FINANCIAL ACCOUNTING & REPORTING 2

PX – SET H

1) Pirates Company provided the following information on December 31, 2019:
Note payable:
Trade 3,000,000
Bank loan 2,000,000
Advances from officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable 3,800,000
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Claim for increase in wages by employees covered in a pending lawsuit 3,500,000
Contract entered into for the contraction of building 5,000,000

What is the total current liabilities on December 31, 2019?

A. 14,100,000 B. 18,100,000 C. 13,800,000 D. 13,100,000

SOLUTIONS: A
Note payable:
Trade 3,000,000
Bank loan 2,000,000
Advances from officers 500,000
Accounts payable – trade 4,000,000
Bank overdraft 300,000
Dividends payable 1,000,000
Withholding tax payable 100,000
Mortgage payable – Noncurrent if silent ---
Income tax payable 800,000
Estimated warranty liability 600,000
Estimated damages payable by reason of breach of contract 700,000
Accrued liabilities 900,000
Estimated premium liability 200,000
Claim for increase in wages by employees covered in a pending lawsuit – contingent liability ---
Contract entered into for the contraction of building – no obligation to pay yet ---
Total current liabilities 14,100,000

2) Ducky Company reported the following information at the end of reporting period:
Accounts payable 1,000,000
Advances to employees 45,000
Unearned rent revenue 300,000
Estimated liability under warranties 250,000
Cash surrender value of officers’ life insurance 75,000
Bonds payable 5,000,000
Discount on bonds payable 500,000
Trademark 50,000

What amount should be reported in the statement of financial position as total liabilities?
A. 6,050,000 B. 1,550,000 C. 7,050,000 D. 6,095,000

SOLUTION: A
Accounts payable 1,000,000
Advances to employees – receivable, asset --
Unearned rent revenue 300,000
Estimated liability under warranties 250,000
Cash surrender value of officers’ life insurance – investment, other noncurrent asset --
Bonds payable 5,000,000
Discount on bonds payable – contra liability (500,000)
Trademark – intangible asset, noncurrent asset --

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•
 Total liabilities 6,050,000

3) At December 31, 2019, the end of the reporting period, the liabilities outstanding of Plan Corporation included the
following:
• Cash dividends on ordinary shares, P550,000, payable on January 15, 2020.
• Notes payable to National Bank, P4,700,000 due January 20, 2020.
• Serial bonds, P20,000,000, of which P5,000,000 mature during 2020.
• Notes payable to China Bank, P4,000,000 due January 27, 2020.

The following transactions occurred early in 2020:

January 15 The cash dividends on ordinary shares were paid.
January 20 The note payable to National Bank was paid.
January 25 The corporation entered into a financing agreement with National Bank enabling it to borrow up to
P5,000,000 at any time through the end of 2020. Amounts borrowed under the agreement would bear
interest at 1% above the bank’s prime rate and would mature three years from the date of the loan. The
corporation immediately borrowed P4,000,000 to replace the cash used in paying the January 20 note
to the bank.
January 26 400,000 ordinary shares were issued for P5,000,000. P4,000,000 of the proceeds was used to liquidate
the note payable to China Bank.
February 1 The financial statements for 2019 were issued.

How much of the above obligation would be classified as current liabilities on the Company December 31, 2019 FS?
A. 6,250,000 B. 9,550,000 C. 10,250,000 D. 14,250,000

SOLUTION: D
Dividends payable 550,000
Note payable to National Bank 4,700,000
Current portion of long term debt 5,000,000
Note payable to China Bank 4,000,000
Total current liability 14,250,000

4) Henry Company reported the following liabilities on December 31, 2018:
Accounts payable 3,000,000
Short-term borrowings 1,500,000
Bonds payable, current portion P500,000 4,000,000
Note payable, due June 30, 2019 2,000,000

The P2,000,000 note payable was refinanced with a 5-year loan on January 15, 2019. The financial statements were
issued February 28, 2019. What total amount should be reported as current liabilities on December 31, 2018?
A. 5,000,000 C. 4,500,000
B. 7,000,000 D. 3,500,000

SOLUTIONS: B
Accounts payable 3,000,000
Short-term borrowings 1,500,000
Current portion of long term debt 500,000
Currently maturing debt – refinanced not before December 31 2,000,000
Total current liabilities 7,000,000

5) The balance in Dallas Company’s accounts payable account at December 31, 2019 was P1,170,000 before any year-
end adjustments relating to the following:
• Goods were in transit from a vendor to Dallas on December 31, 2019. The invoice cost was P65,000 and the
goods were shipped FOB shipping point on December 29, 2019. The goods were received on January 2, 2020.
• Goods shipped FOB shipping point on December 20, 2019 from a vendor to Dallas, were lost in transit. The invoice
cost was P32,500. On January 5, 2020, Dallas filed a P32,500 claim against the common carrier.
• Goods shipped FOB destination on December 21, 2019, from a vendor to Dallas, were received on January 6,
2020. The invoice cost was P19,500.

What amount should Dallas report as accounts payable on its December 31, 2019 statement of financial position?
A. 1,202,500 B. 1,222,000 C. 1,235,000 D. 1,267,500

SOLUTIONS: D
Unadjusted Accounts payable 1,170,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

 1. Unrecorded purchases, goods in transit 65,000
2. Unrecorded purchases, goods lost in transit, FOB shipping point 32,500
3. No adjustment --
Adjusted Accounts payable 1,267,500
*Assume goods purchased was not recorded until received.

6) Acme Company reported accounts payable of P850,000 on December 31, 2018 before necessary year-end
adjustments related to the following information:

On December 31, 2018, Acme has a P50,000 debit balance in accounts payable resulting from a payment to a supplier
for goods to be manufactured to Acme’s specifications.

Goods shipped FOB destination on December 20, 2018 were received and recorded by Acme on January 2, 2019. The
invoice cost was P45,000.

On December 31, 2018, what amount should be reported as accounts payable?

A. 945,000 C. 900,000
B. 850,000 D. 895,000

SOLUTIONS: C
Unadjusted Accounts Payable 850,000
Add back advances to supplier (it was netted) 50,000
Adjusted Accounts Payable 900,000
*No adjustment for the goods in transit, assume not recorded until received.

7) The accounts payable balance of Jek Company at December 31, 2019 was P590,000 before the year-end adjustments
relating to the following information:
• Upon receipt of the invoice on December 31, 2019 for goods costing P30,000, the accounting staff of Jek
Company recorded the purchase in the accounts. It was determined that the goods were shipped FOB destination
on December 27, 2019 and were received by Jek Company on January 2, 2020.
• Goods with an invoice cost of P25,000 which where shipped FOB shipping point in December 23, 2019 from a
vendor to Jek Company were lost in transit. On January 4, 2020, Jek Company filed a P25,000 claim against the
transportation company.
• Goods costing P9,000 were shipped FOB shipping point from a vendor to Jek Company. Because the vendor’s
invoice and the goods were received on January 3, 2020, the accounting staff did not include the goods in its
December 31, 2019 inventory nor was the purchase recorded in the accounts in 2019.

What should Jek Company report as accounts payable in its December 31, 2019 statement of financial position?
A. 594,000 B. 590,000 C. 585,000 D. 569,000

SOLUTION: C
Unadjusted balance 590,000
1. Recorded but should not be recorded as purchases as of 12/31/19 (30,000)
2. Unrecorded purchases – assume not recorded until it was received 25,000
3. Unrecorded purchases 9,000
Adjusted balance 594,000

8) In its 2020 financial statements, Toronto Company reported interest expense of P85,000 in its statement of
comprehensive income and cash payments for interest at P68,000 in its statement of cash flow. There was no prepaid
interest or interest capitalization either at the beginning or end of 2020. Accrued interest payable at December 31, 2019
was P15,000. What amount should Toronto Company report as accrued interest payable in its December 31, 2020
statement of financial position?
A. 32,000 B. 17,000 C. 15,000 D. 2,000

SOLUTION: A
Interest payable
Interest payment 68,000 15,000 Beginning balance
85,000 Interest expense
32,000 Ending balance

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

9) Kemp Company must determine the December 31, Year 2 accruals for advertising and rent expenses. A P500
advertising bill was received January 7, Year 3. It related to costs of P375 for advertisements in December Year 2
issues and P125 for advertisements in January Year 3 issues of the newspaper. A store lease, effective December 16,
Year 1 calls for fixed rent of P1,200 per month, payable one month from the effective date and monthly thereafter. In
addition, rent equal to 5% of net sales over P300,000 per calendar year is payable on January 31 of the following year.
Net sales for Year 2 were P550,000. In its December 31, Year 2 balance sheet, Kemp should report accrued liabilities
of
A. 12,500 B. 12,875 C. 13,100 D. 13,475

SOLUTIONS: D
Accrued advertising expense for Year 2 only 375
Fixed rent (1,200 x 15/30) 600
Contingent rent (550,000 – 300,000) x 5% 12,500
Total accrued expense 13,475

10) Ox King Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the tax
rate of 30% and the correct income before bonus and tax is P9,600,000. How much is the bonus payable to the
president? (Round off to the nearest hundred)
A. 722,600 C. 395,000
B. 2,240,000 D. 628,000

SOLUTIONS: D
T = 0.30 (9,600,000 – B)
B = 0.10 (9,600,000 – B – T)
B = 0.10 [9,600,000 – B – (0.30 (9,600,000 – B)]
B = 0.10 [9,600,000 – B – 2,880,000 + 0.30B]
B = 960,000 – 0.10B – 288,000 + 0.03B
B = 672,000 – 0.07B
1.07B = 672,000
B = 628,000

11) In its statement of comprehensive income for the year ended December 31, 2013, Ethan Company showed bonus
expense of P466,428 and income after deducting tax and bonus is P6,196,822. Income tax rate is 35% and bonus is
computed as percentage of the income after deducting income tax but before deducting bonus. What was the bonus
rate?
A. 7.53% B. 7.00% C. 5.00% D. 5.67%

SOLUTION: B
466,428 / (6,196,822 + 466,428) = 7%

Use the following information for the next three (3) questions:
Lames Company sells personal computers. For each unit of personal computer sold, the company sells a service contract
for P1,000 each. The contract provides that the personal computers sold will be repaired by the company within a period of
three years from the date of sale. Sale of service contracts and repairs are made evenly throughout the year.

Based on industry trend, 10% of repairs are done in the first year from the date of sale, 30% in the second year and 60% in
the third year. Information related to the service contracts for year 2017, 2018 and 2019 is as follows:
2017 2018 2019
Number of service contracts sold 800 1,000 1,200
Service contract expense incurred P50,000 P200,000 P350,000

QUESTIONS:
12) How much is the unearned service contract revenue at December 31, 2019?
A. 300,000 C. 1,930,000
B. 1,200,000 D. 2,130,000

13) How much is the service contract revenue for the year ended December 31, 2019?
A. 200,000 C. 620,000
B. 600,000 D. 1,000,000

14) How much is the net revenue from service contract for the year ended December 31, 2019?
A. 270,000 C. 620,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

 B. 520,000 D. 850,000

SOLUTION: D, C, A
Unearned as of 12/31/2019 from sale of 2017 (1,000 x 800 x 30%) 240,000
Unearned as of 12/31/2019 from sale of 2018 (1,000 x 1,000 x 75%) 750,000
Unearned as of 12/31/2019 from sale of 2019 (1,000 x 1,200 x 95%) 1,140,000
Total unearned as of 12/31/19 2,130,000

Revenue recognized in 2019 Jan.1 to Jul. 1 from sale of 2017 (1,000 x 800 x 30% x 6/12) 120,000
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2017 (1,000 x 800 x 60% x 6/12) 240,000
Revenue recognized in 2019 Jan.1 to Jul. 1 from sale of 2018 (1,000 x 1,000 x 10% x 6/12) 50,000
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2018 (1,000 x 1,000 x 30% x 6/12) 150,000
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2019 (1,000 x 1,200 x 10% x 6/12) 60,000
Total revenue recognized in 2019 620,000

Total revenue recognized in 2019 620,000

Total expense in 2019 350,000
Net revenue 270,000

15) Vanny’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:
2016 2017
Sales 17,000,000 21,000,000
Less cancellations 1,000,000 1,000,000
Net sales 16,000,000 20,000,000

Subscriptions expiration:
2016 4,000,000
2017 7,000,000 5,000,000
2018 5,000,000 11,000,000
2019 4,000,000

In Vanny’s December 31, 2017, balance sheet, the balance of unearned subscription revenue should be
A. 20,000,000 B. 15,000,000 C. 11,000,000 D. 4,000,000

SOLUTION: A
Subscription not yet expired as of December 31, 2017 (subscription that will expire beyond
2017 i.e., 2018 and up):
Sold 2016 expire in 2018 5,000,000
Sold 2017 expire in 2018 11,000,000
Sold 2017 expire in 2019 4,000,000
Total unexpired as of 12/31/18 20,000,000

16) Falcons Company sells its products in returnable containers. The customers are given a period of two years from the
delivery to return the containers. Containers not returned with the prescribed period are considered sold at the amount
deposits forfeited. At January 1, 2019, the balance of the accounts Refundable Deposits on Returnable Containers is
P250,000, consisting of the following:

For containers delivered to customers in

2017 P100,000
2018 P150,000

During 2019, the company received additional deposits of P200,000 for containers delivered to customers. Deposits
refunded to customers during 2019 for return of containers amounted to P267,000 as follows:
Deliveries in 2017 P 82,000
Deliveries in 2018 110,000
Deliveries in 2019 75,000

What is the balance of Refundable Deposits for Returnable Containers at December 31, 2019?
A. 165,000 C. 185,000
B. 183,000 D. 35,000

SOLUTION: A

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

 Liability for container deposit
Cash returned to customers 267,000 250,000 01/01/19 – Beginning balance
Deposit forfeited (100,000 – 82,000) 18,000 200,000 Cash receipt from customers
165,000 12/31/19 – Ending balance

17) Airish Company operates a retail store. All items are sold subject to a 6% value added tax, which Airish collects and
records as sales revenue. Airish files quarterly sales tax return when due, by the 20th day following the end of the sales
quarter. However, in accordance with state requirements, Airish remits vat collected by the 20th day of the month
following any month such collections exceed P500. Airish takes these payments are credits on the quarterly sales tax
return. The sales taxes paid by Airish are charged against sales revenue. Following is a monthly summary appearing in
Airish’s first quarter 2019 sales revenue:
Debit Credit
January -- 10,600
February 600 7,420
March -- 8,480
600 26,500

In its March 31, 2019, balance sheet, what amount should Airish report as sales taxes payable?
A. 1,590 C. 900
B. 1,500 D. 600

SOLUTION: C
Sales revenue – including the 12% vat (Nov. and Dec. only) (7,420 + 8,480) 15,900
To remove Vat /106%
Sales revenue without 12% vat 1,500
Vat 6%
Vat payable 900

18) On the first day of each month, Denise Company received from a customer an escrow deposit of P25,000 for real
estate tax. The entity recorded the P25,000 in escrow account. The customer’s real estate tax is P280,000, payable in
equal installments of the first day of each calendar quarter. On January 1, 2019, the balance of the escrow account was
P30,000. On September 30, 2019, what amount should be reported as escrow liability?
A. 15,000 B. 45,000 C. 85,000 D. 115,000

SOLUTION: B
Escrow Liability
Taxes payment on Jan. 1, Apr. 1, Jul. 1 210,000 30,000 01/01/19 – Beginning balance
225,000 (25,000 x 9mos.) Cash receipt from customers
45,000 12/31/19 – Ending balance
(280,000 / 4) x 3 = 4,200,000

19) T’Chaka Company reported the following liabilities on December 31, 2017:
Accounts payable 750,000
Short-term borrowings 400,000
Mortgage payable, current portion P100,000 3,500,000
Bank loan payable, due June 30, 2018 1,000,000

The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2018, with the first principal payment due
January 15, 2019. The financial statements were issued February 28, 2018. What total amount should be reported as
current liabilities on December 31, 2017?
A. 1,150,000 B. 2,250,000 C. 1,250,000 D. 850,000

SOLUTION: B
Current Noncurrent
Accounts payable 750,000 ---
Short-term borrowings 400,000 ---
Mortgage payable, current portion P100,000 100,000 3,400,000
Bank loan payable, due June 30, 2018 1,000,000 ---
Total 2,250,000 3,400,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

20) Indians Company inaugurated a sales promotional campaign on August 31, 2019 in its desire to improve sales. Indians
placed coupon redeemable for a premium in each ream of bond papers sold. Each premium costs Indians P20 and five
coupons must be presented by a customer to receive a premium. Indians estimated that only 70% of the coupons
issued would be redeemed. For the four months ended December 31, 2019, the following information is available:
Reams of bond paper sold Premiums purchased Coupons redeemed
400,000 30,000 100,000

How much is the estimated liability for premiums outstanding at December 31, 2019?
A. 720,000 B. 1,020,000 C. 1,800,000 D. 3,600,000

SOLUTION: A
In Premiums Net Cost In Peso
Premium Payable – beginning 0 0 0
Premium Expense:
# of units sold x coupon in each unit 400,000
% of redemption 70%
# of coupons required for each premium /5 56,000 20 1,120,000
Total
Premiums Distributed/Paid:
# of coupons redeemed 100,000
# of coupons required for each premium /5 (20,000) 20 (400,000)
Premium Payable – Ending 36,000 20 720,000

Use the following information for the next three (3) questions:
Seedot Candy Company offers a coffee mug as a premium for every ten 50-cent candy bar wrappers presented by
customers together with P1.00. The purchase price of each mug to the company is 90 cents; in addition it costs 60 cents
to mail each mug. The results of the premium plan for the years 2019 and 2020 are as follows:
2019 2020
Coffee mugs purchased 480,000 400,000
Candy bars sold 3,750,000 4,500,000
Wrappers redeemed 1,900,000 2,800,000
2019 wrappers expected to be redeemed in 2020 1,300,000
2020 wrappers expected to be redeemed in 2021 1,800,000

QUESTIONS:
21) The premium expense for the year ended December 31, 2020 is
A. 165,000 C. 495,000
B. 230,000 D. 690,000

22) The inventory of premium mugs as of December 31, 2020 is

A. 369,000 C. 423,000
B. 410,000 D. 540,000

23) The estimated liability for premiums as of December 31, 2020 is

A. 90,000 C. 165,000
B. 162,000 D. 270,000

SOLUTIONS: A, A, A,
In Premium Net Cost* In Peso Mugs***
Premium Payable – beginning (1,300,000 / 10) 130,000 0.5 65,000 **290,000
Premium Expense:
# of units sold x coupon in each unit 2,800,000
% of redemption ?
# of coupons required for each premium /10 SQUEEZE 330,000 0.5 165,000 400,000
Total
Premiums Distributed/Paid:
# of coupons redeemed 2,800,000
# of coupons required for each premium /10 (280,000) 0.5 (140,000) (280,000)
Premium Payable – Ending (1,800,000 / 10) 180,000 0.5 90,000 410,000
*0.9 + 0.6 – 1.0 = 0.5
**in units
Inventory of Mugs 410,000 unit x 0.90 cost per mug = P369,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

24) Chato Company sells electrical goods covered by a one-year warranty for any defects. Of the sales of P70,000,000 for
the year, the entity estimated that 3% will have a major defect, 5% will have minor defect and 92% will have no defect.
The cost of repair would be P5,000,000 if all the products sold had major defect and P3,000,000 if all had minor defect.
What amount should be recognized as a warranty provision?
A. 8,000,000 B. 5,600,000 C. 300,000 D. 190,000

SOLUTION: C
Major defect 5,000,000 x 3% 150,000
Minor defect 3,000,000 x 5% 150,000
Total 300,000

25) On April 1, 2019, Ash company began offering a new product for sale under a one-year warranty. Of the 50,000 units in
inventory on April 1, 2019, 30,000 had been sold by June 30, 2019. Based on its experience with similar products, the
entity estimated that the average warranty cost per unit sold would be P80. Actual warranty cost incurred from April 1
through June 30, 2019 amounted to P700,000. On June 30, 2019, what is the estimated warranty liability?
A. 900,000 B. 1,600,000 C. 1,700,000 D. 3,300,000

SOLUTIONS: C
Sales 30,000
Warranty cost each 80
Warranty expense 2,400,000
Warranty paid (700,000)
Warranty unpaid 1,700,000

26) Sacramento Company gives warranties at the time of sale. Sales of P20,000,000 were made evenly throughout 2016.
Experience indicates that 90% of the products sold require no warranty repairs; 7% would require minor repairs costing
10% of the sales price; and 3% would require major repair/replacement costing 85% of the sales price.

The appropriate discount factor for cash flows expected to occur on June 30, 2016 is 0.935. An appropriate risk-
adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6%. What is the warranty
provision for 2016?
A. 644,215 C. 647,660
B. 689,000 D. 650,000

SOLUTIONS: B
20,000,000 x 7% x 10% 140,000
20,000,000 x 3% x 85% 510,000
Total warranty cost 650,000
PVF 0.935
Risk adjustment factor 1.06
Warranty payable 644,215

27) On January 2, 2019, Athletics Company introduced a new line of products that carry a three-year warranty against
factory defects. Estimated warranty costs related to peso sales are as follows: 1% of sales in the year of sale, 2% in the
year after sales and 3% in the second year after sale. Sales and actual warranty expenditures for the period 2019 to
2021 were as follows:
Sales Actual warranty Expenditures
2019 200,000 1,500
2020 500,000 7,500
2021 700,000 22,500
1,400,000 31,500

What amount should Athletics report as warranty expense in 2021?

A. 52,500 B. 22,500 C. 23,000 D. 42,000

SOLUTION: D
Warranty expense for 2021 700,000 x 6% 42,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

28) A court case decided on December 31, 2019 awarded damages against Rangers. The judge has announced that the
amount of damages will be set at a future date, expected to be in March 2020. Ranger has received advice from its
lawyer that the amount of the damages could be anything between P20,000 and P7,000,000. As of December 31,
2019, how much should be recognized in the statement of financial position regarding this court case?
A. 20,000 B. 7,000,000 C. 3,510,000 D. 0

SOLUTION: D
Provision for litigation should NOT be recorded because the chances of paying is probable but not measurable.
Measurement (depends on the given information or use the level of priority)
1. Actual amount paid (if known before authorization of financial statement) –
2. Best/reasonable estimate (if given) –
3. Mid point (if range is given) –
4. Weighted average probability (if various outcomes is given) –
Significant amount of distance between the two end point of the range signifies unmeasurability. L

29) Aljur Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an
attorney and determined that there is a 50% chance of losing. The attorney estimated that the amount of any payment
would be between P500,000 and P800,000 with P500,000 as the best estimate. What is the required journal entry as a
result of this litigation?
A. No journal entry is required
B. Debit Litigation expense and credit Litigation Liability P250,000.
C. Debit Litigation expense and credit Litigation Liability P500,000.
D. Debit Litigation expense and credit Litigation Liability P660,000.

SOLUTION: A
Since the probability of paying is only possible 50%, the liability should not be recognized.

30) Franze Company was involved in litigation regarding a faculty product sold. The entity consulted with an attorney and
the attorney believed that the entity had a 70% probability of losing the case. The attorney also determined that the
entity had a 60% chance of paying P300,000 and a 40% chance of paying P500,000. The court is expected to rule
early next year. What amount of provision should be recognized at the end of the current year?
A. 560,000 C. 266,000
B. 380,000 D. 0

SOLUTION: B
Provision for litigation should be recorded because the chances of paying is probable (70%).
Measurement (depends on the given information or use the level of priority)
1. Actual amount paid (if known before authorization of financial statement)
2. Best/reasonable estimate (if given)
3. Mid point (if range is given)
4. Weighted average probability (if various outcomes is given) – YES

31) On December 15, 2017, an employee filed a lawsuit against Bojack Company for damages suffered when one of
Bojack’s equipment malfunctioned in August of 2017. The legal counsel of the company believes that it is probable that
Bojack will pay the following damages:
Probability Estimated Litigation Cost
50% P400,000
30% 700,000
20% 550,000

Bojack Company provided a 10% risk adjustment factor.

Using the expected value method, how much is the provision that should be recognized by Bojack Company on
December 31, 2017?
A. 1,815,000 C. 572,000
B. 1,650,000 D. 520,000

32) March 2016, Wyoming Company filed a suit against DC Company seeking P2,000,000 damages for patent
infringement. A court decision on November 2016 awarded Wyoming Company P1,750,000 in damages. DC Company
motioned to appeal the decision which was expected to be resolved within 2017. Wyoming Company’s counsel
believed it is probable that it will be successful against DC Company for an estimated amount ranging from P1,400,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

 to P1,750,000, which P1,500,000 as the most likely amount. The amount reported in Wyoming Company’s 2016
statement of profit or loss statement is
A. 1,400,000 C. 1,500,000
B. 1,750,000 D. 0

SOLUTIONS: D
Rule on Contingent Asset:
1. Virtually certain – recognize gain and asset.
2. Probable – disclosure.
3. Possible and remote – do nothing.

33) Motorboat Company had a 12% bonds payable with carrying amount of P8,320,000 on December 31, 2018. The
bonds, which had a face value of P8,000,000, were issued at a premium to yield 10%. The entity used the effective-
interest method of amortization. Interest was paid on June 30 and December 31. On June 30, 2019, several years
before their maturity, the entity retired the bonds at 105 plus accrued interest. What is the loss on retirement in 2019?
A. 208,000 B. 144,000 C. 104,000 D. 400,000

QUESTIONS: B
Carrying amount of the bonds 12/31/18 8,320,000
Effective interest (10% x 6/12 + 1) x1.05
Nominal interest (8,000,000 x 12% x 6/12 (480,000)
Carrying amount of the bonds 06/30/19 8,256,000
Retirement price (8,000,000 x 1.05) (8,400,000)
Loss on retirement (144,000)

34) On January 1, 2011, Double Blade Co. issued 3 years, 10% P4,000,000 convertible bonds for P4,400,000. Principal is
due at maturity but interest is payable every year end. The bonds are convertible into 6,000 ordinary shares with par
value of P400. At issuance date, the prevailing market rate of interest for similar debt without conversion feature is 12%.
On December 31, 2012, half of the convertible bonds were retired for P2,000,000. The prevailing rate of interest on
similar debt instrument as of December 31, 2012 is 11% without the conversion feature. How much gain (loss) on the
extinguishment of the bonds on December 31, 2012?
A. 24,393 loss B. 24,393 gain C. 17,696 loss D. 17,696 gain

QUESTIONS: C (rounding off difference)

Fair value of the bonds at 1/1/11
Present value of the principal, 4,000,000 x 0.71178 2,847,121
Present value of nominal interest, 4,000,000 x 10% x 2.4018 960,720
Total 3,807,840
Effective interest 1.12
Nominal interest 4,000,000 x x10% (400,000)
Effective interest 1.12
Nominal interest 4,000,000 x x10% (400,000)
Carrying amount at 12/31/12 3,928,555
Portion of the bonds retired ½
Carrying amount of the bonds retired 1,964,277
Retirement price
Present value of the principal 2,000,000 x 0.9009 1,801,800
Present value of the nominal 2,000,000 x 10% 0.9009 180,180
Retirement price 1,981,980

Carrying amount of the bonds retired 1,964,278

Retirement price 1,981,980
Loss 17,702

35) On December 31, 2015, Ariana Grande Corporation issued 20-year, nonconvertible bonds of P5,000,000 for
P5,851,160 to yield 10%. Interest is payable annually on December 31 at 12%. On April 1, 2017, Ariana Grande retires
2,000 of its own P1,000 bonds at 102 plus accrued interest. The accounting period of Ariana Grande Corporation is the
calendar year. What is the amount of gain or loss on early retirement of bond that will be reported in 2017 income
statement?
A. 292,873 gain B. 292,873 loss C. 232,873 loss D. 232,873 gain

SOLUTION: A

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

Carrying amount 12/31/15 5,851,160
Effective interest 1.10
Nominal interest 5,000,000 x 12% (600,000)
Effective interest 1.025
Nominal interest 5,000,000 x 12% x 3/12 (150,000)
Carrying amount 4/1/17 5,832,183
Portion of the bonds retired 2/5
Carrying amount of the bonds retired 2,332,873
Retirement price 2,000,000 x 102% 2,040,000
Gain 292,873

36) The market price of a P400,000, ten-year, 12% (pay interest semiannually) bond issue sold to yield an effective rate of
10% is
A. 449,156 B. 449,850 C. 453,308 D. 748,944

SOLUTION: B (rounding off difference)

Present value of the principal, 400,000 x 0.3855 154,200
Present value of the nominal, 400,000 x 12% x 6.1446 294,940
Total 449,140

37) On January 1, 2021, Mawi Co. issued 1,000, P4,000, 12%, 3 years bonds for P4,198,948. Principal is due on
December 31, 2023 but interest are due annually every year-end. The effective interest rate is 10%. How much is the
unamortized premium on bonds as of December 31, 2021?
A. 198,948 B. 135,204 C. 138,843 D. 143,134

QUESTIONS: C
Initial carrying amount 1/1/21 4,198,948
Effective interest 1.10
Nominal interest (480,000)
Carrying amount12/31/21 4,138,843
Face amount 4,000,000
Premium 138,843

38) Jeanina Company had outstanding a 7%, ten-year P4,000,000 face amount bond. The bond was originally sold to yield
6% annual interest. The entity used the effective interest method to amortize bond premium and did not elect the fair
value option for reporting financial liabilities. On June 30, 2019, the carrying amount of the outstanding bond was
P4,200,000. What amount of unamortized premium on bond should be reported on June 20, 2020?
A. 158,000 B. 172,000 C. 180,000 D. 0

SOLUTION: B
Carrying amount 6/30/19 4,200,000
Effective interest 1.06
Nominal interest (280,000)
Carrying amount 6/30/29 4,172,000
Face amount 4,000,000
Premium 6/30/20 172,000

39) An entity issued 2,000 convertible bonds on January 1, 2016. The bonds have a three-year term, and are issued
at par with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal annual interest
rate of 6 percent. Each bond is convertible at any time up to maturity into 250 ordinary shares. The entity has an
option to settle the principal amount of the convertible bonds on ordinary shares or in cash. When the bonds are
issued, the prevailing market interest rate for similar debt without a conversion option is 9 percent. At the issue
date, the market price of one ordinary share is P3. The issuance of convertible bonds increased the entity’s equity
by (PVF Complete Decimal)
A. 0 B. 151,878 C. 896,025 D. 134,872

SOLUTION: B
FV of compound financial instrument – issued at par 2,000,000
Present value of principal, 2,000,000 x 0.772…….. 1,544,367
Present value of nominal interest, 2,000,000 x 6% x 2.532….. 303,755 1,848,122
Equity 151,878

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40) On January 1, 2015, Leonberger Corporation issued a P3,000,000 6% convertible bonds at par. The bonds mature in
five years and interest is payable every December 31. The bonds may be converted into ordinary shares on the basis of
50 shares for each P1,000 bonds. The par value of each share is P15. The interest rate for an equivalent bond without
the conversion rights would have been 10%. How much is the total credit to equity upon conversion assuming the
bonds were converted on December 31, 2018?
A. 3,345,865 B. 2,890,909 C. 1,095,865 D. 640,909

SOLUTION: B
Fair value of the compound financial instrument – issued at par 3,000,000
Present value of principal, 3,000,000 x 0.6209 1,862,700
Present value of nominal interest 3,000,000 x 6% x 3.7908 682,344 2,545,044
Value assigned to the equity component 454,956

Initial measure of the bonds 1/1/15 2,545,044

Effective interest 1.10
Nominal interest 3,000,000 x 6% (180,000)
Effective interest 1.10
Nominal interest 3,000,000 x 6% (180,000)
Effective interest 1.10
Nominal interest 3,000,000 x 6% (180,000)
Effective interest 1.10
Nominal interest 3,000,000 x 6% (180,000)
Carrying amount 2,890,909
Total par value 3,000,000 / 1,000 x 50 x 15 2,250,000
Credit to SP – excess 640,909
Credit to ordinary share capital 2,250,000
Total credit to all equity account 2,890,909

41) During 2014, Warriors Corporation issued at 95, one thousand of its 8%, P5,000 bonds due in ten years. One
detachable share warrants entitling the holder to buy 20 shares of Warriors ordinary shares was attached to each bond.
Shortly after issuance, the bonds are selling at 10% ex-warrants, and each warrants was quoted at P60. What amount,
if any, of the proceeds from the bond issuance should be recorded as part of Warriors Shareholders’ equity? (PVF 4
Decimal, Final answer round to nearest thousand)
A. 367,000 B. 250,000 C. 225,000 D. 202,000

SOLUTION: A
FV of the compound instrument – issued at 95 4,750,000
Present value of principal, 5,000,000 x 0.3855 1,925,000
Present value of nominal, 5,000,000 x 8% 6.1446 2,457,840 4,382,840
Value assigned to equity 367,160

42) On December 31, 2019, Beedril Co. agreed to the following modification of its existing liability.
• Reduced the principal on the loan of P20,000,000 to P16,000,000.
• Forgave the accrued interest of P2,400,000.
• Extend the maturity date from December 31, 2020 to December 2022.
• Reduced the loan’s nominal interest rate of 12% to 10%.

Interest is payable annually at each year end. The original effective interest rate of the debt instrument for both Beedril
and its creditor, the Bank is 12%. The prevailing market rate of interest as of December 31, 2019 is 11%. How much is
the gain (loss) on the extinguishment of the debt? (PVF 4 Decimal)
A. 7,562,768 loss B. 7,168,586 loss C. 7,168,320 gain D. 0

SOLUTION: C
Carrying amount note payable 20,000,000
Accrued interest 2,400,000
Carrying amount of total liability 22,400,000
PV of cash flow:
Principal, (16,000,000 x 0.7118) 11,388,800
Interest, [(16,000,000 x 10%) x 2.4018] 3,842,880 15,231,680
Gain *7,168,320
*Rounding difference

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

43) On December 31, 2019, Kakuna Co. issued 10,000 shares with par value of P100 share in settlement of a 12%,
P4,000,000 loan payable with a related unamortized discount of P80,000, and accrued interest of P360,000. The
remaining term of the loan is 3 years. The fair value of the shares is not reliably determinable. The prevailing market rate
for similar debt on December 31, 2019 is 8%. How much is the gain (loss) on the extinguishment of the debt?
A. 492,336 loss B. 132,333 loss C. 492,336 gain D. 0

QUESTIONS: B
Face amount 4,000,000
Discount (80,000)
Carrying amount of the note 3,920,000
Accrued interest 360,000
Total carrying amount of the liability 4,280,000
Equity swap priority 2, (4,000,000 x 0.7938) + (4,000,000 x 12% x 2.5771)* (4,412,203)
Loss 132,333

Priority Computation of gain or loss Computation of share premium

1. CA of total liability – Total FV of shares issued = gain (loss) FV of shares issued – Total Par value of shares issued = SP
2. CA of total liability – FV of liability = gain (loss) FV of liability – Total Par value of shares issued = SP
3. CA of total liability – CA of total liability = gain (loss) CA of total liability – Total Par value of shares issued = SP

44) On December 31, 2015, Croco purchased equipment from Fera Corp. and issued a noninterest bearing note requiring
payment of P50,000 annually for 10 years. The first payment is due December 31, 2015, and the prevailing rate of
interest for this type of note at date of issuance is 12%. The interest expense to be reported by Croco in its 2016
income statement is
A. 37,969 B. 31,969 C. 30,301 D. 27,901

SOLUTION: B
Initial carrying amount (50,000 x 6.3283*) 316,412
Principal payment – pain in advance (50,000)
Carrying amount at 12/31/15 after the first installment payment 266,412
Effective interest 12%
Interest expense 31,969
*PV of annuity due 12% for 10 period

45) On April 1, 2015, Loonie Company borrowed P5,000,000 and signed a 2 year note bearing interest at 12% per annum
compounded annually. Interest is payable in full at maturity on March 31, 2017. What amount should Loonie report as a
liability for accrued interest at December 31, 2016?
A. 1,048,000 B. 1,100,000 C. 1,104,000 D. 1,050,000

SOLUTION: C
Face amount 5,000,000
Nominal interest 12%
Accrued interest for the 1st year April 1, 2016 (4/1/15 – 4/1/16) 600,000

Face amount + Accrued interest (5,000,000 + 600,000) new basis 5,600,000

Nominal interest 12%
Number of months accrued for the 2nd year of interest (4/1/16 – 12/31/16) 8/12
Accrued interest for the 2nd year for 8 months 504,000
Accrued interest for the 1st year April 1, 2016 (4/1/15 – 4/1/16) for 12 months 600,000
Total accrued interest (4/1/15 – 12/31/16) 1,104,000

46) On December 31, 2016, Thyro Company shows the following data with respect to its matured obligation.
Note payable P5,000,000
Accrued interest payable 500,000

The company is threatened with court suit if it count not pay its maturing debt. Accordingly, the company enters into an
agreement with the creditor for the issuance of share capital in full settlement of the note payable. The agreement
provides for the issue of 50,000 ordinary shares with par value of P50. The ordinary share is currently quoted at P70.
How much is the share premium arising from the debt restructuring considered as “equity swap”?
A. 3,000,000 B. 1,500,000 C. 2,000,000 D. 1,000,000

QUESTIONS: B
FV of shares issued 50,000 x 70 3,500,000
Total Par value of shares issued 50,000 x 50 2,500,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•

Share premium 1,000,000

Priority Computation of gain or loss Computation of share premium

1. CA of total liability – Total FV of shares issued = gain (loss) FV of shares issued – Total Par value of shares issued = SP
2. CA of total liability – FV of liability = gain (loss) FV of liability – Total Par value of shares issued = SP
3. CA of total liability – CA of total liability = gain (loss) CA of total liability – Total Par value of shares issued = SP

Use the following information for the next two (2) questions:
Due to adverse economic circumstances and poor management, The Weeknd Company has negotiated a restructuring of
its P5,000,000 note payable to Arianna Bank. Arianna bank has agreed to reduce the face value of the note from
P5,000,000 to P4,000,000, reduce the interest rate form 15% to 10%, and extend the due date three years from the date
of restructuring. The restructuring will occur on December 31, 2015, the last day of Weeknd’s annual reporting period. The
unpaid interest on the restructured loan at this time is P750,000 which is forgiven.

QUESTIONS: (PVF 4 Decimal)

47) How much is the gain on extinguishment of debt for the year 2015?
A. 2,206,720 B. 1,750,040 C. 550,000 D. 0

48) How much is the interest expense in 2016?

A. 262,506 B. 531,480 C. 399,996 D. 354,320

SOLUTION: A, B
Face amount 5,000,000
Accrued interest 750,000
Total liability 5,750,000
PV of new liability:
Principal, 4,000,000 x 0.6575 2,630,000
Interest, 4,000,000 x 10% x 2.2832 913,280 3,543,200
Gain 2,206,720

Beginning carrying amount, after restructuring 3,543,200

Original effective interest 15%
Interest expense 531,480

49) On July 1, 2019, Great Dane Company issued P4,000,000 note payable for money borrowed from Miniature Inc. The
one-year, P4,000,000 note payable was discounted at 12% and is payable in lump sum on June 30, 2020. How much
is the carrying amount of the note on initial recording?
A. 4,000,000 B. 3,520,000 C. 3,434,675 D. 3,337,564

SOLUTION: B
Face amount 4,000,000
Interest 12%
Interest for 1 year 480,000
Face amount 4,000,000
Discount as of 12/31/19 (480,000)
Carrying amount 3,520,000

50) On September 1, 2019, Ginalyn Company borrowed on a P5,400,000 note payable from a bank. The note bears
interest at 12% and is payable in three equal annual principal payments of P1,800,000. On this date, the bank’s prime
rate was 11%. The first annual payment for interest and principal was made on September 1, 2020. On December 31,
2020, what amount should be reported as accrued interest payable?
A. 144,000 B. 216,000 C. 132,000 D. 198,000

SOLUTION: A
Remaining principal amount (5,400,000 – 1,800,000) 3,600,000
Nominal interest 12%
Months unpaid as of December 31, (September 1, 2020 – December 31, 2020) 4/12
Interest payable 144,000

J END OF PRELIM EXAM – SET H SOLUTION J

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •SET – H• •J. S. CAYETANO™•