1.

Costs incurred in issuing ten-year bonds which sold at a slight premium should be:

a.

Charged to retained earnings when the bonds are issued.

b.

Expensed in the year in which incurred.

c.

Capitalized as organization cost

d.

Reported on the balance sheet as a reduction from bonds payable and amortized over the ten-year bond
term

2.

The proceeds from a bond issued with detachable warrants should be accounted for:

a.

Entirely as bonds payable.

b.

Entirely as equity.

c.

Partially as unearned revenue and partially as bonds payable,

d.

Partially as equity and partially as bonds payable.

3.

An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the failure to record
premium amortization on interest expense and bond carrying value, respectively?

a.

Understate and understate

b.

Understate and overstate

c.

Overstate and overstate

d.

Overstate and understate

4.

When interest expense is calculated using the effective interest amortization method, interest expense equals the:

a.

Actual amount of interest paid.

b.

Book value of the bonds multiplied by the stated interest rate.

c.

Book value of the bonds multiplied by the effective interest rate.

d.

Maturity value of the bonds multiplied by the effective interest rate.

5.

The net amount of bond liability that appears on the balance sheet is the:

a.

Call price of the bond plus bond discount or minus bond premium.

b.

Face value of the bond plus related premium or minus related discount.

c.

Face value of the bond plus related discount or minus related premium.

d.

Maturity value of the bond plus related discount or minus related premium.

6.

Which of the following is true of a premium or bonds payable?

a.

The premium or bonds payable is a contra shareholders equity account.

b.

The premium on bonds payable is an account that appears only on the books of the investor.

c.

The premium on bonds payable increases when amortization entries are made until it reaches its maturity value.

d.

The premium on bonds payable decreases when amortization entries are made until its balance reaches zero at
the maturity date.

7.

Which of the following is true of accrued interest on bonds that are sold between interest dates?

a.

The accrued interest is computed at the effective rate.

b.

The accrued interest will be paid to the seller when the bonds mature.

c.

The accrued interest is extra income to the buyer.

d.

None of the above.

PROBLEMS
1.

Provident Company inaugurated a promotional campaign on 1/ 2/2011 to promote the salability of their product.
Provident company placed a coupon redeemable for a premium in each package of cereal sold at P200. Each
premium costs P25 and 10 coupons must be presented by a customer to receive a premium. Provident
estimated that only 70% of the coupons issued would be redeemed. For the 6 months ended 7/31/2011, the
following transactions occurred:
Packages of cereal sold
120,000
Premium purchased
30,000
Coupons redeemed
54,000
How much should be reported as premium expense and estimated liability for coupons on the fiscal year ended
7/31/2011, respectively?
2.

Bayview Company inaugurated a sales promotion campaign on May 31, 2011, whereby the company placed a
coupon in each package of chocolate sold, the coupons being redeemable for a premium. Each premium costs
P50 and the customer to receive a premium must present 5 coupons. They estimated that only 60% of the
coupon issued would be redeemed. For the seven months ended December 31, 2011, the following info is
available:
Packages of chocolate sold
400,000
Premiums purchased
30,000
Coupons redeemed
100,000
How much is the estimated liability for premium claims outstanding at 12/31/2011?
3.

The selling price of Abensons Companys is P80,000 each. The buyers are provided with a two year warranty
that is expected to cost the company P2,000 per unit in the year of sale and P6,000 per unit in the year following
the sale. The company sold 80 units in 2011 and 100 units in 2012. Actual payments for warranty claims were
P80,000 and P520,000 in 2011 and 2012 respectively.
How much would be the warranty expense for 2011 and 2012, respectively?

4.

The balance in Haven Corporations accounts payable account at December 31, 2012 was P1,350,000 before
any necessary year-end adjustments relating to the following:

Goods were in transit to Haven from a vendor on December 31, 2012. The invoice cost was P75,000. The
goods were shipped FOB shipping point on December 29, 2012 and were received on January 2, 2013.
Goods hipped FOB destination on December 21, 2012, from a vendor to Haven, were received on January
6, 2013. The invoice cost was P37,500.
On December 27, 2012, Haven wrote and recorded checks totalling P60,000 which were mailed on January
10, 2013.

In Havens December 31, 2012 statement of financial position, how much should be the accounts payable?
5.

On July1, 2012, Regency Company started a sales promotional campaign. In each box of cereal sold, Regency
inserted a coupon redeemable for a premium. To receive a premium, each customer must submit five coupons.
Regencys cost for each premium is P6. Regency estimated that 60% of the coupons issued would be redeemed.
For the six months ended December 31, 2012, the following information is available:
Boxes of cereal sold
Coupons redeemed

P800,000
200,000

How much should be the estimated liability for premium claims outstanding at December 31, 2012?

6.

Red Coconut Company sells calculators that carry a one-year warranty against manufacturers defects. Based
on company experience, warrant costs are estimated at P300 per calculator. During 2012, Red Coconut sold
24,000 calculators and paid warranty costs of P170,000.

In its income statement for the year ended December 31, 2012, how much should Red Coconut report as warranty
expense?
7.

Atimonan has a one-year product warranty on some selected items. The estimated warranty liability on sales
made during the 2013-2014 fiscal year and still outstanding as of March 31, 2014, amounted to P302,400. The
warranty costs on sales made from April 1, 2014 to March 31, 2015, are estimated at P756,000. The actual
warranty costs incurred during 2014-2015 fiscal year are as follows:
Warranty claims honored on 2013-2014 sales
Warranty claims honored on 2014-2015 sales
Total

P302,400
P342,000
P644,400

How much is the estimated warranty payable?

8.

Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit balances in
suppliers accounts. The unpaid voucher file included the following items that not had been recorded as of
December 31, 2013:

A company- P224,000 merchandise shipped on Dec 31, 2013, FOB destination; received on Jan 10, 2014.

B Inc.- P192,000 merchandise shipped on Dec 26, 2013, FOB shipping point; received on Jan 16, 2014.

C Super services- P144,000 janitorial services for the three-month period ending Jan 31, 2014.

MERALCO- P67,200 electric bill covering the period Dec 16, 2013 to Jan 15, 2014.
On December 28, 2013, a supplier authorized Codex to return goods billed at P160,000, and shipped on Dec 20,
2013. The goods were returned by Codex on Dec 28, 2013, but the P160,000 credit memo was not received until
Jan 6, 2014.
How much should be reported as current liabilities?

9.

In May 2011, West Company filed suit against Brown, Inc. seeking P850,000 damages for patent infringement. A
court verdict in November 2011 awarded West P600,000 in damages, but Browns appeal is not expected to be
decided before 2011. Wests counsel believes it is probable but not virtually certain that West will be successful
against Brown for an estimated amount in the range between P300,000 and P450,000, with P400,000
considered the most likely amount.
What amount should West record as a contingent asset from lawsuit in the year ended December 31, 2011?

10. On December 17, 2011, an explosion occurred at Cord Company plant causing extensive property damage to
area buildings. Although no claims had yet been asserted against Cord Company by
March 10, 2012, Cords management and counsel concluded that it is reasonably possible Cord will
be responsible for damages, and that P2,500,000 would be reasonable estimate of its liability. Cords
P10,000,000 comprehensive public liability policy has a P500,000 deductible clause.
In Cords December 31, 2011 financial statements, which were issued on March 25, 2012, how should this item
be reported?
11. In November 2011, attorneys for current and former employees of Mecum Inc. filed a P3,000,000 class action
lawsuit, alleging that exposure to radiation has caused significant medical problems. Attorneys for Mecum are
uncertain as to the outcome of the case. However, similar lawsuits against other firms in the same industry have
resulted in significant payments by the employer but there was no reliable estimate to the amount. In Mecums
December 31, 2012 financial statements, which were issued on April 30, 2013, how should this item be reported?
12. An analysis of Epal Companys liabilities disclosed the following:
Accounts payable,after deducting debit balances in suppliers accounts amounting to 22,500(accounts payable
included non-trade liabilities of 32,500)-105,000
Accrued expenses-15,000
Credit balances of customers accounts-13,500
Stock dividends payable-70,000
Claims for increase in wages and allowances by employees of the company, covered in a pending lawsuit-125,000
Estimated liabilities for premiums-60,000
How much should be presented as total current liabilities in the statement of financial position?

13. To increase sales, Prime Company inaugurated a promotional campaign on June 30, 2013. Prime placed a
coupon redeemable for a premium in each package of product sold. Each premium costs P100. A premium is
offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20.
Prime estimated that only 60% of the coupons issued will be redeemed .For the six months ended Dec 31, 2013,
the following is available:
Packages of product sold
P160,000
Premiums purchased
16,000
Coupons redeemed
64,000
Compute for the estimated liability for coupons on Dec 31, 2013.
14. Bakulaw Company sells office equipment contracts agreeing to service equipment for a two-year period. Cash
receipts from contracts are credited to unearned service contract revenue and service contracts costs are
charged to service contract expense as incurred. Revenue from service contract is recognized as earned over
the lives of the contracts.
Additional information for the year ended December 31, 2011 is as follows:

Unearned service contract, 1/1/2011

Cash receipts from service contracts sold
Service contract revenue recognized
Service contract expense

P600,000
980,000
860,000
520,000

What amount should Bakulaw report as unearned service contract revenue at 12/31/2011?
15. Based upon past experience of Manhid Company, the estimated warranty costs related to peso sales are
computed as follows:
First year
3%
Second year 5%
Third year
8%
Total sales and actual warranty repairs for 2012, 2013 and 2014 are as follows:
2012
2013
Sales
3,800,000
4,200,000
Actual warranty expenditure
278,000 306,000 612,000

2014
5,785,000

Assuming that the sales and repairs occur evenly throughout the year, how much would be the predicted
warranty expense covering 2012, 2013 and 2014 sales still under warranty at Dec 31, 2014?
16. January 2, 2011, Anger Company issued its 9% bonds in the face amount of P4,000,000 which mature on
January 1, 2021. The bonds were issued for P3,756,000 to yield 10%. Anger uses the interest method of
amortizing bond discount. Interest is payable annually on December 31.
At December 31, 2012, how much should be Angers unamortized bond discount?
17. On May 1, 2011, Jet company issued P2,000,000, 5-year, 10% bonds for P2,300,000. Each P1,000 bonds had
two detachable warrant eligible for the purchase of one share of Jets P100 par ordinary share for P120. Without
the warrants the bonds are selling at a prevailing 9% rate of interest. The present value factors are the following:
Pv of 9% of an ordinary annuity
3.89
Pv of 9% after 5 interest periods
.65
What amount should Jet company recognize as value of the equity instruments?

18. On January 1, 2011, Trader company issued its 8% 5-year convertible debt instrument with a face amount of
P6,000,000 for P5,900,000. Interest is payable every December 31 of each year. The debt instrument is
convertible into 50,000 ordinary shares with a par value of p100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 10%.
Pv of 10% of an ordinary annuity
Pv of 10% after 5 interest periods

3.791
.621

How much of the proceeds represent the equity component?

19. On January 1, 2011, Grader company issued its 10% 4-year convertible debt instrument with a face amount of
P4,000,000 for P4,400,000. Interest is payable every December 31 of each year. The debt instrument is
convertible into 35,000 ordinary shares with a par value of p100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 8%.
Pv of 8% for an ordinary annuity
Pv of 8% after 4 interest periods

3.312
.736

Question 1: how much of the total proceeds represent the equity component?
Question 2: what is the balance of the unamortized premium on debt instrument as of December 31, 2011?

20. On January 1, 2011, Tudor company issued its 10%, 5-year convertible debt instrument with a face amount of
P10,0000,000. Interest is payable every December 31 of each year. The debt instrument is convertible into
90,000 ordinary shares with a par value of p100. When the debt instruments were issued, they were selling at
97% without conversion option. Tudor company incurred P80,000 transaction costs on the issue of the debt
instruments.
Question 1: how much of the net proceeds represent the equity component?
Question 2: how much of the net proceeds represent the debt component?

21. On January 2011, Alison company issued its 10%, 5-year convertible debt instrument with a face amount of
p5,000,000 for p5,100,000. Interest is payable every December 31 of each year. The debt instrument is
convertible into 50,000 ordinary shares with a par value of p100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 11%. The company incurred
transaction cost of p70,000 related to the issue of the compound instrument.
Pv of 11% of an ordinary annuity
3.696
Pv of 11% after 5 interest periods .593
Question 1: how much of the total proceeds represent the debt component?
Question: how much of the total proceeds represent the equity component?
22. On March 1, 2011, Mother Goose Corporation issued at 103 excluding accrued interest, 1000 of its 15%, P1,000
bonds. The bonds are dated January 1, 2011 and mature on January 1, 2021. Interest is payable semi-annually
on January 1 and July 1. Mother Goose paid transaction costs of P60,000.
Mother Goose would realize net cash receipts from the bond issuance of?
23. On October 1, 2011, Winston Corporation issued, at 99 excluding interest, 2,000 of its 8% P1,000 bonds. The
bonds are dated January 1, 2011, mature on January 1, 2021, and pay interest on July 1 and January 1. Winston
Paid transaction costs of P70,000.
From the bond issuance, Winston received net cash of?
24. On January 1, 2011, Cinderella Company issued 4,000 of its 8%, P1,000 bonds when the prevailing rate of
interest was 9%. The bonds are dated January 1, 2011, and mature on January 1, 2015. Interest is payable
annually every December 31. The following are the present value factors:
PV of 9% for an ordinary annuity of P1 after 4 years

3.2397

PV of 9% after 4 years

.7084

What amount of proceeds did the company receive on the issue of the debt instruments?
25. On January 2, 2011, East Co. issued 9% bonds in the amount of P1,000,000 which mature on January 2, 2021.
The bonds were issued for P939,000 to yield 10%. Interest is payable annually on December 31. East uses the
interest method of amortizing bond discount.
In its December 31, 2011 statement of financial position, what amount should East report as bonds payable?
26. On April 1, 2011, Jarvis, Inc. issued at 107 including accrued interest, 3,000 of its 12%, P1,000 bonds. The
bonds are dated January1, 2011, to mature on January 1, 2021. Interest is payable semi-annually on January 1
and July 1.
From the bond issuance, how much net cash did Jarvis receive?

27. On June 30, 2011, Reflex corp. had outstanding 10 percent, P2,000,000 face amount, 15-year bonds maturing
on June 30, 2015. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are
amortized on these dates. The unamortized balances on June 30, 2011 of bond premium and bond issue costs
were P110,000 and p40,000, respectively. Reflex reacquired all of these bonds at 96 on June 30, 2011 and
retired them.
Ignoring income taxes, how much gain or loss should reflex record on the bond retirement?
28. On December 31, 2014, Green Inc. issued 1,000 of its 8% 10-year, p1,000 face value bonds with detachable
warrants for P1,200,000. Each bond carried a detachable stock warrant for one share of Green companys
ordinary shares at a specified option price of P25 per share. Immediately after issuance, the market of the bonds
without the warrants was P1,080,000. In its December 31, 2014 statement of financial position, what amount
should Green report as equity reserve?
29. On January 1, 2014, Hard Company issued a ten-year bonds with a face amount of P5,000,000 and a stated
interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%.
PV of 1 for 10 periods at 10%
PV of an ordinary annuity of 1 for 10 periods at 10%

0.3855
6.145

What is the issue price of the bonds?

30. During 2014 Woods Corporation issued at 95, one thousand of its 8% P5,000 bonds due in ten years. One
detachable stock purchase warrants entitling the holder to buy 20 shares of Woods ordinary shares was
attached to each bond. Shortly after issuance, the bonds are selling at 10% ex-warrant, and each warrant was
quoted at P60. The present value factors are the following:
PV of 10% for an ordinary annuity of P1 after 10 periods
PV of 10% after 10 interest periods

6.145
.385

What amount should, if any, of the proceeds from the bond issuance should be recorded as part of Woods
shareholders equity?
Use the following information for questions 31 to 33
Hefner Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income
and taxable income as follows:
Pretax financial income

500,000

Estimated litigation expense

1,250,000

Installment sales

(1,000,000)

Taxable income

750,000

The estimated litigation expense of P1,250,000 will be deductible in 2009 when it is expected to be paid. The gross
profit from the installment sales will be realized in the amount of P500,000 in each of the next two years. The
estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as
P500,000 current and P500,000 noncurrent. The income tax rate is 30% for all years.
31.The income tax expense is
32.The deferred tax asset to be recognized is
33.The deferred tax liabilitycurrent to be recognized is
Use the following information for questions 34 through 36.

Frizell Co. at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income
and taxable income as follows:
Pretax financial income

750,000

Estimated litigation expense

1,000,000

Extra depreciation for taxes

(1,500,000)

Taxable income

250,000

The estimated litigation expense of 1,000,000 will be deductible in 2008 when it is expected to be paid. Use of the
depreciable assets will result in taxable amounts of 500,000 in each of the next three years. The income tax rate is
30% for all years.

34.

Income tax payable is

35.

The deferred tax asset to be recognized is

36.

The deferred tax liability to be recognized is

Current

37.

Noncurrent

Markes Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes

3,750,000

Income tax expense

Current
Deferred
Net income

1,035,000
90,000

1,125,000
2,625,000

Markes uses the straight-line method of depreciation for financial reporting purposes and accelerated
depreciation for tax purposes. The amount charged to depreciation expense on its books this year was
1,500,000. No other differences existed between book income and taxable income except for the amount of
depreciation. Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax
return for the current year?