LAGUNA STATE POLYTECHNIC UNIVERSITY – SINILOAN CAMPUS

Bachelor of Science in Accountancy 3A

Intermediate Accounting III
Quiz #2

NAME: __________________________________________________________ DATE:

____________________________

Instructions: For theory questions, select the correct answer by circling it. For problem-solving
questions, write your answers in the spaces provided. Erasures will be counted as
incorrect answers.

OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged
a deposit for each container delivered and receives a refund for each container returned within
two years after the year of delivery. Omega accounts for the containers not returned within the
time limit as being sold at the deposit amount. Information for 2023 is as follows:

Containers held by customers at December 31, 2022

from deliveries in: 2021 85,000
2022 240,000 325,000
Containers delivered in 2023
435,000

Containers returned in 2023 from deliveries in: 2021 57,500

2022 140,000
2023 157,000 354,500

1. How much revenue from container sales should be recognized for 2023?
________________________________
2. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2023? ________________________________

On January 1, 2023, DIAS COMPANY issued a 3-year, 4,000 convertible bonds at face value of
P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%.
Each bond is convertible, at the holder’s option, into 200 P2 par value ordinary shares at any
time up to maturity. On the date of issuance, the prevailing interest rate for similar debt
without the conversion privilege was 9%. On the same date, the market price of one ordinary
share was P3. The bonds were converted on December 31, 2024. Round the present value
factors to four decimal places.

3. The liability component of the convertible debt is ______________________________.

4. The equity component of the convertible debt is ______________________________.
5. The interest expense to be reported on Dias Company’s income statement for the year
ended December 31, 2024, is ___________________________.
6. The entry to record the bond conversion on December 31, 2024, should include a credit to
share premium – issuance of ____________________________.

7. Classifying liabilities as either current or non-current helps creditors assess

a. Profitability
b. The relative risk of an entity’s liabilities
c. The degree of an entity's liabilities
d. The amount of an entity's liabilities

8. Which situation would not require non-current liability to be reported as current?

a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual violation.
c. The long-term debt matures within the upcoming year.
d. All of these require the current classification.

9. Which statement is true for a bond maturing on a single date when the effective interest
method of amortizing discount on bonds payable is used?
a. Interest expense as percentage of the bond carrying amount varies from period to
period.
b. Interest expense increases each interest payment period.
 c. Interest expense remains constant each interest payment period.
d. Nominal interest rate exceeds effective interest rate.

OHRID Company purchased Machinery on December 31, 2023, paying 80,000 down and
agreeing to pay the balance in four equal installments of 60,000 each December 31. Implicit in
the purchase price is an assumed interest of 12%. Round the present value factors to five
decimal places.

10. What is the cost of the machinery purchased on December 31, 2023?
___________________________
11. How much interest expense should be reported in Ohrid’s income statement for the year
ended December 31, 2024? _________________________
12. What is the carrying amount of the note at December 31, 2025? ___________________________

On December 31, 2023, BAIKAL Company acquired a piece of equipment from Sellar Company
by issuing a 1,200,000 note, payable in full on December 31, 2027. Baikal’s credit rating
permits it to borrow from its several lines of credit at 10%. The equipment is expected to have
a 5-year life and 150,000 salvage value. Round the present value factor to five decimal places.

13. What is the equipment’s book value on December 31, 2025? __________________________
14. What is the carrying amount of the note at December 31, 2025? _________________________

15. When convertible bond is not converted but paid at maturity

a. A gain or loss is recorded for the difference between the carrying amount and the
present value.
b. The carrying amount of the bond equal to face amount is derecognized.
c. The amount allocated to equity is recorded as a gain.
d. The amount allocated to equity is recorded as a loss.

BOOMERANG, INC. is a manufacturer and retailer of household furniture. The company’s

financial statements for the year ended December 31, 2023, discloses the following debt
obligations of the company at the end of its reporting period. Boomerang’s financial
statements are authorized for issuance on March 6, 2024.

I. A 150,000 short-term obligation due on March 1, 2024. Its maturity could be extended
to March 1, 2026, provided Boomerang agrees to provide additional collateral. On
February 12, 2024, an agreement is reached to extend the loan’s maturity to March 1,
2026.

II. A short-term obligation of 3,600,000 in the form of notes payable due February 5, 2024.
The company issued 75,000 ordinary shares for 36 per share on January 25, 2024. The
proceeds from the issuance, plus 900,000 cash, were used to fully settle the debt on
February 5, 2024.

III. A long-term obligation of 2,500,000 due December 1, 2033. On November 10, 2023,
Boomerang breaches a covenant on the debt obligation and the loan becomes payable
on demand. An agreement is reached to provide a waiver of the breach on December
11, 2023.

IV. A long-term obligation of 4,000,000. The loan is maturing over 4 years in the amount of
1,000,000 per year. The loan is dated September 1, 2023, and the first maturity date is
September 1, 2024.

V. A debt obligation of 1,000,000 maturing on December 31, 2026. The debt is callable on
demand by the lender at any time.

16. What amount of current liabilities should be reported on the December 31, 2023, statement
of financial position? _______________________________
17. What amount of non-current liabilities should be reported on the December 31, 2023,
statement of financial position? _______________________________

18. When the cash proceeds from the bonds issued with share warrants exceed the fair value of
the bonds without the warrants, the excess should be credited to
a. Discount on bonds payable
 b. Premium on bonds payable
c. Share premium – ordinary shares
d. Share warrants outstanding

19. When bonds are sold at a premium, at each interest payment date, interest payment
a. Increases c. Remains the same
b. Decreases d. Varies on the change of carrying amount

Items 20 through 26

Described below are certain transactions of ASHBY COMPANY:

Feb. 2 The company purchased from Happy Corp, for 150,000 subject to cash discount terms
of 2/10, n/30. The company records purchases and accounts payable at net amounts
after cash discounts. The invoice was paid on February 25.

Apr. 1 The company purchased a truck for 120,000 from Broom Motors Corp., paying 12,000 in
cash and signing a one year, 12% note for the balance of the purchase price.

May 1 The company borrowed 240,000 from Manila Bank by signing a 276,000 non-interest
bearing note due one year from May 1.

Aug. 1 The company’s board of directors declared a 900,000 cash dividend that was payable
on September 10 to shareholders of record on August 31.

Prepare all the journal entries necessary to record the transactions described above.

Item DATE ACCOUNTS DEBIT CREDIT

Number
20. Feb. 2

21. Feb. 25

22. Apr. 1

23. May 1

24. Aug. 1

Assume that Ashby Company’s financial year ends on December 31 and that no adjusting
entries relative to the transaction above have been recorded. Prepare any adjusting journal
entries concerning interest that are necessary to present fair financial statements at December
31.

Item DATE ACCOUNTS DEBIT CREDIT

Number
25. Dec.
31

26. Dec.
 31

27. An entity neglected to amortize the discount on outstanding bonds payable. What is the
effect of the failure to record discount amortization on interest expense and bond carrying
amount?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated

The following date were obtained from records of HANSTEEN COMPANY:

15%, 10-year, Bonds Payable, dated

January 1, 2022
DEBIT CREDIT BALANCE
Cash proceeds from issue on January 1, 2022,
of 1,000, P1,000 bonds. The market
rate of
interest on the date of issue was
12%. 1,172,044 1,172,044

Bond Interest Expense

Cash paid, 1/2/23 75,000 75,000
Cash paid, 7/1/23 75,000 125,000
Accrual, 12/31/23 75,000 225,000

Accrued Interest on
Bonds
Balance, 1/1/23 75,000 75,000
Accrual, 12/31/23 75,000 150,000

Treasury Bonds
Redemption price and interest to date
on 200 bonds permanently retired on
December 31,
2023. 265,000 265,000

Based on the preceding information, determine the following:

28. Carrying value of bonds payable at December 31, 2023. __________________________________

29. Loss on bonds redemption. _______________________________
30. Accrued interest on bonds at December 31, 2023. ________________________________
31. Bond interest expense for the year ended December 31, 2023.
_________________________________

32. Ronald Company has an incentive compensation plan under which a branch manager
receives 10% of the branch income after deduction of the bonus but before deduction of
income tax. Branch income for the current year before the bonus and income tax was
1,650,000. The tax rate is 30%. What is the bonus for the current year?
__________________________

33. After three profitable years, Cairo Company decided to offer a bonus to the branch manager
of 25% of income over1,000,000 earned by the branch. The income for the branch was
1,600,000 before tax and before bonus for the current year. The bonus is computed on
income in excess of 1,000,000 after deducting the bonus but before deducting tax. What is
the bonus of the branch manager for the current year? ________________________

34. White company issued 2,000,000 face value of 10-year bonds on January 1. The bonds pay
interest on January 1 and July 1 and had a stated rate of 10%. The market rate of interest is
 8%. What is the issue price of the bonds? Round the present value factor to two decimal
places. __________________________

On January 1, 2017, Dome Company issued 4,000,000, 8% serial bonds, to be repaid in the
amount of 800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. The entity amortized the bond discount by the interest
method. Round the present value factors to three decimal places.

35. On December 31, 2017, what is the carrying amount of the bonds payable?
_____________________
36. On December 31, 2017, what is the balance of unamortized discount on bonds payable?
___________________

37. An entity issues a bond with a stated rate of interest that is less than the effective interest
rate on the date of issuance. The bond was issued on one of the interest payment dates.
What should the entity report on the first interest payment date?
a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. A debit to discount on bond payable.
d. A debit to premium on bond payable.

38. What is the interest rate written on the face of the bond?
a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate, or stated rate

39. When bonds are sold between interest date, any accrued interest is credited to
a. Interest payable
b. Interest revenue
c. Interest receivable
d. Interest expense

On December 31, 2017, Moses Company issued 5,000,000 face amount, 5-yaer bonds at
109. Each P1,000 bond was issued with 50 detachable warrants, each of which entitled the
bondholder to purchase one ordinary share of P5 par value at P25. Immediately after
issuance, the market value of each warrant was P5. The stated interest rate on the bonds is
11% payable annually every December 31. However, the prevailing market rate of interest
for similar bonds without warrants is 12%. Round the present value factors to two decimal
places.

40. What is the carrying amount of the bonds payable on December 31, 2017?
_________________________
41. On December 31, 2017, what amount should be recorded as discount or premium on bonds
payable? State if discount or premium. _________________________________
42. What is the equity component arising from the issuance of bonds payable?
__________________________
43. What is the share premium if all the share warrants are exercised?
____________________________

44. Young Company issued 5,000 convertible bonds at the beginning of the current year. The
bonds had a four-year term with a stated rate of interest of 6% and were issued at par with
a face amount of P1,000 per bond. Interest is payable annually on December 31. Each bond
is convertible into 50 ordinary shares with a par value of P10. The market rate of interest on
a similar non-convertible bond is 9%. At the issuance date, the amount of 485,000 was
credited to share premium from conversion privilege. The bonds were not converted and
instead, the entity paid off the bondholders at maturity. What amount should be recorded
as gain or loss on the full payment of the convertible bonds at maturity?
_____________________________

On January 1, 2024, Magna Corp. issued 6,000,000 face value, 8-year bonds at a discount,
yielding an effective interest rate of 9% annually. The bonds pay interest semi-annually at a
coupon rate of 8% annually. However, on January 1, 2027, due to changes in the market
interest rate, Magna Corp. redeemed half of the bond issue and restructured the remaining
 half at a new effective interest rate, still payable annually. After restructuring, the company
pays semi-annual interest payments of 250,000 on the remaining bonds for 5 years, with a
balloon payment of 3,000,000 at maturity (January 1, 2032). Round the present value
factors to four decimal places.

45. How much is the issue price of the bonds on January 1, 2024? __________________________
46. Compute the total interest expense for the first year after restructuring.
________________________
47. Calculate the new effective interest rate after the restructuring. __________________________
48. Compute the carrying amount of the bonds as of December 31, 2017.
_________________________
49. What is the total cash outflow from January 1, 2027, until maturity?
___________________________

50. Which of the following statements regarding bonds payable is incorrect?

a. When bonds are issued at a discount, the effective interest rate is higher than the
stated rate, and the discount is amortized over the life of the bond, increasing interest
expense each period.
b. When bonds are issued at a premium, the effective interest rate is higher than the
stated rate, and the discount is amortized over the life of the bond, increasing interest
expense each period.
c. Under the effective interest method, the amount of interest expense recognized each
period is based on the carrying amount of the bond at the beginning of the period
multiplied by the effective interest rate.
d. Bonds issued at a premium will result in a carrying amount that decreases over time, as
the premium is amortized against the interest expense, ultimately converging to the
bond’s face value at maturity.

END