INTERMEDIATE ACCOUNTING 2

​
PROBLEM SOLVING ​ ​

1. Brite Company reported the following liabilities on December 31,

2019:
Accounts Payable ​ ​ ​ ​ ​ ​ 550,000
Unsecured note payable 8%, due July 1,
2016 ​ ​4,000,000
​Accrued expenses ​ ​ ​ ​ ​ ​ 350,000
​Contingent liability ​ ​ ​ ​ ​ ​ 450,000
​Deferred tax liability ​ ​ ​ ​ ​ ​ 250,000
​Senior bonds payable, 7% due March 31,
2016 ​ ​5,000,000
What total amount should be reported as current liabilities?
a. 10,350,000
b. 10,150,000
c. 9,900,000
d. 4,900,000

2. Charice Company provided the following on December 31, 2019:

➢ Accounts Payable amounted to P500,000 and accrued
expenses totaled P300,000 on December 31, 2019
➢ On December 15, 2019, Charice declared a cash dividend of
P7 per share on 100,000 outstanding shares, payable on
January 15, 2020
➢ On July 1, 2019, Charice issued P5,000,000, 8% bonds for
P4,400,000 to yield 10%. The bonds mature on June 30, 2024
and pay interest annually every June 30.
➢ The pretax financial income was P8,500,000 and taxable
income was P6,000,000. The difference is due to P1,000,000
permanent difference and P1,500,000 of taxable temporary
diiference to reverse in 2020. The income tax rate is 30%.
Charice made estimated income tax payments during the year
of P1,000,000.
What amount should be reported as total current liabilities on
December 31, 2019?
a. 3,500,000
b. 2,700,000
c. 2,300,000
d. 2,500,000
3. Kumaykay Company provided the following schedule of liabilities
on December 31, 2018:

Accounts Payable ​ ​ ​ ​P 6,500,000

Bank Note Payable – 10% ​ ​ 3,000,000
Bank Note Payable – 11% ​ ​ 5,000,000
Interest Payable ​ ​ ​ ​ 150,000
Mortgage Note Payable – 10% ​ 2,000,000
Bonds Payable ​ ​ ​ ​ 4,000,000

a. The P3,000,000, 10% note was issued March 1, 2018, payable

on demand. Interest is payable every six months.
b. The one-year P5,000,000, 11% note was issued January 15,
2018. On December 31, 2018, Kumaykay negotiated a written
agreement with the bank to replace the note with a 2-year,
P5,000,000, 10% note to be issued January 15, 2019.
c. ​The 10% mortgage note was issued October 1, 2015, with
a term of 10 years. Terms of the note give the holder the right
to demand immediate payment if the entity fails to make a
monthly interest payment within 10 days from the date the
payment is due. On December 31, 2018, Kumaykay is three
months behind in making its required interest payment.
d. ​The bonds payable are ten-year, 8% bonds, issued June
30, 2009. Interest is payable semiannually on June 30 and
December 31.

What amount should be reported as total current liabilities on

December 31, 2011?

a. 15,650,000 ​ c​ . 20,650,000
b. 11,650,000 ​ ​d. 13,650,000

4. Jam Company had P5,000,000 note payable that is due on

March 1, 2019. The entity borrowed P3,500,000 on February 1,
2019 which has a five-year term and used the proceeds to pay
down the note and used other cash to pay the balance. The 2018
Financial Statements were issued on March 31, 2019. What
amount of the note payable should be classified as noncurrent on
December 31, 2018?

a. 5,000,000 ​ ​ ​c. 1,500,000

b. 3,500,000 ​ ​ ​d. 0
5. Ducky Company reported the following information at the end of
reporting period:

Accounts payable ​ ​ ​ ​ ​ ​1,000,000

Advances to employees ​ ​ ​ ​ ​ 45,000
Unearned rent revenue ​ ​ ​ ​ ​ 300,000
Estimated liability under warranties ​ ​ ​ 250,000
Cash surrender value of officer’s life insurance ​ ​
75,000
Bonds payable ​ ​ ​ ​ ​ ​5,000,000
Discount on Bonds payable ​ ​ ​ ​ 500,000
Trademark ​ ​ ​ ​ ​ ​ ​ 50,000

What amount should be reported in the statement of financial

position as total liabilities?

a. 6,050,000 ​ ​ ​c. 7,050,000

b. 1,550,000 ​ ​ ​d. 6,095,000

6. Juan Company had P5,000,000 note payable that is due on

March 1, 2016. The entity borrowed P3,500,000 on February 1,
2016 which has a five-year term and used the proceeds to pay
down the note and used other cah to pay the balance. The 2016
financial statements were issued on March 31, 2016. What
amount of the note payable should be classified as noncurrent on
December 31, 2015?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0

7. In an effort to increase sales, Mill Company inaugurated a sales

promotional campaign on June 30, 2018. The entity placed a
coupon redeemable for a premium in each package of cereal
sold. Each premium cost P20 and five coupons must be
presented by a customer to receive a premium. The entity
estimated that only 60% of the coupons issued will be redeemed.
For the six months ended December 31, 2018, the following
information is available:

Packages of Cereal ​ ​Premiums

Purchased ​ ​Coupons redeemed ​
 ​Sold ​ ​ ​ ​ ​
​160,000 ​ ​ ​ ​ 2,000
1 ​ ​40,000

What is estimated liability for premium claims outstanding on

December 31, 2015?

a. 169,000 ​ ​ ​c. 288,000

b. 224,000 ​ ​ ​d. 384,000

8. Topsy Company started a new promotional program. For every

10 box tops returned, customers received a basketball. The entity
estimated that only 60% of the box tops reaching the market will
be redeemed. The entity provided the following information:
Units ​ ​ ​Amount
​ ​Sale of product ​ ​100,000 ​ ​30,000,000
​ ​Basketball purchased ​ ​ 5,500 ​ ​ 4,125,000
​ ​Basketball distributed ​ ​ 4,000 ​ ​
​What is the amount of year-end estimated liability associated
with this promotion?
a. 4,125,000
b. 1,500,000
c. 3,000,000
d. 4,500,000

9. In packages if the products, Curran Company included coupons

that may be presented at retail stores to obtain discounts.
Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Curran
honors requests for coupon redemption by retailers up to three
months after the consumer expiration date. Curran estimates that
70% of all coupons issued will ultimately be redeemed.
Information relating to coupons issued by Curran during 2019 is
as follows:
Consumer expiration date ​ ​ ​ ​December 31,
2019
Total face amount of coupons issued ​ ​ ​600,000
Total payments to retailers ​ ​ ​ ​220,000
What amount should be Currant report as a liability for
unredeemed coupons on December 31, 2019?
a. 0
b. 200,000
c. 242,000
d. 308,000
10. A new product introduced by Maude Company carries a 2-year
warranty against defects. The estimated warranty cost related to
sales is 3% in the year of sale and 5% in the year after sale.
Sales are P4,000,000 for 2015 and P5,000,000 for 2016. Actual
warranty expenditures are P100,000 for 2015 and P350,000 for
2016. What amount should be reported as estimated warranty
liability in December 31, 2016?

a. 370,000 ​ ​ ​c. 250,000

b. 120,000 ​ ​ ​d. 0

11. Gumamela Company provided the following data on December

31, 2015:

Trade accounts payable, including

cost of received on consignment
of P150,000 ​ ​ ​ 1,350,000
Accrued taxes payable ​ ​ ​25,000
Customer’s deposit ​ ​ 100,000
Gumamela Company as Guarantor 200,000
Bank Overdraft ​ ​ ​ 55,000
Accrued electric and power bills ​ 60,000
Reserved for contingencies ​ 150,000

What total amount should be reported as current liabilities?

a. 1,840,000 ​ ​ ​c. 1,650,000

b. 1,740,000 ​ ​ ​d. 1,540,000

12. Mill Company revealed the following account balances on

December 31, 2015:

Account payable ​ ​ ​1,500,000

Bonds payable, due 2016 ​ ​2,500,000
Discounts on bonds payable ​ 300,000
Dividends payable ​ ​ ​ 800,000
Note payable, due 2017 ​ ​2,000,000

What total amount should be reported as current liabilities?

a. 4,500,000 ​ ​ ​c. 6,500,000

b. 5,100,000 ​ ​ ​d. 7,800,000
13. Eliot Company reported the following liabilities on December 31,
2015:

Accounts payable and accrued interest ​ ​ ​

​ ​ ​1,000,000
12% note payable issued 11/1/2014 maturing
07/1/2016 ​ ​ ​2,000,000
10% debentures payable, next annual principal Installment of
P500,000
due February 1, 2016 ​ ​
​ ​ ​ ​ ​ ​7,000,000

On December 31, 2015, the entity consummated a

noncancelable agreement with the lender to refinance the 12%
note payable on a long-term basis. On December 31, 2015, what
total amount should be reported as current liabilities?

a. 3,500,000 ​ ​ ​c. 1,500,000

b. 3,000,000 ​ ​ ​d. 2,500,000

14. After three profitable years, Cairo Company decided to offer a

bonus to its branch manager of 25% of income over P1,000,000
earned by the branch. The income for the branch was
P1,600,000 before tax and before bonus for 2019. The bonus is
computed on income in excess of P1,000,000 after deducting the
bonus but before deducting tax. What is the bonus of the branch
manager for 2019?
a. 120,000
b. 150,000
c. 250,000
d. 320,000

15. On July 1, 2019, the Quezon City government issued realty tax
assessment for its fiscal year ended June 30, 2020. On
September 1, 2019, Zuma Company purchased a land in Quezon
City. The purchase price was reduced by a credit for accrued
realty taxes. Zuma does not record the entire year’s real estate
tax obligation but instead records tax expenses at the end of
each month by adjusting prepaid real estate taxes or real estate
taxes payable as appropriate. On November 1, 2019, Zuma paid
the first of two equal installments of P600,000 for realty taxes.
What amount of the payment should Zuma record as a debit to
 real estate taxes payable?
a. 200,000
b. 400,000
c. 500,000
d. 600,000

16. East Company manufactures stereo systems that carry a two-

year warranty against defects. Based on past experience,
warranty costs are estimated at 5% of sales for the warranty
period. During the current year, stereo system sales amounted to
P5,000,000 and warranty costs of P100,000 were incurred. What
amount should be reported as warranty expense for the current
year?

a. 250,000 ​ ​c. 100,000

b. 150,000 ​ ​d. 125,000

17. Baxia Company gives warranties at the time of sale to

purchasers of its products. Under the terms of the sale, the entity
undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year
from the date of sale.

On December 31, 2019, the entity appropriately recognized

P50,000 warranty provision. The entity incurred and charges
P140,000 against the warranty provision in 2020. Out of the
P140,000, an amount of P80,000 related to warranties for sales
made in 2020. The increase during 2020 in the discounted
amount recognized as a provision on December 31, 2019 arising
from the passage of time is P2,000.

On December 31, 2020, the entity estimated that it would incur

expenditures in 2021 to meet its warranty obligations on
December 31, 2020 as follows:

​ ​ 5% probability of P400,000
​ ​20% probability of P200,000
​ ​50% probability of P 80,000
​ ​25% probability of P 20,000

Assume for simplicity that the 2021 cash flows for warranty
repairs and replacements take place on June 30, 2021.
 An appropriate discount rate is 10% per year. The PV of 1 at 10%
for one year is 0.91 and the PV of 1 at 10% for six months is
0.95. An appropriate risk adjustment factor to reflect the
uncertainties in the cash flow estimates is an increment of 8% to
the probability-weighted expected cash flows.

What is the warranty expense to be recognized in 2020?

a. 107,730
b. 195,730
c. 187,730
d. 185,000

18. Chato Company sells electrical goods covered by a one-year

warranty for any defects. Of the sales of P70,000,000 for the
year, the entity estimates that 3% will have major defect, 5% will
have minor defect and 92% will have no defect. The cost of
repairs would be P5,000,000 if all the products sold had major
defect and P3,000,000 if all have minor defect. What amount
should be recognized as a warranty provision?
a. 8,000,000
b. 5,600,000
c. 300,000
d. 190,000

19. Regal Company sells gift certificates, redeemable for store

merchandise. The gift certificates have no expiration date, The
entity has the following information pertaining to the gift certificate
sales and redemptions:

Unredeemed, 01/01/2018 ​ ​ ​ ​ 750,000

2015 sales ​ ​ ​ ​ ​ ​ ​2,500,000
2015 redemptions of prior year Sales ​ ​ ​ 250,000
2015 redemptions of current Year sales ​ ​ ​1,750,000

What amount should be reported as unearned revenue on

December 31, 2018?

a. 1,250,000 ​ ​c. 1,000,000

b. 1,125,000 ​ ​d. 500,000

20. Kent Company sells magazine subscriptions of one to three-

year periods. Cash receipts from subscribers are credited to
 magazine subscriptions collected in advance, and this account
had a balance of P2,400,000 on December 31, 2019 before year-
end adjustment. Outstanding subscriptions on December 31,
2019 expire as follows:
During 2020 ​ ​500,000
During 2021 ​ ​900,000
During 2022 ​ ​400,000
On December 31, 2019, what amount should Kent report as
magazine subscriptions collected in advance?
a. 500,000
b. 1,200,000
c. 1,900,000
d. 2,400,000

21. On the first day of each month, Lesley Company receives from
Harley Company an escrow deposit of P250,000 for real estate
taxes. Lesley records the P250,000 in an escrow account.
Harley’s 2019 real estate tax is P2,800,000 payable in equal
installments on the first day of each calendar quarter. On January
1, 2019, the balance in the escrow account was P300,000. On
September 30, 2019, what amount should be reported as escrow
liability?
a. 1,150,000
b. 450,000
c. 850,000
d. 150,000

22. In November and December 2018, Dorr Company, a newly

organized magazine publisher, received P720,000 for 1,000
three-year subscription at P240 per year, starting with the
January 2019 issue. The entity elected to include the entire
P720,000 in the 2018 income tax return. What amount should be
reported as subscription revenue in the income statement for
2018?

a. 720,000 ​ ​c. 240,000

b. 360,000 ​ ​d. 0

23. Concord Company sells motorcycle helmets. In 2018, Concord

sold 4,000,000 helmets before discovering a significant defect in
their construction. By December 31, 2018, two lawsuits had been
filed against Concord. The first lawsuit, which Concord has little
chance of winning, is expected to be settled out of court for
 P1,500,000 in January 2019. Concord’s attorneys think the entity
has a 50-50 chance of winning the second lawsuit, which is for
P1,000,000. What is the accrued liability on December 31, 2018
as a result of the lawsuits?

a. 1,500,000 ​ ​ ​c. 1,000,000

b. 2,500,000 ​ ​ ​d. 0

24. Zilong Company has long owned a manufacturing site that has
now been discovered to be contaminated with toxic waste. The
entity has acknowledged its responsibility for the contamination.
An initial clean up feasibility study has shown that it will cost at
least P500,000 to clean up the toxic waste. During the current
year, Zilong Company has been sued for patent infringement and
lost the case. A preliminary judgment of P300,000 was issued
and is under appeal. The entity’s attorneys agree that it is
probable that the entity will lose this appeal. What amount of
provision should be accrued as liability?
a. 500,000
b. 800,000
c. 300,000
d. 0

25. In May 2018, Cherry Company relocated an employee from the

Manila head office to a branch in Zamboanga City. At the end of
reporting period on June 30, 2018, the costs are estimated at
P350,000 analyzed as follows:

Cost for shipping goods ​ ​ ​ ​ ​ ​ 30,000

Airfare ​ ​ ​ ​ ​ ​ ​ ​ 10,000
Temporary accommodation cost for May and June ​ ​
80,000
Temporary accommodation cost for July & August ​ ​
90,000
Reimbursement for lease break cost paid in July (lease
was terminated in May) ​ ​ ​ ​ ​ 20,000 ​
Reimbursement for cost of living increases for the period
May 1, 2018 to May 1, 2019 ​ ​ ​ ​120,000

What amount should be recognized as provision for relocation

costs on June 30, 2018?

a. 250,000 ​ ​ ​c. 160,000

 b. 240,000 ​ ​ ​d. 140,000

26. During 2019, Manfred Company guaranteed a supplier’s

P500,000 loan from a bank. On October 1, 2019, Manfred was
notified that the supplier had defaulted on the loan and filed for
bankruptcy protection. Counsel believes Manfred will probably
have to pay P250,000 under its guarantee. As a result of the
supplier’s bankruptcy, Manfred entered into a contract in
December 2019 to retool its machines so that Manfred could
accept parts from other suppliers. Retooling costs are estimated
to be P300,000. What amount should be reported as liability on
December 31, 2019?
a. 250,000
b. 450,000
c. 550,000
d. 750,000

27. On November 25, 2019, an explosion occurred at a Rex

Company plant causing extensive property damage to area
buildings. By March 10, 2020, claims had been asserted against
Rex. Rex’s management and counsel concluded that it is
probable Rex will be responsible for damages, and that
P3,500,000 would be a reasonable estimate to its liability. Rex’s
P10,000,000 comprehensive public liability policy has a
P500,000 deductible clause. What should be reported in the
December 31, 2019 financial statements, issued on March 25,
2020 in relation to this item?
a. A disclosure indication the probable loss of P3,500,000
b. An accrued liability of P3,500,000
c. An accrued liability of P500,000
d. A footnote disclosure indicating the probable loss of P500,000

28. Winter Company is being sued for illness caused to local

residents as a result of negligence on the entity’s part in
permitting the local residents to be exposed to highly toxic
chemicals from its plant. The entity’s lawyer stated that it is
probable that the entity will lose the suit and be found liable for a
judgment costing the entity anywhere from P1,200,000 to
P6,000,000. However, the lawyer estimated that the most
probable cost is P3,600,000. What amount should be accrued
and disclosed?
a. A loss contingency of P1,200,000 and disclose an additional
contingency of up to P4,800,000
 b. A loss contingency of P3,600,000 and disclose an additional
contingency of up to 2,400,000
c. A loss contingency of P3,600,000 but not disclose any
additional contingency
d. No loss contingency but disclose a contingency of P1,200,000
to P6,000,000

29. During 2019, Miya Company is the defendant in a patent

infringement lawsuit. The entity’s lawyers believe there is a 30%
chance that the court will dismiss the case and the entity will
incur no outflow of economic benefits. However, if the court rules
in favor of the claimant, the lawyers believe that there is a 20%
chance that the entity will be required to pay damages of
P200,000 and an 80% chance that the entity will be required to
pay damages of P100,000. Other outcomes are unlikely. The
court is expected to rule in late December 2020. There is no
indication that the claimant will settle out of the court.

A 7% risk adjustment factor to the probability-weighted expected

cash flows is considered appropriate to reflect the uncertainties in
the cash flow estimates. An appropriate discount rate is 5% per
year. The present value of 1 at 5% for one period is 0.95. What is
the measurement of the provision for lawsuit?
a. 100,000
b. 84,000
c. 89,880
d. 85,386

30. On March 1, 2015, Cain Company issued at 103 plus accrued

interest 4,000 of its 9%. P1,000 face value bonds. The bonds are
dated January 1, 2015 and mature on January 1, 2025. Interest
is payable semiannually on January 1 and July 1. The entity paid
bond issue cost of P200,000. How much cash was received from
the bond issuance?

a. 4,320,000 ​ ​c. 4,120,000

b. 4,180,000` ​ ​d. 3,980,000

31. During the current year, Eddy Company incurred the following
costs in connection with the issuance of bonds:

Promotion cost ​ ​ ​ 200,000

Printing and engraving ​ ​ 150,000
 Legal fees ​ ​ ​ ​ 800,000
Fees paid to independent accountant
​For registration ​ ​ 100,000
Commissions paid to underwriter ​ 1,500,000

What amount should be recorded as bond issue costs to be

amortized over the term of the bonds?

a. 2,550,000 ​ ​c. 1,500,000

b. 2,750,000 ​ ​d. 1,050,000

32. At the beginning of the current year, Colt Company issued ten-
year bonds with a face amount of P5,000,000 and a stated
interest rate of 8% payable annually at the end of each year. The
bonds were priced to yield 10%. Present value factors are as
follows:

Present value of 1 for 10 periods at 10% ​ ​ ​ ​

0.3855
Present value of an ordinary annuity of 1 for 10 periods at
10% ​ 6.145

What is the issue price of the bonds payable?

a. 5,000,000 ​ ​c. 5,614,500

b. 1,927,500 ​ ​d. 4,385,500

33. On March 1, 2019, Zhask Company issued at 103 plus accrued

interest of 4,000 of its 9% face value bonds. The bonds are dated
January 1, 2019 and mature on January 1, 2029. Interest is
payable semiannually on January 1 and July 1. Zhask paid bond
issue cost of P200,000. What is the net cash received from the
bond issuance?
a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000

34. A cash flow of P2,000,000 may be received by Belerick

Company in one year, two years or three years, with probabilities
of 20%, 50% and 30%, respectively. The rate of interest on
default risk-free investments is 5%. The present value factors
are:
 PV of 1 at 5% for 1 year ​ ​ ​ ​0.952
PV of 1 at 5% for 2 years ​ ​ ​ ​0.907
PV of 1 at 5% for 3 years ​ ​ ​ ​0.864
What is the expected present value of the cash flow?
a. 1,904,000
b. 1,806,200
c. 1,814,000
d. 1,728,000

35. Clay Company had P600,000 convertible 8% bonds payable

outstanding on June 30,2018. Each P1,000 bond was convertible
into 10 ordinary shares of P50 par value. On July 1, 2018, the
interest was paid to bondholders, 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. No equity component was recognized when the
bonds were originally issued. What is the increase in the share
capital and share premium, respectively, as a result of the bond
conversion?

a. 300,000 and 312,000

b. 306,000 and 306,000
c. 450,000 and 162,000
d. 600,000 and 12,000

36. On January 1, 2020, Bontoc Company issued P5,000,000, 8%

serial bonds to be repaid in the amount of P1,000,000 each year.
Interest is payable annually on December 31. The bonds were
issued to yield 10% a year. The bond proceeds were P4,757,000
based on the present value at January 1, 2020 of five annual
payments. The entity amortized the bond discount by the interest
method. On December 31, 2020, what is the carrying amount of
the bonds payable?
a. 4,832,700
b. 3,832,700
c. 4,805,600
d. 3,805,600

37. At the beginning of the current year, Susan Company issued

5,000 convertible bonds. 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 in arrears at a nominal 6% interest rate.
 Each bond is convertible at anytime up to maturity into 100
ordinary 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 0.77 and the

present value of an ordinary annuity of 1 at 9% for 3 periods is
2.53.

What is the equity component arising from the original issuance

of the convertible bonds?
a. 1,150,000
b. 1,650,000
c. 891,000
d. 391,000

38. On March 1, 2018, Fine Company borrowed P1,000,000 and

signed a 2-year note bearing interest at 12% per annum
compounded annually. Interest is payable in full at maturity on
February 28, 2013. What amount should be reported as accrued
interest payable on December 31, 2019?

a. 100,000 ​ ​ ​c. 232,000

b. 120,000 ​ ​ ​d. 240,000

39. On January 1, 2015, Lizelle Company signed a P1,000,000

noninterest bearing note due in three years at a discount rate of
10%. Lizelle Company elects to use the fair value option for
reporting its financial liabilities. On December 31, 2015, Lizelle’s
credit rating and risk factors indicated that the rate of interest
applicable to its borrowings was 9%. The present value factors at
10% and 9% are as follows:

PV factor 10%, 3 periods ​ ​ ​0.751

PV factor 10%, 2 periods ​ ​ ​0.826
PV factor 10%, 1 periods ​ ​ ​0.909

PV factor 10%, 2 periods ​ ​ ​0.772

PV factor 10%, 2 periods ​ ​ ​0.842
PV factor 10%, 2 periods ​ ​ ​0.917

What is the carrying amount of the note payable on December

 31, 205?

a. 75,100 ​ ​ ​c. 82,610

b. 77,200 ​ ​ ​d. 84,200

40. On January 1, 2015, Granada Company had an overdue 10%

note payable to First Bank at P8,000,000 and accrued interest of
P800,000.

As a result of a restructuring agreement on January 1, 2015, First

Bank agreed to the following provisions:

1. The principal obligation is reduced to P6,000,000

2. The accrued interest of P800,000 is forgiven
3. The date of maturity is extended to December 31, 2021
4. Annual interest of 12% is to be paid for 4 years every
December 31

The present value of 1 at 10% for 4 periods is 0.683 and the

present value of an ordinary annuity of 1 at 10% for 4 periods is
3.17.

What is present value of the new note payable on January 1,

2018?

a. 6,380,400 ​ ​c. 4,098,000

b. 6,000,000 ​ ​d. 5,464,000

41. Using data from problem no. 3, what is the gain on

extinguishment of debt to be recognized for 2018?

a. 2,000,000 ​ ​c. 2,419,600

b. 2,800,000 ​ ​d. 1,619,600

42. Using data from problem no. 3, what is the interest expense to
be recognized for 2015?

a. 720,000 ​ ​c. 600,000

b. 800,000 ​ ​d. 638,040

43. Due to adverse economic circumstances and poor

management, Tagaytay Highlands Company has negotiated a
restructuring of its 9% P6,000,000 note payable to Second Bank
 due on January 1, 2019. There is no accrued interest on the
note.

The bank has reduced the principal obligation from P6,000,000 to

P5,000,000 and extend the maturity to 3 years or on December
31, 2021. However, the new interest rate is 13% payable
annually every December 31.

The present value of 1 at 9% for three periods is 0.77 and the

present value of an ordinary annuity of 1 at 9% for three periods
is 2.53. What is the gain on extinguishment of debt to be
recognized for 2019?
a. 1,000,000
b. 350,000
c. 505,500
d. 0

44. Rapp Company leased a new machine to Lake Company on

January 1, 2018. The lease expires on January 1, 2023. The
annual rental is P900,000. Additionally, on January 1, 2018, Lake
Company paid P500,000 to Rapp Company as a lease bonus
and P250,000 as a security deposit to be refunded upon
expiration of the lease. What amount should be reported as rent
revenue for the current year?

a. 1,400,000 ​ ​c. 1,000,000

b. 1,250,000 ​ ​d. 900,000

45. On October 1, 2020, Dean Company leased office space at a

monthly rental of P300,000 for 10 years expiring September 30,
2030. As an inducement for Dean to enter into the lease, the
lessor permitted Dean to occupy the premises rent-free from
October 1 to December 31, 2020. For the year ended December
31, 2020, what amount should be reported as rent expense?
a. 900,000
b. 292,500
c. 877,500
d. 0

46. On January 1, 2015, Glen Company leased a building to Dix

Company for a ten-year at an annual rental of P500,000. At
inception of the lease, Glen received P2,000,000 covering the
first two years’ rent of P1,000,000 and a security deposit of
 P1,000,000. This deposit will not be returned to Dix upon
expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the P2,000,000
should be reported as current and noncurrent liability in the
December 31, 2015 statement of financial position?

Current liability ​Noncurrent liability

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

47. At the beginning of the current year, East Company leased a

new machine from North Company with the following information:
Annual rental payable at beginning of each lease
year ​ ​ ​400,000
Lease term ​ ​ ​ ​ ​ ​ ​ ​ ​10 years
Useful life of the machine ​ ​ ​ ​ ​ ​ ​12
years
Implicit rate of interest ​ ​ ​ ​ ​ ​ ​ ​14%
Present value of an annuity of in advance for 10 periods at
14% ​ ​5.95
Present value of one for 10 periods at
14% ​ ​ ​ ​ ​0.27

East Company has the option to purchase the machine upon the
expiration of the lease term by paying P500,000. The purchase
option is reasonably certain to be exercised. What is the initial cost
of the right of use asset to recognized by East Company?
a. 2,515,000
b. 2,380,000
c. 2,245,000
d. 1,980,000
​
48. On December 31, 2020, Tiger Company leased equipment from
another entity with the following data:
➢ The estimated seven-year useful life coincides with the lease
term
➢ The first of the seven equal annual P800,000 lease payments
was paid on December 31, 2020
➢ The implicit interest rate is 12%
➢ Tiger’s incremental borrowing rate is 14%
➢ Present values of an annuity of 1 in advance for seven periods
 are 5,11 at 12% and 4.89 at 14%

What amount should be recorded as initial measurement of the

right of use asset?
a. 5,600,000
b. 4,088,000
c. 3,912,000
d. 0

49. Oak Company leased equipment for the entire nine-year useful
life, agreeing to pay P500,000 at the start of the lease term on
December 31, 2020 and P500,000 annually on each December
31 for the next eight years. The present value on December 31,
2020 of the nine lease payments over the lease term, using the
rate implicit in the lease which Oak Company knows to be 10%,
was P3,165,000. The December 31, 2020, present value of the
lease payments using the incremental borrowing rate of 12% was
P2,985,000. What amount should be reported as lease liability on
December 31, 2021?
a. 3,500,000
b. 2,431,500
c. 2,283,200
d. 2,485,000

50. Abe Company, lessor, leased an equipment under an operating

lease. The lease term is 5 years and the lease payments are
made in advance on January 1 of each year as shown in the
following schedule:
January 1, 2020 ​ ​ ​1,000,000
January 1, 2021 ​ ​ ​1,000,000
January 1, 2022 ​ ​ ​1,400,000
January 1, 2023 ​ ​ ​1,700,000
January 1, 2024 ​ ​ ​1,900,000
On December 31, 2021, what amount should be reported as rent
receivable?
a. 1,400,000
b. 800,000
c. 400,000
d. 0

51. Desiree Company is in the business of leasing new

sophisticated equipment. The lessor expects a 12% return on net
investment. All leases are classified as direct financing lease. At
 the end of the lease term, the equipment will revert to the lessor.
At the beginning of the current year, an equipment is leased to a
lessee with the following information:
Cost of equipment ​ ​ ​ ​ ​ ​5,000,000
Residual value-unguaranteed ​ ​ ​ ​ ​ 600,000
Annual rental payable at the beginning of each year ​ ​
900,000
Initial direct cost incurred by the lessor ​ ​ ​ 250,000
Useful life and lease term ​ ​ ​ ​ ​ 8 years
Implicit interest rate ​ ​ ​ ​ ​ ​ 12%
What is the gross investment on the lease?
a. 7,200,000
b. 7,800,000
c. 5,000,000
d. 5,250,000

52. Refer to problem no. 34. What is the net investment in the
lease?
a. 5,000,000
b. 5,250,000
c. 4,400,000
d. 4,650,000

53. Refer to problem no. 34. What is the total interest income over
the lease term?
a. 2,550,000
b. 1,950,000
c. 3,150,000
d. 1,500,000

54. Refer to problem no. 34. What is the interest income for the
current year?
a. 594,000
b. 522,000
c. 630,000
d. 450,000

55. At the beginning of the current year, Raquel Company sold a

building and immediately leased it back. The following data
pertain to the sale and leaseback transaction:
Sales price at above fair value ​ ​ ​ ​ ​9,000,000
Fair value of building ​ ​ ​ ​ ​ ​ ​8.000,000
Carrying amount of
 building ​ ​ ​ ​ ​ ​7,200,000
Annual rental payment at the end of each year ​ ​ ​
600,000
Remaining life of building ​ ​ ​ ​ ​ ​ 20 years
Lease term ​ ​ ​ ​ ​ ​ ​ ​ 4 years
Implicit interest rate ​ ​ ​ ​ ​ ​ ​ 12%
Present value of an ordinary annuity of 1 at 12% for four
periods ​ 3 037
What is the initial lease liability?
a. 1,822,200
b. 2,400,000
c. 1,200,000
d. 1,000,000

56. Refer to problem no. 38. What is the cost of right of use asset?
a. 1,639,980
b. 739,980
c. 822,200
d. 411,100

57. Refer to problem no. 38. What is the gain on right transferred to
buyer-lessor?
a. 800,000
b. 720,000
c. 717,780
d. 400,000

58. Refer to problem no. 38. What is the annual rental income of the
buyer-lessor?
a. 600,000
b. 329,272
c. 270,728
d. 300,000

59. Hilton Company reported pretax financial income of P6,200,000

for the current year. Included in other income was P200,000 of
interest revenue from government bonds held by the entity. The
income statement also included depreciation expense of
P500,000 for a machine costing P3,000,000. The income tax
return reported P600,000 as depreciation on the machine. The
enacted tax rate is 30% for the current year and future years.
What is the current tax expense for the current year?
 a. 1,860,000 ​ ​c. 1,770,000
b. 1,800,000 ​ ​d. 1,830,000

60. Lara Company reported P5,000,000 in revenue in 2015, of

which P2,200,000 will not be included in the tax return until 2016.
The enacted tax rate is 30% for 2015 and 25% for 2016. What
amount should be reported on December 31, 2015?

a. 550,000 deferred tax liability

b. 550,000 deferred tax asset
c. 660,000 deferred tax liability
d. 660,000 deferred tax asset

61. East Company issued 1,000 shares with P5 par to Howe as

compensation for 1,000 hours of legal services performed. Howe
usually bills P160 per hour for legal services. On the date of
issuance, the share was trading on a public exchange at P140.
By what amount should the share premium account increase as
a result of the transaction?
a. 135,000
b. 140,000
c. 155,000
d. 160,000

62. Ashe Company was organized on January 1, 2019, with

authorized capital of 100,000 shares of P200 par value. During
2019, Ashe had the following transactions affecting shareholders’
equity:

January 10 ​ ​Issued 25,000 shares at P220 a share

March 25 ​ ​Issued 1,000 shares for legal services when
the fair value was P240 a share
September 30 ​ ​Issued 5,000 shares for a tract of land
when the fair value was P260 a share

What amount should Ashe report for share premium on

December 31, 2019?
a. 840,000
b. 800,000
c. 540,000
d. 500,000

63. On December 1 of the current year, Line Company received a

 donation of 2,000 shares with P50 par value from a shareholder.
On that date, the share market value was P350. The shares were
originally issued for P250 per share. What is the decrease in
shareholders’ equity as a result of donation?
a. 700,000
b. 500,000
c. 200,000
d. 0

64. Day Company holds 10,000 shares of P10 par value as treasury
reacquired in 2010 for P120,000. On December 31, 2019, Day
reissued all 10,000 shares for P190,000. Under the cost method
of accounting for treasury shares, what is credited for the excess
of the reissuance price over the cost of treasury shares?
a. Share capital of p100,000
b. Retained earnings of P70,000
c. Gain on sale of investment P70,000
d. Share premium of P70,000

65. Penn Company began operations on January 1, 2019 by issuing

at p15 per share one-half of the 950,000 ordinary shares of P1
par value that had been authorized for sale. In addition, Penn has
500,000 authorized preference shares of P5 par value. During
2019, Penn had P1,025,000 of net income and declared
P230,000 of dividend. During 2020, Penn had the following
transactions:
➢ Issued 100,000 ordinary shares for P17 per share.
➢ Issued 150,000 preference shares for P8 per share.
➢ Authorized the purchase of a custom-made machine to be
delivered in January 2021. Penn restricted P300,000 of
retained earnings for the purchase of the machine.
➢ Issued additional 50,000 preference shares for P9 per share.
➢ Reported P1,215,000 of net income and declared on
December 31, 2020 a dividend of P635,000 to shareholders of
record on January 15, 2021 to be paid on February 1,2021.
What is the total shareholders’ equity on December 31, 2020?
a. 11,850,000
b. 11,550,000
c. 12,485,000
d. 7,920,000

66. Cyan Company issued 200,000 shares of P5 par value at P10

per share. On January 1, 2019, Cyan’s retained earnings
 amounted to P3,000,000. In March 2019, Cyan reacquired
50,000 treasury shares at P20 per share. In June 2019, Cyan
sold 10,000 of these shares to its corporate officers for P25 per
share. Cyan used the cost method to record treasury shares. Net
income for the year ended December 31, 2019 was P600,000.
On December 31, 2019, what amount should be reported as
unappropriated retained earnings?
a. 3,600,000
b. 3,650,000
c. 3,750,000
d. 2,800,000

67. Long Company had 10,000 shares issued and outstanding on

January 1, 2019. During 2019, Long took the following actions:

March 15 ​ ​Declared a 2-for-1 share split, when the fair

value of the shares was P80 per
share.
​December 15 ​ ​Declared a P5 per share cash dividend

In the statement of changes in equity for 2019, what amount

should be reported as dividends?
a. 50,000
b. 100,000
c. 850,000
d. 950,000

68. Solace Company declared and distributed 10% stock dividend

with fair value of P1,500,000 and par value of P1,000,000, and
25% stock dividend with fair value of P4,000,000 and par value of
P3,500,000. What aggregate amount should be debited to
retained earnings for the stock dividends?
a. 4,500,000
b. 3,500,000
c. 5,000,000
d. 5,500,000

69. Karina Company provided the following on January 1, 2019:

Share capital, 250,000 shares authorized; 100,000
​Shares issued and outstanding ​ ​ ​3,000,000
Share premium ​ ​ ​ ​ ​ ​4,000,000
Retained earnings ​ ​ ​ ​ ​ ​8,000,000
 Karina’s board of directors declared a 10% dividend on April
1, 2019 when the market value of the share was P70. The stock
dividend was issued on July 1, 2019 when the market value of
the share was P100. Karina’s share has a par value of P30.
Karina sustained a net loss of P1,200,000 for 2019. What amount
should be reported as retained earnings on December 31, 2019?
a. 6,100,000
b. 6,500,000
c. 6,800,000
d. 5,050,000

70. Gaston Company has sustained heavy losses over a period of

time and conditions warrant that Gaston undergo a quasi-
reorganization on December 31, 2019.
➢ Inventory with cost of P6,500,000 was recorded on December
31, 2019 at its market value of P6,000,000
➢ Property, plant and equipment were recorded on December
31, 2019 at P12,000,000, net of accumulated depreciation. The
sound value was P8,000,000.
➢ On December 31, 2019, the share capital is P7,000,000
consisting of 700,000 shares with par value of P10, the share
premium is P1,600,000, and the deficit in retained earnings is
P900,000.
➢ The par value of the share is to be reduced from P10 to P5.

Immediately after the quasi-reorganization, what is the total

shareholders’ quity/
a. 3,300,000
b. 3,500,000
c. 3,700,000
d. 4,200,000
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