INTERMEDIATE ACCOUNTING 2

MIDTERM EXAM
TEST QUESTIONS

Instruction: Place your answer on the Google Form provided to you.

PROBLEM 1
On January 1, 2019, Tony Company issued 1,000, P1,000, 10%, 3-year bonds at P951,963. Principal is
due on December 31, 2021 but interests are due annually every year-end. In addition, Tony incurred
bond issue costs of P44,829. The effective interest rate is 12% before adjustment for bond issue costs
and 14% after adjustment for bond issue costs.

Required:
a) What is the initial carrying amount of the bonds payable? 907,134
b) How much is the interest expense for the year ended December 31, 2019? 126,999
c) What is the carrying amount of the bonds payable as of December 31, 2019? 934,133

PROBLEM 2
Mimi Corporation issued 12%, 3-year, P1,000,000 bonds dated January 1, 2019 on April 1, 2019.
Principal is due at maturity but interest is due annually at each year-end. The current market rate is
10%.

Required:
a) What is the initial carrying amount of the bonds payable? 1,045,728
b) How much is the interest expense for the year ended December 31, 2019? 78,448
c) What is the carrying amount of the bonds payable as of December 31, 2019? 1,034,419

PROBLEM 3
On January 1, 2019, Clown Company issued 10%, P3,000,000 bonds. Principal on the bonds matures in
three equal annual instalments. Interest is also due annually at each year-end. The effective interest
rate on the bonds is 12%.

Required:
a) What is the initial carrying amount of the bonds payable? 2,900,390
b) How much is the interest expense for the year ended December 31, 2019? 348,047
c) What is the carrying amount of the bonds payable as of December 31, 2019? 1,948,437

PROBLEM 4
On January 1, 2017, Joker Inc., issued 5-year, 12%, P1,000,000 bonds for P1,075,816. Principal is due at
maturity but interests are due annually every December 31. The effective interest rate is 10%. On July
1, 2019, Joker called in half of the bonds and retired them at 102. The retirement price includes
payment for accrued interest.

Required: Compute for the gain on retirement of bonds. 82,225

PROBLEM 5
On January 1, 2019, Alexa Company issued new bonds with a face amount of P10,000,000 for
P10,800,000. Alexa used the proceeds to retire an existing 10-year, 12%, P8,000,000 bonds issued five
years earlier. The bonds have an unamortized discount of P340,000 on January 1, 2019. Alexa retired
the entire outstanding bonds at a call premium of P400,000. Cost incurred that are directly
attributable to the retirement amounted to P50,000.

Required: Compute for the loss on the retirement of the bonds to be recognized in 2019. 690,000

PROBLEM 6
On January 1, 2018, Crybaby Company issued 3-year, 12%, P1,000,000 bonds for P1,100,000. Each
P1,000 bond has two detachable warrants entitling the holder to purchase one share of Crybaby with
par value of P500 for P520. Without the warrants, the bonds are selling at a yield to maturity rate of
10%.
On September 21, 2019, half of the warrants were exercised.

Required: Compute for the following:

a) Net increase in shareholders’ equity as a result of the issuance of bonds. 50,272
b) Net increase in shareholders’ equity as a result of the exercise of share warrants. 520,000

PROBLEM 7
On January 1, 2019, One Mo Gen Inc. issued its 10%, 3-year, P1,000,000 convertible bonds for the face
amount of P1,000,000. Each P1,000 bonds is convertible into 8 shares with par value of P100 per share.
When the bonds were issued, they were selling at 98 without the conversion option. One Mo Gen
incurred P25,000 transaction costs on the issue of the bonds.
Required: Compute for the increase in shareholders’ equity as a result of the issuance of convertible
bonds. 19,500

PROBLEM 8
On January 1, 2018, Caution Company issued its 10%, 3-year, P1,000,000 convertible bonds at 105.
Each P1,000 bond is convertible into 8 shares with par value per share of P100. Principal is due on
December 31, 2020 but interests are due annually every December 31. When the bonds were issued,
they were selling at a yield to maturity market rate of 12% without the conversion option.

On July 1, 2019, all of the bonds were converted into shares. Conversion costs incurred amounted to
P10,000.

Required: Compute for the following:

a) Net increase in the shareholders’ equity as a result of the conversion. 948,245
b) Net increase in Share Premium as a result of the conversion. 148,245
c) Net increase in Share Premium general account as a result of the conversion. 246,265
PROBLEM 9
On December 31, 2019, the bookkeeper of Grand Company provided the following information:

Accounts payable, including deposits and advances from customers

of P500,000 P2,500,000
Note payable, including note payable to bank due on December 31,
2022 for P1,000,000 3,000,000
Share dividends payable 800,000
Customers’ credit balances 400,000
Serial bonds, payable in semi-annual instalments of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment-possible obligation 600,000
Unearned rent income 100,000
Deferred revenue 20,000
Held for trading financial liabilities 50,000
Advances from affiliates payable in 15 months after year-end 23,000
Dividends payable 12,000
Deferred tax liability-to be reversed in 2020 27,000

Required: In the December 31, 2019 statement of financial position, how much current liabilities
should be reported? 7,362,000

PROBLEM 10
Tangy Candy Company offers a coffee mug as a premium for every ten candy bar wrappers presented
by customers together with P30.00. The purchase price of each mug to the company is P40.00; in
addition it costs P10.00 to mail each mug. The results of the premium plan for the years 2018 and
2019 are as follows (assume all purchases and sales are for cash):
2018 2019
Coffee mugs purchased 720,000 800,000
Candy bars sold 6,000,000 6,125,000
Wrappers redeemed 2,800,000 4,200,000
2018 wrappers expected to be redeemed in 2019 2,000,000
2019 wrappers expected to be redeemed in 2020 2,700,000

Required:
a) What is the premium expense for 2018? 9,600,000
b) What is the estimated premium liability on December 31, 2018? 4,000,000
c) What is the premium expense for 2019? 9,800,000
d) What is the estimated liability on December 31, 2019? 5,400,000
 Chapter 27
Employee Benefits Part 1

QUIZ 1:

1. It refers to a plan where plan assets, if any, are retained and managed by the employer.
a. Funded plan c. Unfunded plan
b. Non-contributory plan d. Delicate plan

2. These are pool of assets contributed by various unrelated employers to be used to pay retirement
benefits to participants without regard to the identity of the contributing employers.
a. Multi-employer plans c. Pooling of assets plan
b. State plans d. Secret plan

3. Multi-employer plans are treated as

a. Defined contribution plan c. Hybrid plan
b. Defined benefit plan d. a or b

4. These are established by legislation and are operated by a government agency which is not subject
to control or influence by the reporting entity.
a. State plans b. SSS c. GSIS d. Puro plan

5. State plans are

a. accounted for as defined contribution plan
b. accounted for as defined benefit plan
c. accounted for in the same way as multi-employer plans
d. accounted for only by the Commission on Audit

6. The accounting for defined contribution plan

a. is straightforward – actuarial computations are not required.
b. is complex – actuarial computations are required
c. is simple – not accounted for
d. is done only by CPAs

7. Under a defined contribution plan, the retirement benefits expense is

a. equal to an actuarially determined amount
b. equal to the agreed periodic contribution to the fund
c. equal to the contribution made during the period
d. zero, if no employee retired during the period
8. Employee benefits are all forms of consideration given by an entity in exchange for service rendered
by employees. Which of the following employee benefits is not within the scope of PAS 19?
a. Short-term d. Termination
b. Post-employment e. Share-based payments
c. Other long-term

9. Which of the following employee benefits is not within the scope of PAS 19?
a. Semi-monthly salaries of employees
b. Employer’s share in SSS contributions
c. One sack rice allowance
d. Bonus in the form the entity’s shares

10. Accumulating compensated absences are those that

a. can be carried over to the next period if not fully used during the year of entitlement.
b. expire if not fully used during the year of entitlement.
c. can be carried over to the next period if not fully used during the year of entitlement and are
paid in cash when the employee leaves the company
d. are recognized only when actually taken by employees

"…Have I not commanded you? Be strong and courageous. Do not be frightened,

and do not be dismayed, for the Lord your God is with you wherever you go."
(Joshua 1:9)

ANSWERS TO QUIZ 1:

1. C 6. A
2. A 7. B
3. D 8. E
4. A 9. D
5. C 10. A

QUIZ 2:

1. The last payday for a firm was December 27 on which it paid ₱40,000 to its employees, the amount
earned by employees through the pay period ending December 16. For the period December 17
through December 31, the employees earned ₱12,000.The adjusting entry required at December 31
would include:
 a. cr. crash ₱12,000
b. dr. wages payable ₱12,000
c. dr. wages expense ₱12,000
d. dr. wages expense ₱40,000

2. Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused
vacation time can be accumulated and carried forward to succeeding years and will be paid at the
salaries in effect when vacations are taken or when employment is terminated. There was no
employee turnover in 20X6. Additional information relating to the year ended December 31, 20X6, is
as follows:

Liability for accumulated vacations at 12/31/X5 ₱35,000

Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6

(the authorized period for vacations) 20,000

Vacations earned for work in 20X6 (adjusted to current rates) 30,000

Gavin granted a 10% salary increase to all employees on October 1, 20X6, its annual salary increase date.
For the year ended December 31, 20X6, Gavin should report vacation pay expense of

a. 45,000 b. 33,500 c. 31,500 d. 30,000

3. ANOMALOUS IRREGULAR Co. grants its employees twelve days paid vacation leave each year. Per
ANOMALOUS’s policy, employees are required to take vacation leave each year, but not necessarily
for their entire vacation leave entitlement. Vacation leaves not taken during a year can be carried
over indefinitely.

ADHERE has 500 employees with an average salary of ₱4,000 per day. The average annual pay increase
is 5%. During 20x1, total vacation leaves taken by employees were 5,400 days. Based on past experience,
90% of unused vacation leave for a year are taken in the immediately following year.

If unused vacation leaves vest, how much should ANOMALOUS accrue as liability for unused vacation
leave on December 31, 20x1?
a. 2,520,000 b. 25,200,000 c. 2,268,000 d. 0

Use the following information for the next four questions:

ADHERE TO STICK Co. grants its managerial employees bonus in the form of profit sharing. Information
on operations in 20x1 is shown below:

Profit before tax ₱4,000,000

 Bonus rate or percentage 10%
Income tax rate 30%

4. How much is the bonus “before bonus and before tax?”

a. 363,636 b. 280,000 c. 400,000 d. 288,660

5. How much is the bonus “after bonus and before tax?”

a. 400,000 b. 363,636 c. 261,684 d. 245,798

6. How much is the bonus “before bonus and after tax?”

a. 363,636 b. 261,684 c. 245,798 d. 288,660

7. How much is the bonus “after bonus and after tax?”

a. 363,636 b. 261,682 c. 245,798 d. 288,660

8. ARTIFACT MAN MADE OBJECT Co. provides an incentive compensation plan under which its
president receives a bonus equal to 10% of ARTIFACT’s profit before tax but after deduction of the
bonus. ARTIFACT’s profit after tax and after bonus for the year is ₱2,545,456. Income tax rate is 30%.
How much is the bonus?
a. 245,798 b. 261,684 c. 363,636 d. 288,660

Use the following information for the next two questions:

AMNESTY PARDON Co. has a post-employment benefits plan that is considered as defined contribution
plan. According to the plan, AMNESTY agrees to contribute ₱800,000 annually to a retirement fund for
the benefit of its employees.

On December 31, 20x1, because of poor results of operations and insufficient working capital, AMNESTY
was only able to contribute ₱320,000 to the fund. On December 31, 20x2, because of a profitable year,
AMNESTY decided to contribute ₱1,800,000 to the retirement fund. On January 12, 20x3, an employee
retired and was eligible to a ₱60,000 retirement benefits based on the operating efficiency and
investment earnings of the fund.

9. How much is the retirement benefits expense recognized in 20x2?

a. 800,000 b. 320,000 c. 1,800,000 d. 60,000

10. How much is the retirement benefits expense recognized in 20x3?

a. 800,000 b. 320,000 c. 1,800,000 d. 60,000

“A wise son heeds his father’s instruction, but a mocker does not respond to
rebukes.” - (Proverbs 13:1)
- END -
SOLUTIONS TO QUIZ 2:

1. C

2. C
Solution:

Liability for accumulated vacations at 12/31/X5 35,000

Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6 (20,000)

Liability to be carried over to the next period 15,000

Multiply by: Increase in salary level in Oct. 20x6 10%
Additional liability due to the increase in salary level 1,500
Vacations earned in 20X6 (adjusted to current rates) 30,000
Vacation pay expense in 20x6 31,500

3. A
Solution:

Total vacation leaves entitlement of employees in 20x1

6,000
(500 employees x 12 days each)

Vacation leaves taken in 20x1 (5,400)

Unused vacation leave carried over indefinitely 600
Multiply by: Expected pay rate in 20x2 (₱4,000 x 105%*) 4,200
Liability for unused vacation leaves 2,520,000

*100% + Average annual pay increase is 5%.

4. C
Solution:

B = P x Br
B = 4,000,000 x 10%

B = 400,000

5. B
Solution:
 P
B = P -
1 + Br
4,000,000
B = 4,000,000 -
1 + 10%
3,636,36
B = 4,000,000 -
4

B = 363,636

6. D
Solution:

1 - Tr
B = P x
1/Br - Tr
1 - 30%
B = 4,000,000 x
1/10% - 30%

70%
B = 4,000,000 x
10 - 30%

70%
B = 4,000,000 x
9.7
B = 288,660

7. B
Solution:

1 – Tr
B = P X
1/Br - Tr + 1
70%
B = 4,000,000 x
10 - 30% + 1

70%
B = 4,000,000 x
10.7
B = 261,682
8. C
Solution:
Squeeze upwards

Profit before bonus and before tax 4,000,000

Bonus before tax but after bonus

(3,636,366 x 10%) (363,636)

Profit before tax but after bonus

(2,545,456 ÷ 70%) 3,636,366
Income tax (2,545,456 ÷ 70%) x 30% (1,090,909)

Profit after tax and after bonus 2,545,456 Start

9. A

10. A

Chapter 28
Employee Benefits Part 2

QUIZ 1:

1. Which of the following components should be included in the calculation of net defined benefit cost
recognized for a period by an employer sponsoring a defined benefit pension plan?

Actual Return Amortization of

on Plan Assets, Unrecognized Prior Interest
If Any Service cost, If Any Cost

a. No No Yes
b. Yes No Yes
c. Yes Yes No
d. Yes Yes Yes

2. Which of the following concepts for postretirement benefit plans is comparable to the projected unit
credit method of pension plans?
a. Accrued benefit method pro-rated on service
 b. Expected Postretirement Benefit Obligation (EPBO)
c. Actual return on plan assets
d. Expected return on plan assets

3. Which of the following statements is incorrect?

a. Minimum (corridor) amortization of net unrecognized gain or loss is allowed for postretirement
benefit plans.
b. Gains and losses on settlement of defined benefit retirement plans are recognized immediately.
c. Actuarial gains and losses are recognized immediately.
d. Past service costs are recognized immediately.

4. The interest cost component of the net defined benefit cost is determined using
a. the settlement rate of interest.
b. the rate of return on high quality corporate bonds
c. both a and b.
d. neither a or b.

5. Financial reporting standards for pension currently in effect

a. allow both the accrued benefit and projected benefit methods.
b. allow only the accrued benefit method/ projected unit credit method.
c. allow only the projected benefit method.
d. do not allow either the accrued benefit or projected benefit methods.

6. Which of the following is not correct?

a. PAS 19 does not include any provisions for the recognition of an additional minimum liability.
b. PAS 19 does not allow for the recognition of a net pension asset equal to the computed surplus
in some circumstances.
c. PAS 19 requires the 10% corridor amount in calculating the amortization of deferred gains and
losses.
d. PAS 19 requires settlement gains and losses to be recognized immediately as part of
comprehensive income.

7. These are changes in the present value of the defined benefit obligation resulting from experience
adjustments and the effects of changes in actuarial assumptions.
a. Past service cost c. Settlement gains and losses
b. Actuarial gains and losses d. Interest cost

8. All of the following are demographic assumptions except:

a. future medical costs
b. mortality, both during and after employment
c. rates of employee turnover, disability and early retirement
d. claim rates under medical plans

9. According to PAS 19, which of the following is not a financial assumption?

a. the discount rate
b. future salary and benefit levels
c. the expected rate of return on plan assets
 d. the proportion of plan members with dependents who will be eligible for benefits

10. According to PAS 19, the rate used to discount post-employment benefit obligations shall be
determined by reference to market yields at the end of the reporting period on
a. risk-free rate c. current bank rate
b. high quality corporate bonds d. effective interest rate

ANSWERS TO QUIZ 1:

1. A 6. C
2. A 7. B
3. A 8. A

4. B 9. D
5. B 10. B

QUIZ 2:

1. The following information relates to the defined benefit pension plan of the McDonald Company for
the year ending December 31, 2002:

PV of defined benefit obligation, January 1 ₱4,600,00

0

PV of defined obligation, December 31 4,729,000

Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Interest income on plan assets 450,000
Actuarial loss 32,500
Employer contributions 425,000
Benefits paid to retirees 390,000

Discount rate 10%

The net amount of remeasurement of the net defined benefit liability (asset) included in the defined
benefit cost for 2002 would be
 a. 77,500. b. 47,500. c. 32,500. d. 12,500.

2. Flash Inc. has a defined benefit plan for its employees. The following information relates to this plan:

Present value of defined benefit obligation, January 1, 2002 10,000,000

Fair value of plan assets, January 1, 2002 10,400,000
Service cost - 2002 800,000
Actual return on plan assets - 2002 900,000

Discount rate based on high quality corporate bonds 10%

Expected rate of return on assets 8%

An actuarial loss of ₱20,000 was incurred during 2002. There was no unrecognized prior service cost or
unrecognized gains or losses. Flash's defined benefit cost for the year was
a. 880,000. b. 920,000. c. 640,000. d. 988,000.

3. Information on EQUANIMITY COMPOSURE Co.’s defined benefit plan is shown below:

 PV of defined benefit obligation, Jan. 1 ₱480,000
 PV of defined benefit obligation, Dec. 31 488,000
 Interest cost 10%

 Benefits paid to retirees 200,000

 Increase in present value of defined benefit obligation during the year due to
changes in actuarial assumptions 40,000

How much is the current service cost?

a. 120,000 b. 200,000 c. 160,000 d. 220,000

Use the following information for the next two questions:

PELLUCID CLEAR Co. agrees to provide lump-sum retirement benefits to employees equal to 6% of final
salary for each year of service. Information on an employee is shown below:

 Average annual salary level on January 1, 20x1 ₱12,000,000

 Average annual salary increase starting January 1, 20x2 and every year
thereafter. 3%
 Average service lives before entitlement to retirement benefits (January 1,
20x1 to December 31, 20x5) 5 years
 Discount rate per year 10%

4. How much is the current service cost in 20x2?

a. 553,492 b. 669,724 c. 618,724 d. 608,840

5. How much is the present value of the defined benefit obligation on December 31, 20x2?
a. 1,298,437 b. 1,217,680 c. 1,085,710 d. 1,908,117
“And we know that in all things God works for the good of those who love him, who
have been called according to his purpose.” – (Romans 8:28)

- END –

SOLUTIONS TO QUIZ 2:
1. D
Solution:

Remeasurements of the net defined benefit liability (asset):

(a) Actuarial (gain) loss 32,500

(b) Difference between interest income on plan assets

and return on plan assets (450,000 - 495,000) (45,000)

(c) Difference between the interest on the effect of the asset

ceiling and the change in the effect of the asset ceiling -

Defined benefit cost recognized in OCI 12,500

Fair value of plan assets

Jan. 1 5,035,000

Return on plan assets 495,000 390,000 Benefits paid

Contributions to the fund 425,000

5,565,000 Dec. 31

2. C
Solution:

Service cost 800,000

Interest cost on the defined benefit obligation (10M x 10%) 1,000,000

Interest income on plan assets (10.4M x 10%) (1,040,000)

Actuarial (gains) and losses 20,000

Difference between interest income on plan assets and return

on plan assets (140,000)

Defined benefit cost 640,000

3. A
Solution:
PV of defined benefit obligation

480,000 Jan. 1

Benefits paid 200,000 120,000 Current service cost (squeeze)

48,000 Interest cost (480,000 x 10%)

40,000 Actuarial loss - increase in PV of PBO

Dec. 31 488,000

4. D
Solution:

Final salary level (12M x 103% x 103% x 103% x 103%) 13,506,106

Multiply by: Percentage of benefit per year 6%
Benefit per year of service 810,366
Multiply by: No. of service years 5

Lump sum retirement benefit 4,051,832

(13,506,106 x 6%) = 810,366 benefit entitlement per year;

(810,366 x PV of 1 @10%, n=3) = 608,840 current service cost in 20x2 *(n=3 is from December 31, 20x2
to December 31, 20x5)

5. B
Solution:
(13,506,106 x 6%) = 810,366 benefit entitlement per year;
(810,366 x 2 years passed x PV of 1 @10%, n=3) = 1,217,680
 Chapter 29
Leases Part 1

QUIZ:

1. Entity A (customer) enters into a contract with Entity B (supplier) for the use of a data processing
equipment. According to the contract, Entity A shall operate the equipment only in accordance with
the standard operating procedures stated in the accompanying user’s manual. In assessing the
existence of a lease, does Entity A have the right to direct the use of the asset?
a. No, because the asset’s use is restricted.
b. Yes, because Entity A has the right to direct how and for what purpose the asset is used.
c. Yes, because the asset’s use is predetermined and Entity B is precluded from changing that
predetermined use.
d. Maybe yes, maybe no, but exactly I don’t know.

2. Which of the following is not one of the criteria when determining whether a contract is or contains
a lease?
a. Identified asset
b. Identified liability
c. Right to obtain substantially all of the economic benefits from use of an identified asset
throughout the period of use
d. Right to direct the use of the identified asset throughout the period of use

3. Which of the following statements is correct regarding the accounting for leases?
a. The lessor depreciates the leased asset under a finance lease.
b. The lessee depreciates the leased asset under a “short-term” or a “low-valued asset” lease.
c. When discounting lease payments the lessor and the lessee use the interest rate implicit in the
lease.
d. An entity can never be both a lessor and a lessee of a same leased asset.

4. According to PFRS 16, lease liabilities are presented in the lessee’s statement of financial position
a. separately from the other liabilities of the lessee.
b. together with other liabilities, with disclosure of the line items that include the lease liabilities.
c. a or b
d. not presented in the lessee’s financial statements but only in the lessor’s financial statements

5. According to PFRS 16, right-of-use assets are presented in the lessee’s statement of financial position
a. separately from the other assets of the lessee.
b. together with other assets as if they were owned, with disclosure of the line items that include
the right-of-use assets.
c. a or b
 d. not presented in the lessee’s financial statements but only in the lessor’s financial statements

6. On January 2, 20x9, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori
recognized a lease liability of ₱240,000 at the commencement date. This amount includes the
₱10,000 exercise price of a purchase option. At the end of the lease, Nori expects to exercise the
purchase option. Nori estimates that the equipment's fair value will be ₱20,000 at the end of its 8-
year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended
December 31, 20x9, what amount should Nori recognize as depreciation expense on the leased
asset?
a. 48,000 b. 46,000 c. 30,000 d. 27,500

7. In the long-term liabilities section of its balance sheet at December 31, 20x9, Mene Co. reported a
lease liability of ₱75,000, net of current portion of ₱1,364. Payments of ₱9,000 were made on both
January 2, 2x10, and January 2, 2x11. Mene's incremental borrowing rate on the date of the lease
was 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31,
2x10, balance sheet, what amount should Mene report as lease liability, net of current portion?
a. 66,000 b. 73,500 c. 73,636 d. 74,250

8. Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay ₱50,000 at the start of
the lease term on December 31, 20x8, and ₱50,000 annually on each December 31 for the next
eight years. The present value on December 31, 20x8, of the nine lease payments over the lease
term, using the rate implicit in the lease which Oak knows to be 10%, was ₱316,500. The December
31, 20x8, present value of the lease payments using Oak's incremental borrowing rate of 12% was
₱298,500. Oak made a timely second lease payment. What amount should Oak report as lease
liability in its December 31, 20x9, balance sheet?
a. 350,000 b. 243,150 c. 228,320 d. 0

9. On January 2, 20x5, Marx Co. as lessee signed a five-year noncancelable equipment lease with
annual payments of ₱200,000 beginning December 31, 20x5. The five lease payments have a
present value of ₱758,000 at January 2, 20x5, based on interest of 10%. What amount should Marx
report as interest expense for the year ended December 31, 20x5?
a. 0 b. 48,000 c. 55,800 d. 75,800

10. On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. The rent in 20x1 is
₱10,000 and shall increase by 10% annually starting on January 1, 20x2. Rentals are payable at the
end of each year. ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC Co. opts
to use the practical expedient allowed under PFRS 16 for leases of low value assets. How much is the
lease expense in 20x1?
a. 10,000 b. 11,000 c. 11,603 d. 12,853
"I have set the Lord continually before me. Because He is at my right hand, I will not
be shaken." – (Psalm 16:8)

SOLUTIONS:

1. C
2. B
3. C - choice (d) is incorrect. Under a sublease, the lessee is also the lessor of the same leased asset.
4. C
5. C

6. D
Solution:

Cost 240,000

Residual value (fair value) (20,000)

Depreciable amount 220,000

Useful life 8

Depreciation expense 27,500

7. B
Solution:

First step: Place the given information on the amortization table.

Date Payments Int. expense Amortization Present value

12/31/x9

1/1/x10 9,000 75,000

Second step: “Squeeze” for the requirement.

Date Payments Int. expense Amortization Present value

12/31/x9 This is the lease obligation as of Dec.

1/1/x10 9,000
31, 20x9, net of current portion. 75,000

1/1/x11 9,000 73,500

a
(75,000 x 10%)
8. B
Solution:

Date Payments Int. expense Amortization Present value

12/31/x8 316,500

12/31/x8 50,000 - 50,000 266,500

12/31/x9 50,000 26,650 23,350 243,150

9. D (758,000 x 10%) = 75,800

10. D Solution:

20x1 10,000
20x2 (10K x 110%) 11,000
20x3 (11K x 110%) 12,100

20x4 (12.1K x 110%) 13,310

Lease bonus 5,000

Total 51,410
Divide by: 4

Annual lease expense 12,853

Chapter 30
Leases Part 2

QUIZ 1:

1. Lessor Co. entered into two contract leases. Lease #1 transfers substantially all the risks and rewards
incidental to ownership of the leased asset. Lease #2 does not transfer substantially all the risks and
rewards incidental to ownership of the leased asset. How should Lessor Co. classify the leases?
(Lease #1); (Lease #2)
a. Finance, Operating c. Finance, Finance
b. Operating, Finance d. Operating, Operating

2. A lessor’s gross investment in a finance lease is computed as

a. lease payments plus unguaranteed residual value
b. present value of (a)
 c. difference between (a) and (b)
d. sum of (a) and (b)

3. A lessor’s unearned interest income in a finance lease is computed as

a. lease payments plus unguaranteed residual value
b. present value of (a)
c. difference between (a) and (b)
d. sum of (a) and (b)

4. Which of the following does not correctly relate to the accounting for leases?
a. The underlying asset in a lease contract is recognized by the lessee in its financial statements.
b. The lessor recognizes a finance lease receivable equal to the net investment in a finance lease.
c. A manufacturer or dealer lessor recognizes gross profit or loss on commencement of a finance
lease in accordance with its policy for outright sales.
d. The lessor recognizes lease payments receivable from an operating lease as income in the period
earned.
e. The lessor continues to recognize an asset subject to a finance lease in its financial statements.

5. Regarding the accounting for the residual value of a leased asset, which of the following statements
is incorrect?
a. A lessee accounts for a residual value only if it is guaranteed.
b. A lessor accounts for a residual value only if it is guaranteed.
c. A lessor accounts for a residual value whether guaranteed or not.
d. Both lessee and lessor will account for a residual value only if the leased asset reverts back to
the lessor.

6. Under operating leases, lessors

a. recognize rent income using a straight line basis, unless another method is more appropriate.
b. recognize interest income using the effective interest method.
c. recognize different amounts of rent income each year depending on the contractual payments
d. any of these

7. Security deposits that are refundable

a. are treated as unearned income by lessors under an operating lease.
b. are not discounted because they are normally of a short-term nature
c. are treated as receivable by lessees and as payable by lessors.
d. are discounted only by lessees but not by lessors

8. If the lessor recognizes rent income (lease income), then the lease must have been classified as
a. finance lease c. a or b
b. operating lease d. none of these

9. Which of the following statements is false regarding the accounting for leases?
 a. The lessor may not use the straight line basis for recognizing lease income under an operating
lease if another systematic basis is more representative of the pattern in which benefit from the
use of the underlying asset is diminished.
b. The amount of lease income recognized each year under an operating lease is typically constant
even though the contractual payments increase every year by a certain amount specified in the
contract.
c. It is possible that the lessor does not depreciate the leased asset even if the lease is classified as
an operating lease.
d. Under an operating lease, the lessor capitalizes initial direct costs. These costs will increase the
lease income each year.

10. Which of the following is correct regarding the accounting for operating leases?
a. A lessor under an operating lease may classify the lease as either direct operating lease or sales
type operating lease.
b. A lessor includes a rent collected in advance as part of the cost of the leased asset.
c. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as rent income is recognized.
d. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the
leased asset to be recognized in profit or loss on the same basis as depreciation expense is
recognized.

"Come to me, all you who are weary and burdened, and I will give you rest." - (Matthew
11:28-30)

- END -

QUIZ 2:

Use the following information for the next five questions:

On January 1, 20x1, IMBROGLIO Co. leased equipment to COMPLICATION, Inc. Information on the lease
is shown below:

Cost of equipment ₱
1,200,000

Useful life of equipment 5 years

Lease term 4 years
Annual rent payable at the start of each year 400,000
Interest rate implicit in the lease 10%
Initial direct costs amounted to ₱80,000. The lease qualifies for sales type lease accounting.

1. How much is the gross investment in the lease on January 1, 20x1?

a. 2,000,000 b. 1,600,000 d. 1,200,000 d. 1,800,000

2. How much is the net investment in the lease on January 1, 20x1?

a. 1,200,000 b. 1,280,000 c. 1,394,740 d. 1,474,741

3. How much is the total interest income (finance income) to be recognized by IMBROGLIO over the
lease term?
a. 205,260 b. 235,260 c. 125,259 d. 525,259

4. How much is the gross profit from the sale?

a. 114,740 b. 194,740 c. 125,259 d. 45,259

5. How much is the net profit from the sale?

a. 125,259 b. 45,259 c. 194,740 d. 114,740

Use the following information for the next three questions:

On January 1, 20x1, YATAGHAN Financing Co. leased equipment to LONG KNIFE, Inc. Information on the
lease is shown below:

Cost of equipment ₱ 1,322,588

Useful life of equipment 5 years

Lease term 4 years
Annual rent payable at the end of each year 400,000
Interest rate implicit in the lease 10%

Residual value 80,000

The equipment will revert back to YATAGHAN at the end of the lease term. The lease is classified as
direct financing lease.

6. Assuming the residual value is guaranteed, how much is the gross investment in the lease on January
1, 20x1?
a. 1,600,000 b. 1,680,000 c. 1,520,000 d. 2,080,000
7. Assuming the residual value is unguaranteed, how much is the net investment in the lease?
a. 1,322,588 b. 1,267,948 c. 1,213,308 d. 1,345,981

8. How much is the total interest income to be recognized by YATAGHAN over the lease term if the
residual value is unguaranteed and guaranteed, respectively?
Unguaranteed Guaranteed

a. 357,412 341,270
b. 341,270 357,412
c. 341,753 341,985
d. 357,412 357,412

9. Wall Co. leased office premises to Fox, Inc. for a five-year term beginning January 2, 20x9. Under the
terms of the operating lease, rent for the first year is ₱8,000 and rent for years 2 through 5 is
₱12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six
months of the lease rent-free. In its December 31, 20x9, income statement, what amount should
Wall report as rental income?
a. 12,000 b. 11,600 c. 10,800 d. 8,000

10. As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine months
of free rent under a five-year operating lease. The lease is effective on July 1, 20x5, and provides for
monthly rental of ₱1,000 to begin April 1, 20x6. In Art's income statement for the year ended June
30, 20x6, rent income should be reported as
a. 10,200 b. 9,000 c. 3,000 d. 2,550

“Rejoice always, pray continually, give thanks in all circumstances; for this is God’s
will for you in Christ Jesus.” – (1 Thessalonians 5:16-18)

- END -

SOLUTIONS TO QUIZ 2:
1. B (400,000 x 4 years) = 1,600,000

2. C (400,000 x PV annuity due @10%, n=4) = 1,394,741

3. A (1,600,000 – 1,394,741) = 205,259

4. B (1,394,741 – 1,200,000 = 194,741

5. D (194,741 – 80,000 initial direct costs) = 114,741

6. B (400,000 x 4) + 80,000 = 1,680,000

7. A (400,000 x PV ordinary annuity @10%, n=4) + (80,000 X PV of 1 @10%, n=4) = (1,267,946 + 54,641)
= 1,322,587

8. D (1,680,000 - 1,322,587) = 357,413

9. C

Solution:

Rent for the first year (8,000 x 6/12) 4,000

Rent for the subsequent years (12,500 x 4) 50,000

Total collection on rentals 54,000

Divide by: 5

Annual rent income 10,800

10. A
Solution:

Lease term in years 5

Multiply by: No. of months in a year 12

Lease term in months 60

Nine months free rent (9)

Total 51
Multiply by: Monthly rental 1,000

Total rental payments on the lease 51,000

Divide by: Lease term in years 5

Annual rent income (July 1 to June 30) 10,200

 Chapter 31
Income Taxes

QUIZ 1:

1. All of the following can result in a temporary difference between pretax financial income and taxable
income except for
a. payment of premiums for life insurance.
b. depreciation expense.
c. provision for pending lawsuits.
d. product warranty costs.
(Adapted)

2. Which of the following items results in a temporary difference deductible amount for a given year?
a. Premiums on officer's life insurance (company is beneficiary)
b. Recognition of unrealized gains on financial liabilities that are measured at fair value through
profit or loss.
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting purposes
(Adapted)

3. Which of the following temporary differences may result to a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on held for trading securities
d. Depreciation
(Adapted)

4. When enacted tax rates change, the asset and liability method of interperiod tax allocation
recognizes the rate change as
a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year's net income.
d. a separate charge or benefit to income tax expense.
(Adapted)

5. Current financial reporting standards currently are moving toward the

a. no-deferral approach.
b. partial recognition approach.
c. comprehensive recognition approach.
d. discounted comprehensive recognition approach.
(Adapted)

6. If all temporary differences entering into the determination of pretax accounting income are
considered in the computation of deferred taxes and income tax expense, then
a. the no-deferral approach is being applied.
b. the comprehensive recognition approach is being applied.
c. the partial recognition approach is being applied.
d. the net-of-tax method is being applied.
(Adapted)

7. If there is a change in the tax rate applicable in future periods, which of the following statements is
incorrect?
a. Current tax expense may be equal to taxable profit multiplied by the enacted tax rate(s)
applicable to the period(s) where the profit was earned.
b. Deferred tax asset or liability is computed based on the substantially enacted tax rate that is
applicable in the period where the deferred tax is expected to reverse.
c. Income tax expense is equal to accounting profit multiplied by the substantially enacted future
tax rate.
d. Deferred tax expense (benefit) is equal to the net change in deferred tax asset and deferred tax
liability during the year.

8. Which of the following situations would require interperiod income tax allocation procedures?
a. A temporary difference exists because the tax basis of capital equipment is less than its reported
amount in the financial statements.
b. Proceeds from an insurance policy on capital equipment lost in a fire exceed the book value of
the equipment.
c. Last period's ending inventory was understated causing both net income and income tax
expense to be understated.
d. Nontaxable interest payments are received on municipal bonds.
(Adapted)

9. The result of interperiod income tax allocation is that

a. wide fluctuations in a company's tax liability payments are eliminated.
b. tax expense shown in the income statement is equal to the deferred taxes shown on the balance
sheet.
c. tax liability shown in the balance sheet is equal to the deferred taxes shown on the previous
year's balance sheet plus the income tax expense shown on the income statement.
d. tax expense shown on the income statement is equal to income taxes payable for the current
year plus or minus the change in the deferred tax asset or liability balances for the year.
(Adapted)

10. Assuming no prior period adjustments, would the following allocations affect net income?
Interperiod Tax Allocation Intraperiod Income Tax Allocation
 a. Yes Yes
b. Yes No
c. No Yes
d. No No
(Adapted)

“The roots of education are bitter, but the fruit is sweet.” – Aristotle

- END -

ANSWERS TO QUIZ 1:

1. A 6. B
2. C 7. C
3. D 8. A

4. D 9. D
5. C 10. B

QUIZ 2:

The next two items are based on the following:

Bee Corp. prepared the following reconciliation between book income and taxable income for the year
ended December 31, 20x0:

Pretax accounting income 500,000

Taxable income 300,000

Difference 200,000

Interest on municipal bonds 50,000

Lower depreciation per financial statements 150,000

Total differences 200,000

Bee's effective income tax rate for 20x0 is 30%. The depreciation difference will reverse equally over the
next three years at enacted tax rates as follows:

Years Tax rates

20x1 30%
20x2 25%

20x3 25%

1. In Bee's 20x0 income statement, the current portion of its provision for income taxes should be
a. 150,000 b. 125,000 c. 90,000 d. 75,000

2. In Bee's 20x0 financial statements, the deferred portion of its provision for income taxes should be
a. 60,000 b. 50,000 c. 45,000 d. 40,000

3. In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and no
deferred tax liability. For 20x1, Quinn reported pretax financial statement income of ₱300,000.
Temporary differences of ₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December
31, 20x1, Quinn had cumulative taxable differences of ₱70,000. Quinn's effective income tax rate is
30%. In its December 31, 20x1, income statement, what should Quinn report as deferred income tax
expense?
a. 12,000 b. 21,000 c. 30,000 d. 60,000

4. On its December 31, 20x1, balance sheet, Shin Co. had income taxes payable of ₱13,000 and a
deferred tax asset of ₱20,000 before determining the need for a valuation account. Shin had
reported a deferred tax asset of ₱15,000 at December 31, 20x0. No estimated tax payments were
made during 20x1. At December 31, 20x1, Shin determined that it was more likely than not that 10%
of the deferred tax asset would not be realized. In its 20x1 income statement, what amount should
Shin report as total income tax expense?
a. 8,000 b. 8,500 c. 10,000 d. 13,000

5. Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20x1, Taft
received dividends of ₱30,000 from Flame and recorded ₱180,000 as its equity in the earnings of
Flame. Additional information follows:
 All the undistributed earnings of Flame will be distributed as dividends in future periods.
 The dividends received from Flame are eligible for the 80% dividends received deduction.
 There are no other temporary differences.
 Enacted income tax rates are 30% for 20x1 and thereafter.
In its December 31, 20x1, balance sheet, what amount should Taft report for deferred income tax
liability?

a. 9,000 b. 10,800 c. 45,000 d. 54,000

6. Bishop Corporation began operations in 20x7 and had operating losses of ₱200,000 in 20x7 and
₱150,000 in 20x8. For the year ended December 31, 20x9, Bishop had pretax book income of
₱300,000. For the three-year period 20x7 to 20x9, assume an income tax rate of 40% and no
permanent or temporary differences between book and taxable income. In Bishop’s 20x9 income
statement, how much should be reported as total income tax expense?
a. 0 b. 40,000 c. 60,000 d. 120,000

The next two items are based on the following:

Venus Corp.’s worksheet for calculating current and deferred income taxes for 20x2 follows:

20x2 20x3 20x4

Pretax income 1,400
Temporary differences:

Depreciation (800) (1,200) 2,000

Warranty costs 400 (100) (300)
Taxable income 1,000 (1,300) 1,700

Enacted rate 30% 30% 25%

Venus had no prior deferred tax balances. In its 20x2 income statement, what amount should Venus
report as:

7. Current income tax expense?

a. 420 b. 350 c. 300 d. 0

8. Deferred income tax expense?

a. 350 b. 300 c. 120 d. 95
9. Black Co., organized on January 2, 20x0, had pretax financial statement income of ₱500,000 and
taxable income of ₱800,000 for the year ended December 31, 20x0. The only temporary differences
are accrued product warranty costs, which Black expects to pay as follows:
20x1 ₱100,000

20x2 50,000

20x3 50,000

20x4 100,000

The enacted income tax rates are 25% for 20x0, 30% for 20x1 through 20x3, and 35% for 20x4. Black
believes that future years' operations will produce profits. In its December 31, 20x0, balance sheet, what
amount should Black report as deferred tax asset?

a. 50,000 b. 75,000 c. 90,000 d. 95,000

10. Rom Corp. began business in 20x1 and reported taxable income of ₱50,000 on its 20x1 tax return.
Rom's enacted tax rate is 30% for 20x1 and future years. The following is a schedule of Rom's
December 31, 20x1, temporary differences in thousands of dollars:

12/31/x1 Future taxable (deductible) amounts

Carrying
amount
over (under)
Tax base 20x2 20x3 20x4 20x5

Equipment 10 (5) 5 5 5
Warranty liability (20) (10) (10)

Deferred compensation

liability (15) (5) (10)

Installment receivables 30 10 20

Totals 5 (5) (10) 25 (5)

What amount should Rom report as total deferred tax asset in its December 31, 20x1, balance sheet?

a. 0 b. 1,500 c. 4,500 d. 6,000

"For God has not given us a spirit of fear and timidity, but of power, love, and self-
discipline." - (2 Timothy 1:7)

- END -

SOLUTIONS TO QUIZ 2:

1. C (300,000 taxable income x 30%) = 90,000

2. D
Solution:

Year Reversals* Tax rate Deferred tax

20x1 50,000 30% 15,000

20x2 50,000 25% 12,500

20x3 50,000 25% 12,500

40,000

*Lower depreciation per financial statements 150,000

Divide by: 3
Equal amounts of reversals 50,000

3. C
Solution:

Decrease in DTA (the beginning balance) 9,000

Increase in DTL (70K TTD x 30%) 21,000
Deferred tax expense 30,000

4. C
Solution:

DTA, Dec. 31, 20x1 before adjustment 20,000

Allowance (20,000 x 10%) (2,000)

DTA, Dec. 31, 20x1 after adjustment 18,000

DTA, Dec. 31, 20x0 15,000
Increase in DTA during 20x1 3,000

Income tax expense 10,000 (squeeze)

Add: Increase in DTA during 20x1 3,000

Current tax expense (equal to income tax payable) 13,000 (start)

5. A
Solution:

Share in associate’s profit 180,000

Dividends received (30,000)

Share in undistributed earnings 150,000
Multiply by: Percentage subject to taxation (100% - 80%) 20%

Taxable temporary difference 30,000

Multiply by: Substantially enacted tax rate for future periods 30%

Deferred tax liability – year-end 9,000

6. D (300,000 pretax income x 40%) = 120,000. The reversal of deferred tax asset affects only the
current tax expense but not income tax expense.

7. C (1,000 taxable income x 30%) = 300

8. D
Solution:

Depreciation (FI>TI); TTD; DTL

(800 x 25% rate in 20x4, the yr. of reversal*) (200)

Warranty costs (FI<TI); DTD; DTA

(100 x 30% rate in 20x3) + (300 x 25% rate in 20x4) 105

Deferred tax expense (95)

* Depreciation reverses in 20x4 because it is on this year that the ‘minus’ function becomes an ‘addition’.

9. D
Solution:
Year of reversal Amounts Tax rate Deferred tax asset

20x1 100,000 30% 30,000

20x2 50,000 30% 15,000

20x3 50,000 30% 15,000

20x4 100,000 35% 35,000

95,000

10. A
Solution:

Concept: If the carrying amount (CA) of an asset exceeds its tax base (TB), the difference is a taxable
temporary difference which, if multiplied by the tax rate, results to a deferred tax liability.

“For an asset: CA > TB = difference is TTD; TTD x Tax rate = DTL”

Consequently:

“For a liability: CA < TB = = difference is TTD; TTD x Tax rate = DTL”

In all of the items in the problem, the carrying amounts of the assets (i.e., equipment and installment
receivables) as of December 31, 20x1 exceed their tax bases (CA>TB). Therefore, the differences are
taxable temporary differences which give rise to deferred tax liability and not deferred tax asset.

Also, the carrying amounts of the liabilities (i.e., warranty and deferred compensation) as of December 31,
20x1 are less than their tax bases. Therefore, the differences are taxable temporary differences which
give rise to deferred tax liability and not deferred tax asset.

Conclusion: No deferred tax asset is recognized on December 31, 20x1.

Chapter 32
Shareholders’ Equity (Part 1)

QUIZ:
1. The entry to record the reissuance of treasury shares above their original acquisition cost includes
a. a credit to share premium
b. a debit to share premium
c. a debit to retained earnings
d. b and c

2. Ten thousand shares of ₱20 par value common stock were initially issued at ₱25 per share.
Subsequently, two thousand of these shares were purchased as treasury stock at ₱30 per share.
What is the effect of the purchase of the treasury stock on the amount reported in the balance sheet
for each of the following?
Share premium Retained earnings

a. No effect No effect
b. No effect Decrease
c. Decrease No effect
d. Decrease Decrease

3. The entry to record the retirement of shares at below their original acquisition cost includes
a. a debit to share premium arising from the original issuance
b. a debit to any share premium arising from treasury shares
c. a debit to retained earnings
d. all of these including (c) when (a) and (b) are insufficient to offset any difference between the
original issuance price and the retirement price.

4. In 20x1, Fogg, Inc., issued ₱10 par value ordinary share for ₱25 per share. No other share
transactions occurred until March 31, 20x1, when Fogg acquired some of the issued shares for ₱20
per share and retired them. Which of the following statements correctly states an effect of this
acquisition and retirement?
a. 20x1 profit is decreased.
b. 20x1 profit is increased.
c. Share premium is decreased.
d. Retained earnings is increased.

5. Redeemable preference shares are classified by the issuer as

a. financial liability
b. own equity, presented in shareholders’ equity
c. a or b
d. reduction of share capital in shareholders’ equity

6. In 20x0, Newt Corp. acquired 6,000 shares of its own ₱1 par value ordinary share at ₱18 per share.
In 20x1, Newt issued 3,000 of these shares at ₱25 per share. Newt uses the cost method to account
for its treasury stock transactions. What accounts and amounts should Newt credit in 20x1 to record
the issuance of the 3,000 shares?

Treasury sh. Sh. premium Retained earnings Ordinary sh.

a. ₱54,000 ₱21,000
 b. ₱54,000 ₱21,000

c. ₱72,000 ₱3,000

d. ₱51,000 ₱21,000 ₱3,000

7. On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its ₱5 par value ordinary
shares from a shareholder. On that date, the stock’s market value was ₱35 per share. The stock was
originally issued for ₱25 per share. By what amount would this donation cause total stockholders’
equity to decrease?
a. 70,000 b. 50,000 c. 20,000 d. 0

8. On July 1, 20x1, Vail Corp. issued rights to stockholders to subscribe to additional share of its
common stock. One right was issued for each share owned. A stockholder could purchase one
additional share for 10 rights plus ₱15 cash. The rights expired on September 30, 20x1. On July 1,
20x1, the market price of a share with the right attached was ₱40, while the market price of one
right alone was ₱2. Vail’s stockholders’ equity on June 30, 20x1, comprised the following:

Ordinary shares, ₱25 par value, 4,000 shares issued and outstanding…..₱100,000

Share premium…………………….……………………………………………..60,000

Retained earnings……………..…………………………………………………80,000

By what amount should Vail’s retained earnings decrease as a result of issuance of the stock rights on
July 1, 20x1?

a. 0 b. 5,000 c. 8,000 d. 10,000

9. On September 20x1, West Corp. made a dividend distribution of one right for each of its 120,000
shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share
of West's ₱50 variable rate preference share at an exercise price of ₱80 per share. On March 20,
20x3, none of the rights had been exercised, and West redeemed them by paying each stockholder
₱0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by
a. 120 b. 2,400 c. 12,000 d. 36,000

10. The following trial balance of Shaw Corp. at December 31, 20x1, has been adjusted except for
income tax expense.
Dr. Cr.
Cash 675,000
Accounts receivable (net) 2,695,000
Inventory 2,185,000

Property, plant and equipment (net) 7,366,000

Accounts payable and accrued liabilities 1,801,000
Income tax payable 654,000
Deferred income tax liability 85,000
Ordinary shares 2,300,000

Share premium 3,680,000

Retained earnings, 1/1/x1 3,350,000
Net sales and other revenues 13,360,000
Costs and expenses 11,180,000

Income tax expense 1,129,000

25,230,00 25,230,00
Totals 0 0

Other financial data for the year ended December 31, 20x1:

 Included in accounts receivable is ₱1,000,000 due from a customer and payable in quarterly
installments of ₱125,000. The last payment is due December 30, 20x3.
 The balance in the deferred income tax liability account pertains to a temporary difference not
related to a balance sheet account that arose in a prior year, of which ₱15,000 is expected to be paid
in 20x2.
 During the year, estimated tax payments of ₱475,000 were charged to income tax expense. The
current and future tax rate on all types of income is 30%. In Shaw's December 31, 20x1, balance
sheet,

The working capital and the total shareholders’ equity as of December 31, 20x1 are
Working capital Total Shareholders’ Equity

a. 2,600,000 10,856,000

b. 2,881,000 10,856,000

c. 3,075,000 9,330,000
d. 3,075,000 10,856,000

"A cheerful heart is good medicine but a crushed spirit dries up the bones." - (Proverbs
17:22)

- END -
SOLUTIONS:

1. A
2. A
3. D
4. C
5. A

6. B
Solution:
Dec. 27, Cash (3,000 x 25) 75,000
20x1
Treasury shares (3,000 x 18) 54,000

Share premium – Treasury shares 21,000

7. D

8. A

9. C (120,000 rights x ₱0.10) = 12,000 debit to share premium

10. D
Solutions:

Cash 675,000
Accounts receivable (net) [2.695M - 1M + (125K x 4)] 2,195,000

Inventory 2,185,000
Total current assets 5,055,000

Net sales and other revenues 13,360,000

Costs and expenses (11,180,000)
Profit before tax 2,180,000

Multiply by: Tax rate 30%

Income tax expense 654,000
Income tax payments during the year (475,000)
Adjusted income tax payable 179,000

Accounts payable and accrued liabilities 1,801,000

Income tax payable 179,000
Total current liabilities 1,980,000

Working capital = Current assets – Current liabilities

Working capital = (5,055,000 – 1,980,000) = 3,075,000

Net sales and other revenues 13,360,000

Costs and expenses (11,180,000)

Profit before tax 2,180,000

Income tax expense (30% x 2,180,000) (654,000)
Profit after tax 1,526,000
Retained earnings, Jan. 1 3,350,000
Retained earnings, Dec. 31 4,876,000

Ordinary shares 2,300,000

Share premium 3,680,000
Retained earnings, Dec. 31, 20x1 4,876,000
Shareholders' Equity 10,856,000

Chapter 33
Shareholders’ Equity (Part 2)

QUIZ:

1. On settlement (distribution) date, any difference between the carrying amounts of the property
dividend payable and the non-cash asset distributed is
a. ignored
b. recognized in profit or loss
c. recognized directly in retained earnings
d. recognized but subject to a limit

2. Non-current assets declared as property dividends are

 a. reclassified as “non-current assets held for distribution to owners” if the conditions under PFRS 5
are met.
b. reclassified as current assets.
c. not reclassified but presented separately from the other assets.
d. not reclassified but disclosed only.

3. If shareholders are given a choice of receiving either property dividends or cash dividends, the entity
shall
a. estimate the dividend payable by considering both the fair value of each alternative and the
associated probability of shareholders selecting each alternative.
b. treat the dividends declared as if they are cash dividends.
c. treat the dividends declared as if they are property dividends.
d. not account for the dividends until their final settlements.

4. Which of the following may cause a change in the total shareholders’ equity?
a. “small” share dividends d. “large” share dividends
b. share splits e. none of these
c. recapitalization

5. Imagine you are a CPA. You are preparing the financial statements of your company for the year
ended December 31, 20x1. The board of directors declared dividends on February 1, 20x2. The
dividend declaration is not subject to further approval. The financial statements were authorized for
issue on April 1, 20x2. How should the dividends declared be accounted for in the 20x1 financial
statements?
a. included in current liabilities c. disclosed only
b. included in noncurrent liabilities d. neither accrued nor disclosed

6. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of ₱2 par value
common stock, which had a fair value of ₱5 per share before the stock dividend was declared. This
stock dividend was distributed 60 days after the declaration date. By what amount did Ray’s current
liabilities increase as a result of the stock dividend declaration?
a. 0 b. 500 c. 1,000 d. 2,500

7. Effective April 27, 20x1, the stockholders of Bennett Corporation approved a two-for-one split of the
company's common stock, and an increase in authorized common shares from 100,000 shares (par
value ₱20 per share) to 200,000 shares (par value ₱10 per share). Bennett's stockholders' equity
accounts immediately before issuance of the stock split shares were as follows:

Common stock, par value ₱20; 100,000 shares authorized;

50,000 shares outstanding ₱1,000,000

Share premium (₱3 per share on issuance of ordinary shares) 150,000

Retained earnings 1,350,000

What should be the balances in Bennett's additional paid-in capital and retained earnings accounts
immediately after the stock split is effected?

Share premium Retained earnings

a. ₱ 0 ₱ 500,000

b. ₱ 150,000 ₱ 350,000

c. ₱ 150,000 ₱1,350,000
d. ₱ 1,150,000 ₱ 350,000

8. On July 1, 1999, Bart Corporation has 200,000 shares of ₱10 par ordinary share outstanding and the
market price of the stock is ₱12 per share. On the same date, Bart declared a 1-for-2 reverse stock
split. The par of the stock was increased from ₱10 to ₱20 and one new ₱20 par share was issued for
each two ₱10 par shares outstanding. Immediately before the 1-for-2 reverse stock split, Bart's share
premium was ₱450,000. What should be the balance in Bart's share premium account immediately
after the reverse stock split is effected?
a. 0 b. 450,000 c. 650,000 d. 850,000

9. The stockholders' equity section of Brown Co.'s December 31, 20x1, balance sheet consisted of the
following:

Ordinary shares, ₱30 par, 10,000 shares authorized and outstanding ₱300,000

Share premium 150,000

Retained earnings (deficit) (210,000)

On January 2, 20x2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the
par value of the stock to ₱5 and eliminating the deficit against share premium. Immediately after the
quasi-reorganization, what amount should Brown report as share premium?
a. (60,000) b. 150,000 c. 190,000 d. 400,000

10. On January 2, 2000, the board of directors of Gimli Mining Corporation declared a cash dividend of
₱1,200,000 to stockholders of record on January 18, 2000, and payable on February 10, 2000. The
dividend is permissible by law in Gimli's state of incorporation. Selected data from Gimli's December
31, 1999, balance sheet follow:

Accumulated depletion ₱ 200,000

Capital stock 1,100,000
Additional paid-in capital 800,000
Retained earnings 500,000

The ₱1,200,000 dividend includes a liquidating dividend of

a. 800,000. b. 700,000. c. 600,000. d. 200,000.

"Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each
day has enough trouble of its own." - (Matthew 6:34)

- END -

SOLUTIONS:

1. B
2. A
3. A
4. E
5. C

6. A - Stock dividend payable is not a liability.

7. C
Share splits do not affect total shareholders’ equity. The aggregate par value of outstanding shares
remains the same after a share split. The entry to record the share split is as follows:
Apr. 27, Common stock (old) (50,000 sh. x ₱20) 1,000,000
20x1
Common stock (new) (100,000 sh. x ₱10) 1,000,000

8. B Share premium is not affected by share splits.

9. C

Solution:
The entries to record the quasi-reorganization are as follows:
Jan. 2, Share capital [(₱30 – ₱5) x 10,000 sh.] 250,000
20x2
Share premium 250,000
to record the reduction of par value

Jan. 2, Share premium 210,000

20x2
Retained earnings
to wipe out the deficit 210,000

Share premium - Dec. 31, 20x1 150,000

Credit (see journal entries above) 250,000
Debit (see journal entries above) (210,000)
Share premium after quasi-reorganization 190,000

10. B (1,200,000 dividends declared – 500,000 retained earnings) = 700,000

CHAPTER 1

Problem 1 – True or False

1. (True) As defined under the Conceptual Framework, a liability is recorded as a result of past
events or transactions.
2. (True) The currently maturing portion of long-term debt should be included in current liabilities
if payment will require the use of current assets.
3. (False) One of the following conditions must be met before a short- term obligation may be
properly excluded from the current liability classification: (1) management must intend to
refinance on a long-term basis or (2) management must demonstrate an ability to refinance the
obligation.
4. (False) The ability to refinance, according to PAS 1, can be demonstrated only by actually
refinancing the obligation between the balance sheet date and the date the statements are
issued.
5. (True) Trade payables are normally presented as current liabilities.
6. (True) Conceptually, financial liabilities should be valued, subsequent to initial recognition, at
the present value of all cash to be paid in the future.
7. (False) A debtor firm's 12/31/05 balance sheet is to be published 3/1/06. An obligation due
3/4/11 has a due date which can be accelerated by the creditor to the present date if the
current ratio falls below 2:1. The current ratio is now 2.2:1. The obligation is a current liability.
8. (True) A short-term deferred revenue should be classified as a current liability.
 9. (True) Liability for cash dividends is normally presented as current liabilities except when the
cash dividends are clearly due beyond twelve months from the end of the reporting period.
10. (True) Before a liability is recognized, there must be a past event that gave rise to a present
obligation.

PROBLEM 2

1. For a liability to exist,

a. a past transaction or event must have occurred.
b. the exact amount must be known.
c. the identity of the party owed must be known.
d. d. an obligation to pay cash in the future must exist.
2. Which of the following does not meet the Conceptual Framework's definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
3. Which of the following items would be excluded from current liabilities?
a. A long-term liability callable or due on demand by the creditor even though the creditor has
given no indication that the debt will be called.
b. Normal accounts payable which had been assigned by the creditor to a finance company.
c. Long-term debt callable within one year or less because the debtor violated a debt provision.
d. A short-term debt which at the discretion of the entity can be rolled over at least twelve
months after the balance sheet date.
4. An entity wants to exclude short-term debt from its current liabilities to improve its current ratio.
Which of the following would help the entity accomplish its goal?
a. Refinance the debt through an existing loan facility before the balance sheet date.
b. Enter into a financing agreement before the balance sheet date which permits the
refinancing of the debt with other debt due 8 months after the balance sheet date.
c. Pay the debt after the balance sheet date and replenish the cash used to pay the debt with
the proceeds from long- term debt issued before issuance of the balance sheet
d. Plan not to pay the debt until after the end of the next fiscal period.
5. Short-term debt expected to be refinanced:
a. may be classified as long-term if refinancing arrangements are completed as of the
balance sheet date.
b. must always be reported as a current liability.
c. may be classified as long-term if off-balance sheet financing is to be obtained after the
balance sheet date but before the issue date of the financial statements.
d. may be classified as long-term if there is an intent to refinance.
6. Determine the correct classification of the following liabilities:
1) Liability due in 6 months, payable in non-cash assets.
 2) Liability refinanced with long-term debt between the balance sheet date and date of
issuance of balance sheet.
3) Liability which will be refinanced on a long-term basis between the balance sheet
date and date of issuance of balance sheet through an irrevocable agreement signed by debtor.
4) Liability paid between the balance sheet date and date of issuance of balance sheet
with cash; the cash is replenished with proceeds from long-term debt also between the balance
sheet date and date of issuance of balance sheet.
a. All are current liabilities.
b. All are long-term liabilities.
c. Only No.4 is a current liability.
d. Only No. 1 is a long-term liability
7. Which of the following statements concerning dividends is untrue?
a. Once declared, a cash dividend on ordinary shares becomes a liability of the corporation.
b. Since a dividend is generally paid within a month or so, it usually is classified as current.
c. Preference dividends in arrears should not be accrued as a liability.
d. Preference dividend declared but not yet paid should be disclosed only in the footnote.

8. Included in Witt Corporation's liability account balances at December 31, 2008 were the
following:
14% note payable issued October 1, 2007 maturing September 30, 2009 500,000
16% note payable issued April 1, 2006 maturing April 1, 2009 800,000

Witt's December 31, 2008 financial statements were issued on March 1, 2009. On January 15,
2009, the entire P800,000 balance of 16% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on March 10, 2009, Witt consummated a non-
cancelable agreement with the lender to refinance the 14%, P500,000 note on a long-term basis,
on readily determinable terms that have not yet been implemented. Both parties are financially
capable of honoring the agreement's provisions. On the December 31, 2008 balance sheet, the
amount of the notes payable that Witt should classify as current liability is
a. 1,300,000 b. 500,000 c. 800,000 d. O
9. Red Hot Chili Peppers has the following information:
 Refinancing on a long-term basis of a currently maturing debt in the amount of
P2,000,000 on January 1, 2009.
 Rectification of a breach of a long-term loan agreement during 2008 on January 3, 2009
in the amount of P12,000,000.
 Receipt from the lender of a grace period ending December 31, 2009 on January 2, 2009
on a long-term liability amounting to P3,000,000.

The financial statements of Red Hot Chili Peppers were issued on March 15, 2009. Of the amounts
shown above, how much would be included in the current liabilities section of Red Hot Chili Pepper's
2008 year-end financial statements?

a. 17,000,000 b. 15,000,000 c. 14,000,000 d. O

 10. Included in Levi Corporation's liability account balances at December 31, 2008, were the
following:
14% note payable issued October 1, 2007, maturing
September 30, 2009 1,250,000
16% note payable issued April 1, 2006 maturing
April 1, 2009 2,000,000
On December 31, 2008, the company expects to refinance the P2,000,000 by issuance of a long-
term note payable in lump sum. The refinancing of the P2,000,000 is at the discretion of the
enterprise. Levi's December 31, 2008 financial statements were issued on March 31, 2009. On
January 15, 2009, the entire P2,000,000 balance of the 16% note was refinanced by issuance of
long-term obligation payable.
On the December 31, 2008 balance sheet, what amount of the notes payable should Levi classify
as short-term obligation?
a. O b. 1,250,000 c. 1,750,000 d. 2,000,000
11. Regal Department Store sells gift certificates, redeemable for store merchandise, that expire one
year after their issuance.

Regal has the following information pertaining to its gift certificate sales and redemptions:

Unredeemed at 12/31/2007 750,000

2008 sales 2,500,000

2008 redemptions of prior year sales 250,000

2008 redemptions of current year sales 1,750,000

Regal's experience indicates that 10% of gift certificates sold not be redeemed. In its December 31, 2008
balance sheet, 6 amount should Regal report as unearned revenue?

a. 1,250,000 b. 1,125,000 c. 1,100,000 d. 500,000

Use the following information for the next two questions:

Dunne Company sells equipment service contracts that cover a two-year period. The sales price of each
contract is P600. Dunne's past experience is that, of the total pesos spent for repairs on service
contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second
contract year. Dunne sold 1,000 contracts evenly throughout 2008.

12. In its December 31, 2008 balance sheet, what amount should Dunne report as deferred service
contract revenue?
a. 540,000 b. 480,000 c. 360,000 d. 300,000
13. In its December 31, 2009 income statement, what amount should Dunne report as service
contract revenue?
a. 300,000 b. 180,000 c. 480,000 d. O
14. Dunn Trading Stamp Company records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Dunn's past experience indicates that only
80% of the stamps are sold to licensees will be redeemed. Dunn's liability for stamp redemptions
was P6,000,000 at December 31, 2007. Additional information for 2008 is as follows:
Stamp service revenue from stamps sold to licensees 5,000,000
Cost of redemption (stamps sold prior to 1/1/2008) 2,750,000

If all the stamps sold in 2008 were presented for redemption in 2009, the redemption cost will
be P2,250,000. What amount should Dunn report as a liability for stamp redemptions at
December 31, 2008?
a. 7,250,000 b. 5,500,000 c. 5,050,000 d. 3,250,000
15. Kent Company, a division of National Reality Corporation maintains escrow accounts and pays
real estate taxes for National's mortgage customers. Escrow funds are kept in interest-bearing
accounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used to
reduce future escrow payments. Additional information for the year 2008 follows:
Escrow accounts liability, 1/1 900,000
Escrow payments received 1,500,000
Real estate taxes paid 1,900,000
Interest on escrow funds 90,000
What amount should Kent report as escrow accounts liability in it December 31, 2008 balance
sheet?
a. 491,000 b. 581,000 c. 605,000 d.590,000
16. On July 1, 2008, the Quezon City government issued reality tax assessment for its fiscal year
ended June 30, 2009. On September 1, 2008, Zuma Company purchased a land in Quezon City.
The purchase price was reduced by a credit for accrued reality 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, 2008 Zuma paid the first of two equal installments of P600,000 for realty taxes. What amount
of this payment should Zuma record as a debit to real estate taxes payable?
a. 200,000 b. 400,000 c. 500,000 d. 600,000

17. Organ Company requires refundable advance payments with special orders for machinery
constructed to customer's specifications. Information for 20x8 is as follows:
Customers advances - balance, December 31, 2007 885,000
Advances received with orders in 2008 1,380,000
Advances applied to orders shipped in 2008 1,230,000
Advances applicable to orders cancelled in 2008 375,000

What amount should Organ Company report as current liability for customer's deposits in the
December 31, 2008 balance sheet?
a. 0 b. 660,000 c. 1,035,000 d. 1,110,000
PROBLEM 3: EXERCISES

1. An entity’s liabilities include the following:

Accounts payable 500,000

Held for trading financial liabilities 1,000,000
Note payable (1M due 20x3) 2,800,000
Unearned revenue 300,000
Dividends payable 800,000
Deferred tax liability 200,000
Requirement: Compute for the total current liabilities.

2. Kew Co.’s accounts payable balance at December 31, 1990, was 2,200,000 before
considering the following data:
 Goods shipped to Kew F.O.B. shipping point on December 22, 1990, were lost in
transit. The invoice cost of 40,000 was not recorded by Kew. On January 7, 1991,
Kew filed a 40,000 claim against the common carrier.
 On December 27, 1990, a shipped and billed at 70,000 on December 3, 1990. The
returned goods were shipped by Kew on December 28, 1990. A 70,000 credit
memo was received and recorded by Kew on January 5, 1991.
 Goods shipped to Kew F.O.B. destination on December 20, 1990, were received
on January 6, 1991. The invoice cost was 50,000.
Requirement: What amount should Kew report as accounts payable in its
December 31, 1990, balance sheet?

3. Eliot Corporation’s liabilities at December 31, 2005, were as follows:

 Accounts payable and accrued interest 1,000,000
 12% note payable issued November 1, 2004
Maturing July 1, 2006 2,000,000
 10% debentures payable, next annual principal 7,000,000
Installment of 500,000 due February 1, 2006

On March 1, 2006, Eliot consummated a noncancelable agreement with the lender to

refinance the 12% note payable on a long-term basis, on readily determinable terms that
have not yet been implemented. Both parties are financially capable of honoring the
agreement’s provisions. Eliot’s December 31, 2005 financial statements were issued on
March 31, 2006.
Requirement: In its December 31, 2005 balance sheet, what amount should Eliot
report as current liabilities?
 4. Able, Inc. had the following amounts of long-term debt outstanding at December 31,
2008:
 14% term note, due 2009 30,000
 11% term note, due 2011 1,070,000
 8% note, due in 11 equal annual principal
Payments, plus interest beginning December 31,
2009 1.100,000
 7% guaranteed debentures, due 2011 1,000,000

Able’s annual sinking-fund requirement on the guaranteed debentures is 40,000 per

year.
Requirement: What amount should Able report as current maturities of long-term
debt in its December 31, 2008 balance sheet?

5. Taken from the records of Funk Company as of December 31, 2008 are the following
information:
 Long-term debt of 10,000,000 dated January 1, 2001 due December 31, 2009.
Funk expects to refinance this liability on a long-term basis on January 2009. The
refinancing agreement was consummated on February 2, 2009.
 Note payable due on January 1, 2011 amounting to 6,000,000. The note is
payable on demand.
 Bank loan of 14,000,000 due December 31, 2013 wherein a breach of loan
covenant was committed by Funk during 2008. The Bank agreed on December
31, 2008 to provide Funk a grace period to rectify the breach ending December
31, 2009.
 Serial bonds dated January 1, 2008 totaling 10,000,000 payable in 10 annual
installments.
Requirement: How much would be included in the current liabilities section of
Funk’s year-end financial statements?

PROBLEM 4: CLASSROOM ACTIVITY

1. VENERABLE RESPECTED co. has the following liabilities of December 31, 20x1.
a. Trade accounts payable net of debit balance in supplies account of P10,000, net of
unreleased checks of P8,000 and net of postdated. Checks of P4,000
600,000
b. Credit balance in customers' accounts 4,000
c. Financial liability designated at FVPL 100,000
d. Bonds payable maturing in 10 equal annual installments of P200,000
2,000,000
 e. 12%, 5-year note payable issued on October 1, 20x1 200,000
f. Deferred tax liability 10,000
g. Unearned rent 8,000
h. Contingent liability 20,000
i. Reserve for contingencies 50,000
Requirement: How much is the total current liabilities?
2. On December 31, 20x1, THESPIAN ACTOR Co. has accounts payable of P2,000,000 before
possible adjustment for following:
a. Goods in transit from a vendor to THESPIAN December 31, 20x1 with an invoice cost of
P100,000 purchased FOE shipping point was not yet recorded.
b. Goods shipped FOB shipping point from a vendor THESPIAN was lost in transit. The
invoice cost of P40,000 not yet recorded.
c. Goods shipped FOB shipping point from a vendor to THESPIAN on December 31, 20x1
amounting to P16,000 was recorded and included in the year-end physical count as
"goods in transit."
d. Goods in transit from a vendor to THESPIAN on December 31, 20x1 with an invoice cost
of P20,000 purchased FOB destination was not yet recorded. The goods were received in
January 20x2.
e. Goods with invoice cost of P30,000 was recorded and included in the year-end physical
count as "goods in transit." It was found out that the goods were shipped from a vendor
under FOB destination.
f. Checks drawn but not yet released to payees amounted to P24,000 while checks drawn
and released to payees but were postdated amounted to P10,000
g. On December 28, 20x1, a vendor authorized THESPIAN to return for full credit goods
shipped and billed at P50,000 on December 14, 20x1. THESPIAN shipped the returned
goods on December 31, 20x1 but the credit memo was received and recorded only on
January 3, 20x2.
h. Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 20x1
was recorded at invoice cost at shipment date. The invoice cost is P28,000 while the
freight cost is P6,000.
i. Goods shipped FOB destination, freight collect were received on December 29, 20x1.
The invoice cost of P80,000 was credited to accounts payable on date of receipt and the
related freight of P10,000was debited to an expense account.
Requirement: Compute for the adjusted accounts payable on December 31, 20xI.
3. AFFLUENT RICH Co. sells service contracts that cover a 2-year period. The sales price of each
contract is P2,000. AFFLUENT sold 1,000 contracts evenly throughout 20x1. AFFLUENT's past
experience shows that of the total pesos spent for repairs on service contracts, 40% is
incurred evenly during the first contract year and 60% evenly during second year.
Requirements:
(a) How much are the current and noncurrent portions of deferred revenue to be
presented in AFFLUENT's statement of financial position?
(b) How much is the service revenue recognized in 20x2?
PROBLEM 5 MCQ-THEORY

1. Liability may be recognized

a. only if the entity to which the obligation is owed is specifically identified.
b. even if the entity to which the obligation is owed is not specifically identified so long
as the liability is probable and can be measured reliably.
c. on legal obligations arising from future events which are probable of occurrence.
d. any of these
2. Liabilities arise from past events called obligating events. Obligating events create
a. legal obligations
b. constructive obligations
c. a or b
d. d. contractual obligations
3. Financial liabilities are classified as
a. FVPL or at amortized cost
b. FVPL or FVOCI
c. FVPL, FVOCI or at amortized cost
d. none of these
4. The most conceptually appropriate method of valuing a liability under the historical cost basis is
to
a. discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date the liability was initially incurred.
b. discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date financial statements are prepared
subsequent to issuance.
c. record as a liability the amount of cash or cash-equivalent value that the company
would be required to pay to eliminate the liability in the ordinary course of business on the date
of the financial statements.
d. record as a liability the amount of cash or cash-equivalent proceeds actually received
when a liability was incurred.
5. Reclassification of financial liabilities is
a. allowed only if an entity changes its business model
b. allowed only if management changes its intention of holding financial instruments
c. allowed only if an entity changes its accounting policy on financial instruments
d. prohibited

6. Financial liabilities are initially measured at

a. fair value plus transaction costs.
b. fair value plus transaction costs, except financials liabilities at FVPL whose transaction
cos expensed immediately.
c. fair value plus transaction costs, except financials liabilities at FVOCI whose transaction
costs are recognized in other comprehensive income.
 d. fair value minus transaction costs, except financial liabilities at FVPL whose transaction
costs are expensed immediately.

7. Deferred tax liabilities are

a. always presented as noncurrent when an entity presents a classified statement of
financial position.
b. presented as noncurrent only when the reversal date extends beyond 12 months from
the end of reporting period.
c. always presented as current an entity presents a classified statement of financial
position
d. always presented as noncurrent when the deferred tax liabilities are required under the
standards to be recognized directly in equity.

8. Share (stock) dividends payable

a. are always presented as noncurrent liabilities
b. may or may not be presented as current liability depending on their expected dates of
settlement
c. are not liabilities but rather presented as part of equity as a deduction to share capital.
d. are not liabilities but rather presented as part of equity as an addition to share capital.

9. A currently maturing obligation is presented as current. Which of the following instances

would a currently maturing obligation is nonetheless presented as noncurrent?
a. Refinancing is completed as of the end of reporting period
b. Refinancing made after the end of reporting period but before authorization of financial
statements for issues is at the discretion of the entity.
c. Grace period is received as of end of reporting period to rectify breach of loan
agreement ending at least 12 months after the end of reporting period.
d. In any of these situations

10. Cali, Inc., had a 4,000,000 note payable due on March 15, 20x2. On January 28, 20x2, before
the issuance of its 20x1 financial statements, Cali issued long-term bonds in the amount of
4,500,000. Proceeds from the bonds were used to repay the note when it came due. How
should Cali classify the note in its December 31, 20x1, financial statements?
a. As a current liability, with separate disclosure of the note refinancing
b. As a current liability, with no separate disclosure required.
c. As a noncurrent liability, with separate disclosure of the note refinancing.
d. As a noncurrent liability, with no separate disclosure required.
PROBLEM 6 COMPUTATIONAL

1. At December 31, 20x7, Cain, Inc., owed notes payable of 1,750,000 due on May 15,
20x8. Cain expects to retire this debt with proceeds from the sale of 100,000 shares of
 its common stock. The stock was sold for 15 per share on March 10, 20x8, prior to the
issuance of the year-end financial statements. In Cain’s December 31, 20x7, balance
sheet, what amount of the notes payable should be excluded from current liabilities?
a. 0 b. 250,000 c. 1,500,000 d. 1,750,000

2. Pam, Inc., has 1,000,000 of notes payable due June 15, 20x6. At the financial statement
date of December 31, 20x5, Pam signed an agreement to borrow up to 1,000,000 to
refinance the notes payable on a long-term basis. The refinancing agreement is at the
discretion of Pam, Inc. The financing agreement called for borrowings not exceed 80%
of the value of the collateral Pam was providing. At the date of issue of the December
31, 20x5, financial statements, the value of the collateral was 1,200,000 and was not
expected to fall below this amount during 20x6. In its December 31, 20x5, balance
sheet, Pam should classify notes payable as
Short-term Long-term Short-term Long-term
a. 0 1,000,000 c. 200,000 800,000
b. 40,000 960,000 d. 1,000,000 0

3. Wilk Co. reported the following liabilities at December 31, 20x1:

Accounts payable-trade 750,000
Short-term borrowings 400,000
Bank loan, current portion 100,000 3,500,000
Other bank loan, matures June 30, 20x2 1,000,000

The bank loan of 3,500,000 was in violation of the loan agreement. The creditor had not
waived the rights for the loan. What amount should Wilk report as current liabilities at
December 31, 20x1?
a. 1,250,000 b. 2,150,000 c. 2,250,000 d. 5,650,000

4. Regal Department Store sells gift certificates, redeemable for store merchandise, that
expire one year after their issuance. Regal has the following information pertaining to
its gift certificates sales and redemptions:
Unredeemed at 12/31/x2 75,000
20x3 sales 250,000
20x3 redemptions of prior year sales 25,000
20x3 redemptions of current year sales 175,000

Regal’s experience indicates that 10% of gift certificates sold will not be redeemed. In its
December 31, 20x3 balance sheet, what amount should Regal report as unearned
revenue?
a. 125,000 b. 112,500 c. 100,000 d. 50,000
 5. Aneen’s Video Mart sells one and two-year mail order subscriptions for its video-of-
the-month business. Subscriptions are collected in advance and credited to sales. An
analysis of the recorded sales activity revealed the following:

20x2 20x3
Sales 420,000 500,000
Less cancellations 20,000 30,000
Net sales 400,000 470,000
Subscriptions expirations:
20x2 120,000
20x3 155,000 130,000
20x4 125,000 200,000
20x5 140,000
Totals 400,000 470,000

In Aneen’s December 31,20x3 balance sheet, the balance sheet, the balance for
unearned subscription revenue should be
a. 495,000 b. 470,000 c. 465,000 d. 340,000

6. On July 1, 20x0, Ran County issued realty tax assessments for its fiscal year ended June 30, 20x1.
On September 1, 20x0, Day Co. purchased a warehouse in Ran County. The purchase price was
reduced by a credit for accrued realty taxes. Day did 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, 20x0, Day paid the first
of two equal installments of P12,000 for realty taxes. What amount of this payment should Day
record as a debit to real estate taxes payable?
a. 4,000 b. 8,000 c. 10,000 d. 12,000
7. Black Co. requires advance payments with special orders for machinery constructed to customer
specifications. These advances are nonrefundable. Information for 20x0 is as follows:
Customer advances-balance 1/1/20x0 P118,000
Advances received with orders in 20x0 184,000
Advances applied to orders shipped in 20x0 164,000
Advances applicable to orders canceled in 20x0 50,000

In Black's December 31, 20x0, balance sheet, what amount should be reported as a current
liability for advances from customer?
a. O b. 88,000 c. 138,000 d. 148,000
8. Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes
for National's mortgage customers. Escrow funds are kept in interest-bearing account Interest,
less a 10% service fee, is credited to the mortgage account and used to reduce future escrow
payments.
 Additional information follows:
Escrow accounts liability, 1/1/20x9 700,000
Escrow payments received during 20x9 1,580,000
Real estate taxes paid during 20x9 1,720,000
Interest on escrow funds during 20x9 50,000
What amount should Kent report as escrow accounts liability in its December 31, 20x9, balance
sheet?
a. 510,000 b. 515,000 c. 605,000 d. 610,000
9. Aneen's Video Mart sells 1- and 2-year mail order subscriptions for its video-of-the-month
business Subscriptions are collected in advance and credited to sales. An analysis of the recorded
sales activity revealed the following:
20x6 20x7
Sales 420,000 500,000
Less cancellations 20,000 30,000
Net sales 400,000 470,000

Subscriptions expirations:
20x6 120,000
20x7 155,000 130,000
20x8 125,000 200,000
20x9 140,000
470,000 400,000
In Aneen's December 31, 20x7, balance sheet, the balance for unearned subscription revenue
should be
a. 495,000 b. 470,000 c. 465,000 d. 340,000
10. Lyle, Inc. is preparing its financial statements for the year ended December 31, 20x9. Accounts
payable amounted to P360,000 before any necessary year-end adjustment related to the
following:
 At December 31, 20x9, Lyle has a P50,000 debit balance in its accounts payable to Ross, a
supplier, resulting from a P50,000 advance payment for goods to be manufactured to
Lyle's specifications.
 Checks in the amount of P100,000 were written to vendors and recorded on December
29, 20x9. The checks were mailed on January 5, 2000.

What amount should Lyle report as accounts payable in its December 31, 20x9, balance sheet?

a. 510,000 b. 410,000 c. 310,000 d. 210,000

CHAPTER 2

PROBLEM 1: TRUE OR FALSE

 FALSE 1. Notes payable are obligations supported by creditor promissory notes.
TRUE 2. Financial liabilities are initially recognized at fair value minus transaction costs
that are directly attributable to the issuance, except for financial liabilities measured at
FVPL whose transaction costs are expensed immediately.
FALSE 3. Fair value is the price that would be paid to buy an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
FALSE 4. costs of issuing financial liabilities are expensed outright.
TRUE 5. Short-term notes payable are initially measured either at face amount or
present value.
FALSE 6. All short-term notes payable are initially measured at face amount.
TRUE 7. A note payable may be measured initially on the basis of the cash price
equivalent of the asset obtained in exchange for the note payable.
TRUE 8. If the cash flows on a note payable are due in lump sum, the most appropriate
present value factor is “PV of 1.”
FALSE 9. If the cash flows on a note payable are due in installments and ,the first
installment is due on initial recognition, the most appropriate present value factor is “PV
of an ordinary annuity of 1.”
TRUE 10. Origination fees incurred on issuance of loan payable are deducted from the
carrying amount of the loan and subsequently amortized using the effective interest
method.

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Theoretically, a short-term, non-trade, note payable with no stated rate of interest

should be
a. Recorded at maturity value.
b. Recorded at the face amount.
c. Discounted to its present value.
d. Reported separately from Other short-term notes payable.

2. A short-term note payable may include all of the following except:

a. Trade notes payable
b. Nontrade notes payable
c. Unearned revenue
d. Current maturity of a long-term liability
3. On July 1, 2002, Riviera Manufacturing Co. issued a five-year note payable with a face
amount of and an interest rate of 10 percent. The terms of the note require Riviera to
make five annual payments of plus accrued with the first payment due June 30, 2003.
 With respect to the note, the current liabilities section of Riviera’s December 31, 2002,
balance sheet should include
a. 12,500 b. 50,000 c. 62,500 d. 75,000

4. On January 1, 20x1, an entity issues a 3-year, noninterest-bearing, note payable

amounting to P1,600,000 in exchange for land. The principal on the note is due on
December 31, 20x3. The effective interest rate on January 1, 20x1 is 17%.

Requirement: Provide all the entries during the term of the note payable.

5. On January 1, 20x1, an entity issues a 3-year, noninterest-bearing, note payable

amounting to P1,200,000 in exchange for land. The principal on the note is due in three
equal annual installments of P400,000 payable every December 31. The effective
interest rate on January 1, 20x1 is 17%.

Requirements:

a. Compute for current and noncurrent portions of the note payable on December
31, 20x1.
b. Provide all the entries during the term of the note payable.

6. On January 1, 20xI, an entity obtains 12%, P4,000,000 bank loan. The bank charges the
entity an 11.19% nonrefundable loan origination fee. The principal on the loan matures
on December 31, 20x4 but interest is due annually every December 31.

Requirements:

a. Compute for the initial carrying amount of the loan.

b. Compute for the effective interest rate on the loan.
c. Compute for the carrying amount of the loan on December 31, 20x1.

PROBLEM 3: EXERCISES

1. On January 1, 20x1, an entity issues a 3-year, noninterest bearing, note payable

amounting to P2,000,000 in exchange for equipment. The principal on the note is due on
December 31, 20x3. Effective interest rate on January 1, 20x1 is 16%.

Requirement: Provide all the entries during the term of the note payable.
2. On January 1, 20x1, an entity issues a 4-year, noninterest. Bearing, note payable
amounting to P3,000,000 in exchange for equipment. The principal on the note is due on
December 31, 20x3. The effective interest rate on January 1, 20x1 is 17%.

Requirement: Provide all the entries during the term of the note payable.
3. On January 1, 20x1, an entity issues a 3-year, noninterest bearing, note payable
amounting to P3,000,000 in exchange for equipment. The principal on the note is due in three
equal annual installments payable every December 31. The effective interest rate on January 1,
20x1 is 18%.

Requirements:
a. Compute for current and noncurrent portions of the note payable on December 31,
20xq.
b. Provide all the entries during the term of the note payable.

4. On January 1, 20x1, an entity issues a 4-year, noninterest bearing, note payable amounting to
P4,800,000 in exchange for equipment. The principal on the note is due in three equal annual
installments payable every December 31. The effective interest rate on January 1, 20x1 is 14%.

Requirements:

a. Compute for current and noncurrent portions of the note payable on December 31,
20x2.
b. Provide all the entries during the term of the note payable.
5. An entity issues the following notes payable on January I, 20x1:

a. P5,000,000 noninterest-bearing note payable due on December 31, 20x4.

b. P4,000,000 noninterest-bearing note payable due in four equal annual installments
every December 31.
c. P8,000,000 noninterest-bearing note payable due in five equal annual installments every
January 1. The first installment is due on January 1, 20x1.

The effective interest rate in all of the notes payable above is 15%.

Requirements: Prepare the amortization table for each of the notes payable above.

7. On January 1, 20x1, an entity obtains an 11%, P5,000,000 bank loan. The bank charges
the entity an 8.74% nonrefundable loan origination fee. The principal on the loan
matures on December 31, 20x4 but interest is due annually every December 31.

Requirements:
 a. Compute for the initial carrying amount of the loan.
b. Compute for the effective interest rate on the loan.
c. Compute for the carrying amount Of the loan on December 31, 20x1.

8. On December 31, 2001, International Refining Company purchased machinery having a

cash selling price of P85,933.75. The company paid down and agreed to finance the
remainder by making four equal payments each December 31 at the implicit interest
rate of 12%.

Requirements:
a. Determine the amount of the annual payments to be made under the financing
agreement.
b. Prepare the journal entry to record the acquisition Of the machinery on
December 31, 2001.
c. Prepare the journal entry at December 31, 2002. (Adapted)
CHAPTER 3

PROBLEM 1: TRUE OR FALSE

TRUE 1. Zero-interest bonds sell at a significant discount that provides an investor with a total interest
payoff at maturity.

TRUE 2. Callable bonds may be redeemed prior to maturity at the option of the issuer.

FALSE 3. The term "junk bonds" is frequently applied to low-yield bonds.

FALSE 4. If the stated interest rate for a bond issue exceeds the effective interest rate, the bonds will sell
at a discount.

FALSE 5. Bond issuance costs must be reported separately as deferred charges and charged to expense
over the life of the bond issue.

FALSE 6. Convertible bonds can be exchanged for another form of security, such as common stock, at the
option of the issuer.

FALSE 7. The amortization of bond discount reduces interest expense to an amount less than the interest
actually paid to bondholders.

TRUE 8. When debt is retired prior to its maturity date, a gain or loss must be recognized for the
difference between the carrying amount of the debt security and the amount paid.

FALSE 9. Under generally accepted accounting principles, gain or loss must be recognized on the
conversion of bonds into equity securities.
TRUE 10. In-substance defeasance is a process of transferring assets to an irrevocable trust, using the
assets and earnings therefrom to satisfy the long-term debt as it comes due.

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be
equal to

a. the face amount of the bond.

b. the present value of the bond maturity value plus the present value of the interest payments
to be made during the life of the bond.

c. the face amount of the bond plus the present value of the interest payments made during the
life of the bond.

d. the sum of the face amount of the bond and the periodic interest payments.

2. Unamortized debt premium should be reported on the balance sheet of the issuer as a

a. direct addition to the face amount of the debt.

b. direct addition to the present value of the debt.

c. deferred credit.

d. deduction from the issue costs.

3. Which one of the following is true when the effective-interest method of amortizing bond discount is
used?

a. Interest expense as a percentage of the bonds' carrying amount varies from period to period.

b. Interest expense remains constant for each period.

c. Interest expense increases each period.

d. The interest rate decreases each period.

4. Scott Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the
effect of the failure to record discount amortization on interest expense and bond carrying value,
respectively?

a. Understate; understate

b. Understate; overstate

c. Overstate; overstate

d. Overstate; understate

5. Bond discount should be presented in the financial statements of the issuer as a(n)
 a. contra liability

b. adjunct liability.

c. deferred charge.

d. contra asset.

6. DESTITUTE LACKING, Inc. issued P500,000, 10% bonds to yield 8%. Bond issuance costs were P10,000.
How should DESTITUTE calculate the net proceeds to be received from the issuance?

a. Discount the bonds at the stated rate of interest.

b. Discount the bonds at the market rate of interest.

c. Discount the bonds at the stated rate of interest and deduct bond issuance costs.

d. Discount the bonds at the market rate of interest and deduct bond issuance costs.

7. Any gains or losses from the early extinguishment of debt should be

a. recognized in income of the period of extinguishment.

b. treated as an increase or decrease in Paid-In Capital.

C. allocated between a portion that is an increase (decrease) in Paid-In Capital and a portion that
is recognized in current income.

d. amortized over the remaining original life of the extinguished debt.

8. When bonds are retired prior to maturity with proceeds from a new bond issue, gain or loss from the
early extinguishment of debt, if material, should be

a. amortized over the remaining original life of the retired bond issue.

b. amortized over the life of the new bond issue.

c. recognized as an extraordinary item in the period extinguishment

d. recognized in income from continuing operations in the period of extinguishment.

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. For a bond issue which sells for less than its par value, the market rate of interest is

a. Dependent on rate stated on the bond.

b. Equal to rate stated on the bond.

c. Less than rate stated on the bond.

d. Higher than rate stated on the bond.

2. The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest

a. Less the present value of all future interest payments at the market (effective) rate of interest.

b. Less the present value of all future interest payments at the rate of interest stated on the
bond.

c. Plus the present value of all future interest payments at the market (effective) rate of interest.

d. Plus the present value of all future interest payments at the rate of interest stated on the
bond.

3. The issue price of a bond is equal to the present value of the future cash flows for interest and
principal when the bond is issued

At face amount At a discount At a premium

a. Yes No Yes
b. Yes No No
c. No Yes Yes
d. Yes Yes Yes

4. Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the
effect of the failure to record premium amortization on interest expense and bond carrying value,
respectively?

a. Understate; understate

b. Understate; overstate

c. Overstate; overstate

d. Overstate; understate

5. On March 1, 1997, Clark Co. issued bonds a discount. Clark incorrectly used the straight-line method
instead of the effective interest method to amortize the discount. How were the following amounts, as
of December 31, 1997, affected by the error?

Bond carrying amount Retained earnings

a. Overstated Overstated
b. Understated Understated
c. Overstated Understated
d. Understated Overstated

6. If interest-bearing obligations are issued in between interest dates, the accrued interest sold

a. should be included in the carrying amount of the liability as a credit to 'interest expense' or
'interest payable.'
 b. should not be included in the carrying amount of the liability but rather credited to 'interest
expense' or 'interest payable.'

C. interest payable is debited

d. interest income is credited

7. The equity component of a compound financial instrument is determined

a. by allocating the issue price to the liability and equity components based on their relative fair
values.

b. by allocating the equity component its fair value.

c. by deducting the fair value of the liability component without the equity feature from the net
proceeds from the issuance of the compound instrument.

d. none of the above.

8. Upon conversion of convertible bonds,

a. no gain or loss is recognized

b. any share premium recognized on the conversion feature is transferred directly to retained
earnings

c. any unamortized discount is derecognized by a debit

d. a and b

9. Upon retirement of convertible bonds,

a. no gain or loss is recognized

b. gain or loss is recognized as the difference between the retirement price and the carrying
amount of the liability component

c. any share premium recognized on the conversion feature is recognized in profit or loss

d. gain or loss is recognized as the difference between the retirement price allocated to the
liability component and the carrying amount of the liability component.

10.The share premium recognized on a convertible bond

a. remains in equity only if the bonds are actually converted

b. reclassified out of equity to profit or loss if the bonds are not converted

c. remains in equity whether the bonds are actually converted or not

d. a and b

11.When the equity feature of a compound instrument is exercised, the related share premium is
 a. transferred directly to retained earnings

b. transferred to profit or loss

c. transferred within equity

d. none of these

12. In an "asset swap," where a liability is settled through the transfer of noncash asset,

a. the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the fair value of the noncash asset transferred.

b. the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the carrying amount of the noncash asset transferred.

C the gain or loss on settlement is computed as the difference between the carrying amount of
the liability extinguished and the more clearly determinable between the fair value of the
liability extinguished and the carrying amount of the noncash asset transferred.

d. no gain or loss is recognized

13.In an "equity swap," where a liability is settled through the issuance of equity securities, the equity
securities issued are measured at

a. the fair value of the equity securities issued

b. the fair value of the liability extinguished

c. the carrying amount of the liability extinguished

d. choice a, if this is determinable, if not, then choice b

14.In an "equity swap," where a liability is settled through the issuance of equity securities,

a. no gain or loss is recognized

b. any apparent gain or loss is recognized in equity as an addition to share premium

C. gain or loss is recognized as the difference between the measurement amount of the equity
securities issued and the carrying amount of the liability derecognized.

d. a and b

15. There is substantial modification of a liability if the difference between the present value of the new
liability discounted at the original effective interest rate and the carrying amount of the old liability is

a. at least 10%

b. more than 10%

c. less thann 10%

 d. none of these

PROBLEM 6: MULTIPLE CHOICE-COMPUTATIONAL

1. Blue Corp.'s December 31, 1991, balance sheet contained the

following items in the long-term liabilities section:

93/4% registered debentures, callable in 2002, due in 2007 700,000

912% collateral trust bonds, convertible into common

stock beginning in 2000, due in 2010 600,000

10% subordinated debentures (P30,000 maturing

annually beginning in 1997) 300,000

What is the total amount of Blue's term bonds?

a. 600,000

b. 700,000

c. 1,000,000

d. 1,300,000

2. Hancock Co.'s December 31, 20x0, balance sheet contained the following items in the long-term
liabilities section:

Unsecured

9.375% registered bonds (P25,000 maturing annually

beginning in 20x4) 275,000

11.5% convertible bonds, callable beginning in 20x9,

due 2010 125,000

Secured

9.875% guaranty security bonds, due 2x10 250,000

10.0% commodity backed bonds (P50,000 maturing

annually beginning in 20x5) 200,000

What are the total amounts of serial bonds and debenture bonds?

Serial bonds Debenture bonds

a. 475,000 400,000
b. 475,000 125,000
c. 450,000 400,000
d. 200,000 650,000

3. During 20x9, Lake Co. issued 3,000 of its 9%, P1,00 0 face value bonds at 101%. In connection with
the sale of these bonds,

Lake paid the following expenses:

Promotion costs P 20,000

Engraving and printing 25,000

Underwriters' commissions 200,000

What amount should Lake record as bond issue costs to be amortized over the term of the bonds?

a. 0

b. 220,000

c. 225,000

d. 245,000

4. On July 1, 20x7, Day Co. received P103,288 for P100,000 face amount, 12% bonds, a price that yields
10%. Interest expense for the six months ended December 31, 20x7, should be

a. 6,197

b. 6,000

c. 5,164

d. 5,000

5. On January 2, 2001, West Co. issued 9% bonds in the amount of P500,000, which mature on January
2, 2011. The bonds were issued for P469,500 to yield 10%. Interest is payable annually on December 31.
West uses the effective interest method of amortizing bond discount. In its June 30, 2001, balance sheet,
what amount should West report as bonds payable?

a. 469,500

b. 470,475

c. 471,025
 d. 500,000

6. On May 1, 1999, Bolt Corp. issued 11% bonds in the face amount of P1,000,000 that mature on May 1,
2009. The bonds were issued to yield 10%, resulting in bond premium of P62,000. Bolt uses the effective
interest method of amortizing bond premium. Interest is payable semiannually on November 1 and May
1. In its October 31, 1999, balance sheet, what amount should Bolt report as unamortized bond
premium?

a. 62,000

b. 60,100

c. 58,900

d. 58,590

7. On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial bonds, to be repaid in the amount of
P40,000 each year, Interest is payable annually on December 31. The bonds were issued to yield 10% a
year. The bond proceeds were P190,280 based on the present values at December 31, 20x0, of the five
annual payments as follows:

Amounts due

Due date Principal Interest Present value at

12/31/99
12/31/x1 40,000 16,000 50,900
12/31/x2 40,000 12,800 43,610
12/31/x3 40,000 9,600 37,250
12/31/x4 40,000 6,400 31,690
12/31/x5 40,000 3,200 26,830
190,280

Arnold amortizes the bond discount by the effective interest method. In its December 31, 20x1, balance
sheet, at what amount should Arnold report the carrying value of the bonds?

a. 139,380

b. 149,100

c. 150,280

d. 153,308

8. On November 1, 20x4, Mason Corp. issued P800,000 of its 10-year, 8% term bonds dated October 1,
20x4. The bonds were sold to yield 10%, with total proceeds of P700,000 plus accrued interest. Interest
is paid every April 1 and October 1. What amount should Mason report for interest payable in its
December 31, 20x4, balance sheet?
 a. 17,500

b. 16,000

c. 11,667

d. 10,667

9. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value bonds at 101 plus accrued interest. The
bonds were dated November 1, 20x8, and bear interest at an annual rate of 9% payable semiannually on
November 1 and May 1. What amount did Hill receive from the bond issuance?

a. 194,500

b. 200,000

c. 202,000

d. 209,500

10. The following information pertains to Camp Corp.'s issuance of bonds on July 1, 1998:

Face amount P800,000

Terms 10 years

Stated interest rate 6%

Interest payment dates Annually on July 1

Yield 9%

What should be the issue price for each P1,000 bond?

a. 1,000

b. 864

c. 807

d. 700

PROBLEM 4: CLASSROOM ACTIVITY

1. On January 1,20x1, RESTRAIN TO CURB Co. issued 1,000, P2,000, 10%. 3-year bonds for
P1,903,927. Principal is due on December 31, 20x3 but interests are due annually every year-
end. The effective interest rate is 12%.

Requirement: Provide the pertinent entries.

Jan. 1, 20x1 Cash on hand 1,903,927

Discount on bonds payable 96,073
 Bonds payable 2,000,0000

Date Interest Interest expense Amortization Present value

payment
Jan. 1, 20x1 1,903,927
Dec. 31, 20x1 200,000 228,471 28,471 1,932,398
Dec. 31, 20x2 200,000 231,888 31,888 1,964,286
Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

Dec. 31, 20x1 Interest expense 228,471

Cash in bank 200,000
Discount on 28,471
bonds payable
Dec. 31, 20x2 Interest expense 231,888
Cash in bank 200,000
Discount on 31,888
bonds payable
Dec. 31, 20x3 Interest expense 235,714
Cash in bank 100,000
Discount on 35,714
bonds payable

Bonds payable 2,000,000

Cash in bank 2,000,000

2. On January 1, 20x1, INCISE TO CARVE Co. issued 1,000, P2,000, 12%, 3-year bonds for
P2,099,474. Principal is due on December 31, 20x3 but interests are due annually every year-
end. The effective interest rate is 10%.

Requirement: Provide the pertinent entries.

Jan. 1, 20x1 Cash on hand 2,099,474

Bonds payable 2,000,000
Premium on bonds payable 99,474

Date Interest Interest expense Amortization Present value

payment
Jan. 1, 20x1 2,099,274
Dec. 31, 20x1 240,000 209,947 30,053 2,069,421
Dec. 31, 20x2 240,000 206,942 33,058 2,036,364
 Dec. 31, 20x3 240,000 203,636 36,364 2,000,000

Dec. 31, 20x1 Interest expense 209,947

Premium on bonds payable 30,053
Cash in bank 240,000
Dec. 31, 20x2 Interest expense 206,942
Premium on bonds payable 33,058
Cash in bank 240,000
Dec. 31, 20x3 Interest expense 203,636
Premium on bonds payable 36,364
Cash in bank 240,000

Bonds payable 2,000,00

Cash in bank 0 2,000,000

CHAPTER 4

PROBLEM 1: TRUE OR FALSE

1. A provision is a liability of uncertain timing or amount.

TRUE

2. Provisions differ from other liabilities because of the uncertainty about the timing or amount of
expenditure required in settlement.

TRUE

3. Provisions are presented in the statement of financial position as part of the line item “Trade
and other payables.”

FALSE
 4. Before a provision is recognized, there must be a present obligation arising from past events and
that it is probable that there will be an outflow of resources embodying economic resources and
the amount of outflow can be estimated reliably.

TRUE

5. A present obligation that requires an outflow that is reasonably possible may recognized as a
provision.

FALSE

6. If the outflow of resources from a present obligation is remote the entity shall disclose a
contingent liability.

FALSE

7. A provision is measured at the best estimate of the outflow needed to settle the obligation.

TRUE

8. A provision should never be discounted to the present value of the expected cash outflows
needed to settle the obligation•

FALSE

9. According to PAS 37, an entity shall recognize contingent assets that are probable.

FALSE

10. According to PAS 37, restructuring is a program that is planned and controlled by management,
and materially changes either the scope of a business undertaken by an entity; or the manner in
which that business is conducted.

TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Which of the following sets of conditions would give rise to the accrual of a contingency under
PAS 37?
a. Amount of loss is reasonably estimable and event occurs

Infrequently.

b. Amount of loss is reasonably estimable and occurrence of event is probable.

c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.

2. When can a “provision” be recognized in accordance with PAS 37?

 a. When there is a legal obligation arising from a past (obligating) event, the probability of
the outflow of resources is more than remote (but less than probable), and a reliable
estimate can be made of the amount of the obligation.
b. When there is a constructive obligation as a result of a past (obligating) event, the
outflow of resources is probable, and a reliable estimate can be made of the amount of
the obligation.
c. When there is a possible obligation arising from a past event, the outflow of resources is
probable, and an approximate amount can be set aside toward the obligation.
d. When management decides that it is essential that a provision be made for unforeseen
circumstances and keeping in mind this year the profits were enough but next year there
may be losses.

3. A competitor has sued an entity for unauthorized use of its patented technology. The amount
that the entity may be required to pay to the competitor if the competitor succeeds in the
lawsuit is determinable with reliability, and according to the legal counsel it is less than probable
(but more than remote) that an outflow of the resources would be needed to meet the
obligation. The entity that was sued should at yearend:
a. Recognize a provision for this possible obligation.
b. Make a disclosure of the possible obligation in footnotes to the financial statements.
c. Make no provision or disclosure and wait until the lawsuit is finally decided and then
expense the amount paid on settlement, if any.
d. Set aside, as an appropriation, a contingency reserve, an amount based on the best
estimate of the possible liability.

4. In which of the following events shall a provision most likely be recognized?

a. An entity is sued for PIOO,()()(),OO() for damages caused by its product.
b. An entity receives inventory purchased under FOB destination.
c. An entity’s building is razed by fire after the reporting period but before the financial
statements are authorized for issue. The outflow is probable and can be mea,SU reliably.
d. An entity sells a product. The entity has an implied policy of providing warranty for its
products. The entity can reliably estimate the probability of product returns and the cost
of warranty.

5. A factory owned by XYZ Inc. was destroyed by fire. XYZ lodged an insurance claim for the value of
the factory building, plant, and an amount equal to one year’s net profit’

During the year there were a number of meetings with the representatives of the insurance company.
Finally, before year-end, it was decided that XYZ Inc. would receive compensation for 90% of its claim.
XYZ Inc. received a letter that the settlement check for that amount had been mailed, but it was not
received before year-end. How should XYZ Inc. treat this in its financial statements?

a. Disclose the contingent asset in the footnotes.

 b. Wait until next year when the settlement check is actually received and not recognize or
disclose this receivable at all since at year-end it is a contingent asset.
c. Because the settlement of the claim was conveyed by a letter from the insurance
company that also stated that the settlement check was in the mail for 90% of the claim,
record 90% of the claim as a receivable as it is virtually certain that the contingent asset
will be received.
d. Because the settlement of the claim was conveyed by a letter from the insurance
company that also stated that the settlement check was in the mail for 90% of the claim,
record 100% of the claim as a receivable at year-end as it is virtually certain that the
contingent asset will be received, and adjust the 10% next year when the settlement
check is actually received.

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. What distinguishes a provision from other types of liabilities?

a. A provision must arise from contracts.
b. A provision is recognized only if the provision meets the definition of an element of
financial statements, it is probable, and can be measured reliably.
c. The settlement of a provision requires the delivery of cash or other financial instruments
under conditions which are potentially unfavorable.
d. A provision is a liability of uncertain timing or amount.
2. A provision is recognized only when
a. It meets the definition of a liability
b. There is a probable outflow of resources
c. It can be measured reliably
d. A, b, and c are present

3. Provisions are presented

a. Together with other liabilities under the caption “Trade and other payables.” Disclosures
are made in the notes to distinguish the provisions from the other liabilities.
b. Always as current liabilities.
c. Separately from other liabilities.
d. Only in the notes.

4. When measuring a provision, an entity uses:

a. Best estimate
b. Expected value
c. Mid-point.
d. Any of these, depending on the case at hand

5. A present obligation which would possibly require an outflow when settled is

a. Accrued c. accrued and disclosed
 b. Disclosed only d. ignored

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. Dunn Trading Stamp Co. records stamp service revenue an provides for the cost of redemptions
in the year stamps sold to licensees. Dunn’s past experience indicates that only 80% of the
9tamps sold to licensees will be redeemed. Dunn ; liability for stamp redemptions was P6,
()00,000 at December 31, 20x5. Additional information for 20x6 is as follows:

Stamp service revenue from stamps sold to licensees 4,000,000

Cost of redemptions (stamps sold prior to 1/1/x6) 2,750,000

If all the stamps sold in 20x6 were presented for redemption in the redemption cost would be
P2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31,
20x6?

a. 7,250,000 b. 5,500,000 c. 5,050,000 d. 3,250,000

2. During 20x1, Haft Co. became involved in a tax dispute with the BIR. At December 31, 20x1,
Haft’s tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of
additional taxes was P200,000 but could be as much as After the 20x1 financial statements were
issued, Haft received and accepted a BIR settlement offer of P275,000. What amount of accrued
liability should Haft have reported in its December 31, 20x1 balance sheet?
a.200,000 b. 250,000 c. 275,000 d. 300,000
3. On February 5, 2000, an employee filed a P2,000,000 lawsuit against Steel Co. for damages
suffered when one of Steel’s plants exploded on December 29, 1999. Steel’s legal counsel
expects the company will lose the lawsuit and estimates the loss to be between P500,()00 and
P1,000,000. The employee has offered to settle the lawsuit out of court for P900,000, but Steel
will not agree to the settlement. In its December 31, 1999, balance sheet, what amount should
Steel report as liability from lawsuit.

a. 2,000,000 b. 1,000,000 c. 900,000 d. 500,000

4. During 2()x7, Gum Co. introduced a new product carrying a two-year warranty against defects:
The estimated warranty costs related to peso sales are 2% within 12 months following the sale
and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for
the years ended December 31, 20x7 and 20x8, are as follows:

Actual warranty

Year Sales expenditures

20x7 150,000 2,250

 20x8 250,000 7,500

400,000 9,750

What amount should Gum report as estimated warranty liability in its December 31, 20x8, balance
sheet?

a. 2,500 b. 4,250 c. 11,250 d. 14,250

5. In packages of its products, the Kent Food Company includes coupons which may be presented
to grocers for discounts on certain products of Kent on or before a stated expiration date. The
grocers are reimbursed when they send the coupons to Kent. In Kent’s experience, 40% of such
coupons are redeemed, and one month generally elapses between the date a grocer receives a
coupon from a consumer and the date Kent receives it. During 20x4, Kent issued two series of
coupons as follows:

Issued on Total value Consumer expiration date Amount disbursed as of

12/31/x4

_____________________________________________________________________________________

1/1/x4 100,000 6/30/x4 34,000

7/1/x4 120,000 12/31/x4 40,000

Kent’s December 31, 20x4, balance sheet should include a liability for unredeemed coupons of

a. 0 b. 8,000 c. 14,000 d. 48,000

CHAPTER 10- PROBLEMS

PROBLEM 1: TRUE OR FALSE

TRUE 1. A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal
age and a majority of whom are residents of the Philippines.

TRUE 2. To amend the articles of incorporation, a majority vote of the board plus a vote by
shareholders representing at least two. thirds (2/3) of the outstanding share capital is
needed.

FALSE 3. Under the memorandum method of accounting for share capital, the entity records its
authorized capitalization in a debit/credit form.

TRUE 4. Preferred stock is generally issued with a par value.

FALSE 5. In the Philippines, a corporation may issue only one class of shares which is the preferred
stock.

FALSE 6. Convertible preferred stock allows the issuing corporation to redeem the stock.

TRUE 7. The call price on callable preferred stock is usually specified in the original agreement and
provides for payment of dividends in arrears, if applicable, as part of the repurchase
price.
FALSE 8. Stock Subscriptions Receivable is usually regarded as a current asset.

TRUE 9. Additional paid-in capital for the excess of the stock subscription price over par or stated
value is recorded at the time of subscription.

FALSE 10. When capital stock is issued for consideration in the form Of property other than cash, the
carrying amount of the property is used to record the transaction.

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. The par value of common stock represents

a. the liquidation value of the stock.

b. the book value of the stock.

c. the legal nominal value assigned to the stock.

d. the amount received by the corporation when the stock was originally issued.

2. Which Of the following is not one of the basic shareholders rights?

a. The right to participate in earnings.

b. The right to maintain one's proportional interest in the corporation.

c. The right to participate in the proceeds of the sale of corporate assets upon liquidation
of the corporation.

d. The right to inspect the accounting records of the corporation.

3. The following transactions relate to the stockholders' equity transactions of Lindsay Corporation for its
initial year of existence.

(a) Jan. 7 Articles of incorporation are filed with the state. The state authorized the
issuance of 10,000 shares of P50 par value preferred stock and 200,0
shares of PIO par value common stock.

(b) Jan. 28 40,000 shares of common stock are issued for P14 per share.

(c) Feb. 3 80,000 shares of common stock are issued in exchange for land and buildings
that have fair values of P250,000 and 1,000,000 respectively.
 (d) Feb. 24 2,000 shares of common stock are issued to Shane and Winston, Attorneys-at-
Law, in payment for legal services rendered in connection with
incorporation. The company charged the amount to organization costs. The
market value of the stock was P16 per share.

(e) Sep. 12 Received subscriptions for 10,000 shares of preferred stock at P53 per share. A
40 percent down payment accompanied the subscriptions.
The balance is due on October I.

(f) Oct. I Received the final payment for 10,000 shares.

Requirements: Prepare journal entries to record the foregoing transactions. Identify the entries by letter
(a - f). Assume the entity uses the "memorandum method. "
4. On February I, authorized common stock was sold a subscription basis at a price in excess of par value,
and 20 percent of the subscription price was collected. (h May 1, the remaining 80 percent of the
subscription price was collected. Additional Paid-In Capital would increase on

February May

a. No Yes

b. No No
c. Yes No

d. Yes Yes

(Adapted)

5. The entry to record the issuance of common stock for fully paid stock subscriptions is

a. a memorandum entry.

b. Dr. Common Stock Subscribed; Cr. Common Stock; Cr. Additional Paid-In Capital
c. Dr. Common Stock Subscribed; Cr. Subscriptions Receivable

d. Dr. Common Stock Subscribed; Cr. Common Stock

6. The issuance of shares of preferred stock to shareholders

a. increases preferred stock outstanding.

b. has no effect on preferred stock outstanding.

c. increases preferred stock authorized.

d. decreases preferred stock authorized.

7. Which of the following is an appropriate presentation treasury stock?

a. As a marketable security
 b. IAS a deduction at cost from total stockholders' equity

c. Asa deduction at cost from total contingent liabilities

d. As a deduction at par from total stockholders' equity

8. The data below are from the December 31, 2002, balance sheet of the Handi Corner Corporation:
Common stock, P50 par, 3,000 shares issued and outstanding ………………………P150,OOO

Paid-in capital in excess of par…………………….. 45,000

Retained earnings…………………………………………………. 75,000

During 2003, the following transactions affecting corporate capital were recorded:
Aug. 16 Purchased 400 shares of treasury stock at P78 per share.

Oct. 23 Purchased 225 shares of stock at P71 per share and immediately retired the stock.

Nov. 3 Sold 150 shares of the treasury stock purchased on Aug. 16 at P81 per share.

Requirement: Assuming the cost method is used for treasury stock and that retained earnings are to be
reduced minimally in stock reacquisition transactions, provide the entries required to record the above
transactions.

9. Gains and losses on the purchase and resale of treasury stock may be reflected only in

a. paid-in capital accounts.

b. paid-in capital and retained earnings accounts.

c. income, paid-in capital, and retaining earnings accounts.

d. income and paid-in capital accounts.

10. At the date of the financial statements, common stock share issued would exceed common stock
shares outstanding as a result of the

a. declaration of a stock split.

b. declaration of a stock dividend.

c. purchase of treasury stock.

d. payment in full of subscribed stock.

11. When treasury stock is purchased for more than its par value Treasury Stock is debited for the
purchase price under which of the following methods?

Cost Method Par Value Method

a. No No

b. No Yes
 c. Yes No

d. Yes Yes

12. When treasury stock is purchased for cash at more than its par value, what is the effect on total
stockholders' equity under each of the following methods?
Cost Method Par Value Method

a. No effect Decrease

b. Decrease No effect

c. Increase Increase
d. Decrease Decrease

13. Treasury stock was acquired for cash at a price in excess of its par value. The treasury stock was
subsequently reissued cash at a price in excess of its acquisition price. Assuming the cost method of
accounting for treasury stock tr is used, what is the effect on retained earnings?
Acquisition of Treasury Stock Reissuance of Treasury Stock

a. No effect Increase

b. Increase No effect

c. No effect No effect

d. Increase Decrease

CHAPTER 10- EXERCISE 2

PROBLEM 3: EXERCISES

1. Barker Corp. received a charter authorizing 120,000 shares of common stock at P15 par value
per share. During the first year of operations, 40,000 shares were sold at P28 per share. 600
shares were issued in payment of a current operating debt of P18,600. In the first year, the net
income was P142,000.

During the year, dividends of P36,000 were paid to stockholders. At the end of the year, total liabilities
were P82,000.

Requirements: Use the given data to compute the following items at the end of the first year (show all
computations):

(1) Total liabilities and stockholders' equity

(2) Stockholders' equity

(3) Contributed capital

(4) Issued capital stock (par)

(5) Outstanding capital stock (par)

 (6) Unissued capital stock (number of shares)

(7) Paid-In capital in excess of par value

2. On August 10, Jameson Corporation reacquired 8,000 shares Of its P100 par value common
stock at P134. The stock was originally issued at P110. The shares were resold on November 21
at P145.

Requirement: Provide the entries required to record the reacquisition and the subsequent resale of the
stock using the cost method of accounting for treasury stock.

3. The Perry Company wants to raise additional equity capital. The company decides to issue 5,000
shares of P25 par preferred stock with detachable warrants. The package of the stock and
warrants sells for P105. Each warrant enables the holder to purchase two shares of PIO par
common stock at P30 per share. Immediately following the issuance of the stock, the stock
warrants are selling at P14 each. The market value of the preferred stock without the warrants
is P96.

Requirements:
(1) Prepare a journal entry for Perry Company to record the issuance of the preferred stock and the
detachable warrants.
(2) Assuming that all the warrants are exercised, prepare a journal entry for Perry to record the
exercise of the warrants.
(3) Assuming that only 70 percent of the warrants are exercised, prepare a journal entry for Perry to
record the exercise and expiration of the warrants.

ANSWER

1. Solutions:

(1)

Shares sold (40,000 x ₱ 28) ........................... ₱ 1,120,000

Shares issued in payment of debt (600 x ₱31) ......... 18,600

Net income ........................................... 142,000

Total liabilities .................................... 82,000

₱ 1,362,600

Less dividends ....................................... 36,000

Total liabilities & stockholders' equity ............. ₱ 1,326,600

(2) ₱ 1,326,600 - ₱ 82,000 = ₱1,244,600

(3) ₱ 1,120,000 + ₱ 18,600 = ₱1,138,600

(4) 40,600 shares x ₱15 = ₱609,000

(5) 40,600 shares x ₱15 = ₱609,000

(6) 120,000 - 40,600 = 79,400 shares

(7) ₱ 1,138,600 - ₱ 609,000 = ₱529,600

2. Solution

Aug. 10 Treasury Stock ..................... 1,072,000

Cash ............................. 1,072,000

Nov. 21 Cash (8,000 ₱ 145) ................ 1,160,000

Treasury Stock ..................... 1,072,000

Paid-In Capital from Sale of

Treasury Stock (8,000 x ₱11) ... 88,000

3. Solutions:

(1)

Cash (5,000 x ₱ 105) ......................... 525,000

Common Stock Warrants ..................... 66,818

Preferred Stock (5,000 x ₱25) ............. 125,000

Paid-In Capital in Excess of Par-Preferred

Stock ................................... 333,182

Value assigned to warrants:

14/110 x ₱ 105 x 5,000 = ₱ 66,818

Value assigned to preferred stock:

96/110 x ₱ 105 x 5,000 = ₱458,182

(2)

Common Stock Warrants ....................... 66,818

Cash (10,000 x ₱ 30) ......................... 300,000

Common Stock (10,000 x ₱10) ............... 100,000

 Paid-In Capital in Excess of Par-Common

Stock .................................... 266,818

(3)

Common Stock Warrants (70% x ₱ 66,818) ....... 46,773

Cash (7,000 x ₱ 30) .......................... 210,000

Common Stock (7,000 x ₱10) ................ 70,000

Paid-In Capital in Excess of Par-Common

Stock .................................... 186,773

Common Stock Warrants (30% x ₱ 66,818) ....... 20,045

Paid-In Capital from Expired Stock Warrants 20,045

POBLEM 5: MULTIPLE CHOICE – THEORY

1. If shares are issued below par or issued value, the deficiency of the consideration received is recorded
as "discount on share capital." The discount is presented in the statement of financial position as

a. receivable from the shareholdér concerned

b. a deduction in shareholders' equity

c. an addition in shareholders' equity

d. a and b

2. Legal capital is the portion of contributed capital that cannot be distributed to the owners during the
lifetime of the corporation unless the corporation is dissolved and all of its liabilities are settled first. For
no-par value shares, legal capital is

a. the aggregate par value of shares issued and subscribed.

b. the total consideration received or receivable from shares issued or subscribed.

c. the aggregate stated value of shares issued and subscribed.

d. the aggregate market value of shares issued and subscribed.

3. How should the excess of the subscription price over the par value of ordinary subscribed be
recorded?

a. As share premium when the subscription is received.

b. As share premium when the subscription is collected.

 c. As retained earnings when the subscription is received.

d. As share premium when the capital stock is issued.

4. Share issuance costs are recognized directly in equity. If the related share premium is insufficient to
offset any share issuance costs, the issuance costs are
a. recognized as expense in profit or loss

b. charged directly to retained earnings

c. charged directly to share capital

d. a or b
5. Treasury shares are accounted for at

a. cost

b. par value

c. market value
d. fair value

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL

1. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances:

Ordinary shares, P3 par P600,0OO

Share premium 800,000

Treasury stock, at cost 50,000

Accumulated other comprehensive income (Debit) 20,000

Retained earnings appropriated for uninsured earthquake losses 150,000

Retained earnings unappropriated 200,000

What amount should Zinc report as total stockholders' equity in its December 31, 20xI, balance sheet?
a. 1,680,000

b. 1,720,000

c. 1,780,000

d. 1,820,000
2. On April I, 20x9, Hyde Corp., a newly formed company, had the following stock issued had
outstanding:

• Ordinary shares, PI par value, 20,000 shares originally issued for P30 per share.
 • Preference shares, PIO par value, 6,000 shares originally issued for P50 per share.

Hyde's April J, 20x9, statement of shareholders' equity should report

Ordinary shares Preference shares Share premium

a. P20,OOO P60,OOO P820,OOO

b. P20,OOO P300,OOO P580,000

c. P600,OOO P300,OOO PO
d. P60,000 P60,000 P240,OOO

3. On March I, 20x1, Rya Corp. issued 1,000 shares of its P20 par value ordinary shares and 2,000 shares
of its P20 par value convertible preference shares for a total of At this date, Rya's ordinary share was
selling for P36 per share, and the convertible preference share was selling for P27 per share. What
amount of the proceeds should be allocated to Rya's convertible preference share?

a. 60,000 b. 54,000 c. 48,000 d. 44,000

4. The stockholders' equity section of Peter Corporation's balance sheet at December 31, 20X2, was as
follows:

Ordinary shares (PIO par value, authorized 1,000,000 shares,

issued and outstanding 900,000 shares) P9,000,000

Share premium 2,700,000

Retained earnings P1,300,000

On January 2, 20X3, Peter purchased and retired 100,000 shares of its stock for P1,800,000. Immediately
after retirement of these 100,000 shares, the balances in the share premium and retained earnings
accounts should be

Share premium Retained earnings

a. P900,000 P1,300,000

b. P1,400,000 P800,000
c. P1,900,000 P1,300,000

d. P2,400,000 P800,000

5. Asp Co. was organized on January 2, 200, with 30,000 authorized shares of PIO par ordinary shares.
During 20x1 the corporation had the following capital transactions:

Jan. 5 Issued 20,000 shares at r 15 per share.

July 14 Purchased 5,000 shares at PI 7 per share.

Dec 27 Reissued the 5,000 shares held in treasury at P20 per share.
Asp used the cost method to record the purchase and reissuance of the treasury shares, In its December
31, 20xI, balance sheet, What amount should Asp report as additional paid-in capital in excess of par?

a. 100,000

b. 125,000
c. 140,000

d. 115,000