LA PATRIA COLLEGE

Santiago City

College of Accountancy and Management

Midterm Examination in ACC 106
Intermediate Accounting 2
December 23, 2020

----------------------------------------------------------------------------------------------------------------------
General Guidelines:
a. Write your final answers first, then solutions, if any on succeeding pages on a clean sheet of bond
paper with your name, course and year level, “Final Exam”, course number, and course description.
Use black ball pen in writing your answers.
Example: CHANGOLAN, CHRISTOPHER D. BSA 2 Final Exam
ACC 106 Intermediate Accounting 2
b. After writing your answers, install the CamScanner Application on your smartphone and use it to
capture image/s of your answer sheet/s.
c. Send your answers to the personal accounts of your instructor Mr. Christopher D. Changolan and to
the Program Head of Accountancy, Ms. Aiza P. Rumauac thru Microsoft Teams.
d. Your answer sheet must be sent in PDF form and name your file with this format: Course Number
-Surname – Final Exam (all in capital letters).
Example: ACC 106 – CHANGOLAN – FINALEXAM
e. Deadline of exam: December 23, 2020 until 12:20 PM
----------------------------------------------------------------------------------------------------------------------

I. PROBLEM SOLVING. Solve the following problems and provide what is/are being asked. (2 Points each)

1. On April 30, 2000, White Corporation had outstanding 12% P1,000,000 face amount, convertible bonds
maturing on April 30, 2004. Interest is payable on April 30 and October 31. On April 30, 2000, all these
bonds were converted into 40,000 shares of P10 par common stock. On the date of conversion:
a. Unamortized bond discount was P30,000.
b. Each bond had a market value of P1,080.
c. Each share of stock had a market price of P28.
What amount should White record as a loss on conversion of bonds?

2. On January 2, 2000, a calendar-year corporation sold 5% bonds with a face value of P100,000. These
bonds mature in five years, and interest is paid semi-annually on June 30 and December 31. The bonds
were sold for P95,735 to yield 6%. Using the yield method of computing interest, how much should be
charged to interest expense in 2000?

3. In December 1, 2002, the West Company issued at 103, one hundred of its 5%, P1,000 bonds. Attached
to each bond was one detachable stock purchase warrant entitling the holder to purchase 10 shares of
West’s common stock. On December 1, 2002, the market value of the bonds, without the stock purchase
warrants, was 94, and the market value of each stock purchase warrant was P60. The amount of the
proceeds from the issuance that should be accounted for as initial carrying value of the bonds
payable would be:

4. On March 1, 2002, Seiko issued at 103 plus accrued interest, one hundred of its 9%, P1,000 bonds. The
bonds are dated January 1, 2002, and mature on January 1, 2012. Interest is payable semi-annually on
January 1 and July 1. Seiko paid bond issue costs of P5,000. Based on the information above,
Seiko would realized net cash receipts from the bond issuance of:

5. Bay Company issued bonds with detachable stock warrants. Each warrant granted an option to buy one
share of P40 par value common stock for P75 per share. 500 warrants were originally issued, and P4,000
was appropriated credited to warrants. If 90% of these warrants are exercised when the market value
price of the common stock is P85 per share, how much should be credited to capital in excess of
par?

6. Blue, Inc. issued P500,000 face amount of 10% bonds with interest payable on January 1 and July 1. The
bonds were called in at 103 on July 1, 2002, and retired them. Unamortized bond discount amounted to
P40,000 at July 1, 2002. Ignoring income taxes, how much loss should Blue report on this early
extinguishment of debt?

7. On January 1, 1996, Red issued for P970,000, one thousand of its 9%, P1,000 callable bonds. The bonds
mature on December 21, 2010, and interest is payable on January 1 and July 1. The bonds can be called
by Red at 101 on any interest payment date after December 31, 2001. The unamortized bond discount
was P16,000 at December 31, 2002, and the market price of the bonds was 98 on this date. In its
December 31, 2002 balance sheet, Red should report the carrying amount of the bonds at:

8. On May 1, 2002, Hill issued P2,000,000, 20-year, 10% bonds for P2,120,000. Each P1,000 bond had a
detachable warrant eligible for the purchase of one share of Hill’s P50 par common stock for
P60. Immediately after bonds were issued, Hill’s securities had the following market values:
10% bond without warrant P1,040
Warrant P20
Common stock, P50 par P56
What amount should Hill credit to premium on bonds payable?
9. On May 1, 2002, Ben issued 11% bonds in the face amount of P1,000,000 that mature on May 1,
2012. The bonds were issued to yield 10% resulting in bond premium of P62,000. Ben uses the
effective interest and pays interest semiannually on November 1 and May 1. In its October 31, 2002
balance sheet, what amount should Ben report as unamortized premium?

10. On July 1, 2000, Car issued 9% bonds in the face amount of P1,000,000, which mature on July 1,
2010. The bonds were issued for P939,000 to yield 10% resulting in a bond discount of P61,000. Car
uses the interest method of amortizing bond discount. Interest is payable annually on June 30. At June
30, 2002, Car’s unamortized bond discount should be:

11. On January 1, 2002, Mar issued its 10% bonds in the face amount of P1,500,000. They mature on
January 1, 2012. The bonds were issued for P1,329,000 to yield 12%, resulting in bond discount of
P171,000. Mar uses the effective interest method of amortizing bond discount. Interest is payable July
1 and January 1. For the six months ended June 30, 2002, Mar should report bond interest of:

12. Maria Rosa, president of the Villa Nova Company, has a bonus arrangement with the company under
which she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current
year, the net income before deducting either the provision for income taxes or the bonus is P4,650,000.
The bonus is deductible for tax purposes, and the tax rate is 32%. The amount of Maria Rosa’s
bonus is

Use the folloling problem for 13-15;

In the packages of its products, ALONDRA, INC. includes coupons that may be presented at retail stores
to obtain discounts on other Alondra products. Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Alondra honors requests for coupon redemption
by retailers up to 3 months after the consumer expiration date. Alondra estimates that 60% of all coupons
issued will ultimately be redeemed. Information relating to coupons issued by Alondra during 2007 is as
follows:
Consumer expiration date 12/31/07
Total payments to retailers as of 12/31/07 165,000
Liability for unredeemed coupons as of 12/31/07 99,000
13. The total face amount of coupons issued in 2007 is
14. Coupons expense at year-end is
15. Estimated liability for unredeemed coupons is

16. MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank to
restructure its P3 million note outstanding. The presented note has 3 years remaining and pays a current
rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued
at its face value.

Presented below are four independent situations. Determine the journal entry that Mariana would
make for each of the following types of debt restructuring.
17. NALOOY Bank agrees to take an equity interest in Mariana by accepting common stock valued at 2,400 in
exchange for relinquishing its claim on this note. The common stock has a par value of P1,200,000.

18. NALOOY Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a
book value of P2,000,000 and a fair value of P2,500,000.

19. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores does not have to pay any
interest on the note over the 3-year period.

20. NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require interest only in the
second and third year at a rate of 10%.

Use the following problem for items 21-23;

Abam Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The
following information relates the obligations of the company as of March 31, 2007.
Notes payable
Abam has signed several long- term notes with financial institutions. The maturities of these notes are
given below. The total unpaid interest for all of these notes amount to P340,000 on March 31, 2007.
Due date Amount
April 31, 2007 P 600,000
July 31, 2007 900,000
September 1, 2007 450,000
February 1, 2008 450,000
April 1, 2008- March 31, 2011 2,700,000
P5,100,000
Estimated warranties:
Abam has one year product warranty on some selected items. The estimated warranty liability on sales
made during the 2005-2006 fiscal year and still outstanding as of March 31, 2006, amounted to
P252,000. The warranty costs on sales made from April 1, 2006 to March 31, 2007 are estimated at
P630,000. The actual warranty costs incurred during 2006- 2007 fiscal year as follows:
Warranty claims honored on 2005- 2006 P252,000
Warranty claims honored on 2006- 2007 sales 285,000
Total P537,000
Trade payables
 Accounts payable for supplies, goods and services purchases on open account amount to P560,000 as of
March 31, 2007.
Dividends
On march 10, 2007, Abam’s board of directors declared a cash dividend of P0.30 per common share and
a 10% common stock dividend. Both dividends were to be distributed on Aptil 5, 2007 to common
stockholders on record at the close of business on March 31, 2007. As of March 31, 2007, Abams has 5
million, P2 par value common stock shares issued and outstanding.
Bonds payable
Abams issued P5,000,000, 12% bonds, on October 1, 2001 at 96. The bonds will mature on October 1,
2011. Interest is paid semi- annually on October 1 and April 1. Abams uses straight line method to
amortize bond discount.
Based on the forgoing information, determine the adjusted balances of the following as of March 31,
2007:
21. Estimated warranty payable
22. Unamortized bond discount
23. Bond interest payable

24. Presented below is pension information related to Woods, Inc. for the year 2013:
Service cost P92,000
Interest on projected benefit obligation 54,000
Interest on vested benefits 24,000
Amortization of prior service cost due to increase in benefits 12,000
Expected return on plan assets 18,000
The amount of pension expense to be reported for 2013 is

25. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan
for the year 2013.
Service cost P 250,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Projected benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The expected return on plan assets and the settlement rate were both 10%. The amount of pension
expense reported for 2013 is

26. Presented below is information related to Jensen Inc. pension plan for 2013.
Service cost P1,100,000
Actual return on plan assets 210,000
Interest on projected benefit obligation 390,000
Amortization of net loss 90,000
Amortization of prior service cost due to increase in benefits165,000
Expected return on plan assets 180,000
What amount should be reported for pension expense in 2013?

27. Barnel Corporation owns and manages 19 apartment complexes. On signing a lease, each tenant must
pay the first and last month’s rent and a P5,000 refundable security deposit. The security deposits are
rarely refunded in total, because cleaning costs of P1,500 per apartment are almost always
deducted. About 30% of the time, the tenants are also charged for damages to the apartment, which
typically cost P1,000 to repair. If a one-year lease is signed on a P9,000 per month apartment, what
amount should Barnel report as refundable security deposit?

28. Robin leased a machine from Ready. The lease qualifies as a capital lease and requires 10 annual
payments of P10,000 beginning immediately. The lease specifies an interest rate of 12% and a purchase
option of P10,000 at the end of the tenth year, even though the machine’s estimated value on that date
is P20,000. Robin’s incremental borrowing rate is 14%.
The present value of an annuity due of 1 at:
12% 6.328 14% 5.946
The present value of 1 at:
12% 0.322 14% 0.270
What amount should Robin record as lease liability at the beginning of the lease term?

29. Oak Company leased equipment for its entire nine-year useful life, agreeing to pay P50,000 at the start
of the lease term on December 31, 2002, and P50,000 annually on each December 31, for the next eight
years. The present value on December 31, 2002, of the nine lease payments over the lease term, using
the rate implicit in the lease which Oak knows to be 10%, was P316,500. The December 31, 2002
present value of the lease payments using Oak’s incremental borrowing rate of 12% was P298,500. Oak
made a timely second lease payment. What amount should Oak report as capital lease liability in
its December 31, 2003 balance sheet?

30. Unity Corp. prepared the following reconciliation between pretax accounting income and taxable income
for the year ended December 31, 2002:
Pretax accounting income P1,500,000
Taxable income ( 900,000)
Difference P 600,000
Analysis of difference:
 Interest on money market funds P 150,000
Excess of tax depreciation over book
depreciation 450,000
P 600,000
Unity’s effective income tax rate for 2002 is 32%. The depreciation difference will reverse in equal
amounts over the next three years at an enacted tax rate of 32%. In Unity’s 2002 income
statement, what amount should be reported as the current portion of its provision for income
taxes?

31. S Corp. received cash of P200,000 that was included in revenues in its 2002 financial statements, of
which P120,000 will not be taxable until 2003. S’s enacted tax rate for 2002 and 2003 is 32%. What
amount should S report in its balance sheet as deferred income tax liability?

For items 33-35:

The Merry Corporation has the following classes of stock outstanding:
Common stock, par value P100 P300,000
6% preferred stock, par value P100 100,000
Retained earnings of P48,000 is to be distributed as dividends. Dividends have not been paid on
preferred stock for the preceding two years.
32. The total dividends to be given to preferred stock, if preferred stock is cumulative and fully
participating, would be:
33. The total dividends to be given to common stock, if preferred stock is cumulative and fully
participating, would be:
34. The total dividends to be given to preferred stock, if preferred stock is non-cumulative and
fully participating, would be:

35. The following owners’ equity section of a firm’s balance sheet relates to the current year (end-of-year
data):
8%, P100 par cumulative preferred stock P10,000
P5 par common stock 40,000
Contributed capital in excess of par-preferred stock 5,000
Contributed capital in excess of par-common stock 20,000
Retained earnings 60,000
Treasury stock (10,000)
Total owners’ equity 125,000
There were 2 years of preferred stock dividends in arrears as of the beginning of the current year, and the
firm uses the cost method to account for treasury stock. If the firm pays the maximum allowable
dividend at the end of the current year, how much do the common shareholders receive?

36. A firm declares a property dividend to its shareholders. The assets to be distributed in the dividend have
a combined book value of P40,000 and combined market value of P60,000. Before taxes, the net
change in retained earnings as a result of this nonreciprocal transfer is:

37. On January 1, 2007, Flight reported the following stockholders’ equity:

Common stock, par P300, 40,000 shares
outstanding (market, P350) P120,000
Contributed capital in excess of par, common 8,000
Retained earnings 205,000
On February 1, 2007, the Board of Directors declared (and issued) a 50 percent stock dividend. Then, on
December 1, 2007, they approved and implemented a 100 percent stock split. Immediately after the
stock split was implemented the account balances for Common stock, APIC and RE would be:

38. Ale Company had 40,000 shares of common stock outstanding in January 2007. The company
distributed a 15% stock dividend in March and a 10% stock dividend in June 2007. After acquiring 5,000
shares of treasury stock in July, the company split its stock 4 for 1 in December 2007. How many
shares of common stock are outstanding as of December 31, 2007?

39. Manning Company issued 10,000 shares of its P5 par value common stock having a fair value of P25 per
share and 15,000 shares of its P15 par value preferred stock having a fair value of P20 per share for a
lump sum of P520,000. How much of the proceeds would be allocated to the common stock?

40. Norton Company issues 4,000 shares of its P5 par value common stock having a fair value of P25 per
share and 6,000 shares of its P15 par value preferred stock having a fair value of P20 per share for a lump
sum of P204,000. What amount of the proceeds should be allocated to the preferred stock?

41. Berry Corporation has 50,000 shares of P10 par common stock authorized. The following transactions
took place during 2012, the first year of the corporation’s existence:
Sold 10,000 shares of common stock for P18 per share.
Issued 10,000 shares of common stock in exchange for a patent valued at P200,000.
At the end of the Berry’s first year, total paid-in capital amounted to

42. Glavine Company issues 6,000 shares of its P5 par value common stock having a fair value of P25 per
share and 9,000 shares of its P15 par value preferred stock having a fair value of P20 per share for a lump
sum of P312,000. The proceeds allocated to the common stock is
43. Wheeler Company issued 5,000 shares of its P5 par value common stock having a fair value of P25 per
share and 7,500 shares of its P15 par value preferred stock having a fair value of P20 per share for a lump
sum of P260,000. The proceeds allocated to the preferred stock is

44. Pember Corporation started business in 2007 by issuing 200,000 shares of P20 par common stock for P36
each. In 2012, 30,000 of these shares were purchased for P52 per share by Pember Corporation and held
as treasury stock. On June 15, 2013, these 30,000 shares were exchanged for a piece of property that
had an assessed value of P810,000. Perber’s stock is actively traded and had a market price of P60 on
June 15, 2013. The cost method is used to account for treasury stock. The amount of paid-in capital
from treasury stock transactions resulting from the above events would be

45. On September 1, 2012, Valdez Company reacquired 16,000 shares of its P10 par value common stock for
P15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record
the reacquisition of the stock should debit Treasury Stock for

Prepared by:
CHRISTOPHER D. CHANGOLAN, CPA 12/13/2020
Instructor Date

Reviewed/Approved:
AIZA P. RUMAUAC, CPA
Program Head, Accountancy