SABUCO, EMERALD MARIE V.

FINANCIAL ACCOUNTING 2 – LIABILITIES (Solving)

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

CURRENT LIABILITIES

1. During 2021, Adam Company sold 350,000 boxes of pancake mix under a new sales
promotional program. Each box contained one coupon, which entitled to a customer to
a pancake pan upon remittance of P50. The entity paid P60 per pan and handling and
shipping of P10 and estimated that 80% of the coupons will be redeemed, even though
only 100,000 coupons had been processed during 2021. What amount should be
reported as a liability for unredeemed coupons?
a. 3,600,000. c. 3,800,000
b. 3,700,000 d. 3,900,000
Solution Answer: A
Net Premium expense (60 + 10 - 50) 20
Coupons to be redeemed (350,000 x 80%) 280,000
Less: Coupons redeemed (100,000)
Coupons Outstanding 180,000

Liability for unredeemed Coupons (180,000 x 20) 3,600,000

2. Tenor Company manufactures high-end home electronics systems. The entity provides
a one-year warranty for all the products sold. The entity estimated that the warranty cost
is P200 per unit sold and a reported liability for estimated warranty cost is P550,000 on
January 1, 2020. During the current year, the entity sold 5,000 units for the total of
P8,000,000 and paid warranty claims of P650,000 on current and prior years. What is
warranty liability on December 31, 2020?
a. 250,000 c.900,000
b. 350,000 d. 750,000
Solution Answer: C
Warranty liability – January 1, 2020 550,000
Warranty Expense (5,000 x 200) 1,000,000
Warranty payments (650,000)
Warranty Liability – December 31 2020 900,000

3. Gifted Company is preparing annual financial statements on December 31, 2021.

Because of the recently proven health hazard in one of the products, the Philippine
Government has clearly indicated its intention of requiring the entity to recall all cans of
this product sold in the last three months. The entity estimated that this recall would
cost P680,000. What accounting recognition should be accorded in this situation?
a. No recognition
b. Note disclosure only
c. Expense of 680,000 and Retained earnings restriction 680,000

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d. Expense of 680,000 and liability of 680,000.

Solution Answer: D

4. Kobie Department store sells gift certificates redeemable only when merchandise is
purchased. These gift certificates have no expiration date. Upon redemption or
expiration, the entity recognizes the unearned revenue as realize.
Information of the year 2021 is as follows:
Unearned Revenue, January 1, 2021 650,000
Gift Certificates sold 2,250,000
Gifts certificates redeemed 1,950,000
Gift certificates expected not to be redeemed 100,000
Cost of Goods Sold 60%
On December 31, 2021, what amount should be reported as unearned revenue?
a. 510,000 c. 570,000
b. 850 000 d. 950,000
Solution Answer: B
Unearned Revenue, January 1, 2021 650,000
Add: Gift Certificates sold 2,250,000
Total 2,900,000
Less: Gifts certificates redeemed 1,950,000
Gift certificates expected not to be redeemed 100,000 2,050,000
Unearned Revenue, December 31, 2021 850,000

5. Donald Company has an incentive compensation under which a branch manager

received 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 P1,650,000. The tax rate is 30%. What is the bonus for the current
year?
a. 126,000 c. 165,000
b. 150 000 d. 180,000
Solution Answer: B
Income after bonus before tax (1,650,000/110%) 1,500,000
Bonus 1,500,000 x 10% 150,000

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NOTES PAYABLE AND DEBT STRUCTURE

1. On January 1, 2021. Mona Company purchases equipment. There was no established

market price for the equipment which has an 8-year life and no residual value. The entity
gave P5,250,000 noninterest bearing note payable in three equal annual installments of
P1,750,000 with the first payment due December 31, 2021. The prevailing rate of interest
for a note of this type is 8%. The present value of the note at 8% was P4,509,950. What
amount should be reported at expense in 2021?
a. 360 796 c. 220,796
b. 420,000 d. 0
Solution Answer: A
Interest Expense (4,509,950 x 8%) 360,796

2. On January 1, 2022, Joy Company signed a P100,000 noninterest bearing note due in
three years at discounted rate of 10%. The entity elects the fair value option for reporting
financial liabilities. On December 31, 2022, the credit rating and risk factors indicated that
the rate of interest applicable to its borrowings was 9%. The present value factors of 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 9% 3 periods 0.772
PV factor 9% 2 periods 0.842
PV factor 9% 1 periods 0.917
What is the carrying amount of the note payable on December 31, 2022?
a. 75,100 c. 82,610
b. 77,200 d. 84,200.

Solution Answer: D
Fair Value – December 31, 2022 (100,000 x 0.842) 84,200

3. The following informations pertains to the transfer of real estate pursuant to a debt
restructuring by Krusty Company to Crab Company in full liquidation of Krusty’sliability to
Manny:
Carrying amount of liability liquidated 2,500,000
Carrying amount of real estate transferred 2,000,000
Fair Value of real estate transferred 2,200,000
At what amount of pretax gain should Krusty report as component of income from continuing
operations?
a. 300,000 c.500,000
b. 400,000 d. 0
Solution Answer: C
Carrying amount of liability liquidated 2,500,000
Carrying amount of real estate transferred (2,000,000)
Pretax gain 500,000

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4. Grow Company had bonds payable with a face value of P5,000,000 and a carrying amount
of P4,800,000. In addition, unpaid interest on the bonds was accrued in the amount of
P250,000. The creditor had agreed to the settlement of the bonds payable in exchange for
50,000 shares of P50 par value. The shares have no reliable measure of fair value.
However, the bonds are quoted at P3,500,000.

1. What is the gain on extinguishment of the bonds payable?

a. 1,500,000 c. 1,550,000
b. 1,300,000 d. 0

2. What is the share premium from the issuance of the shares?

a. 2,300,000 c. 1 500,000
b. 1,000 000 d. 0

Solution Answer Q1: C

Carrying amount of bonds payable 4,800,000
Accrued Interest on bonds payable 250,000
Total 5,050,000
Fair value of bonds payable (3,500,000)
Gain in extinguishment 1,550,000

Solution Answer Q1: B

Fair value of bonds 3,500,000
Par Value of shares (50,000 x 50) (2,500,000)
Share Premium 1,000,000

5. Bruno Company after having experienced financial difficulties in 2023, negotiated with a
major creditor and arrived at an agreement to restructure a note payable on December 31,
2023. The creditor was owed P3,600,000 and interest of P400,000 but agreed to accept
equipment worth P700,000 and note receivable from Bruno Company’s customer with
carrying amount of P2,700,000. The equipment had an original cost of P900,000 and
accumulated depreciation of P300,000what amount should be recognized as gain from debt
extinguishment on December 31,2023?
a. 700 000 c. 400,000
b. 500,000 d. 0
Solution Answer: A
Note Payable 3,600,000
Accrued interest 400,000
Total Liability 4,000,000
Assets transferred:
Note receivable 2,700,000
Equipment (900,000-300,000) 600,000 3,300,000
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Gain from extinguishment 700,000

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BONDS PAYABLE

1. On January 31, 2021, Beauty Company issued P4,000,000 maturity value, 12% for
P4,000,000 cash. The bonds are dated December 31, 2020 and mature on December 21,
2030. Interest is paid semiannually on June 30 and December 31. What amount of accrued
interest payable should be reported on September 30, 2021?
a. 130,000 c. 110,000
b. 120,000. d. 90,000
Solution Answer: B
Accrued interest payable from June 30, 2021 to September 30, 2021
(4,000,000 x 12% x 3/12) 120,000

2. Ion Company is authorized to issue P5,000,000 of 6%, 10-year bonds date July 1, 2020
with interest payments on June 30 and December 31. When the bonds are issued on
November 1, 2020, the entity received cash of P5,150,000 including accrued interest. What
is the discount or premium from the issuance of the bonds payable?
a. 150,000 bond premium
b. 50,000 Bond premium
c. 150,000 bond discount
d. No bond premium and discount
Solution Answer: B
Cash received 5,150,000
Accrued Interest from June 30 to November 1
(5,000,000 x 6% x 4/12) ( 100,00)
Issue price of bonds 5,050,000
Fair Value of Bonds (5,000,000)
Premium on bonds payable 50,000

3. On December 31, 2019, Vincent Company reported bonds payable of P7,360,000 and
accrued interest payable of P200,000. The bonds are retired on January 1, 2020 for
P8,160,000 excluding accrued interest. What amount should be reported as gain on
extinguishment of bonds payable?
a. 800,000 gain
b. 600,000 gain
c. 800,000loss
d. 600,000 loss
Solution Answer: C
Loss on extinguishment (7,360,000 – 8,160,000) 800,000

4. On December 31, 2023, Boho Company reported 9% bonds payable due December 31,
2029 with a carrying amount of P15,405,000. The bonds were issued on December 31,
2019 and had the face amount of P15,000,000 with interest payable semiannually on June
30 and December 31 of each year. On January 1, 2024, the entity retired P5,000,000 of
these bonds at 98. What amount should be reported as gain or loss on the retirement of the
bond for 2024?
a. 235 000 gain c. 100,000 gain
b. 235,000 loss d. 100,000 loss

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Solution Answer: A
Carrying amount retired (15,405,000 x 1/3) 5,135,000
Retirement Price (5,000,000 x 98%) (4,900,000)
Gain on retirement 235,000

5. On January 1, 2019, Carrot Company issued 10% bonds in the face amount of P1,000,000
that mature on January 1, 2029. The bonds were issued for P886,000 to yield 12%,
resulting in bond discount of P114,000. The entity used the effective interest method.
Interest is payable January 1 and July 1. For the year ended December 31, 2019, what
amount should be reported as bond interest expense?
a. 106 510
b. 100,000
c. 53,160
d. 0
Solution Answer: A
Date interest paid interest expense discount carrying amount
1/1/19 886,000
7/1/19 50,000 53,160 3,160 889,160
1/1/20 50,000 53,350 3,350 892,510
100,000 106,510

Interest expense for 2019

886,000 x 12% x 6/12 53,160
889,160 x 12% x 6/12 53,350
106,510

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LEASES

1. Ely Company leased a machine with a fair value of P1,650,000 for a period of 5 years under a
finance lease. The initial indirect cost included in negotiating the lease amounting to P12,500.
The present value of the minimum lease payments discounted at the rate implicit is
P1,484,000. At what amount should the machine be recognized initially in Ely’s financial
statement?
a. 1,497 500 c. 1,499,500
b. 1,498,500 d. 1,500,500
Solution Answer: A
Present Value 1,484,000
Indirect Cost 12,500
total initial cost of machine 1,497,500

2. Piaatos Company had lease an asset on finance lease. The present value of the minimum
lease payment is P586,000 and the fair value of the asset is P700,000. The asset has a
useful life 5 years and the lease is for the period of 4 years, after which the asset can be
acquired for a near zero cost, which is substantially below the expected value of the asset
at that date. The asset is depreciated on a straight line method. What us the amount of the
annual depreciation expense?
a. 200,000 c. 146,000
b. 140,000 d. 117 200
Solution Answer: D
Annual depreciation
585,000/5 117,200

3. On January 1. 2020, Maling Company, acting as a lessor, leased an equipment for 10 years
at an annual rental of P1,200,000, payable by Tamang Company, the lessee, at the
beginning of each year under a direct financing lease. The equipment had a cost of
P8,400,000 with an estimated life of 12 years and no residual value. The implicit rate is 9%.
What amount of lease receivable shall be reported in 2020?
a. 8,400,000 c. 1,200,000
b. 7,200,000. d. 0
Solution Answer: B
Present Value of rental equal to the cost of asset 8,400,000
Advance Payment (1,200,000)
Lease Receivable 7,200,000

4. Magic Company had an asset costing P5,239,000. The asset is leased on January 1, 2021
to another entity. Five annual lease payments are due each January 1, beginning January
1, 2021. The lessee guaranteed the P2,000,000 residual value of the asset as of the end of
the lease term on December 31, 2025. The implicit rate is 8%. The PV of 1 at 8% for 5
periods is 0.68, and the PV of the annuity of 1 in advance at 8% for 5 periods is 4.31. What
is the annual lease payment?
a. 1,215,545
b. 15,31,090
c. 900.000
d. 751,500
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Solution Answer: C
Cost of Asset 5,239,000
PV of guaranteed residual value (2,000,000 x 0.68) (1,360,000)
Net investment to recovered from rental 3,879,000
Divide by the PV of annuity of 1 in advance 4.31
Annual lease payment 900,000

5. On December 31,2022, Brain Company sold a machine with 12-year useful life to another
entity and simultaneously leased it back for one year.
Sale price 360,000
Carrying Amount 330,000
PV of reasonable lease rentals (3,000 for 12 months) 34,100

What is the revenue from the sale reported?

a. 34,100 c. 4,100
b. 30 000 d. 0

Solution Answer: B

Sale price 360,000

Carrying Amount 330,000
Gain on sale and leaseback 30,000

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ACCOUNTING FOR TAXES

1. Hammer Company reported pretax financial income of P6,200,000 for the current year.
Included in other income was P200,000 of interest revenue from the government bonds
held by the entity. The income statement included depreciation expense of P500,000 with a
machine cost of P3,000,000. The income tax return reported P600,000 as a 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
Solution Answer: C
Financial income 6,200,000
Interest revenue on government bonds ( 200,000)
Tax depreciation in excess of financial depreciation
(600,000 – 500,000) (100,000)
Taxable Net Income 5,900,000
Tax Rate x 30%
Current tax expense 1,770,000

2. Genre Company reported the following partial income statement after the first year of
operations:

Income before income tax 3,750,000

Income tax expense
Current 1,035,000
Deferred 90,000 (1,125,000)
Net Income 2,265,000

The entity used the straight line method of depreciation for financial reporting purposes and
accelerated depreciation for tax purposes. The amount charged to depreciation expense per book
was P1,500,000. No other differences existed between book income and taxable income except
the amount of depreciation. The income tax rate is 30%. What amount was deducted for
depreciation and tax return for the current year?
a. 1,200,000 c. 1,500,000
b. 1,425,000 d.1,800,000
Solution Answer: D
Depreciation per book 1,500,000
Taxable temporary difference (90,000/30%) 300,000
Depreciation for tax purposes 1,800,000

3. Taduh Company began operations at the beginning of the 2020. At the end of first 2020
operations, the entity reported P7,000,000 income before income tax in the income
statement but only P5,100,000 taxable income in tax return. Analysis of P900,000
difference revealed that P500,000 was a permanent difference and P400,000 was a
temporary tax liability difference related to a current asset. The enacted tax rate for 2020
and future years is 30%. What is the total income tax expense to be reported in the income
statement for the current year?

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a. 1,8000,000

b. 1,530,000
c. 1,650,000
d. 1.950,000
Solution Answer: D
Financial income 7,000,000
Permanent difference ( 500,000)
Financial income subject to tax 6,500,000

Total income tax expense (6,500,000 x 30%) 1,950,000

4. Barbie Company had cumulative taxable temporary differences on December 31, 2023 and
December 31, 2022 of P1,350,000 and P960,000 respectively. The tax rate for 2023 is 40%
while the tax rate for future years is30%. Taxable net income for 2023 is P2,400,000 and
there are no permanent differences. What is the pretax financial income for 2023?
a. 3,750,000 c. 2,010,000
b. 2 790 000 d. 1,050,00
Solution Answer: B
Cumulative taxable temporary difference – 12/31/2023 1,350,000
Cumulative taxable temporary difference – 12/31/2022 ( 960,000)
Taxable temporary difference in 2023 390,000

Taxable net income in 2023 2,400,000

Taxable temporary difference in 2023 390,000
Pretax financial income 2,790,000

5. EMVS Company reported in the statement of comprehensive income for the year ended,
December 31, 2020 a pretax of income of P1,000,000.
Tax Return Accounting Period
Rent income 70,000 120,000
Depreciation 280,000 220,000
Premiums on officer’s life insurance 90,000
Income tax rate 30%
What is the current provision for income tax for 2020?
a. 294 000 c. 327,000
b. 300,000 d. 360,000
Solution Answer: A
Pretax accounting income 1,000,000
Premiums on officer’s life insurance 90,000
Accounting Income subject to income tax 1,090,000
Rent income ( 50,000)
Depreciation ( 60,000)
Taxable Income 980,0000

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EMPLOYEES’S BENEFITS

1. Sarah Company provided the following information pertaining to the defined benefit plan
for 2021:
Current service cost 1,600,000
Actual return on assets 350,000
Interest income on plan assets 400,000
Past service cost during 2021 50,000
Annual interest on personal liability 500,000

What is the total defined benefit cost?

a. 2,160,000 c.1,800,000
b. 1,700,000 d. 1,750,000
Solution Answer: C
Current service cost 1,600,000
Interest income on plan assets (400,000)
Past service cost during 2021 50,000
Annual interest on personal liability 500,000
Pension expense 1,750,000

Actual return on asset 350,000

Interest income on plan assets (400,000)
Remeasurement loss ( 50,000)

Pension expense 1,750,000

Remeasurement loss 50,000
Defined benefit cost 1,800,000

2. Barney Company provided the following information for 2019:

Current service cost 520,000
Actual return on assets 810,000
Interest expense on PBO 590,000
Interest income on plan assets 350,000
Loss on plan settlement 240,000
Past service cost during the year 360,000
Contribution to the plan 1,500,000

1. What is the employee benefit expense for 2019?

a. 1,710,000 c. 1,350,000
b. 1 360 000 d. 1,470,000

2. What is the remeasurement gain or loss?

a. 460,000 loss c. 220,000 loss
b. 460,000gain d. 220,000 gain

3. What is the total defined benefit cost?

a. 1,820,000 c. 740,000
b. 900,000. d. 960,000
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4. What is the prepaid or accrued benefit cost during 2019?

a. 600,000 accrued c. 140,000 accrued
b. 600,000prepaid d. 140,000 prepaid

Solution Answer: Q1. B

Current service cost 520,000
Interest expense on PBO 590,000
Interest income on plan assets (350,000)
Loss on plan settlement 240,000
Past service cost during the year 360,000
Employee’s benefit expense 1,360,000

Solution Answer: Q2. B

Actual return on assets 810,000
Interest income on plan assets (350,000)
Remeasurement gain 450,000

Solution Answer: Q3. B

Employee’s benefit expense 1,360,000
Remeasurement gain ( 450,000)
Defined benefit cost 900,000

Solution Answer: Q4. B

Contribution to the plan 1,500,000
Defined benefit cost ( 900,000)
Prepaid benefit cost 600,000

3. On December 31, 2022, Rawr Company provided the following information:

Fair value of plan assets 3,450,000
Accumulated benefit obligation 4,300,000
Projected benefit obligation 5,700,000
What is the accrued liability on December 31, 2022?
a. 2,250.000 c. 3,450,000
b. 5,700,000 d. 1,400,000
Solution Answer: A
Fair value of plan assets 3,450,000
Projected benefit obligation (5,700,000)
Accrued benefit cost ( 2,250,000)

4. Winnie Company had the following balances relating to the defined benefit plan on
December 31, 2023:
Fair value of plan assets 33,450,000
Asset ceiling 2,500,000
Projected benefit obligation 35,700,000
What is the prepaid benefit cost on December 31, 2023?
a. 0 c. 35,700,000

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b. 33,450,000 d. 2500,000
Solution Answer: D Asset ceiling 2,500,000
5. Bongga Company provided the following data pertaing to the defined benefit pension
plan for 2019:
Prepaid pension cost, January 1 20,000
Current service cost 190,000
Interest expense on PBO 380,000
Interest income on plan assets and actual return on assets 400,000
Past service cost during the year 500,000
Employer Contribution to the plan 400,000
What is the accrued pension cost at December 31, 2019?
a. 250 000
b. 170,000
c. 290,000
d. 400,000

Solution Answer: A
Current service cost 190,000
Interest expense on PBO 380,000
Interest income on plan assets and actual return on assets (400,000)
Past service cost during the year 500,000
Employee benefit expense 670,000
Employer Contribution to the plan (400,000)
Accrued benefit cos – 2019 270,000
Prepaid pension cost, January 1 ( 20,000)
Net accrued benefit cost – December 31 250,000

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SHAREHOLDER’S EQUITY

1. Kath Company granted 100 share appreciation gifts to each of the 2,000 employees in
January 2020. The entity estimates that 90% of the awards will vest on December 31, 2023.
The fair value of each share appreciation right on December 31, 2020 is P20. What is the
accrued liability on December 31, 2020?
a. 1,200,000
b. 1,000,000.
c. 2,400,000.
d. 3,600,000.
Solution Answer: A
Total Compensation (100 x 2,000 x 20 x 90%) 3,600,000
Accrued Compensation – December 31, 2020 (3,600,000/3) 1,200,000

2. Hangover Company granted 50,000 share appreciation rights which entitled key employees to
receive cash equal to the difference between 20 and the market price of the share on the date
of each right is exercised. The service period is 2023 and 2025, and the rights are exercisable
in 2026. The market price of the share was P25 and P28 on December 31, 2023 and 2024,
respectively. What amount should be reported as liability under the share appreciation rights on
December 31, 2024?
a. 133,334
b. 266 667
c. 355,556
d. 0
Solution Answer: B
Fair value of share appreciation right (28-20) 8
Accrued compensation – December 31, 2024
(50,000 x 8 = 400,000/3 x 2 years) 266,667

3. Pagoda Company reported the financial statements for the year ended December 31, 2019
basic earnings per share of P85. On July 1, 2020, the entity made a 3 for 1 bonus issue.
What 2019 earnings per share should be reported as comparative information in the
financial statements for 2020?
a. 28.30 c. 37.50
b. 34.00 d.21.25
Solution Answer: D
Basic earnings per share – 2019 (85/4) 21.25

4. Hotdog Company had 10,000 shares issued and an outstanding on January 1, 2020. On
March 15, the entity declared a 2 for 1 share spilt when the fair value was P80. On
December 15, the entity declared a P5 per share cash dividend. What amount should be
reported as dividends?
a. 50,000
b. 75,000
c. 100 000
d. 150,000
Solution Answer: C
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Share issued on January 1 10,000

Share split on March 15 2-for-1 x 2
Total shares issued and outstanding 20,000
Dividends 20,000 x 5 100,000

5. On January 1, 2023 Kikay Company had 220,000 P5 par value shares outstanding. On
June 1, the entity acquired 20,000 shares to be held in the treasury. On December 1, when
the market price of the share was P20, the entity declared a 10% record on December 16,
2023. What was the impact of the share dividend in the retained earnings?
a. 100,000 decrease
b. 100,000 increase
c. 400,000decrease
d. 400,000 increase
Solution Answer: C
Outstanding shares 220,000 – 20,000 250,000
Share dividend 10% x 200,000 x 20 400,000

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