Estimated Liabilities, Provisions, and Bonds Payable,

Notes Payable & Debt Restructuring

1. Charlene Company includes one coupon in each box of laundry soap it sells. A towel is offered as
a premium to customers who send in 10 coupons and a remittance of P10.

Distribution cost of premium is P5. Experience indicates that only 30% of the coupons will be
redeemed.

2017 2018
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 50,000 80,000
Coupons redeemed 400,000 700,000

1.1 What is the premium expense for 2017?

a. 2,500,000 c. 1,800,000
b. 2,400,000 d. 2,700,000

1.2 What is the premium expense for 2018?

a. 3,000,000 c. 3,375,000
b. 3,750,000 d. 4,000,000

1.3 What is the estimated premium liability on December 31, 2017?

a. 1,000,000 c. 800,000
b. 1,100,000 d. 900,000

1.4 What is the estimated premium liability on December 31, 2018?

a. 1,000,000 c. 1,125,000
b. 1,250,000 d. 1,375,000

2. In packages of the products, Curran Company included coupons that may be presented at retail
stores to obtain discounts on other Curran products. Retailers were reimbursed for the face amount
of coupons redeemed plus 10% of that amount for handling costs. The entity honored requests for
coupon redemption by retailers up to three months after the consumer expiration date. The entity
estimated that 70% of all coupons issued would ultimately be redeemed. The consumer expiration
date is December 31, 2018.The total face amount of coupons issued was P600, 000.00 and the total
payments to retailers during 2018 amounted to P 220,000.00

2. 1What is the premium expense for 2018?

a. 600,000 c. 462,000
b. 180,000 d. 198,000

2.2 What amount should be reported as liability for unredeemed coupons on December 31, 2018?
a. 308,000 c. 242,000
b. 200,000 d. 0

3. During 2018, Namnama Company introduced a new product carrying a two-year warrant against
defects.

The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6%
in the second 12 months following sale.

The entity reported sales of P 5, 000,000 for 2018 and P 6,000,000 for 2019.

The actual expenditures incurred amounted to P 150,000 for 2018 and P 550,000 for 2019.

3. 1What is the warranty expense for 2018?

a. 500,000 c. 250,000
b. 200,000 d. 300,000
 3.2 What is the estimated warranty liability on December 31, 2018?
a. 350,000 c. 100,000
b. 150,000 d. 50,000

3.3 What is the warranty expense for 2019?

a. 650,000 c. 500,000
b. 600,000 d. 550,000

3.4 What is the estimated warranty liability on December 31, 2019?

a. 360,000 c. 240,000
b. 400,000 d. 50,000

4. Wall Company sold a product under a two-year warranty. The estimated cost of warranty repairs
is 2% of net sales.

During the first two years in business, the entity made the following sales and incurred the following
warranty repair costs:
2018 2019
Net sales 2,500,000 3,000,000
Total repair costs incurred 45,000 50,000

What amount should be reported as warranty expense for 2019?

a. 60,000 c. 10,000
b. 50,000 d. 59,000

5. Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants
program members loyalty points when they spend a specified amount on groceries.

Program members can redeem the points for further groceries. The points have no expiry date.
During 2018, the sales amounted to P 7,200,000 based on stand-alone selling price.

During the year, the entity granted 10,000 points. But management expected that only 80% or 8,000
points will be redeemed. The stand-alone selling price of each loyalty point is estimated at P100.

On December 31, 2018, 4,000 points have been redeemed. In 2019, management revised its
expectations and now expected that 90% or 9,000 points will be redeemed altogether.

During 2019, the entity redeemed 4,100 points.

5. 1What amount should be reported as sales revenue including the revenue earned from points
for 2018?
a. 7,200,000 c. 6,480,000
b. 8,000,000 d. 6,840,000

5.2 What is the revenue earned from loyalty points for 2019?
a. 360,000 c. 288,000
b. 648,000 d. 400,000

6. Jamaica Company, a retailer of electrical goods, participates in a customer loyalty program

operated by an airline. The entity grants program members one air travel point for every P1, 000
spent on electrical goods.

Program members can redeem the points for travel with the airline subject to availability. The entity
pays the airline P60 for each point.

During the current year, the entity sold electrical goods for consideration totaling P 4,500,000 based
on stand-alone selling price and granted 5,000 points with stand-alone selling price of P100 per
point.

6. 1 What amount should be recognized as product sales revenue?

a. 4,500,000 c. 5,000,000
b. 4,050,000 d. 2,500,000

6.2 What is the net revenue from points?

a. 450,000 c. 200,000
 b. 150,000 d. 300,000

7. Black Company requires advance payments with special orders for machinery constructed to
customer specifications. These advances are nonrefundable.

Information for the current year is as follows:

Advances from customers – January 1 1,180,000

Advances received with orders 1,840,000
Advances applied to orders shipped 1,640,000
Advances applicable to orders canceled 500,000

What amount should be reported as current liability for advances from customers at year-end?
a. 1,480,000 c. 880,000
b. 1,380,000 d. 0

8. During 2018, Libya Company is the defendant in a breach of patent lawsuit. The lawyers believe
there is an 80% chance that the court will not dismiss the case and the entity will incur outflow of
benefits.

If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the
entity will be required to pay damages of P 2,000,000.00 and a 40% chance that the entity will be
required to pay damages of P 1,000,000.00. Other amounts of damages are unlikely.

The court is expected to rule in late December 2019. There is no indication that the claimant will
settle out of court. A 7% risk adjustment factor to the cash flows is considered appropriate to reflect
the uncertainties in the cash flow estimates.

An appropriate discount is 10% per year. The present value of 1 at 10% for one period is 0.91.

What is the measurement of the provision for lawsuit?

a. 1,280,000 c. 1,500,000
b. 1,369,600 d. 1,246,336

9. Hart Company sells subscriptions to a specialized directory that is published semiannually and
shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and
September 30 cut-off dates are held for the next publication.

Cash from subscribers is received evenly during the year and is credited to deferred revenue from
subscriptions. Data relating to the current are as follows:

Deferred revenue from subscriptions – January 1, 2018 1,500,000

Cash receipts from subscribers 7,200,000

9. 1On December 31, 2018, what amount should be reported as deferred revenue from
subscription?
a. 1,800,000 c. 3,600,000
b. 3,300,000 d. 5,400,000

9.2 What is the subscription revenue for 2018?

a. 7,200,000 c. 8,700,000
b. 6,900,000 d. 5,100,000

10. Cobb Department Store sells gift certificates redeemable only when merchandise is purchased.
These gift certificates have no expiration date. Upon redemption or expiration, the entity
recognizes the unearned revenue as realized.

Information for the current year is as follows:

Unearned revenue, January 1, 2018 650,000

Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Gift certificates expected not to be redeemed 100,000
Cost of goods sold 60%
On December 31, 2018, what amount should be reported as unearned revenue?
a. 510,000 c. 850,000
b. 570,000 d. 950,000

11. Weaver Company sells magazine subscriptions for a 1-year, 2-year or 3-year period.

Cash receipts from subscribers are credited to magazine subscriptions collected in advance and this
account had a balance of P 1,700,000 on January 1, 2018.

Information for the current year is as follows:

Cash receipts from subscribers 2,100,000

Subscription revenue credited on December 31, 2018 1,500,000

On December 31, 2018, what amount should be reported as the balance for subscription collected in
advance?
a. 1,900,000 c. 1,400,000
b. 2,300,000 d. 2,100,000

12. Greene Company sells office equipment service contracts agreeing to service equipment for a
two-year period.

Cash receipts from contracts are credited to unearned service contract revenue.

Service contract costs are charged to service contract expense as incurred. Revenue from service
contracts is recognized as earned over the lives of the contracts.

Additional information for the current year is as follows:

Unearned service contract revenue at January 1 600,000

Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

What amount should be reported as unearned service contract revenue on December 31?
a. 460,000 c. 490,000
b. 480,000 d. 720,000

13. On March 1, 2018, Ellen Company issued 5,000 of P 1,000 face value bonds at 110 plus accrued
interest. The entity paid bond issue cost of P300, 000. The bonds were dated November 1, 2017,
mature on November 1, 2027, and bear interest at 12% payable semiannually on May 1 and
November 1. What net amount was received from the bond issuance on March 1, 2018?
a. 5,700,000 c. 5,400,000
b. 5,200,000 d. 5,500,000

14. During the current year, Anne Company issued 3,000,000 9% face value bonds at 110 at interest
date. In connection with the issue of the bonds, the entity paid the following costs:

Promotion cost 20,000

Engraving and printing cost 25,000
Underwriters’ commission 200,000
Legal fees 100,000
Fees paid to accountants for registration 55,000

What amount should be recorded as bond issue costs to be amortized?

a. 400,000 c. 300,000
b. 380,000 d. 0

15. On January 1, 2018, Jenalyn Company issued 9% bonds in the face amount of P 5,000,000 which
mature on January 1, 2028. The bonds were issued for P 4,695,000 to yield 10%. Interest is payable
annually on December 31. The entity used the effective interest method of amortizing bond
discount.

15. 1What is the interest expense for 2018?

 a. 469,500 c. 450,000
b. 500,000 d. 422,500

15.2What is the carrying amount of the bonds payable on December 31, 2018?
a. 4,695,000 c. 4,714,500
b. 4,704,750 d. 5,000,000

16. On January 1, 2018, Rossana Company issued 10-year bonds with face value of P5, 000,000 for
P 5,775,000. The entity paid bond issue cost of P100, 000 on same date. The stated interest rate on
the bonds is 10% payable annually every December 31. The bonds have an 8% yield per annum after
considering the bond issue cost. The entity used the effective interest method of amortizing bond
premium

16.1 What is the interest expense?

a. 454,000 c. 500,000
b. 400,000 d. 567,500

16.2 What is the carrying amount of the bonds payable on December 31, 2015?
a. 5,000,000 c. 5,629,000
b. 5,675,000 d. 5,737,000

17. On December 31, 2018, Claudine Company issued 5,000 of 8% 10-year P1, 000 face value
bonds with detachable warrants at 110. Each bond carried a detachable warrant for 10 ordinary
shares of P100 par value at a specified option price of P120. Immediately after issuance, the market
value of the bonds without warrants was P 4, 800,000 and the market value of the warrants was P
1,200,000.

17.1 On December 31, 2018, what is the carrying amount of bonds payable?
a. 5,500,000 c. 4,400,000
b. 4,800,000 d. 5,000,000

17.2 What is the share premium from the subsequent exercise of all share warrants?
a. 1,700,000 c. 2,100,000
b. 1,000,000 d. 0

18. On December 31, 2018, Elvira Company issued P5, 000,000 fair value 5-year bonds at 109. Each
P1, 000 bond was issued with 20 nondetachable share warrants. Each warrant entitled the
bondholder to purchase one share of P20 par value for P25. Immediately, after issuance, the market
value of each warrant was P5. The interest rate is 11% payable annually every December 31.

The prevailing market rate of interest for similar bonds without warrants is 12%. The PV of 1 at 12%
for 5 periods is 0.57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60.

What amount should be recorded as increase in equity as a result of the bond issuance on December
31, 2018?
a. 620,000 c. 500,000
b. 450,000 d. 0

19. On January 1, 2018, Mayleen Company issued 5,000 convertible bonds with P1, 000 face value
per bond. The bonds mature in three years and are issued at 110. Interest is payable annually every
December 31 at a nominal 6% interest rate. Each bond is convertible at anytime up to maturity into
100 shares with par value of P5. It is reliably determined that the bonds would sell only at P
4,600,000 without the conversion privilege. What is the equity component of the original issuance of
the convertible bonds?
a. 500,000 c. 900,000
b. 400,000 d. 0

20. On December 31, 2018, after recording interest and amortization, Lyka Company converted P5,
000,000 of 12% convertible bonds into 50,000 shares of P50 par value. On the conversion date, the
carrying amount of the bonds payable was P6, 000,000, the market value of the bonds was P6,
500,000, and the share was publicly trading at P150. The entity incurred P100, 000 in connection
with the conversion. When the bonds were originally issued, the equity component was recorded at P
1,500,000. What amount of share premium should be recorded as a result of the conversion?
a. 5,000,000 c. 4,900,000
b. 3,500,000 d. 3,400,000
 21. On January 1, 2018, Ezekiel Company received P 1,077,200 for P 1,000,000 face amount 12%
bonds. The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July
1.The entity has elected the fair value option for measuring the financial liability. On December
31, 2018, the fair value of the bonds is determined to be P 1, 064,000.00 due to market and interest
factors.

21.1 What is the carrying amount of the bonds payable on January 1, 2018?
a. 1,000,000 c. 500,000
b. 1,077,200 d. 538,600

21.2 What is the interest expense for 2018?

a. 120,000 c. 107,720
b. 100,000 d. 129,264

21.3 What is the gain or loss from change in fair value of the bonds for 2018?
a. 64,600 gain c. 12,600 gain
b. 54,600 loss d. 12,600 loss

21.4 What is the carrying amount of the bonds payable on December 31, 2018?
a. 1,064,600 c. 1,000,000
b. 1,077,200 d. 1,064,920

22. On December 31, 2018, Boston Company purchased a machine from Helix Company in exchange for
a noninterest bearing note requiring eight payments of P 200,000.00. The first payment was made on
December 31, 2018 and the others are due annually on December 31.

At date of issuance, the prevailing rate of interest, for this type of note was 11%. The PV of an
ordinary annuity of 1 at 11% for 8 periods is 5.146 and the PV of an annuity of 1 in advance at 11%
for 8 periods is 5.712.

22. 1On December 31, 2018, what is the carrying amount of the note payable?
a. 1,142,400 c. 1,046,200
b. 1,029,200 d. 942,400

22.2 What is the interest expense for 2019?

a. 125,664 c. 176,000
b. 103,664 d. 154,000

23. On September 3, 2018, World Company borrowed P 1,000,000 on a 9% note payable. The entity paid
the first of four quarterly payments of P 264,200.00 when due on December 31, 2018.

On December 31, 2018, what is the carrying amount of the note payable?
a. 758,300 c. 825,800
b. 750,000 d. 735,800

24. On January 1, 2018, Jonathan Company borrowed P 500,000.00 8%, interest-bearing note due in four
years. The present value of the note on January 1, 2018 was P 367,500.00

The entity has elected the fair value option for reporting the financial liability. On December 31,
2018, the fair value of the note is P 408,150.00.

24.2 What is the carrying amount of the note payable on December 31, 2018?
a. 500,000 c. 408,150
b. 367,500 d. 460,000

24.3 What amount should be reported as interest expense for 2018?

a. 40,000 c. 32,562
b. 29,400 d. 20,000

24.4 What is the net gain from change in fair value to be recognized in 2018?
a. 132,500 c. 91,850
b. 40,650 d. 0

24.5 At what amount should be the discount on note payable be presented on December 31, 2018?
 a. 132,500 c. 100,000
b. 103,100 d. 0

25. On January 1, 2018, Lizelle Company signed a P 100,000 noninterest-bearing note due in three years
at a discount rate of 10%.The entity elected the fair value option for reporting the note payable.

On December 31, 2018, the credit rating and risk factors indicated that the rate of interest applicable
to its borrowings was 9%. The present value factors at 10% and 9% are as follows:

PV factor 10% 3 periods .751 PV factor 9%, 3 periods .772

PV factor 10% 2 periods .826 PV factor 9%, 2 period .842
PV factor 10% 1 period .909 PV factor 9% 1 period .917

25.2 What is the initial carrying amount of the note payable on January 1, 2018?
a. 75,100 c. 82,610
b. 77,200 d. 84,200

25.3 What is the carrying amount of the note payable on December 31, 2018?
a. 84,200 c. 91,700
b. 82,600 d. 77,200

26. On December 31, 2018, Columbia Company shows the following data with respect to its matured
obligation.

Notes Payable 5,000,000

Accrued Interest Payable 500,000

The company is threatened with a court suit if it could not pay its maturing debt. Accordingly, the
company enters into an agreement with the creditor for the transfer of a non-cash asset in full
settlement of the mortgage. The agreement provides for the transfer of real estate carried in the books
of Columbia at P 3,000,000.00. The real estate has a current fair market value of P 4,500,000.00.

What total amount should Columbia recognize in profit or loss for the year 2018 as a result of this
transaction?
a. 500,000 c. 1,500,000
b. 1,000,000 d. 2,500,000

27. Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a P 2,500,000.00 note payable to United Bank.

The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted
at P12 per share. The par value is P10 per share.

The fair value of the note payable on the date of restructuring is P 2,200,000.00.

27.2 What amount should be recognized as gain from debt extinguishment as a result of the “equity
swap”?
a. 400,000 c. 500,000
b. 100,000 d. 200,000

27.3 What amount should be recognized as share premium from the issuance of the shares?
a. 500,000 c. 400,000
b. 100,000 d. 200,000

27.4 If the shares have no fair value, what amount should be recognized as gain on extinguishment?
a. 200,000 c. 400,000
b. 300,000 d. 500,000

28. Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a 10% P
5,000,000 note payable due on December 31, 2018. The unpaid interest on the note on such date is P
500,000.
 The creditor had agreed to reduce the face value to P4, 000,000, forgive the unpaid interest, reduce
the interest rate to 8% and extend the due date three years from December 31, 2018.

The PV of 1 at 10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for three
periods is 2.49.

28.2 What is the gain on extinguishment of debt in 2018?

a. 1,703,200 c. 2,000,000
b. 1,203,200 d. 540,000

28.3 What is the interest expense for 2019?

a. 320,000 c. 400,000
b. 379,680 d. 500,000

29. Due to adverse economic circumstances and poor management, Tagaytay Highlands Company had
negotiated a restructuring of its 9% P 6,000,000 note payable to Second Bank due on January 1,
2016. There is no accrued interest on the note.

The bank has reduced the principal obligation from P 6,000,000 to P5, 000,000 and extends the
maturity to 3 years or on December 31, 2018. However, the new interest rate is 13% payable
annually every December 31.

The present value of 1 at 9% for three periods is .77 and the present value of an ordinary annuity of 1
at 9% for three periods is 2.53.

What is the gain on extinguishment of debt to be recognized for 2016?

a. 1,000,000 c. 505,000
b. 350,000 d. 0