Junior Philippine Institute of Accountants

Philippine School of Business Administration Manila

General Evaluation- Midterm Examination
Accounting 4

Name:

Batch:

Professor:

Date:

THEORIES (1PT)

Raw
Score

Equivale
nt

PROBLEMS (4PTS)

01.

06.

11.

16.

01.

06.

11.

16.

02.

07.

12.

17.

02.

07.

12.

17.

03.

08.

13.

18.

03.

08.

13.

18.

04.

09.

14.

19.

04.

09.

14.

19.

05.

10.

15.

20.

05.

10.

15.

20.

I.
(THEORIES)
1. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
2. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven
months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability
of the refunding issue.
3. Which of the following should not be included in the current liabilities section of the balance
sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
4. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these
5. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.

c. balance sheet as a liability.

d. balance sheet as an item of stockholders' equity.
6. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
7. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's
insurance coverage.
d. none of these.
8. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or
services.
c. Liquidation is reasonably expected to require use of existing resources classified as current
assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
9. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or
services.
d. Liquidation is reasonably expected to require use of existing resources classified as current
assets or create other current liabilities.
10. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
11. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating cycle
(or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
12. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

13. What is a discount as it relates to zero-interest-bearing notes payable?

a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
14. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term
liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a longterm liability.
d. Current liability.
15. Which of the following is not a condition necessary to exclude a short-term obligation from
current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
16. Which of the following does not demonstrate evidence regarding the ability to consummate a
refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.
17. A company has not declared a dividend on its cumulative preferred stock for the past three
years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
18. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
19. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to
refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the
balance sheet date and subsequently replaced by long-term debt before the balance sheet is
issued.
d. None of these.

20. The ability to consummate the refinancing of a short-term obligation may be demon- strated
by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the
balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a
long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance
sheet but before it is issued.
d. all of these

PROBLEM 1 (1-5)
Pretender Music Emporium(PME) carries a wide variety of musical instruments, sound
reproduction equipment, recorded music, and sheet music. Pretender uses two sales promotion
techniques namely (a) warranties and (b) premiums, to attract customers.
Musical instruments and sound equipment are sold with a one-year warranty for replacement of
parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20
for a cassette player. Pretender pays P34 for each cassette player and estimates that 60% of the
coupons given to the customers will be redeemed.
Pretenders total sales for 2017 were P7,200,00; P5,400,00 from musical instruments and sound
reproduction equipment and P1,800,000 from recorded music and sheet music. Replacement
parts and labor for warranty work totaled P164,000 during 2017.a total of 6,500 cassette players
used in the premium program were purchased during the year and there were 1,200,000
coupons redeemed in 2017.
The accrual method is used by Pretender to account for the warranty and premium costs for
financial reporting purposes. The balances in the accounts related to warranties and premiums
on January 1, 2017 are shown below:
Inventory of premium cassette players
estimated Premium Claims Outstanding
estimated liability from warranties

P39,950
44,800
136,000

1) At what amount should the warranty expense be shown in the December 31, 2017 profit or
loss of PME?
2) At what amount should the premium expense be shown in the December 31, 2017 profit
or loss of PME?
3) At what amount should the estimated liability from warranties be shown in the December
31, 2017 statement of financial position of PME?
4) At what amount should the inventory of premium cassette players be shown in the
December 31, 2017 financial statements of PME?
5) At what amount should the estimated premium claims outstanding be shown in the
December 31, 2017 financial statements of PME?
PROBLEM 2 (6-10)

On January 1, 2016, beef company issued its 9%, 4-year convertible debt instrument with a face
amount of P4,000,000 for P4,100,000. Interest is payable every December 31 of each year. The
debt instrument is convertible into 80,000 ordinary shares with a par value of P50. When the
debt instruments were issued, the prevailing market rate of interest for similar debt without
conversion option is 10%.
PV of 10% for an ordinary annuity of P1 after 4 periods
PV of 10% after 4 interest periods

3.170
.683

On December 31, 2017 of the convertible debt instruments were retired for P1,000,000.
Without the conversion option, the debt instrument can be retired at 97%.
6) On the date of issue, what amount of the proceeds represents the equity component?
7) What is the carrying value of the debt instruments as of December 31, 2017?
8) On the date of retirement, what amount of the proceeds represents the equity
component?
9) What amount of gain or loss should be reported in the profit or loss on the retirement of
the convertible debt instruments?
10)
Gain on cancellation to shareholders equity
PROBLEM 3 (11)
Dark company owes P1,998,000 to pure, inc. The debt is a 10-year, 11% note. Because dark
company is in financial trouble, pure, inc. Agrees to accept some property and cancel the entire
debt. The property has a book value of P800,000 and fair market value of P1,200,000.
11)
How much gain on the disposition of property and restructuring of the liability
should be reported in darks profit or loss?
PROBLEM 4 (12)
Glee company had the following long-term debt:
Sinking fund bonds, maturing in instalments
industrial revenue bonds, maturing in installements
subordinated bonds, maturing on a single date
1,500,000
12)

2,600,000
1,400,000

what is the total amount of serial bonds?

PROBLEM 5 (13-14)
On January 1, 2016, Wae company issued 9% bonds in face amount of P4,000,000, which mature
on January 1, 2026. The bonds were issued for P3,756,000 to yield 10%, resulting in bond
discount of P244,000. The entity used the interest method of amortizing bond discount. Interest
is payable annually on December 31.
13)
14)

On December 31, 2016, what is the unamortized bond discount?

What is the carrying amount of bonds payable on December 31, 2016?

PROBLEM 6 (15-16)
In 2016, Lion company reported pretax financial income of P5,000,000. Included in the pretax
financial income are P900,000 of non-taxable life insurance proceeds received as result of the

death of an offices, P1,200,000 of estimated warranty expense accrued on December 31, 2016,
and P200,00 of life insurance premiums for a policy for an officer. No income tax was previously
paid during the year and the income tax rate is 30%.
15)
16)

What is the income tax payable on December 31, 2016?

What is the total expense?

PROBLEM 7 (17-20)
On January 1, 2016, EZ company received P1,077,200 for P1,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannuallu every January 1 and July 1.
The entity has elected the fair value option for measuring the financial liability. On December 31,
2016, the fair value of the bonds is determined to be P1,064,000 due to market and interest
factors.
17)
18)
19)
20)

What
What
What
What

is
is
is
is

the
the
the
the

carrying amount of the bonds payable on January 1, 2016?

interest expense for 2016?
gain or loss from change in fair value of the bonds for 2016?
carrying amount of the bonds payable on December 31, 2016?