NAME: Date:

Professor: Section: Score:

1. A retail store sells gift certificates that are redeemable in merchandise. What is the effect of a
sale of gift certificate on the following?
Revenue Liability
a. No effect No effect
b. Increase Increase
c. No effect Increase
d. Increase No effect

2. According to the revised Conceptual Framework, a liability is recognized if

a. the liability exists by meeting all the aspects in the definition of a liability.
b. recognizing the liability results in relevant and faithfully represented information.
c. the outflow of economic benefits from the obligation is both probable and can be measured
reliably. d. a and b

3. Which of the following instruments would not be classified as a financial liability?

a. A preference share that will be redeemed by the issuer for cash on a future date (i.e., the
entity has an outstanding share that it will repurchase at a future date).
b. A contract for the delivery of as many of the entity’s ordinary shares as are equal in value to
₱100,000 on a future date (i.e., the entity will issue a variable number of own shares in return
for cash at a future date).
c. An issued perpetual debt instrument (i.e., a debt instrument for which interest will be paid for
all eternity, but the principal will not be repaid).
d. A written call option that gives the holder the right to purchase a fixed number of the entity’s
ordinary shares in return for a fixed price (i.e., the entity would issue a fixed number of own
shares in return for cash, if the option is exercised by the holder, at a future date).

4. The following are taken from the records of MOLLIFY APPEASE Co. as of year-end.
Accounts payable 8,000 SSS contributions payable 24,00
0
Utilities payable 28,000 Cash dividends payable 16,00
0
Accrued interest expense 24,000 Property dividends 28,00
payable 0
Advances from customers 4,000 Share dividends payable 12,00
0
Unearned rent 36,000 Lease liability 140,00
0
Warranty obligations 20,000 Bonds payable 480,00
0
Unearned interest on 12,000 Discount on bonds (60,00
receivables payable 0)
Income taxes payable 8,000 Security deposit 8,000
Obligation to deliver a Redeemable preferences
variable number of own shares issued 56,00
shares worth a fixed 40,000 0
amount of cash
Preference shares issued 40,000 Constructive obligation 44,00
0
How much are the total financial liabilities to be disclosed in the notes?
a. 784,000 b. 800,000 c. 740,000 d. 700,000
4. C

Accounts payable 8,000

Utilities payable 28,000

Accrued interest expense 24,000

Obligation to deliver a variable number of own shares worth a fixed amount of cash 40,000

Cash dividends payable 16,000

Lease liability 140,000

Bonds payable 480,000

Discount on bonds payable (60,000)

Security deposit 8,000

Redeemable preference shares 56,000

Total financial liabilities 740,000

5. ENVISAGE THINK VISUALIZE Co. has a 10%, ₱2,000,000 loan payable as of December 31, 20x1
which is maturing on July 1, 20x2. Interest on the loan is due every July 1 and December 31. All
interests accruing during year were settled on the scheduled dates. On December 1, 20x1,
ENVISAGE Co. entered into a refinancing agreement with the lender to roll over the loan for
another six-year term. The rollover transaction was completed in December 20x1. In
ENVISAGE’s 20x1 annual financial statements, how much is presented as current liability in
relation to the loan?
a. 2,000,000 b. 2,200,000 c. 240,000 d. 0

6. Eliot Corporation’s liabilities at December 31, 2008 were as follows:

Accounts payable and accrued interest 2,000,000
5-year 10% Notes payable – due December 31, 2011 5,000,000

Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits
and losses annually until the amount of appropriation has equaled the face amount of the obligation.
Non-compliance will render the note as payable on demand by the lender. As of December 31, 2008,
Elliot Corporation has not yet complied with the loan agreement. However, on December 31, 2008,
the lender provided Elliot a grace period of 12 months to rectify the breach and, within which, the
lender will not demand payment. What amount of current liabilities should Elliot Corporation report
in its December 31, 2008 statement of financial position?
a. 2,000,000 b. 5,000,000 c. 7,000,000 d. 0

7. NESCIENCE IGNORANCE Co. has the following liabilities as of December 31, 20x1.
• Trade accounts payable, net of debit balance in supplier’s account of ₱20,000, net of unreleased
checks of ₱16,000, and net of postdated checks of ₱8,000. 1,200,000
• Credit balance in customers’ accounts 8,000
• Financial liability designated at FVPL 200,000 • Bonds payable maturing in 10 equal annual
installments of ₱400,000 4,000,000
• 12%, 5-year note payable issued on October 1, 20x1 400,000
• Deferred tax liability 20,000 • Unearned rent 16,000
• Contingent liability 40,000
• Reserve for contingencies 100,000

How much are the total current liabilities?

a. 1,880,000 b. 1,868,000 c. 1,872,000 c. 1,860,000

8. FLUNK TO FAIL Co. requires advance payments for custom-built guitar effects, gadgets, and
racks. The records of FLUNK show the following:
• Unearned revenue, January 1, 20x1 ₱ 2,000,000
• Advances received during 20x1 20,000,000
• Advances applied to orders shipped in 20x1 16,000,000
 • Advances pertaining to orders cancelled in 20x1 600,000

How much is presented as current liability assuming the advance payments received are
refundable?
a. 4,500,000 b. 5,400,000 c. 6,000,000 d. 6,600,000

9. WOLFISH FEROCIOUS Co. maintains escrow accounts and pays real estate taxes for its
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. Information
on escrow accounts are shown below:
Escrow accounts liability, January 1, 20x1 ₱ 800,000
Escrow payments received during 20x1 6,000,000
Real estate taxes paid during 20x1 2,000,000
Interest on escrow funds during 20x1 400,000

How much is the current liability for the escrow accounts on December 31, 20x1?
a. 5,160,000 b. 4,800,000 c. 4,840,000 d. 5,040,000

10. SOOTHE RELIEVE Co.’s note payable with a carrying amount of ₱4,000,000 as of December 31,
20x1 is due for immediate repayment upon the demand of the lender. However, on December 31,
20x1, there is no indication that the lender will demand payment over the next 12 months. What
amount of the note payable is reported as current liability in SOOTHE’s 20x1 year-end financial
statements? a. 4,000,000 b. 200,000 c. 4,200,000 d. 0

11. Which of the following represents a liability?

a. The obligation to pay interest on a five-year note payable that was issued on the last day of
the current year.
b. The obligation to pay for goods that an entity expects to order from suppliers next year.
c. The obligation to deliver goods that customers have ordered and paid for during the current
year.
d. The obligation to distribute own shares of stocks next year as a result of a dividend
declaration near the end of the current year.

12. On January 1, 20x1, Washy-washy Co. acquired a washing machine by paying cash of ₱400,000
and issuing a noninterest-bearing note of ₱4,000,000 due on January 1, 20x4. The effective
interest rate on the note is 12%. How much is the interest expense in 20x1?
a. 341,656 b. 389,654 c. 334,357 d. 480,000

13. On January 1, 20x1, Spin Co. acquired an intangible asset by paying cash of ₱400,000 and issuing
a noninterestbearing note payable of ₱4,000,000 due in 4 equal annual installments. The first
installment is due on January 1, 20x1, while the succeeding installments are due every December
31. The effective interest rate is 12%. How much is the carrying amount of the note on December
31, 20x1?
a. 2,401,832 c. 2,188,776
b. 2,179,830 d. 1,690,051

14. On January 1, 20x1, Bath Co. issued a ₱4,800,000 noninterest-bearing note due in six equal semi-
annual payments starting July 1, 20x1. The effective interest rate is 10%. How much is the
carrying amount of the note on December 31, 20x1?
a. 3,463,580 c. 3,343,341
b. 2,279,830 d. 2,836,761

15. On January 1, 20x1, Warehouse Co. acquired a machine in exchange for a ₱4,800,000
noninterest-bearing note due as follows:
Date Amount
December 31, 20x1 ₱ 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total ₱ 4,800,000

The prevailing rate of interest of this type of note is 10%. How much is the interest expense in 20x1?
a. 400,000 c. 410,581
b. 479,340 d. 410,518
16. On January 1, 20x1, Fate Co. purchased an inventory with a list price of ₱4,400,000 and a cash
selling price of ₱4,000,000 in exchange for a ₱4,800,000 noninterest-bearing note due on
December 31, 20x3. The carrying amount of the note on December 31, 20x1 is approximate
equal to
a. 3,897,830 b. 4,000,000 c. 4,250,780 d. 4,362,036

17. Tweet Co. acquired a machine on January 1, 20x1 by paying cash of ₱400,000 and issuing a
noninterest-bearing note of ₱4,000,000 due in 4 equal annual installments starting on December
31, 20x1. The prevailing rate of interest for this type of note is 12%. How much is the
noncurrent portion of the note on December 31, 20x1?
a. 1,468,050 c. 1,683,508
b. 1,476,996 d. 1,690,051

18. SUCCOR Co. issued a 3-year, noninterest-bearing note of ₱4,000,000 to RELIEF, Inc., a related
party. The proceeds from the issuance of the note were ₱4,000,000. The note matures on
December 31, 20x3. The prevailing interest for similar type of obligation is 12%. The entry on the
initial recognition of the note includes a a. credit to notes payable for ₱2,847,120
b. debit to discount on notes payable for ₱1,152,880
c. credit to unrealized gain for ₱1,152,880
d. b and c

19. On January 1, 20x1, SAVOR TASTE Co. acquired a machine by issuing a 3-year, 3%, ₱4,000,000
note payable. Principal is due on January 1, 20x4 but interests are to be paid annually. The
prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note
on December 31, 20x1? a. 3,401,832 c. 3,288,776
b. 3,391,580 d. 3,505 ,464

20. On January 1, 20x1, SEEMLY HANDSOME Co., issued a ₱12,000,000 non-interest bearing note
that is due in three annual installments as follows:
Date Amount
January 1, 20x4 ₱ 6,000,000
January 1, 20x5 4,000,000
January 1, 20x6 2,000,000
Total ₱12,000,000

The effective interest rate is 12%. How much is the carrying amount of the note on initial
recognition?
a. 7,947,608 c. 7,958,340
b. 7,840,234 d. 7,712,349

21. Which of the following is the least relevant consideration when evaluating whether to
derecognize a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether the obligation has a potential to cause inflows of economic benefits to the issuer.

22. When bonds are redeemed by the issuer prior to their maturity date, any material gain or loss on
the redemption,
is
a. amortized over the period remaining to maturity and reported as an extraordinary item in the
income statement.
b. amortized over the period remaining to maturity and reported as part of income from
continuing operations in the income statement.
c. reported in the income statement as an extraordinary item in the period of redemption.
d. reported in the income statement as part of income from continuing operations in the period
of redemption.

23. On January 1, 20x1, SMUDGE BLUR Co. issued 1,000, ₱4,000, 12%, 3-year bonds for ₱4,198,948.
Principal is due on December 31, 20x3 but interests are due annually every year-end. The
 effective interest rate is 10%. How much is the unamortized discount or premium on bonds
payable as of December 31, 20x1?
a. 198,948 c. 138,843
b. 135,204 d. 143,134

24. On January 1, 20x1, SLOPPY UNTIDY Co. issued 10%, ₱4,000,000 bonds at face amount. SLOPPY
paid underwriter’s commission of ₱192,147. The bonds mature on December 31, 20x3. Interest is
due annually. The effective interest on the bond issue is approximately equal to
a. 9.2659% c. 12%
b. 11.3692% d. 13.5%

25. On March 1, 2002, Pyne Furniture Co. issued ₱700,000 of 10 percent bonds to yield 8 percent.
Interest is payable semiannually on February 28 and August 31. The bonds mature in ten years.
Pyne Furniture Co. is a calendaryear corporation. How much is the issue price of the bonds?
a. 792,335 c. 802,336
b. 795,132 d. 809,667

26. On January 1, 20x1, SPITEFUL MALICIOUS Co. issued 1,000, ₱4,000, 10%, 3-year bonds for
₱3,807,852. Principal is due on December 31, 20x3 but interests are due annually every year-
end. The effective interest rate is 12%. SPITEFUL Co. incorrectly used the straight line method
instead of the effective interest method to amortize the discount. What is the effect of the error
on the carrying amount of the bonds on December 31, 20x1? (over)
understated
a. 7,107 c. 6,341
b. (7,107) d. (6,341)

27. On April 1, 20x1, SQUALID FILTHY Co. issued 12%, ₱4,000,000 bonds dated January 1, 20x1 at
97 including accrued interest. The bonds mature in ten years and pay interest annually every
year-end. How much is the initial carrying amount of the bonds?
a. 3,760,000 d. 3,812,341
b. 3,880,000 c. 4,000,000

28. On January 1, 20x1, POTENT POWERFUL Co. issued 12% bonds with face amount of ₱4,000,000
for ₱4,303,264. The bonds mature in five years and pay annual interest every year-end. The
effective interest rate is 10%. On July 1, 20x3, POTENT called-in the entire bonds and retired
them at 102, which is inclusive of payment for accrued interest. How much is the gain (loss) on
the extinguishment of the bonds?
a. 328,897 c. (118,948)
b. (328,896) d. 118,948

29. On January 1, 20x1, TIPSY UNSTEADY Co. issued 10%, ₱12,000,000 bonds for ₱11,601,220.
Principal on the bonds matures in three equal annual installments. Interest is also due annually
at each year-end. The effective interest rate on the bonds is 12%. How much is the carrying
amount of the bonds on December 31, 20x1?
a. 7,844,635 c. 7,683,343
b. 7,793,366 d. 7,543,341
30. On December 31, 20x1, CONFLAGRATION LARGE FIRE Co. agreed to the following modification
of its existing liability:
• The principal remained unchanged at ₱20,000,000.
• The repayment of the accrued interest of ₱600,000 was waived.
• The maturity date was extended from December 31, 20x2 to December 31, 20x4.
• The stated rate was reduced from 12% to 10%.

Interest is payable annually at each year-end. The original effective interest rate is 12%.
CONFLAGRATION Co. incurred costs of ₱200,000 which were directly attributable to the
restructuring. The costs were paid to third parties. How much is the gain (loss) on the
extinguishment of the debt?
a. (1,360,732) c. (200,000)
b. 1,360,732 d. 0

31. To record an asset retirement obligation (ARO), i.e., provision for decommissioning and
restoration costs, the cost associated with the ARO is a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
32. The board of directors of ABC Inc. decided on December 15, 20XX, to wind up international
operations in the Far East and move them to Australia. The decision was based on a detailed
formal plan of restructuring as required by PAS 37. This decision was conveyed to all workers
and management personnel at the headquarters in Europe. The cost of restructuring the
operations in the Far East as per this detailed plan was ₱2 million. How should ABC Inc. treat
this restructuring in its financial statements for the year-end December 31, 20XX?
a. Because ABC Inc. has not announced the restructuring to those affected by the decision and
thus has not raised an expectation that ABC Inc. will actually carry out the restructuring (and
as no constructive obligation has arisen), only disclose the restructuring decision and the cost
of restructuring of ₱2 million in footnotes to the financial statements.
b. Recognize a provision for restructuring since the board of directors has approved it and it has
been announced in the headquarters of ABC Inc. in Europe.
c. Mention the decision to restructure and the cost involved in the chairman’s statement in the
annual report since it a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on prudence, wait until
next year and do nothing in this year’s financial statements.

33. In 20x1, LUMINOUS SHINING Co. recalled a product due to a possible defect caused by
malfunctioning factory equipment. The products recalled will be repaired free of charge.
LUMINOUS is uncertain whether all products recalled will have the possible defect. However,
the following estimate was made by LUMINOUS’s engineers and managerial accountants and
approved by the board of directors.
Repair cost Probabilit
80,000,000 y
5%
60,000,000 20%
40,000,000 35%
20,000,000 40%
10 %
0
How much is the provision to be recognized?
a. 38M c. 48M
b. 50M d. 32M

34. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract of sale, the manufacturer undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from the date of sale.
On the basis of experience, it is probable (i.e., more likely than not) that there will be some
claims under the warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold
in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the
20x2 outflows of economic benefits related to the warranty repairs and replacements take place on
June 30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs
or replacement costing 90% of sale price. The entity has no reason to believe future warranty claims
will be different from its experience.
At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30,
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in
the cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash
flows.

How much is the warranty provision at December 31,

20x1? a. 424,000 c. 800,000
b. 840,000 d. 752,000

35. SENTIENT AWARE Co. is engaged in logistics services. During the year, a warehouse was
destroyed by fire. It was estimated that SENTIENT will probably pay around ₱200M in damages
caused to the goods owned by customers that were contained in the destroyed warehouse. The
contents of the warehouse are insured for ₱80M. SENTIENT’s claim for the insurance has been
approved for payment by the insurance company. How much is the provision to be recognized?
a. 200M c. 60M
b. 120M d. 0

36. On April 30, 20x2, an explosion occurred at CONVOLUTE TWIST Co.’s plant causing extensive
property damage to area buildings. CONVOLUTE’s management and counsel concluded that it is
likely that claims will be asserted and that it is probable that CONVOLUTE will be held
responsible for damages. CONVOLUTE’s management believed that ₱5,000,000 would be a
reasonable estimate of its liability. CONVOLUTE’s ₱20,000,000 comprehensive public liability
policy has a ₱1,000,000 deductible clause. CONVOLUTE’s financial statements were authorized
for issue on March 30, 20x2. How should the event above be reported in CONVOLUTE’s
December 31, 20x1 financial statements?
a. accrue a provision of ₱1M.
b. disclose only ₱1M.
c. accrue and disclose ₱1M.
d. neither accrue nor disclose.

37. In 20x1, JUBILEE REJOICING Co. recognized a provision for a probable loss on a pending lawsuit
amounting to ₱2,000,000. In 20x2, the lawsuit remains unsettled and JUBILEE determined that
the provision on the pending law suit must be increased by ₱800,000. In 20x3, JUBILEE won the
lawsuit. Nothing was paid on the settlement. The effect of the settlement on the 20x3 profit is:
increase (decrease)
a. 2,800,000 c. 2,000,000
b. (2,800,000) d. 0

38. On January 1, 20x1, DECRY Co. signed a three year, non-cancelable purchase contract, which
allows DECRY Co. to purchase up to 60,000 units of a microchip annually from BELITTLE Co. at
₱100 per unit and guarantees a minimum annual purchase of 15,000 units. At year-end, it was
found out that the goods are obsolete. DECRY had 10,000 units of this inventory at December 31,
20x1, and believes these parts can be sold as scrap for ₱20 per unit. How much is the loss on
purchase commitment?
a. 2,400,000 c. 3,200,000
b. 800,000 d. 9,600,000

39. RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that
warranty costs ₱400 per unit sold. As of January 1, 20x1, the liability for warranty has a balance
of ₱800,000 for units sold in 20x0. During the year RISIBLE sold 5,000 units and actual warranty
costs incurred were ₱1,240,000. How much is the warranty expense to be recognized in 20x1?
a. 2,000,000 c. 3,240,000
b. 1,240,000 d. 4,240,000

40. CANDID FRANK Co. launched a sales promotion in 20x1. For every five bottles returned to
CANDID, customers will receive a T-shirt. The unit cost of T-shirt is ₱400. CANDID estimates that
80% of sales will be redeemed. Additional information is as follows:

Units
Sales in 20x1 500,000
Sales in 20x2 900,000
T-shirts distributed in 20x1 60,000
T-shirts distributed in 20x2 147,600
How much is the liability for premiums as of December 31, 20x2?
a. 6,650,000 c. 6,870,000
b. 7,860,000 d. 6,560,000

“Pride goes before destruction, a haughty spirit before a fall.” (Proverbs 16:18)

- END -

ANSWERS:
1. C

2. D

3. D

4. C

Accounts payable 8,000

Utilities payable 28,000

Accrued interest expense 24,000

Obligation to deliver a variable number of own shares worth a fixed amount of cash 40,000

Cash dividends payable 16,000

Lease liability 140,000

Bonds payable 480,000

Discount on bonds payable (60,000)

Security deposit 8,000

Redeemable preference shares 56,000

Total financial liabilities 740,000

5. D – the loan is noncurrent as of December 31, 20x1 because it is due in six-years’ time
6. A
7. A
Solution:
a. Trade accounts payable gross of debit balance, unreleased check, and postdated check 1,244,000
(1.2M + 20K + 16K + 8K)
 b. Advances from customers (Credit balance in customers’ accounts)
8,000
c. Financial liability designated at FVPL 200,000
2,000,000
d. Current portion of bonds payable 20,000,00 400,000
16,000,0 0
e. Interest payable on note payable (₱400,000 x 12% x 3/12) 12,000
00
g. Unearned rent 600,000 16,000
5,400,000
Total current liabilities 1,880,000

8. C
Unearned income

Jan. 1, 20x1
Advances earned Advances received
Orders cancelled
Dec. 31, 20x1

Unearned income – Dec. 31, 20x1 5,400,000

Refundable deposits 600,000
Total current liability for advances received 6,000,000

9. A
Liability for escrow accounts
Jan. 1, 20x1 800,000
Escrow payments 6,000,000 received
Interest on escrow funds
2,000,000 360,000 net of 10% service fee
5,160,000 (400,000 x
Taxes paid 90%) Dec. 31, 20x1

10. A ₱4,000,000, the note is payable on demand. Only if an enforceable promise is received by the
end of the reporting period from the creditor not to demand payment for at least 12 months after
the reporting period that the note may be classified as
noncurrent.
11. C
12. A
Initial measurement: (4,000,000 x PV of 1 @12%, n=3) = 2,847,121
Interest expense in 20x1: 2,847,121 x 12% = 341,655

13. D
Initial measurement: (1,000,000 x PV of an annuity due @12%, n=4) = 3,401,831

Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 3,401,831
Jan. 1, 20x1 1,000,000 - 1,000,000 2,401,831
Dec. 31, 20x1 1,000,000 288,220 711,780 1,690,051

14. D
Initial measurement:
(4,800,000 ÷ 6 semiannual payments) = 800,000 x PV of ordinary annuity @5%,
n=6 = 4,060,554

Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 4,060,554
July 1, 20x1 800,000 203,028 596,972 3,463,582
Dec. 31, 20x2 800,000 173,179 626,821 2,836,761

15. D
Initial measurement:
Cash flows PV of 1 @10% PVF PV
Dec. 31, 20x1 2,400,000 n=1 0.909091 2,181,818
Dec. 31, 20x2 1,600,000 n=2 0.826446 1,322,314
Dec. 31, 20x3 800,000 n=3 0.751315 601,052
4,105,184
Subsequent measurement:
Date Payments Interest expense Amortization Present value
Jan. 1, 20x1 4,105,184
Dec. 31, 20x1 2,400,000 410,518 1,989,482 2,115,702
16. C
Initial measurement: 4,000,000 – the cash price equivalent

Trial and error approach

1st trial: (at 6%)
➢ Future cash flows x PV factor at x% = PV of note
➢ 4,800,000 X PV factor at 6%, n=3 = 4,000,000
➢ (4,800,000 x 0.839619) = 4,030,171 is not equal to 4,000,000

2nd trial: (at 7%)

➢ Future cash flows x PV factor at x% = PV of note
➢ 4,800,000 X PV factor at 7%, n=3 = 4,000,000
➢ (4,800,000 x 0.816298) = 3,918,230 is not equal to 4,000,000

Interpolation:
x% - 6%

7% - 6%

== 0.2695

2,847,1
20

19. B
Initial measurement:

a
(PV of ₱1 @12%, n=3)
b
(PV of ordinary annuity of ₱1 @12%, n=3

Subsequent measurement:
1/1/x4 6,000,000 PV of ₱1 @ 12%, n=3 0.711780 4,270,680
1/1/x5 4,000,000 PV of ₱1 @ 12%, n=4 0.635518 2,542,072
1/1/x6 2,000,000 PV of ₱1 @ 12%, n=5 0.567427 1,134,854
7,947,606

21. D – inflows relate to assets not liabilities

22. D
23. C
Date Interest payments Interest expense Amortization Present value
Jan. 1, 20x1 4,198,948
Dec. 31, 20x1 480,000 419,894 60,106 4,138,842
Date Payments for interests Interest expense Amortization Present value
Jan. 1, 20x1 3,135,340
Jan. 1, 20x2 120,000 376,240 256,240 3,391,580
Jan. 1, 20x3 120,000 406,990 286,990 3,678,570
Jan. 1, 20x4 120,000 441,430 321,430 4,000,000

20. A
Date Cash flows PV of ₱1 PV factors Present value

4,000,000 face amount – 4,138,842 = 138,842

24. C
Initial measurement: (4,000,000 – 192,147) = 3,807,853

Trial using 12%:

 (4M x PV of ₱1 @ 12%, n=3) + [400,000 x PV of an ordinary annuity of ₱1 @ 12%, n=3] =
3,807,853
 (2,847,120 + 960,733) = 3,807,853 is equal to 3,807,853

❖ The effective interest is 12%.

25. B
Solution:
 (700,000 x PV of 1 @4% (a), n=20(b)) + (35,000(c) x PV ordinary annuity
@4%, n=20) =  319,471 + 475,661 = 795,132

(a)
8% ÷ 2 = 4%
(b)
10 yrs. x 2 payments in a year = 20
(c)
700,000x 10% x ½ = 35,000

26. B
Erroneous amortization of discount using straight line:
The erroneous straight-line amortization of the discount on bonds payable is computed as follows:
Discount on bonds payable - Jan. 1, 20x1 192,148
Divide by: Term of bonds (in years) 3
Annual amortization (straight line method) 64,049

Interest expense for 20x1 recognized under straight-line method:

Interest paid (4,000,000 x 10%) 400,000
Amortization of discount (see computation above) 64,049
Interest expense under straight-line method 464,049

Carrying amount of bonds on Dec. 31, 20x1 under straight-line method:

Carrying amount - Jan. 1, 20x1 3,807,852
Amortization of discount (see computation above) 64,049
Carrying amount - Dec. 31, 20x1 3,871,901

Amortization of discount under effective interest method:

Amortization table:
Face amount of bonds
4,000,000
Cash proceeds (3,807,8
52)

Interest Interest Present

Date payments expense Amortization value
Jan. 1, 20x1 3,807,852

Dec. 31, 20x1 400,000 456,942 56,942 3,864,794

The
Effect on carrying amount of bonds as of Dec. 31,
20x1
Carrying amounts on Dec. 31, 20x1:

Straight-line 3,871,9
01
Effective interest rate 3,864,7
94
Difference - overstatement under straight-line
7,107
carrying amount of the bonds on December 31, 20x1 under the straight line method is overstated by
₱7,107.

27. A Solution:
Cash proceeds including accrued interest (4M x 97%) 3,880,000
Accrued interest sold (4M x 12% x 3/12) (120,000)
Carrying amount of onds, April 1, 20x1 3,760,000
the b

28. A
Date Interest payments Interest expense Amortization Present value
Jan. 1, 20x1 4,303,264
Dec. 31, 20x1 480,000 430,328 49,672 4,253,592
Dec. 31, 20x2 480,000 425,360 54,640 4,198,948
July 1, 20x3 240,000 209,948 30,052 4,168,896

Carrying amount of bonds retired: (see

table above) 4,168,896
Retirement price (Call price):
Retirement price including payment for
accrued interest (4M x 102%) 4,080,000
Accrued interest (4M x 12% x 6/12) (240,000) 3,840,000

Gain on extinguishment of bonds 328,896

29. B
Interest on outstanding Total
Date Principal payments principal balance Interest payments payments
Dec. 31, 20x1 4,000,000 12,000,000 x 10% 1,200,000 5,200,000
Dec. 31, 20x2 4,000,000 8,000,000 x 10% 800,000 4,800,000
Dec. 31, 20x3 4,000,000 4,000,000 x 10% 400,000 4,400,000

Date Total payments Interest expense Amortization Present value

Jan. 1, 20x1 11,601,220
Dec. 31, 20x1 5,200,000 1,392,148 3,807,852 7,793,368

30. D
The modification is analyzed as follows:
Old New terms
terms
Principal 20,000,00 20,000,000
0
Accrued interest 600,000 -
Remaining term ('n') 3 years
Nominal rate 12% 10%
Direct costs of modification 200,000

Future cash flows PV factors @12%, n=3 Present value

Principal 20,000,000 0.711780 14,235,600
Interest 2,000,000 2.401831 4,803,662
Present value of the modified liability 19,039,262

Carrying amt. of old liability (20M + 600K accrued int.) 20,600,000

Present value of modified liability 19,039,262

Difference 1,560,738

Differen 1,560,738
ce
Divide by: Carrying amount of old liability 20,600,000

7.58%

❖ The modification is NOT substantial. The old liability is not extinguished and NO GAIN OR LOSS
on extinguishment is recognized. The direct costs of modification are treated as an adjustment to
the carrying amount of the existing liability.

31. B
32. A
33. A (80M x 5%) + (60M x 20%) + (40M x 35%) + (20M x 40%) = 38M
34. A
Minor repairs (40M x 3% x 10%) 120,000
Major repairs (40M x 2% x 90%) 720,000

Total 840,000
Multiply by: Present value factor (given) 0.95238
Total 800,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 848,000 Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,000

35. A 200M – without deduction for reimbursement of impairment loss 36. D

37. A (0 actual settlement – 2,800,000 carrying amount of provision) = 2,800,000 gain on
settlement

38. A [15,000 guaranteed annual purchase x 2 years x (₱100 - ₱20)] = 2,400,000

39. A (5,000 units sold x ₱400) = 2,000,000

40. D
Estimated premium liability
Jan. 1, 20x1 -
Actual cost of premiums Premium expense - 20x1 (500,000 x
distributed - 20x1 (60,000 x ₱400) 80% ÷ 5 x ₱400 )
24,000,000 32,000,000
Actual cost of premiums
distributed - 20x2 (147,600 x Premium expense - 20x2 (900,000
x
₱400) 80% ÷ 5 x ₱400 ) 59,040,000 57,600,000 Dec. 31, 20x2
6,560,000