MANUEL L.

QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

LIABILITIES
1. On December 31, 2014, the bookkeeper of Grand Company provided the following
information:
Accounts payable, including deposit and advances
from customers of P 500,000 P 2,500,000
Notes payable, including note payable to bank due on
December 31, 2016 for P 1,000,000 3,000,000
Share dividends payable 800,000
Credit balance in customers’ accounts 400,000
Serial bonds, payable in semiannual instalments
of P 1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
Unearned net income 100,000
In the December 31, 2014 statement of financial position, how much current liabilities should
be reported?
a. P 6,800,000
b. P 7,300,000
c. P 7,900,000
d. P 8,700,000
2. The balance in Stem Corporation’s accounts payable account at December 31, 2014 was
P1,350,000 before any necessary year-end adjustments relating to the following:
 Goods were in transit to Stem from a vendor on December 31, 2014. The invoice cost
was P 75,000. The goods were shipped FOB shipping point on December 29, 2014 and
were received on January 2, 2015.
 Goods shipped FOB destination on December 21, 2014, from a vendor to Stem, were
received on January 6, 2015. The invoice cost was P 37,500.
 On December 27, 2014, Stem wrote and recorded checks totalling P 60,000 which were
mailed on January 10, 2015.
In Stem’s December 31, 2014 statement of financial position, how much should be the accounts
payable?
a. P 1,410,000
b. P 1,425,000
c. P 1,462,500
d. P 1,485,000

DEFERRED REVENUE

Question 3 and 4: Bugs Appliance Company’s has been reviewing the firm’s past television
sales. For the past year, Bugs has been offering a special service warranty on all television sold.
With the purchase television, the customer has the right to purchase a 3-year service contract
for an extra P600.
Information concerning past television and warranty contract sales is given below:
2015 2014
Television sales in units 550 460
Sales price per unit P 5,000 P 4,000
Number of service contracts sold 350 300
Expenses relating to television warranties P 38,520 P 13,400
BUGS’ accountant has estimated from past record that the pattern of repairs has been 40% in
the year of sale, 36% first year after sale and 24% on 2nd year of sale. Sales of contracts are
made evenly during the year.
3. What is the adjusted balance of the unearned service contract as of December 31, 2015?
a. P 111,600
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

b. P 168,600
c. P 211,200
d. P 243,600
4. How much profit on service contract would be recognized in year 2015?
a. P 42,000
b. P 68,400
c. P 71,880
d. P 110,400
5. Gallery Department Store sells gift certificates, redeemable for store merchandise that expires
one year after their issuance. Gallery has the following information pertaining to its gift
certificates sales and redemptions:
Unearned at December 31, 2014 600,000
2015 sales 2,000,000
2015 redemptions of prior-year sales 200,000
2015 redemptions of current-year sales 1,400,000
Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed.
In its December 31, 2015 statement of financial position, what amount should Gallery report as
unearned revenue?
a. P 400,000
b. P 600,000
c. P 800,000
d. P 1,000,000

ACCRUED LIABILITIES

6. All of Gold Company’s employees are entitled to two weeks of paid vacation for each full year
in Gold’s employ. Unused vacation time can be accumulated and carried forward to succeeding
years and will be compensated at the salary in effect when the vacation is taken. Silver started
her employment with Gold on January 1, 2008. As of December 31, 2014, when Silver’s salary
was P 5,000 per week, Silver had used 10 weeks of her accumulated vacation time. In December
2014, Silver notified Gold of Silver’s intention to use her accumulated vacation weeks in June
2015. Gold regularly scheduled salary adjustments in July of each year. Gold properly did not
deduct compensation for unused vacations in Silver’s 2014 income tax return.
How much Gold report as a liability should at December 31, 2014 for Silver’s accumulated
vacation time?
a. None
b. P 5,000
c. P 10,000
d. P 20,000
Question 7 and 8: Governance, Inc. has a bonus plan covering all employees. The total bonus
is equal to 10% of Governance’s preliminary (pre-bonus, pretax) income reduced by the income
tax (computed on the preliminary income less the bonus itself). Governance’s preliminary
income for 2011 is P 1,000,000 and the income tax rate is 32%.
7. How much is the bonus for 2011?
a. P 61,200
b. P 68,000
c. P 70,248
d. P100,000
8. What amount should Governance Company recognize as a distribution of profit related to their
bonus plan in 2011?
a. None
b. P 68,000
c. P 70,248
d. P 100,000
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

9. Ball Corporation frequently borrows from the bank in order to maintain sufficient operating
cash. The following loans were at a 12% interest rate, with interest payable at maturity. Ball
repaid each loan on its scheduled maturity date.
Date of Loan Amount Maturity Date Term of Loan
11/01/14 P 500,000 10/30/15 1 year
02/01/15 1,500,000 07/31/15 6 months
05/01/15 800,000 01/31/16 9 months
Ball records interest expenses when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2015.
If no correction is made, by what amount would 2015 interest expense be understated?
a. P 54,000
b. P 62,000
c. P 64,000
d. P 72,000
10. Brown Eyes Company operates a retail store and must determine the proper December 31,
2014, year-end accrual for the following expenses:
 The store lease calls for fixed rent of P 6,000 per month, payable at the beginning of
the month, and an addition rent equal to 6% of net sales over P 1,250,000 per calendar
year, payable on January 31 of the following year. Net sales for 2014 were P 2,250,000.
 An electric bill of P 4,250 covering the period December 17, 2014 through January 16,
2015 was received January 23, 2012.
 A P 2,000 telephone bill was received on January 2, 2012, covering:
Service in advance for January 2015 P 750
Local and toll calls for December 2014 1,250
In its December 31, 2014 statement of financial position, what amount of accrued liabilities
should Brown Eyes report?
a. P 63,375
b. P 64,125
c. P 65,500
d. P 75,375

PREMIUM AND WARRANTY LIABILITIES

11. Bangkok Company inaugurated a sales promotion campaign on May 31, 2014, whereby
Bangkok placed a coupon in each package of chocolate sold, the coupons being redeemable for
a premium. Each premium costs Bangkok P50 and a customer to receive a coupon must present
five coupons. Bangkok estimated that only 60% of the coupon issued would be redeemed. For
the seven months ended December 31, 2014, the following information is available:
Packages of chocolates sold 400,000
Premiums purchased 30,000
Coupons redeemed 100,000
How much is the estimated liability for premium claims outstanding at December 31, 2014?
a. P 100,000
b. P 140,000
c. P 180,000
d. P 240,000
12. The Top Bottling Corporation embarked on a promotional program whereby a key chain
costing P15 each is given away for every 10 bottle crowns returned plus P5. Top Bottling
Corporation estimates that only 40% of the bottles crown in the hands of consumers will be
presented for redemption. The following information is available:
Quantity Amount
Bottles sold 1,000,000 P 5,000,000
Key chains bought for giveaways 15,000 225,000
Key chain distributed to customers 10,000
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

At the close of the first year, how much should Top Bottling Corporation recognize as estimated
liability for promotional items outstanding?
a. P 250,000
b. P 300,000
c. P 375,000
d. P 450,000
13. A new product introduced by Beauty Promotions carries a two-year warranty against defects.
The estimated warranty costs related to sales are as follows:
Year of sale 3%
Year after sale 5%
Sales and actual warranty expenditures for the years ended December 31, 2014 and 2015 are as
follows:
Sales Actual Warranty Expenditures
2014 P 800,000 P 20,000
2015 1,000,000 70,000
What amount should Beauty report as its estimated liability as of December 31, 2015?
a. P 4,000
b. P 24,000
c. P 54,000
d. P 74,000

PROVISION AND COTINGENT LIABILITIES

14. In May 2014, West Company filed suit against Brown, Inc. seeking P 850,000 damages for
patent infringement. A court verdict in November 2014 awarded West P 600,000 in damages,
but Brown’s appeal is not expected to be decided before 2014. West’s counsel believes it is
probable but not virtually certain that West will be successful against Brown for an estimated
amount in the range between P 300,000 and P 450,000 considered the most likely amount.
What amount should West record as a contingent asset from lawsuit in the year ended December
31, 2014?
a. None
b. P 300,000
c. P 400,000
d. P 600,000

NOTES PAYABLE

15. On January 1, 2015, Solemn Company sold land to Glory Company. There was no established
market price for the land. Glory gave Solemn a P2,400,000 noninterest bearing note payable in
three equal annual installments of P800,000 with the first payment due December 31, 2015.
The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The
present value of a P2,400,000 note payable in three equal installments of P800,000 at a 10%
rate of interest in P1,989,600.
What is the carrying amount of note payable on December 31, 2015?
a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000

BONDS PAYABLE

16. On March 1, 2014, Rapine Corporation issued at 103 plus accrued interest, 1,000 of its 9%,
P1,000 bonds. The bonds are dated January 1, 2014 and mature on January 1, 2024. Interest is
payable semi-annually on January 1 and July 1. Rapine paid transaction costs of P 5,000. Based
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

on the given information, how much would Rapine realize as net cash receipts from the bond
issuance?
a. P 1,025,000
b. P 1,030,000
c. P 1,040,000
d. P 1,045,000
Question 17 and 18: On January 1, 2014, MM Company issues a P 100,000,000 face value
bond at an issue price of P 90,000,000. The bond is redeemable on December 31, 2018 at its
nominal value of P 100,000,000. The company incurred P 5,000,000 as transaction cost. The
bond pays a fixed coupon rate of 4% per year at the end of each year. At the time of issue the
benchmark interest rate (LIBOR) is 4%. Based on MM Company’s credit rating, the market
interest rate for this bond is 6.4% (excluding effects of transaction costs) i.e. a credit spread of
2.4%. On December 31, 2014, LIBOR increases by 1% to 5%. However, due to deterioration
of its credit rating, the credit spread of MM Company increases to 5.4%. Thus, the total market
interest for the bond on December 31, 2014 is 10.4% and the market value of the bond on this
date is P 79,890,000. The effective interest rate after imputing the transaction cost is 7.73%.
17. If MM Company does not designate the bond to be at fair value, at what amount should the
financial liability be reported in the statement of financial position as of December 31, 2014?
a. P 85,000,000
b. P 87,571,154
c. P 90,340,404
d. P 93,323,717
18. If MM Company designate the bond at fair value to profit or loss, what amount of the gain
(loss) should be reported in the entity’s other comprehensive income for the year ended
December 31, 2014?
a. (P 1,760,000)
b. P 3,170,000
c. P 8,700,000
d. P 10,110,000
Question 19 and 20: On January 1, 2014, Beanstalk Corporation issued 3,000 of its 9%, P1,000
bonds when the prevailing rate of interest was 8%. Interest is payable annually every January
1. The bonds mature on January 1, 2019. Beanstalk paid transaction costs of P 24,460 in relation
to the issue of the debts instruments and in effect the yield rate is 8.2%. Beanstalk uses the
effective method of amortization.
19. On December 31, 2015 statement of financial position, how much should be shown as the
carrying amount of the bonds payable? (Carry present value factors to five decimal places)
a. P 3,022,181
b. P 3,042,681
c. P 3,061,631
d. P 3,077,314
20. What is the balance of the unamortized transaction cost or bond issue cost as of December 31,
2015?
a. P 5,598
b. P 10,818
c. P 15,676
d. P 20,226
21. On July 1, 2014, Glamorous Corporation issued 11% bonds in the face amount of P 2,000,000
that mature on June 30, 2018. The bonds were issued to yield 5%, and interest is payable every
January 1 and July 1. Glamorous Corporation uses the effective interest method of amortizing
bond premium or discount. The following are the value factors:
PV of 5% for an ordinary annuity of P1 after 8 periods 6.463
PV of 5% after 8 interest periods .677
What is the carrying value of the debt instruments as of December 31, 2014?
a. P 2,043,640
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

b. P 2,051,086
c. P 2,058,176
d. P 2,064,930
22. On January 2, 2014, Anger Company issued its 9% bonds in the face amount of P 4,000,000
which mature on January 1, 2024. The bonds were issued for P 3,756,000 to yield 10%. Anger
uses the interest method of amortizing bond discount. Interest is payable annually on December
31. At December 31, 2015, how much should be Anger’s unamortized bond discount?
a. P 192,364
b. P 211,240
c. P 228,400
d. P 244,000

COMPOUND FINANCIAL INSTRUMENT

23. On January 1, 2014, Allison Company issued its 10%, 5-year convertible debt instrument with
a face amount of P 5,000,000 for P 5,100,000. Interest is payable every December 31 of each
year. The debt instrument is convertible into 50,000 ordinary shares with a par value of P100.
When the debt instrument were issued, the prevailing market rate of interest for similar debt
without conversion option is 11%. The Company incurred transaction cost P 70,000 related to
the issue of the compound instrument.
PV of 11% for an ordinary annuity of P1 after 5 periods 3.696
PV of 11% after 5 interest periods .593
How much of the total proceeds represent the equity component?
a. P 100,000
b. P 225,500
c. P 283,059
d. P 285,050
24. On January 1, 2014, Emilia Corporation issued its 5-year, 12% P 5,000,000 face value
convertible debt instrument for P 4,800,000. The debt instrument is convertible into 80,000
ordinary shares with a par value of P50 per share and can be converted anytime from January
2015 to maturity. At the time of issue, the market rate of interest for a similar instrument is
14%. Interest is payable every six months of January 1 and July 1.
On July 1, 2015, the entire debt instrument was converted into equity instrument by the issuance
of 80,000 ordinary shares of the enterprise. Transaction costs of P 50,000 were incurred in
relation to the issue of new shares.
PV of 7% for an ordinary annuity of P1 after 10 periods 7.024
PV of 7% after 10 interest periods .508
What amount should be credited to the share premium account as a result of the conversion?
a. None
b. P 152,800
c. P 831,349
d. P 881,549
Question 25-29: On January 1, 2012, Faith Company issued its 8%, 5-year convertible debt
instrument with a face amount of P 8,000,000 for P 7,700,000. Interest is payable every
December 31 of each year. The debt instrument is convertible into 50,000 ordinary shares with
a par value of P100.When the debt instrument were issued, the prevailing market rate of interest
for similar debt without conversion option is 10%.
PV of 10% for an ordinary of P1 after 5 periods 3.791
PV of 10% after 5 interest periods .621
On December 31, 2014, all the convertible debt instruments were retired for P 8,000,000. The
prevailing rate of interest on a similar debt instrument as of December 31, 2011 is 9% without
the conversion option.
PV of 9% for an ordinary of P1 after 2 periods 1.759
PV of 9% after 2 interest periods .842
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Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

25. On the date of issue, what amount of the proceeds represents the equity component?
a. None
b. P 100,000
c. P 306,400
d. P 454,800
26. What is the carrying amount value of the debt instrument as of December 31, 2014?
a. P 7,393,600
b. P 7,492,960
c. P 7,602,256
d. P 7,722,482
27. On the date of retirement, what amount of the proceeds represents the equity component?
a. P 138,240
b. P 139,278
c. P 168,160
d. P 306,400
28. How much is the gain or loss that should be reported in the profit or loss on the retirement of
the convertible debt instrument?
a. P 138,240
b. P 139,278
c. P 168,160
d. P 306,400
29. How much is the gain on cancellation of the equity component to be reported in the
shareholders’ equity?
a. P 138,240
b. P 139,278
c. P 168,160
d. P 306,400
Question 30-33: On January 1, 2013, Belief Company issued its 9%, 4-year convertible debt
instrument with a face amount of P 4,000,000 for P 4,100,000. 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 instrument were issued, the prevailing market rate of interest
for similar debt without conversion option is 10%.
PV of 10% for an ordinary of P1 after 4 periods 3.170
PV of 10% after 4 interest periods .683
On December 31, 2014, ¼ of the convertible debt instruments were retired for P 1,000,000.
Without the conversion option, the debt instrument can be retired at 97%.
30. On the date of issue, what amount of the proceeds represents the equity component?
a. None
b. P 226,800
c. P 3,873,200
d. P 4,100,000
31. What is the carrying amount value of the debt instrument as of December 31, 2014?
a. P 3,873,200
b. P 3,900,520
c. P 3,930,572
d. P 3,963,629
32. On the date of retirement, what amount of the proceeds represents the equity component?
a. P 12,643
b. P 26,700
c. P 30,000
d. P 56,700
33. What amount of gain or loss that should be reported in the profit or loss on the retirement of
the convertible debt instrument?
a. P 12,643
MANUEL L. QUEZON UNIVERSITY School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1 Day 8

b. P 26,700
c. P 30,000
d. P 56,700

DEBT RESTRUCTURE

Question 40 and 41: Turtle Company is experiencing financial difficulty and is negotiating
trouble debt restructuring with its creditors to relieve its financial stress. Turtle has a P5,000,000
note payable to Metrobank. The bank is considering acceptance of an equity interest in Turtle
Company in the form of 400,000 ordinary shares with a fair value of P12 per share. The par
value of the ordinary share is P10 per share.
34. If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain
to be reported by Turtle in its profit or loss statement as a result of the restructuring?
a. None
b. P 200,000
c. P 500,000
d. P 1,000,000
35. If the issue of equity is treated as an extinguishment of an existing debt instrument, what amount
of gain or loss should Turtle Company report in its profit or loss statement as a result of the
restructuring?
a. None
b. P 200,000
c. P 500,000
d. P 1,000,000
Question 36 and 37: In 2011, Runny Corporation acquired land by paying P 2,000,000 and
signing a note with a face value of P 6,000,000. On the note’s due date, December 31, 2013,
Runny owed P 480,000 of accrued interest and P 6,000,000 principal on the note. Runny was
in financial difficulty and was unable to make any payments. Runny and the bank agreed to
amend the note as follows:
 Extended the maturity to December 31, 2015.
 The P 480,000 interest due on December 31, 2013 was forgiven
 Runny would be required to make an annual interest payment of P 540,000 every
December 31 starting 2014.
 Transaction cost incurred that is directly related to the debt restructuring was P 177,420.
As of December 31, 2013, the yield based on the restructured debt and after considering the
amount of transaction cost is 6.24%.
36. What amount should Runny report as gain, before income taxes, in its 2013 profit or loss?
a. None
b. P 80,000
c. P 375,180
d. P 480,000
37. What is the carrying value of the obligation should Runny Company report in its 2014 statement
of financial position?
a. P 5,893,150
b. P 6,155,861
c. P 6,302,580
d. P 6,480,000