?
a. P14,709,482
b. P15,000,000
c. P14,718,844
d. P14,706,232

10. AKI Co. issues P15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June
30 and December 31. The proceeds from the bonds are P14,703,109. Using straight-line amortization,
what is the carrying value of the bonds on December 31, 2019?
a. P14,752,673
b. P14,955,466
c. P14,725,375
d. P14,747,642

11. AKI Co. issues P15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June
30 and December 31. The proceeds from the bonds are P14,703,109. What is interest expense for 2019,
using straight-line amortization?
a. P1,540,207
b. P1,170,000
c. P1,176,894
d. P1,184,845

12. AJ Co. issues P10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June 30
and December 31. The proceeds from the bonds are P9,802,072. Using effective-interest amortization,
how much interest expense will be recognized in 2018?
a. P390,000
b. P780,000
c. P784,248
d. P784,166

13. AKI Co. issues P10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June
30 and December 31. The proceeds from the bonds are P9,802,072. Using effective-interest amortization,
what will the carrying value of the bonds be on the December 31, 2018 balance sheet?
a. P9,806,320
b. P10,000,000
c. P9,812,562
d. P9,804,154

14. AJ company issues P10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on
June 30 and December 31. The proceeds from the bonds are P9,802,072. Using straight-line amortization,
what is the carrying value of the bonds on December 31, 2019?
a. P9,835,116
b. P9,970,312
c. P9,816,916
d. P9,831,762

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15. AKI Co. issues P10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June
30 and December 31. The proceeds from the bonds are P9,802,072. What is interest expense for 2019,
using straight-line amortization?
a. P770,104
b. P780,000
c. P784,596
d. P789,896

16. On January 1, 2018, Hanz Co. sold 12% bonds with a face value of P800,000. The bonds mature in five
years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for P861,600
to yield 10%. Using the effective-interest method of amortization, interest expense for 2018 is
a. P80,000.
b. P85,914.
c. P86,160.
d. P96,000.

17. On January 2, 2018, a calendar-year corporation sold 8% bonds with a face value of P900,000. These
bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds
were sold for P830,400 to yield 10%. Using the effective-interest method of computing interest, how
much should be charged to interest expense in 2018?
a. P72,000.
b. P83,040.
c. P83,316.
d. P90,000.

On October 1, 2018 Marco Corporation issued 5%, 10-year bonds with a face value of P2,000,000 at 104. Interest is
paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

18. The entry to record the issuance of the bonds would include a credit of
a. P50,000 to Interest Payable.
b. P80,000 to Discount on Bonds Payable.
c. P1,920,000 to Bonds Payable.
d. P80,000 to Premium on Bonds Payable.

19. Bond interest expense reported on the December 31, 2018, income statement of Marco Corporation
would be
a. P23,000
b. P25,000
c. P27,000
d. P46,000

20. At the beginning of 2018, Billy Corporation issued 10% bonds with a face value of P1,500,000. These
bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds
were sold for P1,389,600 to yield 12%. Billy uses a calendar-year reporting period. Using the effective-
interest method of amortization, what amount of interest expense should be reported for 2018? (Round
your answer to the nearest peso.)
a. P172,080
b. P167,255
c. P166,750
d. P166,250

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21. Vernon Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2018, the
company began a program of granting its employees 10 days of paid vacation each year. Vacation days
earned in 2018 may first be taken on January 1, 2019. Information relative to these employees is as
follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2018 P21.50 10 0
2019 22.50 10 8
2020 23.75 10 10

Vernon has chosen to accrue the liability for compensated absences at the current rates of pay in effect
when the compensated time is earned. What is the amount of expense relative to compensated absences
that should be reported on Vernon’s income statement for 2018?
a. P0.
b. P57,400.
c. P63,000.
d. P60,200

22. What is the amount of the accrued liability for compensated absences that should be reported at
December 31, 2020?
a. P79,100.
b. P75,600.
c. P66,500.
d. P79,800.

23. Kanon provides its employees two weeks of paid vacation per year. As of December 31, 65 employees
have earned two weeks of vacation time to be taken the following year. If the average weekly salary for
these employees is P1,140, what is the required journal entry?
a. Debit Salaries and Wages Expense for P148,200 and credit Salaries and Wages Payable for
P148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for P147,600 and credit Salaries and Wages Expense for
P147,600.
d. Debit Salaries and Wages Expense for P74,100 and credit Salaries and Wages Payable for
P74,100.

24. Teddy Co. is involved in litigation regarding a faulty product sold in a prior year. The company has
consulted with its attorney and determined that it is possible that they may lose the case. The attorneys
estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount
of any payment would be P500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for P500,000 and credit Litigation liability for P500,000.
b. No journal entry is required.
c. Debit Litigation Expense for P200,000 and credit Litigation Liability for P200,000.
d. Debit Litigation Expense for P300,000 and credit Litigation Liability for P300,000.

25. Ricci Co. is involved with innovative approaches to finding energy reserves. Ricci recently built a facility to
extract natural gas at a cost of P15 million. However, Ricci is also legally responsible to remove the facility
at the end of its useful life of twenty years. This cost is estimated to be P21 million (the present value of
which is P8 million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for P21,000,000 and credit Asset Retirement Obligation for
P21,000,000
c. Debit Natural Gas Facility for P6,000,000 and credit Asset Retirement Obligation for P6,000,000.
d. Debit Natural Gas Facility for P8,000,000 and credit Asset Retirement Obligation for P8,000,000.

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26. Warren provides extended service contracts on electronic equipment sold through major retailers. The
standard contract is for three years. During the current year, Warren provided 42,000 such warranty
contracts at an average price of P81 each. Related to these contracts, the company spent P400,000
servicing the contracts during the current year and expects to spend P2,100,000 more in the future. What
is the net profit that the company will recognize in the current year related to these contracts?
a. P902,000.
b. P3,002,000.
c. P300,667.
d. P734,000.

27. Warren manufactures high-end whole home electronic systems. The company provides a one-year
warranty for all products sold. The company estimates that the warranty cost is P200 per unit sold and
reported a liability for estimated warranty costs P7.8 million at the beginning of this year. If during the
current year, the company sold 60,000 units for a total of P243 million and paid warranty claims of
P9,000,000 on current and prior year sales, what amount of liability would the company report on its
balance sheet at the end of the current year?
a. P3,000,000.
b. P4,200,000.
c. P10,800,000.
d. P12,000,000.

28. AKI Co. offers a cash rebate of P1 on each P4 package of light bulbs sold during 2019. Historically, 10% of
customers mail in the rebate form. During 2019, 3,000,000 packages of light bulbs are sold, and 160,000
P1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the
2019 financial statements dated December 31?
a. P300,000; P300,000
b. P300,000; P140,000
c. P140,000; P140,000
d. P160,000; P140,000

29. AKI Co. buys an oil rig for P2,000,000 on January 1, 2019. The life of the rig is 10 years and the expected
cost to dismantle the rig at the end of 10 years is P400,000 (present value at 10% is P154,220). 10% is an
appropriate interest rate for this company. What expense should be recorded for 2019 as a result of these
events?
a. Depreciation expense of P240,000
b. Depreciation expense of P200,000 and interest expense of P15,422
c. Depreciation expense of P200,000 and interest expense of P40,000
d. Depreciation expense of P215,420 and interest expense of P15,422

30. Azzy Company self-insures its property for fire and storm damage. If the company were to obtain
insurance on the property, it would cost them P1,500,000 per year. The company estimates that on
average it will incur losses of P1,200,000 per year. During 2020, P525,000 worth of losses were
sustained. How much total expense and/or loss should be recognized by Azzy Company for 2020?
a. P525,000 in losses and no insurance expense
b. P525,000 in losses and P675,000 in insurance expense
c. P0 in losses and P1,200,000 in insurance expense
d. P0 in losses and P1,500,000 in insurance expense

31. AKI Co. offers a cash rebate of P2 on each P6 package of batteries sold during 2020. Historically, 10% of
customers mail in the rebate form. During 2020, 6,000,000 packages of batteries are sold, and 210,000 P2
rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the
2020 financial statements dated December 31?
a. P1,200,000; P1,200,000
b. P1,200,000; P780,000
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c. P780,000; P780,000
d. P420,000; P780,000

32. AJ Co. buys an oil rig for P3,000,000 on January 1, 2020. The life of the rig is 10 years and the expected
cost to dismantle the rig at the end of 10 years is P600,000 (present value at 10% is P231,330). 10% is an
appropriate interest rate for this company. What expense should be recorded for 2020 as a result of these
events?
a. Depreciation expense of P360,000
b. Depreciation expense of P300,000 and interest expense of P23,133
c. Depreciation expense of P300,000 and interest expense of P60,000
d. Depreciation expense of P323,133 and interest expense of P23,133

33. During 2019, Rocky Co. introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the
year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty
expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2019 P 600,000 P 9,000
2020 1,500,000 65,000
2021 2,100,000 135,000
P4,200,000 P209,000
What amount should Rocky report as a liability at December 31, 2021?
a. P0
b. P12,000
c. P54,000
d. P169,000

34. Coco Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Coco
Flakes boxes and P1. The company estimates that 60% of the boxtops will be redeemed. In 2020, the
company sold 500,000 boxes of Coco Flakes and customers redeemed 220,000 boxtops receiving 55,000
bowls. If the bowls cost Coco Flakes Company P3 each, how much liability for outstanding premiums
should be recorded at the end of 2020?
a. P150,000
b. P40,000
c. P60,000
d. P84,000

35. Another Co. offers its customers a pottery cereal bowl if they send in 3 boxtops from Another Co. boxes
and P1. The company estimates that 60% of the boxtops will be redeemed. In 2020, the company sold
675,000 boxes of Another Co. Coco and customers redeemed 330,000 boxtops receiving 110,000 bowls. If
the bowls cost Another Co. P3 each, how much liability for outstanding premiums should be recorded at
the end of 2020?
a. P270,000
b. P50,000
c. P75,000
d. P138,000

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