MIDTERM EXAM IN INTERMEDIATE 2

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1.Which of the following represents a liability?

a. The obligation to pay for goods that a company expects to order from suppliers next year.
b. The obligation to provide goods that customers have ordered and paid for during the
current year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of
the current year.
d. The obligation to distribute share of a company's own common stock next year as a result
of a stock dividend declared near the end of the current year.

2. Bruemmer Co. has a P20,000, two-year note payable to Second City Bank that matures June 30, 2008. Bruemmer's
management intends to refinance the note for an additional three years and is negotiating a financing agreement
with Second City. In order to exclude this note from current liabilities on its December 31, 2007, balance sheet,
Bruemmer Co. must
a. pay off the note and complete the refinancing before the 2007 financial statements are
issued.
b. demonstrate an ability to refinance the obligation before the 2007 financial statements are
issued.
c. complete the refinancing before the balance sheet date.
d. complete the refinancing before the note's maturity date.
3. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be equal to
a. the face amount of the bond.
b. the present value of the bond maturity value plus the present value of the interest payments
to be made during the life of the bond.
c. the face amount of the bond plus the present value of the interest payments made during
the life of the bond.
d. the sum of the face amount of the bond and the periodic interest payments.

4. Which of the following is true of a premium on bonds payable?

a. It is a contra-stockholders' equity account.
b. It is an account that appears only on the books of the investor.
c. It increases when amortization entries are made until it reaches its maturity value.
d. It decreases when amortization entries are made until its balance reaches zero at the
maturity date.

5. Accrued interest on bonds that are sold between interest dates

a. is ignored by both the seller and the buyer.
b. increases the amount a buyer must pay to acquire the bonds.
c. is recorded as a loss on the sale of the bonds.
d. decreases the amount a buyer must pay to acquire the bonds.

6. Which of the following is true of accrued interest on bonds that are sold between interest dates?
a. It is computed at the effective market rate.
b. It will be paid to the seller when the bonds mature.
c. It is extra income to the buyer.
d. None of the above.
7. At December 31, 2008, Reed Corp. owed notes payable of P1,000,000 with a maturity date of April 30, 2009.
These notes did not arise from transactions in the normal course of business. On February 1, 2009, Reed issued
P3,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the P1,000,000 of
notes payable. Reed's December 31, 2008, financial statements were issued on March 29, 2009. How much of the
P1,000,000 notes payable should be classified as current in Reed's balance sheet at December 31, 2008?
a. P0
b. P100,000
c. P900,000
d. P1,000,000
8. On January 1, MAX issued ten-year bonds with a face amount of P1,000,000 and a stated interest rate of 8 percent
payable annually each January 1. The bonds were priced to yield 10 percent. The total issue price (rounded) of the
bonds was
 a. P1,000,000.
b. P980,000.
c. P920,000.
d. P880,000.

9. On October 1, 2008, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent, P1,000 bonds. The
bonds are dated July 1, 2008, and mature on July 1, 2015. Interest is payable semiannually on January 1 and July 1.
At the time of issuance, Westridge would receive cash of
a. P800,000.
b. P808,000.
c. P820,000.
d. P828,000.
10. On January 1, 2008, Matlock Inc. issued its 10 percent bonds in the face amount of P1,500,000. They mature on
January 1, 2018. The bonds were issued for P1,329,000 to yield 12 percent, resulting in bond discount of
P171,000. Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1 and
January 1. For the six months ended June 30, 2008, Matlock should report bond interest expense of
a. P75,000.
b. P79,740.
c. P83,550.
d. P85,260.

11. White Sox Corporation issued P200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and
July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8 percent,
what will be the issuance price of the bonds?
a. P175,078
b. P211,283
c. P215,902
d. P227,183

12. On January 1, 2008, P50,000 of 20-year, 6 percent debentures were issued for P56,275.20. Interest payment dates
on the bonds are January 1 and July 1. The amount of premium to be amortized on July 1, 2008, when using the
straight-line method is
a. P313.76.
b. P156.88.
c. P776.50.
d. P93.11.
13. The total interest expense on a P200,000, 10 percent, 10-year bond issued at 95 would be
a. P190,000.
b. P195,000.
c. P200,000.
d. P210,000.

14. On January 1, 2008, Felipe Hospital issued a P250,000, 10 percent, 5-year bond for P231,601. Interest is payable
on June 30 and December 31. Felipe uses the effective-interest method to amortize all premiums and discounts.
Assuming an effective interest rate of 12 percent, how much interest expense should be recorded on June 30, 2008?
a. P11,935.14
b. P12,500.00
c. P13,896.06
d. P14,729.82

Kiyabu County issued a P500,000, 10 percent, 10-year bond on January 1, 2008, for 113.6 when the effective
interest rate was 8 percent. Interest is payable on June 30 and December 31. Kiyabu uses the effective-interest
method to amortize all premiums and discounts.

15. How much premium or discount should be amortized on June 30, 2008?
a. P2,790
b. P2,280
c. P2,000
d. P1,970
16. How much interest expense should Kiyabu record on December 31, 2008?
a. P25,000.00
b. P23,810.15
 c. P22,628.80
d. P19,920.10

17. If a P1,000, 9 percent, 10-year bond was issued at 96 plus accrued interest one month after the authorization date,
how much cash was received by the issuer?
a. P967.50
b. P960.00
c. P1,007.50
d. P992.50
18. Bonds that were authorized on January 1, 2008, and that pay interest on January 1 and July 1 of each year were
issued on October 1, 2008. If the issuer's accounting year ends on December 31, how many months would any
discount or premium be amortized in 2008?
a. 3 months
b. 6 months
c. 9 months
d. 12 months
19. If a P1,000, 9 percent, 10-year bond was issued at 103 plus accrued interest one month after the authorization date,
how much cash did the issuer receive?
a. P1,037.50
b. P1,030.00
c. P1,007.50
d. P992.50

RCM Corporation, a calendar-year firm, is authorized to issue P200,000 of 10 percent, 20-year bonds dated
January 1, 2008, with interest payable on January 1 and July 1 of each year.

20. If the bonds were issued on April 1, 2008, the amount of accrued interest on the date of sale is
a. P20,000.
b. P10,000.
c. P5,000.
d. P2,500.
21. If the bonds were issued at 97 on April 1, 2008, plus accrued interest, the amount of cash received by RCM
Corporation would be
a. P200,000.
b. P194,000.
c. P199,000.
d. None of the above.

22. When a corporation issues bonds, the price that buyers are willing to pay for the bonds does not depend on which
of the following below
a. face value of the bonds
b. market rate of interest
c. periodic interest to be paid on the bonds
d. denominations the bonds are sold

23. When the maturities of a bond issue are spread over several dates, the bonds are called
a. serial bonds
b. bearer bonds
c. debenture bonds
d. term bonds
24. The market interest rate related to a bond is also called the
a. stated interest rate
b. effective interest rate
c. contract interest rate
d. straight-line rate

25. The present value of P40,000 to be received in one year, at 6% compounded annually, is (rounded to nearest
dollar)
a. P37,736
b. P42,400
c. P40,000
d. P2,400
26. Current liabilities are
a. due, but not receivable for more than one year
b. due, but not payable for more than one year
c. due and receivable within one year
d. due and payable within one year
27. Notes may be issued
a. when assets are purchased
b. to creditor's to temporarily satisfy an account payable created earlier
c. when borrowing money
d. all of the above
28. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. What is the due date of the note?
a. October 8
b. October 7
c. October 6
d. October 5
29. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. What is the maturity value of the
note?
a. P80,100
b. P84,800
c. P81,600
d. P81,200
30. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. Assume that the fiscal year of
Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in the current fiscal year?
a. P293.33
b. P400.00
c. P391.10
d. P1,600.00
31. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. Assume that the fiscal year of Still
Co. ends June 30. What is the amount of interest revenue recognized by Still in the following year?
a. P1,200.00
b. P1,208.89
c. P1,306.67
d. P1,600.00
32. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable on an overdue account payable to Still Co.
Assume that the fiscal year of Acme Co. ends June 30. Which of the following relationships is true?
a. Acme is the creditor and credits Accounts Receivable
b. Still is the creditor and debits Accounts Receivable
c. Still is the borrower and credits Accounts Payable
d. Acme is the borrower and debits Accounts Payable
33. A business borrowed P40,000 on March 1 of the current year by signing a 30 day, 6% interest bearing note. When
the note is paid on March 31, the entry to record the payment should include a
a. debit to Interest Payable P200
b. debit to Interest Expense P200
c. credit to Cash for P40,000
d. credit to Cash for P42400
34. The interest deducted from the maturity value of a note is called
a. proceeds
b. discount
c. face value
d. maturity value
35. The maturity value of an interest-bearing note payable is the
a. face value plus the interest
b. face value minus the interest
c. interest
d. face value
36. The interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable for P100,000 is
a. P6,000
b. P1,500
c. P500
 d. P1,000
37. The maturity value of a P40,000, 90-day, 6% note payable is
a. P40,600
b. P42,400
c. P600
d. P2,400
38. Proceeds of P48,750 were received from discounting a P50,000, 90-day note at a bank. The discount rate used by
the bank in computing the proceeds was
a. 6.25%
b. 10.00%
c. 10.26%
d. 9.75%
39. Miller Co. issued a P35,000, 60-day, discounted note to River City Bank. The discount rate is 6%. What is the
maturity value of the note?
a. P35,350
b. P37,100
c. P35,000
d. P34,650
40. Chu Co. issued a P50,000, 60-day, discounted note to River City Bank. The discount rate is 6%. The cash proceeds
to Chu Co. are
a. P50,500
b. P50,250
c. P49,500
d. P50,250
41. The journal entry a company uses to record the issuance of a note for the purpose of converting an existing account
payable would be
a. debit Cash; credit Accounts Payable
b. debit Accounts, Payable; credit Cash
c. debit Cash; credit Notes Payable
d. debit Accounts Payable; credit Notes Payable
42. The journal entry a company uses to record the issuance of a note for the purpose of borrowing funds for the
business is
a. debit Accounts Payable; credit Notes Payable
b. debit Cash; credit Notes Payable
c. debit Notes Payable; credit Cash
d. debit Cash and Interest Expense; credit Notes Payable
43. The journal entry a company uses to record the issuance of a discounted note for the purpose of borrowing funds
for the business is
a. debit Cash and Interest Expense; credit Notes Payable
b. debit Cash and Interest Payable; credit Notes Payable
c. debit Accounts Payable; credit Notes Payable
d. debit Notes Payable; credit Cash
44. The journal entry a company uses to record the payment of a discounted note is
a. debit Notes Payable and Interest Expense; credit Cash
b. debit Notes Payable; credit Cash
c. debit Cash; credit Notes Payable
d. debit Accounts Payable; credit Cash
45. The journal entry a company uses to record the payment of an ordinary note is
a. debit Cash; credit Notes Payable
b. debit Accounts Payable; credit Cash
c. debit Notes Payable and Interest Expense; credit Cash
d. debit Notes Payable and Interest Receivable; credit Cash
46. A current liability is a debt that can reasonably be expected to be paid
a. between 6 months and 18 months.
b. out of currently recognized revenues.
c. within one year.
d. out of cash currently on hand.
47. Current liabilities are due
a. and receivable within one year.
b. but not receivable for more than one year.
 c. but not payable for more than one year.
d. and payable within one year.
48. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1. Starkwood Building
Company signs a P100,000, 9%, 9-month note. The entry made by Starkwood Building Company on January 1 to
record the proceeds and issuance of the note is
a. Interest Expense 9,000
Cash 91,000
Notes Payable 100,000
b. Cash 100,000
Notes Payable 100,000
c. Cash 100,000
Interest Expense 9,000
Notes Payable 109,000
d. Cash 100,000
Interest Expense 9,000
Notes Payable 109,000
Interest Payable 4,500
49. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1. Starkwood Building
Company signs a P100,000, 9%, 9-month note. What is the adjusting entry required if Starkwood Building
Company prepares financial statements on June 30?
a. Interest Expense 9,000
Interest Payable 9,000
b. Interest Expense 4,500
Interest Payable 4,500
c. Interest Expense 6,750
Interest Payable 6,750
d. Interest Payable 4,500
Interest Expense 4,500
50. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1. Starkwood Building
Company signs a P100,000, 9%, 9-month note. What entry will Starkwood Building Company make to pay off the
note and interest at maturity assuming that interest has been accrued to September 30?
a. Notes Payable 106,750
Cash
106,750
b. Notes Payable 100,000
Interest Payable 6,750
Cash
106,750
c. Interest Expense 6,750
Notes Payable 100,000
Cash
106,750
d. Interest Payable 9,000
Notes Payable 100,000
Cash
109,000
51. As interest is recorded on an interest-bearing note, the Interest Expense account is
a. decreased; the Interest Payable account is increased.
b. increased; the Interest Payable account is increased.
c. increased; the Notes Payable account is decreased.
d. increased; the Notes Payable account is increased.
52. The journal entry to record the conversion of an P250 accounts payable to a notes payable would be:
a. Jan 31 Cash 250
Notes Payable 250
b. Jan 31 Notes Receivable 250
Notes Payable 250
c. Jan 31 Notes Payable 250
Cash 250
d. Jan 31 Accounts Payable 250
Notes Payable 250
53. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of P60,000 to Charah Hair Products,
Inc for merchandise inventory. Determine the adjusting entry for Santos on December 31 assuming the note carries
an interest rate of 8%.
 a. Interest Expense 1,200
Interest Payable 1,200
b. Interest Expense 800
Interest Payable 800
c. Interest Receivable 1,200
Interest Revenue 1,200
d. Interest Receivable 800
Interest Revenue 800
54. Current liabilities are:
a. due and receivable within one year.
b. due and to be paid out of current assets within one year.
c. due, but not payable for more than one year.
d. payable if a possible subsequent event occurs.
55. Which of the following would most likely be classified as a current liability?
a. Two-year notes payable.
b. Bonds Payable.
c. Mortgage payable.
d. Unearned Rent.
56. The maturity value of a P15,000, 60-day, 5% note payable is:
a. P15,750
b. P750
c. P15,125
d. P125
57. The current portion of long-term debt should
a. be classified as a long-term liability.
b. not be separated from the long-term portion of debt.
c. be paid immediately.
d. be reclassified as a current liability.
58. On January 1, 2007, Gannon Company, a calendar-year company, issued P400,000 of notes payable, of which
P100,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December
31, 2007, is
a. Current Liabilities, P400,000.
b. Current Liabilities, P100,000; Long-term Debt, P300,000.
c. Long-term Debt, P400,000
d. Current Liabilities, P200,000; Long-term Debt, P200,000.
59. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of P60,000 to Charah Hair Products,
Inc. for merchandise inventory. Determine the proceeds of the note assuming the note is discounted at 8%.
a. P55,200
b. P64,800
c. P58,800
d. P61,200

60. Searches Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500 units. It is
estimated that warranty repairs will average P10 per unit sold, and 30% of the repairs will be made in 2007 and
70% in 2008. In the 2007 income statement, Searches should show warranty expense of
a. P25,000
b. P7,500
c. P17,500
d. P0
61. During September, Eltronics sold 100 radios for P50 each. Each radio cost Eltronics P30 to purchase, and carried a
two-year warranty. If 5% typically need to be replaced over the warranty period and one is actually replaced during
September, for what amount in September would Eltronics debit Product Warranty Expense?
a. P50
b. P150
c. P30
d. P120

62. Elgor Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500 units. It is estimated
that warranty repairs will average P10 per unit sold, and 30% of the repairs will be made in 2007 and 70% in 2008.
In the 2007 income statement, Elgor should show warranty expense of
a. P7,500
b. P17,500
c. P25,000
 d. P0
63. Elgor Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500 units. It is estimated
that warranty repairs will average P10 per unit sold, and 30% of the repairs will be made in 2007 and 70% in 2008.
In the 2008 income statement, Elgor should show warranty expense of
a. P7,500
b. P17,500
c. P25,000
d. P0
64. The cost of a product warranty should be included as an expense in the
a. period the cash is collected for a product sold on account
b. future period when the cost of repairing the product is paid
c. period of the sale of the product
d. future period when the product is repaired or replaced
65. Pilgrim Company sells merchandise with a one year warranty. In 2007, sales consisted of 1,500 units. It is
estimated that warranty repairs will average P10 per unit sold, and 30% of the repairs will be made in 2007 and
70% in 2008. In the 2007 income statement, Pilgrim should show warranty expense of
a. P4,500
b. P10,500
c. P15,000
d. P0
66. During May, CircuitSound sold 500 portable CD players for P50 each. Each CD player cost CircuitSound P25 to
purchase and carried a one-year warranty. If 10 percent typically need to be replaced over the warranty period,
what amount should CircuitSound debit Product Warranty Expense for in June?
a. P2,500
b. P1,250
c. P250
d. P1,000
67. During June, CircuitSound sold 800 portable CD players for P50 each. Each CD player cost CircuitSound P25 to
purchase and carried a one-year warranty. If 10 percent typically need to be replaced over the warranty period,
what amount should CircuitSound debit Product Warranty Expense for in June?
a. P4,000
b. P400
c. P2,000
d. P1,000
68. Estimating and recording product warranty expense in the period of the sale best follows which of the following
accounting concepts?
a. Cost concept
b. Business entity concept
c. Matching Concept
d. Materiality concept

69. For a liability to exist,

a. a past transaction or event must have occurred.
b. the exact amount must be known.
c. the identity of the party owed must be known.
d. an obligation to pay cash in the future must exist.
70. The most conceptually appropriate method of valuing a liability under the historical cost basis is to
a. discount the amount of expected cash outflows that are necessary to liquidate the liability
using the market rate of interest at the date the liability was initially incurred.
b. discount the amount of expected cash outflows that are necessary to liquidate the liability
using the market rate of interest at the date financial statements are prepared subsequent to
issuance.
c. record as a liability the amount of cash or cash-equivalent value that the company would
be required to pay to eliminate the liability in the ordinary course of business on the date
of the financial statements.
d. record as a liability the amount of cash or cash-equivalent proceeds actually received when
a liability was incurred.

71. Kenwood Co. neglected to amortize the premium on outstanding ten-year bonds payable. What is the effect of the
failure to record premium amortization on interest expense and bond carrying value, respectively?
a. Understate; understate
b. Understate; overstate
c. Overstate; overstate
 d. Overstate; understate
72. Unamortized debt premium should be reported on the balance sheet of the issuer as a
a. direct addition to the face amount of the debt.
b. direct addition to the present value of the debt.
c. deferred credit.
d. deduction from the issue costs.
73. Which one of the following is true when the effective-interest method of amortizing bond discount is used?
a. Interest expense as a percentage of the bonds' book value varies from period to period.
b. Interest expense remains constant for each period.
c. Interest expense increases each period.
d. The interest rate decreases each period.
74. When bonds are retired prior to maturity with proceeds from a new bond issue, gain or loss from the early
extinguishment of debt, if material, should be
a. amortized over the remaining original life of the retired bond issue.
b. amortized over the life of the new bond issue.
c. recognized as an extraordinary item in the period of extinguishment.
d. recognized in income from continuing operations in the period of extinguishment.
75. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective)
rate of interest
a. plus the present value of all future interest payments at the market (effective) rate of
interest.
b. plus the present value of all future interest payments at the rate of interest stated on the
bond.
c. minus the present value of all future interest payments at the market (effective) rate of
interest.
d. minus the present value of all future interest payments at the rate of interest stated on the
bond.
76. When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, the
amount of interest expense at December 31 of the year of issuance would be for
a. two months.
b. six months.
c. seven months.
d. eight months.
77. For a bond issue that sells for more than its face value, the market rate of interest is
a. dependent on the rate stated on the bond.
b. equal to the rate stated on the bond.
c. less than the rate stated on the bond.
d. higher than the rate stated on the bond.
78. The issuance price of a bond does not depend on the
a. face value of the bond.
b. riskiness of the bond.
c. method used to amortize the bond discount or premium.
d. effective interest rate.
79. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at face value.
b. above face value.
c. below face value.
d. at maturity value.
80. Bonds usually sell at a discount when
a. investors are willing to invest in the bonds at the stated interest rate.
b. investors are willing to invest in the bonds at rates that are lower than the stated interest
rate.
c. investors are willing to invest in the bonds only at rates that are higher than the stated
interest rate.
d. a capital gain is expected.