LQ 1 - Set B Solution

FINANCIAL ACCOUNTING & REPORTING 2
LONG QUIZ 1 – SET A

Use the following information for the next six (6) questions:
The following information are relevant to determine the proper amount to be reported on Son Goku’s December 31, 2015
financial statements:
Accounts payable:
• The unadjusted balance of accounts payable is P5,000,000.
• The balance is net of debit balances in a supplier’s account amounting to P200,000
• Purchase of goods to X Company for P300,000 was unrecorded. The merchandise was shipped December 31, 2015
FOB shipping point. The goods were received on January 3, 2016.
• Purchase of goods to Y Company for P120,000 was unrecorded. The merchandise was shipped on December 28,
2015, FOB destination. The goods were received on January 4, 2016.
Bonds payable:
• Son Goku issued 2,000 of its 5 year P1,000 face value 11% bonds on January 1, 2013. These bonds were sold for
P2,155,800 a price that yields 9%. The bonds were dated January 1, 2013 and pay interest annually every December
31. On July 1, 2015, 1,000 of the bonds were retired, the company paying P1,100,000 inclusive of accrued interest.
Lawsuit:
• In October 2015, an employee was injured on the parking lot in an accident partially the result of his own negligence.
The employee has sued for P500,000. The legal counsel believes it is probable that the outcome of the action will be
unfavorable and that the settlement would cost the corporation from P200,000 to P300,000 with P240,000 the most
probable amount within this range.
Warranty payable:
• Son Goku sells goods with a warranty under which customers are covered for the cost of any manufacturing defects
that become apparent within the first year after the purchase. If minor defects were detected in all products sold, repair
costs of P2,000,000 would result. If major defects were detected in all products sold, repair cots of P5,000,000 would
result. The enterprise’s past experience and future expectations indicate that 65% of the goods sold have no defects,
25% of the goods sold have minor defects and 10% of goods sold have major defects.
Note payable:
• On September 30, 2013, Son Goku acquired special equipment from Vegetta Company by paying P2,000,000 down
and signing a note with a face value of P4,000,000 due September 30, 2016. The note is non interest bearing. Market
rate of interest for similar notes at the date of its issuance was 10%.
QUESTIONS: (PVF Complete Decimals)

1) The correct balance of accounts payable at December 31, 2015 is
A. 5,010,000 B. 5,410,000 C. 5,530,000 D. 5,500,000
2) The correct balance of premium on bonds payable at December 31, 2015 is

A. 155,800 B. 101,506 C. 70,642 D. 35,321
3) The amount of gain or loss on retirement of bonds payable during 2015 is

A. 1,963 loss B. 56,963 loss C. 5,753 loss D. 1,963 gain
4) The carrying amount of notes payable that will be shown on December 31, 2015 statement of financial position is
A. 4,000,000 B. 3,727,272 C. 3,636,240 D. 3,388,408
5) The provision for litigation expenses that should be shown on the statement of financial position at December 31, 2015
A. 200,000 B. 240,000 C. 250,000 D. 500,000
6) The provision for warranties that should be shown on the statement of financial position at December 31, 2015 is
A. 0 B. 1,000,000 C. 2,000,000 D. 3,500,000

•FAR eastern university• •FINANCIAL ACCOUNTING 2• •LONG QUIZ – SET A• •J. S. CAYETANO™•
SOLUTION: D, D, A, B, B, B
Unadjusted accounts payable 5,000,000
1. Add back debit balance 200,000
2. Unrecorded purchases 300,000
3. No adjustment --
Adjusted accounts payable 5,500,000
Initial measure 1/1/13 2,155,800

Effective interest 1.09
Nominal interest (220,000)
Carrying amount 12/31/15 2,070,642
Retire half of the bonds ½
Carrying amount of the remaining bonds 1,035,321
Face amount 1,000,000
Premium 35,321
Initial measure 1/1/13 2,155,800

Retired half ½
Carrying amount of the retired bonds at 7/1/15 1,043,036
Accrued interest 1,000,000 x 11% x 6/12 55,000
Total liability 1,098,037
Cash paid (1,100,000)
Loss (1,963)
Present value of principal amount, 4,000,000 x 0.75132 3,005,259

Effective interest 3 months amortization 1.025
Provision for lawsuit – best estimate 240,000
Defect Probability Cost Weighted probability

No defect 65% 0 0
Minor 25% 2,000,000 500,000
Major 10% 5,000,000 500,000
1,000,000

7) On December 31, 2019, the bookkeeper of Cleveland Company provided the following information:
Accounts payable, including deposits and advances from customers of P500,000 2,500,000
Notes payable, including note payable to bank due on December 31, 2021 for P1,000,000 3,000,000
Share dividends payable 800,000
Credit balance in customers’ account 400,000
Serial bonds, payable in semiannual installments of P1,000,000 10,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
Unearned rent income 100,000
In the December 31, 2019 statement of financial position, how much current liabilities should be reported?
A. 6,300,000 B. 7,300,000 C. 7,900,000 D. 8,700,000


8) Pander Company reported liabilities totaling P1,230,000. The following information relates to those liabilities:
a. Pander reported a P100,000 bank loan payable. However, Pander intends to repay this loan in January of the
following year.
b. Pander has reported a P40,000 liability for the estimated cost of future warranty repairs based on product sales for
the past years.
c. Pander is being sued for P350,000 disgruntled employee. Pander’s attorney thinks that is is possible that Pander
will lose the case. Pander has not yet recorded any liability for this potential loss.
d. Pander receives consulting services from a local CPA. Expected services by the CPA for the coming year will cost
P35,000. No liability has been recorded.
e. Pander has reached an agreement with a major customer. Pander expects to provide services totaling P400,000
over the coming three years. The customer has already paid Pander P100,000. No liability has been recorded.
After considering these items, what should be the total of Pander’s reported liabilities?
A. 1,230,000 C. 1,290,000
B. 1,630,000 D. 1,330,000
SOLUTIONS: D
Unadjusted liabilities 1,230,000
a. No adjustment – correctly reported ---
b. No adjustment – correct reported ---
c. No adjustment – correct not reported ---
d. No adjustment – not measurable ---
e. Unrecorded advances from customer 100,000
Adjusted liabilities 1,330,000

Use the following information for the next two (2) questions:
Flo-Rida Company’s trial balance reflected the following account balances on December 31, 2019:
Cash P 1,000,000
Accounts payable, net of debit balance in suppliers’ accounts amounting to P25,000 1,000,000
Bonds payable 3,400,000
Premium on bonds payable 200,000
Deferred tax liability 400,000
Property dividends payable 400,000
Income tax payable 300,000
Note payable, due January 31, 2020 500,000
Contingent liability 150,000
Share dividends payable 320,000
Cash dividends payable 80,000
Financial liabilities at FV through profit or loss 130,000
Reserve for contingencies 430,000
Estimated expense of meeting warranties 335,000
Estimated damages as a result of unsatisfactory performance on a contract 268,000
Mortgage payable 1,000,000
Loans payable (payable in five equal annual installments) 500,000
The P1,000,000 Cash account is net of bank overdraft of P300,000 and unreleased check of P100,000 and including
customer’s posted check of P50,000 and sinking fund amounting to P280,000
QUESTIONS:
9) How much is the total current liabilities for the year ended December 31, 2019?
A. 3,538,000 B. 3,238,000 C. 3,688,000 D. 3,388,000
10) How much is the total non current liabilities for the year ended December 31, 2019?
A. 5,500,000 B. 6,003,000 C. 5,400,000 D. 6,103,000
SOLUTION: C, C
Current Non-current
Bank overdraft 300,000 --
Accounts payable – adjusted (1,000,000 +25,000 +100,000) 1,275,000 --
Bonds payable -- 3,400,000
Premium on bonds payable -- 200,000
Deferred tax liability -- 400,000
Property dividends payable 400,000 --
Income tax payable 300,000 --
Note payable, due January 31, 2020 500,000 --
Contingent liability – disclosure only -- --
Share dividends payable – equity account -- --
Cash dividends payable 80,000 --
Financial liabilities at FV through profit or loss 130,000 --
Reserve for contingencies – equity account (appropriated retained earnings) -- --
Estimated expense of meeting warranties 335,000 --
Estimated damages as a result of unsatisfactory performance on a contract 268,000 --
Mortgage payable -- 1,000,000
Loans payable (payable in five equal annual installments) 100,000 400,000
Total 3,688,000 5,400,000
*Customer’s postdated check should be added to the company’s Accounts Receivable. If the check is Company’s
postdated check it should be added back to Accounts Payable.

11) The trial balance of Beatriz Company reflected the following liability account balances on December 31, 2018:
Accounts payable 3,800,000
Accrued expense 400,000
Unearned interest income 100,000
Bonds payable 6,800,000
Premium on bonds payable 400,000
Deferred tax liability 800,000
Dividends payable 1,000,000
Income tax payable 1,800,000
Note payable, due January 31, 2019 1,200,000
Note payable, due March 15, 2020 2,000,000
Mortgage payable 1,500,000
Total amount of current liabilities in the statement of financial position as at December 31, 2018 is:
A. 14,700,000 B. 9,100,000 C. 8,700,000 D. 8,300,000
SOLUTIONS: D
Accounts payable 3,800,000
Accrued expense 400,000
Unearned interest income 100,000
Dividends payable 1,000,000
Income tax payable 1,800,000
Note payable, due January 31, 2019 1,200,000
Total current liabilities 8,300,000

12) The current liabilities section of the balance sheet of Lilac Company showed:
Accounts payable, after deducting P3,000 debit balance in a suppliers’ account due to returns after payment 57,000
Accrued taxes 4,500
Accrued interest payable 1,300
Stock dividend declared but not yet issued 30,000
Total current liabilities 92,800
It was disclosed that at the balance sheet date, the company was being assessed by the Bureau of Internal Revenue
for deficiency income tax of P7,500 for the prior year; the assessment is being contested.
A. 62,800 B. 65,800 C. 92,800 D. 100,300
SOLUTIONS: B
Accounts payable – adjusted (57,000 + 3,000) 60,000
Accrued taxes 4,500
Stock dividend declared but not yet issued – equity account --
BIR assessment – contingent liability --
Total current liabilities 65,800

13) Fatima Corporation’s account payable at December 31, 2017, totaled P900,000 before any necessary year-end
adjustments relating to the following transactions:
• On December 27, 2017, Fatima wrote and recorded checks to creditors totaling P350,000 causing an overdraft of
P100,000 in Fatima’s bank account at December 31, 2017. The checks were mailed out on January 10, 2018.
• On December 28, 2017, Fatima purchased and received goods for P200,000, terms 2/10, n/30. Fatima records
purchases and accounts payable at net amount. The invoice was recorded and paid January 3, 2018.
• Goods shipped FOB destination on December 20, 2017 from a vendor to Fatima were received January 2, 2018.
The invoice cost was P65,000.
At December 31, 2017, what amount should Fatima report as total accounts payable?
A. 1,511,000 C. 1,150,000
B. 1,446,000 D. 1,100,000
SOLUTIONS: B
Unadjusted Accounts payable 900,000
1. Unreleased checks 350,000
2. Unrecorded purchases (200,000 x 98%) 196,000
3. No adjustment (assume not recorded until received) ---
Adjusted Accounts Payable 1,446,000

14) The balance in Iwig Company’s accounts payable account at December 31, 2019 was P400,000 before any necessary
year-end adjustments relating to the following:
• Goods were in transit to Iwig from a vendor on December 31, 2019. The invoice was P50,000. The goods were
shipped FOB shipping point on December 29, 2019 and were received on January 4, 2020.
• Goods shipped FOB destination on December 21, 2019 from a vendor to Iwig were received on January 6, 2020.
The invoice cost was P25,000.
• On December 27, 2019, Iwig wrote and recorded checks to creditors totaling P30,000 that were mailed on January
10, 2020.
In Iwig’s December 31, 2019 statement of financial position, the accounts payable should be
A. 430,000 B. 450,000 C. 475,000 D. 480,000
SOLUTIONS: D
Accounts payable – unadjusted 400,000
1. Unrecorded purchases – assume unrecorded until received 50,000
2. No adjustment – assume unrecorded until received --
3. Reversal of unreleased checks 30,000
Accounts payable – adjusted 480,000

15) Kew Company’s account payable balance at December 31, Year 1 was P2,200,000 before considering the following
data:
• Goods shipped to Kew FOB shipping point on December 22, Year 1 were lost in transit. The invoice cost of
P40,000 was not recorded by Kew. On January 7, Year 2, Kew filed a P40,000 claim against the common carrier.
• On December 27, Year 1, a vendor authorized Kew to return, for full credit, goods shipped and billed at P70,000 on
December 3, Year 1. The returned goods were shipped by Kew on December 28, Year 1. A P70,000 credit memo
was received and recorded by Kew on January 5, Year 2.
• Goods shipped to Kew FOB destination on December 20, Year 1 were received on January 6, Year 2. The invoice
cost was P50,000.
What amount should Kew report as accounts payable in its December 31, Year 1 balance sheet?
A. 2,170,000 B. 2,180,000 C. 2,230,000 D. 2,290,000
SOLUTIONS: A
Accounts payable – unadjusted 2,200,000
1. Unrecorded purchases 40,000
2. Unrecorded purchase return (70,000)
3. No adjustment – assume not recorded until received --
Accounts payable – adjusted 2,170,000

16) 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

17) After three profitable years, Colohan Company decided to offer a bonus to its branch manager of 25% of income over
P2,000,000 after deducting the bonus but before deducting tax earned by the branch. The income for the branch was
P3,600,000 before tax and before bonus for 2017. The bonus of the branch manager for 2017 is
A. 400,000 C. 300,000
B. 320,000 D. 100,000
SOLUTIONS: B
B = 0.25 (3,600,000 – 2,000,000 – B)
B = 0.25 (1,600,000 – B)
B = 400,000 – 0.25B
1.25B = 400,000
B = 320,000

18) Rachel Company is considering to give bonus for its new company CEO. The plan states that the bonus would be
equal to 15% based on profits after deducting bonus and tax. Profit before income tax and bonus for 2019 is
P10,000,000. Income tax rate is 30%. How much is the amount of bonus under the plan?
A. 1,304,348 C. 1,004,785
B. 1,099,476 D. 950,226
SOLUTIONS: D,
T = 0.30 (10,000,000 – B)
B = 0.15 (10,000,000 – B – T)
B = 0.15 [10,000,000 – B – (0.30 (10,000,000 – B)]
B = 0.15 [10,000,000 – B – 3,000,000 + 0.30B]
B = 1,500,000– 0.15B – 450,000 + 0.045B
B = 1,050,000 – 0.105B
1.105B = 1,050,000
B = 950,226

On January 1, 2019, Forte Company sold appliance service contract agreeing to repair appliance for a 2-year period. Forte
Company’s past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly in the
first contract year and 60% evenly in the second contract year. Service contract sales for the past two years were
P800,000 in 2019 and P950,000 in 2020. All contract sales are made evenly during the year. Actual expenditures made in
2019 and 2020 were P110,000 and P280,000, respectively.
QUESTIONS:
19) The net profit from the service contracts for 2019 is
A. 580,000 C. 210,000
B. 310,000 D. 50,000
20) The balance of the unearned service contract revenue account at December 31, 2020 is
A. 1,000,000 C. 715,000
B. 760,000 D. 570,000
SOLUTIONS: D, A
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2018 (800,000 x 40% x 6/12) 160,000
Expense (110,000)
Net profit 50,000
Unearned as of 12/31/20 from 2019 sale (800,000 x 30%) 240,000

Unearned as of 12/31/20 from 2020 sale (950,000 x 80%) 760,000
Total 1,000,000

Buffalo Company sells equipment service contracts that cover a two-year period. The sales price of each contract is
P5,000. Buffalo Company’s past experience shows that of the total pesos spent for repairs in service contracts, 40% is
incurred evenly during the first contract year and 60% evenly during the second contract year. Buffalo Company sold 1,000
contract evenly throughout 2019 and 800 contracts evenly throughout 2020.
QUESTIONS:
21) In its December 31, 2019 statement of financial position, what amount should Buffalo Company report as unearned
revenue?
A. 4,000,000 C. 1,500,000
B. 3,000,000 D. 0
22) How much should Buffalo Company report as contract service revenue for the year ended December 31, 2020?
A. 4,500,000 C. 2,500,000
B. 3,300,000 D. 800,000
SOLUTION: A, B
Service contract sold in 2019 (1,000 x 5,000) 5,000,000
Revenue recognized in 2019 Jul. 1 to Dec. 31 from sale of 2019 (1,000 x 5,000 x 40% x 6/12) (1,000,000)
Unearned as of 12/31/19 4,000,000
Revenue recognized in 2020 Jan. 1 to Jul. 31 from sale of 2019 (1,000 x 5,000 x 40% x 6/12) 1,000,000
Revenue recognized in 2020 Jul. 1 to Dec. 31 from sale of 2019 (1,000 x 5,000 x 60% x 6/12) 1,500,000
Revenue recognized in 2020 Jul. 1 to Dec. 31 from sale of 2020 (800 x 5,000 x 40% x 6/12) 800,000
Total revenue recognized in 2020 3,300,000

23) On the first day of each month, Denise Company received from a customer an escrow deposit of P500,000 for real
estate tax. The entity recorded the P500,000 in escrow account. The customer’s real estate tax is P5,600,000, payable
in equal installments of the first day of each calendar quarter. On January 1, 2019, the balance of the escrow account
was P600,000. On September 30, 2019, what amount should be reported as escrow liability?
A. 2,300,000 C. 900,000
B. 1,700,000 D. 300,000
SOLUTION: C
Escrow Liability
Taxes payment on Jan. 1, Apr. 1, Jul. 1 *4,200,000 600,000 01/01/19 – Beginning balance
4,500,000 (500,000 x 9mos.) Cash receipt from customers
900,000 12/31/19 – Ending balance

24) Pain Company sells products with reusable and expensive containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of delivery.
Containers held by customers on January 1, 2019 from deliveries in:
2017 20,000
2018 45,000 65,000
Containers delivered in 2019 90,000
Containers returned in 2019 from deliveries in:
2017 9,000
2018 25,000
2019 46,000 80,000
What is the liability for deposits on December 31, 2019?

A. 64,000 C. 75,000
B. 39,000 D. 55,000
SOLUTION: A
Liability for container deposit
Cash returned to customers 80,000 65,000 01/01/19 – Beginning balance
Deposit forfeited (20,000 – 9,000) 11,000 90,000 Cash receipt from customers
64,000 12/31/19 – Ending balance

25) Included in Jets Company’s liability account balances December 31, 2019 were the following:
14% note payable issued, October 1, 2015, maturing September 30, 2020 2,500,000
16% note payable issued, October 1, 2019 payable in six equal semi-annual installments of 4,800,000
P800,000 every April 1 and October 1, beginning April 1, 2020
Jets Company’s December 31, 2019 financial statements were issued on March 31, 2020. On March 10, 2020, Jets
Consummated a non-cancellable agreement with the lender to refinance the 14% P2,500,000 note on a long-term
basis, on readily determinable terms that have not yet been implemented. On the December 31, 2019 statement of
financial position, what amount of the notes payable should Jets classify as current liabilities? (Disregard any amount of
accrued interest as of December 31, 2019)
A. 2,500,000 C. 4,100,000
B. 3,300,000 D. 1,600,000
SOLUTION: D
Current Non-current
14% note payable (refinanced after 12/31, therefore, Current) 2,500,000
16% note payable C=(800T x 2 installments); NC=(4.8M – 1.6M) 1,600,000 3,200,000
Total 4,100,000 3,200,000

26) At December 31, 2018, Dolphins Corporation owed notes payable of P2,000,000 with a maturity of April 30, 2019.
These notes did not arise from transactions in the normal course of business. On February 1, 2019, Dolphins issued
P4,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the P2,000,000 of
notes payable. Dolphins Company’s 2018 financial statements were issued on March 29, 2019. How much of the
P2,000,000 notes payable should be classified as current liabilities in Dolphin Company’s statement of financial position
at December 31, 2018?
A. 6,000,000 C. 2,000,000
B. 4,000,000 D. 0

Beginning the year 2019, Arizona Company began marketing a new beer called “Serbersa”. To help promote the product,
the management of Arizona is offering a special Serbesa beer Mug to each customer for every 20 specially marked bottles
of Serbesa. Arizona estimates that out of the 300,000 bottles of Serbesa sold during 2019, only 30% of the bottle caps will
be redeemed. For the year 2019, 5,000 beer mugs were purchased by the company at a total cost of P140,000. A total of
4,000 mugs were already distributed to customers.
QUESTIONS:
27) How much is the premium expense reported on Arizona’s profit or loss for the year ended December 31, 2019?
A. 112,000 C. 157,500
B. 140,000 D. 126,000
28) What is the amount of liability that Arizona should report on its December 31, 2019 balance sheet?
A. 308,000 C. 17,500
B. 280,000 D. 14,000
SOLUTIONS: C, C
In Premium *Net Cost In Peso
Premium Payable – beginning 0 0 0
Premium Expense:
# of units sold x coupon in each unit 300,000
% of redemption 30%
# of coupons required for each premium /20 4,500 28 157,500
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium (4,000) 28 (140,000)
Premium Payable – Ending 500 28 17,500

29) In December 2021, Texan Company began including one coupon in each package of candy that it sells and offering a
toy in exchange for 50 centavos and five coupons. The toys cost Texan 80 centavos each. Eventually 60% of the
coupons will be redeemed. During December, Texan sold 110,000 packages of candy and no coupons were
redeemed. In its December 31, 2021, balance sheet, what amount should Texan report as estimated liability for
coupons?
A. 3,960 B. 10,560 C. 19,800 D. 52,800
SOLUTIONS: A
In Premium *Net Cost In Peso
Premium Payable – beginning 0 0 0
Premium Expense:
# of units sold x coupon in each unit 110,000
% of redemption 60%
# of coupons required for each premium /5 13,200 0.30 3,960
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium 0 0.30 0
Premium Payable – Ending 13,200 0.30 3,960

30) During 2020, Vanpelt Company introduced a new line of machines that carry a three-year warranty against
manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale,
4% in the year after sale, and 6% in the second year after the sale. Sales and actual warranty expenditures for the first
thee-year period were as follows:
Sales Actual Warranty Expenditures
2020 600,000 9,000
2021 1,500,000 45,000
2022 2,100,000 135,000
What amount should Vanpelt report as a liability at December 31, 2022?

A. 0 B. 15,000 C. 204,000 D. 315,000
SOLUTION: D
Cumulative warranty expense as of 2020 (600,000 + 1,500,000 + 2,100,000) x 12% 504,000
Cumulative warranty payment made (9,000 + 45,000 + 135,000) (189,000)
Unpaid warranty expense 315,000

During 2016, Raven Company became involved in a tax dispute with BIR. At December 31, 2016, Raven’s tax advisor
believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was P5,000,000 but
could be as much as P6,500,000. After the 2016 financial statements were issued, Raven received and accepted a BIR
settlement offer of P5,500,000.
QUESTIONS:
31) What amount of accrued liability would Raven have reported in its December 31, 2016 balance sheet?
A. 6,500,000 C. 5,500,000
B. 5,750,000 D. 5,000,000
32) Assume that the company accepted the BIR settlement offer of P5,500,000 before the 2016 financial statements were
issued, what amount of accrued liability would Raven have reported in its December 31, 2016 statement of financial
position?
A. 6,500,000 C. 5,500,000
B. 5,750,000 D. 5,000,000
SOLUTION: D, C
Provision for litigation should be recorded because the chances of paying is probable.
Measurement (depends on the given information or use the level of priority)
1. Actual amount paid (if known before authorization of financial statement) – YES, SECOND QUESTION
2. Best/reasonable estimate (if given) – YES, FIRST QUIESTION
3. Mid point (if range is given)
4. Weighted average probability (if various outcomes is given)

33) 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.

On January 1, 2019 Chespin Co. issued 3 year bonds with a face value of P1,200,000 and stated interest of 8% per year
payable annually on December 31. The bonds were acquired to yield 10%. The bonds were appropriately classified as
financial liability at amortized cost. (PVF 4 Decimal)
QUESTIONS:
34) How much is the issue price of the bonds on January 1, 2019?
A. 1,140,302 B. 1,051,730 C. 1,055,730 D. 1,200,340
35) How much is the interest expense for 2019?

A. 117,817 B. 114,104 C. 114,030 D. 96,000

36) On January 1, 2016, Quilladin Company issued 5 year bonds with face value of P5,000,000 at 110. The company paid
bond issued cost of P80,000 on same date. The stated interest rate on the bonds is 8% payable annually every
December 31. After consideration of bond issue costs to be initially measured, the bonds were determined to yield 6%
per annum. On December 31, 2016, what should Quilladin report as carrying amount of the bonds payable?
A. 5,430,800 B. 5,345,200 C. 5,414,800 D. 5,000,000
SOLUTION: B
Issue price 5,000,000 x 110 5,500,000
Transaction cost (80,000)
Initial carrying amount 5,420,000
Nominal interest 5,000,000 x 8% (400,000)

37) On January 1, 2019, Soul Inc. issued 1,000 of its 8%, P1,000 bonds at 96. Interest is payable semiannually on January
1 and July 1. The bond mature on January 1, 2029. Soul paid 50,000 in bond issue costs. Soul uses straight line
amortization. The amount of interest expense for the year is:
A. 76,000 B. 71,000 C. 84,000 D. 89,000
SOLUTION: D
Nominal interest 1,000,000 x 8% 80,000
Amortization of discount 1,000,000 x .96 – 50,000 = 910,000 – 1,000,000 = 90,000 / 10 9,000
Interest expense 89,000

38) On March 1, 2019, Harbour Corporation issued 10% debentures dated January 1, 2019, in the face amount of
P1,000,000, with interest payable on January 1 and July 1. The debentures were sold at face and accrued interest.
How much should Harbour debit to cash on March 1, 2019?
A. 966,667 B. 983,333 C. 1,016,667 D. 1,033,333
SOLUTION: C
Fair value – sold at face 1,000,000
Accrued interest (1,000,000 x 10% x 2/12) 16,667
Total cash received 1,016,667

39) On May 1, 2019, Raiders Company issued P2,000,000, 10 years, 9% bonds at 105 including accrued interest. These
bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and July 1. Transaction costs of
P10,000 were paid by Raiders. What is the net cash receipts from the bond issuance?
A. 2,090,000 B. 2,100,000 C. 2,150,000 D. 2,160,000
SOLUTION: A
Fair value of bonds including the interest (2,000,000 x 1.05) 2,100,000
Transaction cost (10,000)
Net cash receipt 2,090,000

40) 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

41) A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2022. Interest is paid on June
30 and December 31. The proceeds from the bonds are P19,604,145. Using effective-interest amortization, how
much interest expense will be recognized in 2022?
A. 1,566,666 B. 1,564,514 C. 1,568,498 D. 1,568,332
SOLUTION: C
Initial carrying amount 1/1/22 19,604,145
Effective interest 8%
January 1 – June 30 6/12
Interest expense 1st half 784,166

July 1 – December 31 6/12
Interest expense 2nd half 784,332
Interest expense 1st half 784,166
Total 1,568,498
42) Franzia Company issues P10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2022. Interest is paid on July 1
and January 1. The proceeds from the bonds are P9,802,073. What amount should be reported for the bonds
payable account on the December 31, 2022 statement of financial position?
A. 9,806,322 B. 9,804,156 C. 9,806,239 D. 9,414,156
SOLUTION: C
Effective 1.04
Nominal interest 780,000

Use the following information for the next three (3) questions:
Kala Company regularly borrows from the bank in order to finance working capital. The following schedule shows loans with
12% interest rate, with interest payable at maturity. All loans are repaid on their scheduled maturity dates, and interest
expense is recorded when the loans are repaid, with no adjustments taken up at year end.
Date of Loan Amount Maturity Date Term of Loan
November 1, 2014 P 1,500,000 October 31, 2015 One year
February 1, 2015 2,500,000 July 31, 2015 Six months
May 1, 2015 1,000,000 January 31, 2016 Nine months
43) How much did Kala Company record as interest expense during the year 2015?
A. 225,000 B. 300,000 C. 330,000 D. 390,000
44) What is the correct interest expense during the year 2015 as a result of the above loans?
A. 300,000 B. 330,000 C. 380,000 D. 390,000
45) How much notes payable, inclusive of interest payable should be shown in the current liabilities section of the statement
of financial position as a result of the foregoing loans on December 31, 2015?
A. 1,000,000 B. 1,080,000 C. 3,500,000 D. 3,855,000
SOLUTION: C, B, B
1,500,000 x 12% x 12/12 180,000
2,500,000 x 12% x 6/12 150,000
Total interest expense recorded by the company 2015 330,000
1,500,000 x 12% x 10/12 150,000

2,500,000 x 12% x 6/12 150,000
1,000,000 x 12% x 8/12 80,000
Total correct interest expense 380,000
Note still unpaid 1,000,000

Accrued interest unpaid 80,000
Current liability 1,080,000

On January 1, 2016, Chris Brown Co. acquired a machine from Rihanna Co. In lieu of cash payment, Chris Brown gave
Rihanna a 3 year, P1,200,000, non interest bearing note payable due on December 31, 2018. The prevailing interest rate
for this type of note is 12%.
QUESTIONS:
46) How much is the cost of the machinery acquired on January 1, 2016?
A. 1,200,000 B. 946,667 C. 854,160 D. 774,160
47) How much is the interest expense for 2017?

A. 144,000 B. 144,799 C. 113,600 D. 102,499
SOLUTION: C, B
Present value of principal, 1,200,000 x 0.71178 854,136
Initial measure 1/1/16 854,136

Carrying amount 12/31/16 956,632
Interest expense 114,796

48) Noelbic Company is experiencing financial difficulties with Andro Bank. The entity negotiated with the bank and arrived
at an agreement to restructure a note payable at the end of the current period. The entity owed the bank principal
amount of P8,000,000 and accrued interest of P960,000. Based on the agreement, the bank will accept equipment
with a fair value of P1,600,000 and a note receivable from customer with carrying amount of P5,000,000. It was
determined that the equipment had been acquired at P2,600,000 with accumulated depreciation of P600,000. What
amount of gain from extinguishment of debt should be recognized?
A. 1,960,000 B. 2,560,000 C. 2,360,000 D. 0
SOLUTION: A
Carrying amount note payable 8,000,000
Accrued interest 960,000
Carrying amount of total liability 8,960,000
Carrying amount of asset transferred:
Equipment, 2,600,000 – 600,000 2,000,000
Note receivable 5,000,000 7,000,000
Gain on asset swap 1, 960,000

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

50) The Bridge Company is experiencing financial difficulties and a downward trend in its operations. The firm is unable to
service its debt and as a result, has missed payment of an annual interest on its loan from Bank of Manila. The principal
amount of the loan is P2,000,000 (which is already due) with annual interest of 12% payable annually. The Bridge
management has negotiated a modification of its debt terms with its creditors. The creditors agree to the following new
terms:
• Forgive all accrued interest.
• Reduce the principal amount of the loan to P1,800,000.
• Extend the payment of principal for two years.
• Reduce the interest rate for the remaining two years to 8%.
What is the gain on debt restructuring? (PVF 3 Decimal)

A. 562,040 B. 440,000 C. 322,040 D. 0
SOLUTION: A
Face amount 2,000,000
Accrued interest (2,000,000 x 12%) 240,000
Total liability 2,240,000
PV of new liability:
Principal, 1,800,000 x 0.797 1,434,600
Interest, 1,800,000 x 8% x 1.690 243,360 1,677,960
Gain 562,040

J END OF LONG QUIZ 1 – SET B SOLUTION J



LQ 1 - Set B Solution

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

LQ 1 - Set B Solution

Uploaded by

Copyright:

Available Formats

FINANCIAL ACCOUNTING & REPORTING 2

LONG QUIZ 1 – SET A

QUESTIONS: (PVF Complete Decimals)

2) The correct balance of premium on bonds payable at December 31, 2015 is

3) The amount of gain or loss on retirement of bonds payable during 2015 is

Initial measure 1/1/13 2,155,800

Initial measure 1/1/13 2,155,800

Present value of principal amount, 4,000,000 x 0.75132 3,005,259

Provision for lawsuit – best estimate 240,000

Defect Probability Cost Weighted probability

Unearned as of 12/31/20 from 2019 sale (800,000 x 30%) 240,000

What is the liability for deposits on December 31, 2019?

What amount should Vanpelt report as a liability at December 31, 2022?

35) How much is the interest expense for 2019?

Initial carrying amount 1/1/22 19,604,145

1,500,000 x 12% x 10/12 150,000

Note still unpaid 1,000,000

47) How much is the interest expense for 2017?

Initial measure 1/1/16 854,136

Priority Computation of gain or loss Computation of share premium

What is the gain on debt restructuring? (PVF 3 Decimal)

You might also like