1

Intermediate Accounting 2
Final Examination

PART I. THEORIES

Instructions: Select the letter of the correct answer.

1. Which of the following statements is/are trye regarding supplier's debit balances?
A. Supplier's debit balances are debit balances in accounts payable resulting from
overpayments, returns and allowances, and advance payment to suppliers.
B. Supplier's debit balances are classified as current assets unless the amount is immaterial in
which case an offset may be made against the account payable account.
C. Both A and B
D. Neither A nor B

2. It is an event that creates a legal or constructive obligation because the entity has no other realistic
alternative but to settle the obligation.
A. Current event
B. Obligating event
C. Past event
D. Subsequent event

3. What are the two methods in recording unearned revenues?

A. The asset method and expense method
B. The income method and liability method
C. The asset method and income method
D. The liability method and expense method

4. Which of the following is considered as a non-current liability?

A. Trade accounts payable
B. Supplier's accounts with credit balances
C. Accumulated depreciation on leased equipment
D. Deferred tax liability
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5. Advance payments from customers represent which of the following?

A. Assets until the product is provided.
B. Liabilities until the product is provided.
C. An equity component
D. Revenue upon receipt of the advance payment.

6. A decommissioning liability is also known as

A. Contingent asset
B. Asset retirement obligation
C. Contingent liability
D. Provision

7. When updating the provision for equipment retirement, the entry would include a:
A. Debit to the Equipment account
B. Credit to Accumulated depreciation
C. Debit to Accretion expense
D. Credit to Gain on retirement of equipment

8. Ron Company issued a note solely in exchange for cash. The present value of the note at issuance
should be equal to the:
A. Face amount of the note
B. Amount of cash received
C. Face amount of the note discounted at the prevailing interest rate
D. Amount of cash received discounted at the prevailing interest rate

9. Interest expense is normally recorded:

A. Based on the period or term expired.
B. Based on the period or term unexpired.
C. As a percentage of the discount on a promissory note
D. Upon payment at maturity date.

10. If bonds are issued at a discount, this indicates that

A. The yield rate of interest exceeds the nominal rate.
B. The nominal rate of interest exceeds the yield rate.
C. The yield and nominal rates coincide.
D. No necessary relationship exists between the two rates.
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11. How would the amortization of premium on bonds payable affect the carrying amount of the bonds
and the profit of the company, respectively?
A. Increase, increase
B. Decrease, decrease
C. Increase, decrease NT
D. Decrease, increase

12. When bonds are issued with share warrants, the equity component is equal to:
A. Zero
B. The excess of the proceeds over the face amount of the bonds
C. The market value of the share warrants
D. The excess of the proceeds over the fair value of the bonds without the share warrants

13. Which of the following would result in reporting a deferred tax liability?
A. Excess of tax depreciation over accounting depreciation
B. Interest income on government bonds
C. Accrual of warranty expense
D. Excess of accounting depreciation over tax depreciation

14. It is the deferred tax consequence attributable to a taxable temporary difference

A. Current tax liability
B. Current tax asset
C. Deferred tax liability
D. Deferred tax asset

15. A deferred tax asset represents the increase in taxes refundable in future years as a result of
deductible temporary differences existing at the end of the current year.
A company should add a decrease in a deferred tax liability to income tax payable in computing
income tax expense.
A. True, false
B. False, true
C. True, true
D. False, false

16. Which of the following is an example of employee benefits?

A. Free or subsidized goods or services
B. Termination benefits
C. Disability benefits
D. All of the above.
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17. Under this plan, only the employer contributes to the retirement benefit plan:
A. Contributory plan
B. Non-contributory plan
C. Funded plan
D. Unfunded plan

18. These are entitlements compensated or paid absences that are carried forward and can be used in
future periods but the employees are not entitled to a cash payment for unused entitlement upon
leaving the entity-employer:
A. Accumulating and vesting
B. Accumulating and non-vesting
C. Non-accumulating and vesting
D. Non-accumulating and non-vesting

19. Which statement is incorrect concerning the recognition and measurement of defined benefit plans?
A. Actuarial assumptions are required to measure the obligation and expenses and there is
possibility for actuarial gains and losses
B. The obligation is measured on a discounted basis
C. The expense recognized for defined benefit plan is not necessarily equal to the amount of
the contribution due for the period.
D. Select this letter if all of the foregoing statements are correct.

20. Which of the following is not a component of defined benefit cost?

A. Service cost
B. Net interest
C. Remeasurements
D. All of these are components of defined benefit cost.

21. Contributed capital does not include:

A. Share capital account
B. Share premium account
C. Retained earnings
D. All of these are included in contributed capital

22. Which of the following best describes the legal capital of a corporation that issues no-par value share
A. Entire value of shares issued and subscribed
B. Stated value of shares outstanding
C. Entire consideration received or receivable
D. Stated value of shares authorized
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23. How would the declaration and subsequent issuance of a 30% share dividend affect share capital and
share premium, respectively, when the fair value of the shares exceeds par value?
A. No effect and no effect
B. No effect and increase
C. Increase and no effect
D. Increase and increase

24. Total shareholders’ equity is not affected by the

A. Sale of treasury shares at more than cost
B. Sale of treasury shares at less than cost
C. Declaration of a cash dividend
D. Issuance of a share dividend

25. In an asset swap, the gain on extinguishment of liability is equal to the excess of:
A. Fair value of the asset transferred over its carrying amount.
B. Carrying amount of the liability over the fair value of the asset transferred
C. Fair value of the asset over the carrying amount of the liability.
D. Carrying amount of the debt over the carrying amount of the asset transferred

26. Under IFRIC 19, an entity shall initially measure equity instruments issued to extinguish a financial
liability
A. Fair value of the equity instruments issued
B. Fair value of the liability extinguished
C. Par value of the equity instruments issued
D. Carrying amount of the liability extinguished

27. There is substantial modification of terms if the gain or loss on modification is:
A. Atleast 1% of the old financial liability
B. Atleast 5% of the old financial liability
C. Atleast 10% of the old financial liability
D. Atleast 20% of the old financial liability

28. If the residual value of the underlying asset at the end of the lease term is less than the amount
guaranteed by the lessee:
A. The lessor pays the lessee for the difference and the lessee recognizes a gain at the end of
the lease term.
B. The lessor pays the lessee for the difference and the lessee recognizes a loss at the end of
the lease term.
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C. The lessee pays the lessor for the difference and the lessee recognizes a loss at the end of
the lease term.
D. The lessee has no obligation related to the residual value.

29. In a sales-type lease, interest income should be:

A. Recognized over the lease term using the effective interest method
B. Recognized over the lease term on a straight-line basis
C. Recognized as income in full at the inception of the lease
D. Ignored.

30. IFRS 16 provides that the seller-lessee shall measure the right of use asset arising from the leaseback
at the proportion of the:
A. Carrying amount of the asset that relates to the right transferred to the buyer-lessor
B. Carrying amount of the asset that relates to the right retained by the seller-lessee
C. Fair value of the asset that relates to the right transferred to the buyer-lessor
D. Fair value of the asset that relates to the right retained by the seller-lessee

PART II. PROBLEMS

Instructions: Solve for the requirements. Select the letter of the correct answer.

1. Tokyo Company's accounts payable balance on December 31, 2022, totaled P2,000,000 before any
adjustments relating to the following:
 On December 29, 2022, the company wrote and issued checks to suppliers totaling P700,000.
These checks were recorded on January 5, 2023.
 On December 30, 2022, the company purchased and received goods for P300,000 terms 2/10,
n/30. The company records purchase at net amounts. The invoice was recorded and paid on
January 6, 2023.
 Goods shipped on December 21, 2022, from a vendor to the company under terms FOB
Destination were received on January 2, 2023. The invoice cost was P130,000. The purchase was
recorded on January 2, 2023.
 Goods shipped on December 289, 2022, from a vendor to the company under terms FOB
shipping point were received on January 4, 2023. The invoice cost was P240,000. The purchase
was recorded on January 4, 2023, since the invoice was also received on that date.
 The accounts payable general ledger balance of P2,000,000 is net of P160,000 debit balance in a
supplier's account representing advances for goods to be delivered in January 2023.
 On December 30, 2022, a vendor authorized the company to return, for full credit, goods
shipped and billed at P160,000 on December 3, 2022. The company shipped the returned goods
on December 30, 2022. A credit memo for P160,000 was received and recorded by the company
on January 7, 2023.
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What amount should Tokyo Company report as trade accounts payable on December 31, 2022?
A. P1,724,000
B. P1,834,000
C. P1,994.000
D. P2,154,000

2. On January 1, 2021, Chrysanthemum Co. purchased equipment by issuing a four-year, 9% promissory

note with face value of P1,500,000. The note is payable in four equal annual installments of
P375,000 plus accrued interest on the unpaid balance every December 31, starting December 31,
2021. How much is the interest expense for the year 2021?
A. P33,750
B. P67.500
C. P101,250
D. P135,000

3. Refer to Number 2. What amount shall be presented as non-current liability on December 31, %0212
A. P375,000
B. P750,000
C. P1,125,000
D. P1,500,000

4. On January 1, 2022, Bogota Corp issued 3-year, 12% bonds with face amount of P15,000,000.
Interest is payable semi-annually every June 30 and December 31 of each year starting June 30,
2022. The market rate of interest on January 1, 2022, is 18%. Round off present-value factors to four
decimal places. At what amount shall the bonds be initially recognized on January 1, 2022?
A. P12,164,520
B. P12,415,440
C. P12,981,810
D. P15,000,000

5. Refer to Number 4. How much is the interest expense for the year 2023?
A. P1,800,000
B. P2,360,879
C. P2,466,380
D. P2,590,932
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6. On January 1, 2017, Singalong Company issued a 3-year, 16,000, P1,000 convertible bonds at 110.
Interest is to be paid annually at the stated coupon rate of 12% every December 31. Each bond is
convertible, at the holder’s option, into 30, P25 par value ordinary shares at any time up to maturity.
On the date of issuance, prevailing market interest rate for similar debt without the conversion
privilege was 9%. On the same date market price of one ordinary share was P30. The bonds were
converted on January 1, 2019. Use four decimal places for the present value factors. How much is
the equity component of the convertible debt?
A. 384,704
B. 1,660,000
C. 844,670
D. None.

7. Refer to Number 6. How much is the bonds payable carrying value as of December 31, 2017?
A. 17,215,296
B. 16,440,692
C. 16,844,672
D. 16,000,000

8. Refer to Number 6. How much is the amount to be credited to Share premium from the equity
conversion?
A. 5,229,376
B. 384,704
C. 4,825,396
D. None

9. Sato Corporation was threatened with bankruptcy due to the inability to settle note payable
amounting to P10,000,000 plus accrued interest of P800,000. The entity entered into an agreement
with the creditor to exchange shares for the full settlement of the note. The terms of the exchange
were 300,000 ordinary shares with P10 par value and P20 market value and 25,000 preference
shares with P20 par and P120 market value. The fair value of the liability was P9,600,000. What
amount should be recognized as gain on extinguishment of debt?
A. None.
B. P1,800,000
C. P5,500,000
D. P7,300,000

10. During 2022, Sanjo Corp. is experiencing extreme financial distress due to the COVID-19 pandemic.
On December 31, 2022, the company defaulted in paying the 2022 interest on a long-term note of
P12,000,000. The interest rate is 12% payable every December 31. The accrued interest payable on
December 31, 2022, is P1,440,000.
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In negotiation with the creditor, the following has been agreed upon:

 The accrued interest is forgiven

 The principal is reduced by P1,000,000
 The new interest rate is 8% payable every December 31
 The new maturity date is December 31, 2025

Round off present value factors to two decimal places.

Is the modification substantial or not?

A. It is considered non-substantial
B. It is considered substantial.
C. There is no modification of terms.
D. Cannot be determined without additional information.

11. Refer to Number 10. How much is the gain or loss on debt extinguishment to be recognized in the
2022 profit or loss?
A. P558,800
B. P1,440,000
C. P2,998,000
D. P3,518,000

12. On March 1, 2019, a suit was filed against Rodeo Company for patent infringement. Rodeo’s legal
counsel believed an unfavorable outcome is probable and estimated that Rodeo will have to pay
between P1,000,000 and P1,800,000 in damages.

However, Rodeo’s legal counsel is of the opinion that P1,200,000 is a better estimate than any other
amount in the range. The situation was unchanged when the December 31, 2019, financial
statements was released on February 15, 2020. What amount should be accrued as a liability on
December 31, 2019, in connection with the above?

A. P1,200,000
B. P1,000,000
C. P900,000
D. None

13. On January 2, 2020, Javier Company launched a promotional campaign effort to increase the
salability of their product. Each P200 package of oatmeal sold by Javier Company included a coupon
redeemable for a reward. Each premium costs P25, and a customer must surrender 10 coupons to
acquire one. Javier predicted that only 70% of the coupons sent would be redeemed. The following
transactions occurred during the six-month period ending July 31, 2020:
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Packages of oatmeal sold 120,000

Premiums purchased 30,000 units
Coupons redeemed 54,000

How much should be reported as premium expense and estimated liability for coupons on the fiscal
year ended July 31, 2020, respectively?
A. P75,000 and P75,000
B. P135,000 and P135,000
C. P135,000 and P210,000
D. P210,000 and P75,000

14. Bridgestone Company operates a car dealership, which it utilizes to service vehicles that are still
under warranty. During the fiscal year, the company sold 500 vehicles.

According to the entity's warranty claim experience, 60% of all automobiles sold in a year have zero
fault, 25% of all cars sold in a year have normal defects, and 15% of all cars sold in a year have major
defects.

A “normal fault” in an automobile costs P10,000 to repair. A “serious fault” in an automobile costs
P30,000 to repair.

What amount should be reported as warranty liability at year-end?

A. P3,500,000
B. P1,750,000
C. P1,400,000
D. P4,000,000

15. Sitti Company received P792,000 in November and December 2020 for 1,000 3-year subscriptions at
P264 per issue per year, beginning with the January 2021 issue. For tax purposes, Sitti chose to put
the entire P792,000 in its 2020 income statement. What amount should Sitti report in its 2020
statement of financial position as unearned subscription revenue?
A. P792,000
B. P264,000
C. P44,000
D. None
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16. The bonus arrangement of FPJ Company provides that the general manager shall receive an annual
bonus of 10% of the net income after bonus and tax. The income tax rate is 30%. The general
manager received P280,000 for the current year as a bonus. What is the income of FPJ Company
before bonus and tax?
A. P4,280,000
B. P4,000,000
C. P2,800,000
D. P3,720,000

17. Your prepared the reconciliation schedule between the accounts payable general ledger and
subsidiary ledger balances. The reconciliation is reported below:

Spicks and Specks Company

Reconciliation of the Accounts Payable Subsidiary & General Ledger Balances
December 31, 2019

Balance per subsidiary ledger P 875,250

Add(deduct) reconciling items:
Valid purchases 150,000
Valid payment 120,000
Valid purchase allowances 70,000
Balance per general ledger P 1,215,250

You verified that the purchases, payment and purchase allowance are valid 2019 transactions. The
goods worth P150,000 are still in transit, thus did not form part of the client's ending inventory per
their financial statements. The goods in transit shall be treated as:
A. Addition to ending inventory as of December 31, 2019
B. Deduction from ending inventory as of December 31, 2019
C. Adjusted already and therefore will not require addition to or deduction from ending inventory
D. Cannot be determined without additional information

18. Refer to Number 17. The adjusted accounts payable balance is:
A. P 875,250
B. P1,025,250
C. P1,175,250
D. P1,215,250
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19. The shareholders’ equity section of RM Company revealed the following information on December
31, 2022:
Preference shares, P100 par P2,200,000
Share premium - preference 805,000
Ordinary shares, P15 par 5,500,000
Share premium - ordinary 2,750,000
Subscribed ordinary shares 40,000
Retained earnings 1,900,000
Subscription receivable — ordinary 400,000

How much is the legal capital?

A. P 7,740,000
B. P 7,750,000
C. P 7,600,000
D. P11,000,000

20. 20. At the beginning of the year 2018, Baby Company had 100,000 ordinary shares authorized and
40,000 shares issued and outstanding. The company had the following equity transactions during
2018:

January 31 Declared and issued 20% share divided

May 1 Purchased 5,000 of own shares issued
September 30 Reissued 2,000 treasury shares
November 30 Declared 3-for-1 share split

How many shares are issued as of year-end?

A. 134,000
B. 135,000
C. 144,000
D. 145,000

21. On December 1, 2019, Mars Company declared a property dividend of equipment, payable on
February 28, 2020. The carrying amount of the equipment on December 1, 2019, is P800,000.
Estimated cost to distribute and fair value less cost to distribute on different dates are as follows:

Fair value Estimated cost to Fair value less cost

distribute to distribute
December 1, 2019 P750,000 P50,000 P700,000
December 31, 2019 730,000 50,000 680,000
February 28, 2020 745,000 55,000 690,000
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What amount of impairment loss is recognized on December 1, 2019?

A. None
B. P50,000
C. P100,000
D. P120,000

22. Refer to number 21. What amount of gain or loss on distribution of property dividend is recognized
on February 28, 2020?
A. P10,000 gain
B. P10,000 loss
C. P65,000 loss
D. P65,000 gain

23. Dharma Company held 20,000 treasury shares of P100 par value at the start of the current year,
which it had purchased the previous year for P120 per share. The corporation reissued 15,000 of
these treasury shares at P150 per share in December. At the end of the year, how much should be
reported as restriction of retained earnings as a result of the treasury share transaction?
A. P 500,000
B. P 600,000
C. P1,800,000
D. P2,400,000

24. On December 31, 2021, Blissful Corporation's shareholders’ equity shows the following account
balances:

10% preference share, 5,000 shares P100 par P500,000

12% preference share, 6,000 shares P100 par 600,000
Ordinary share, 10,000 shares, P40 par 400,000
Share premium 320,000
Retained earnings 480,000

The 10% preference share is cumulative and fully participating, whereas the 12% preference share is
non-cumulative and fully participating. The last dividend payment was made on December 31, 2019.
What is the book value per ordinary share?
A. P44.00
B. P59.68
C. P60.27
D. P102.80
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25. At the beginning of the current year, Blisters Company established a stock option plan for its selected
employees. A total of 45,000 stock options were granted that allows the said employees to purchase
45,000 shares of P30 par ordinary share capital at P52.50 per share. The options are exercisable after
the four-year vesting period.

On the grant date, the fair value of the stock options was P12, based on an option pricing model
used by the company. All the options were exercised at the beginning of the fifth year.

How much is the compensation expense during the second year?

A. P135,000
B. P270,000
C. P405,000
D. P540,000

26. Refer to number 25. Upon exercise, share premium would be credited for:
A. P 540,000
B. P1,350,000
C. P1,552,500
D. P2,362,500

27. JCM Co. reported taxable income of P8,000,000 in its income tax return for the first year of
operations. The entity revealed the following temporary differences between financial income and
taxable income for the year:

Tax depreciation in excess of book depreciation P 800,000

Accrual for product liability claim in excess of actual claim 1,200,000
Reported installment sales income in excess of taxable
installment sales income 2,600,000

Income tax rate is 30%. How much is the deferred tax asset at year-end?
A. P120,000
B. P240,000
C. P330,000
D. P360,000

28. Refer to Number 27. How much is the total tax expense?
A. P2,400,000
B. P2,960,000
C. P3,300,000
E. P3,060,000
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29. Goya Company provided the following information for their defined benefit plan:

Defined benefit obligation, beginning P120,000

Defined benefit obligation, ending 122,000
Benefits paid 50,000
Increase in DBO due to changes in actuarial assumptions 10,000
Discount rate 10%

What would be the current service cost?

A. P30,000
B. P24,000
C. P15,000
D. P12,000

30. Delighted Company memorandum records for the year 2022 in relation to a defined benefit plan
showed the following:

Fair value of plan assets (FVPA), beginning P5,000,000

Defined benefit obligation (DBO), beginning 7,000,000

During the year, the following transactions were noted:

Current service cost P1,200,000
Past service cost 300,000
Actual return on plan assets 800,000
Contributions to the plan 1,000,000
Benefits paid to retirees 500,000
Remeasurement loss on defined benefit obligation 900,000
Discount rate 10%

How much is the defined benefit cost for 2022?

A. P2,300,000
B. P1,700,000
C. P1,600,000
D. P1,100,000

31. Refer to Number 30. What is the fair value of plan assets on December 31, 2022?
A. P6,000,000
B. P6,300,000
C. P6,800,000
D. P7,100,000
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32. Refer to Number 30. How much is the retirement liability at year-end?
A. None
B. P2,000,000
C. P3,300,000
D. P3,800,000

33. Precise Company is engaged in the leasing business. As a lessor, Precise expects a 12% return. At the
end of the lease term, the leased asset will revert to Precise Company.
On January 1, 2022, an equipment was leased to another entity under a direct financing lease.
Details follow:

Cost of equipment to Precise P4,400,000

Residual value — unguaranteed 320,000
Annual rental payable in advance 767,600
Useful life and lease term 8 years
Interest rate implicit in the lease 12%
First lease payment January 1, 2022

Round present value factors to two decimal places.

How much is the interest income for 2022?

A. P257,600
B. P397,488
C. P435,888
D. P528,000

34. On January 1, 2022, Orient Company entered into an eight-year lease for an equipment. Orient
Company appropriately accounted for the lease as finance lease. The recorded cost of right of use
asset at the commencement date of the lease is P2,500,000 which included a P100,000 purchase
option. The expected fair value of the equipment is P200,000 at the end of the 10-year useful life.
The straight-line method of depreciation is used.

Assuming Orient Company is reasonably certain to exercise the purchase option, what amount
should be recognized as depreciation of the right of use asset for 2022?

A. P230,000
B. P275.000
C. P300,000
D. P312,500
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35. Refer to Number 34. Assuming Orient Company is not reasonably certain to exercise the purchase
what amount should be recognized as depreciation of the right of use asset for 2022?
A. P230,000
B. P275,000
C. P300,000
D. P312,500

-end of examination-

Courtesy: Sir Aldous Sarmiento