Cordillera College financial reporting problems

Cordillera Career Development College
COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

Buyagan, Poblacion, La Trinidad, Benguet
PROBLEM 1:
BOOMERANG INC., is a manufacturer and retailer of household furniture. Your audit of the company’s financial
statements for the year ended December 31, 2012, discloses the following debt obligations of the company at the
end of its reporting period. Boomerang’s financial statements are authorized for issuance on march 6, 2013.
a. A P150,000 short – term obligation due on March 1, 2012. Its maturity could be extended to March 1, 2015,
provided Boomerang agrees to provide additional collateral. On February 12, 2013, an agreement is
reached to extend the loan’s maturity to March 1, 2015.
b. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2013. The company
issued 75,000 ordinary shares for P36 per share on January 25, 2013. The proceeds from the issuance, plus
P900,000 cash, were used to fully settle the debt on February 5, 2013.
c. A long – term obligation of P2,500,000 on December 1, 2012. On November 10, 2012, Boomerang breaches
a covenant on its debt obligation and the loan becomes payable on demand. An agreement is reached to
provide a waiver of the breach on December 11, 2012.
d. A long – term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1,000,000 per
year. The loan is dated September 1, 2012, and the first maturity date is September 1, 2012, and the first
maturity date is September 1, 2013.
e. A debt obligation of P1,000,000 maturing on December 31, 2015. The debt is callable on demand by the
lender at any time.
1. What amount of current liabilities should be reported on the December 31, 2012, statement of financial
position?
A. P8,250,000 C. P4,750,000
B. P5,570,000 D. P3,750,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2012 statement of financial
position?
A. P5,500,000 C. P6,500,000
B. P1,000,000 D. P7,500,000
PROBLEM 2:
The data are from the records of MANOR INC. on December 31, 2012:
Accounts payable P 680,000

Cash balance, ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customer’s accounts with credit balances 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2012 maturing in 20 semi – annual
installments beginning on April 1, 2013) 4,000,000
Salaries payable 400,000
The amount to be shown as total current liabilities on Manor statement of financial position at December 31,
2012, is
A. P2,225,000 C. P2,625,000
B. P2,025,000 D. P2,145,000
PROBLEM 3:
SAI CORP. records its purchases at gross amounts but wishes to change to recording purchases net of purchase
discounts. Discounts on purchases recorded from January 1, 2012 to December 31, 2012, totaled P80,000. Of
this amount, P8,000 is still available in the accounts payable balance. The balance in Sai’s accounts as of and for
the year ended December 31, 012, before conversion are:
Purchases P 4,000,000
Purchase Discounts 32,000
Accounts payable 1,200,000
1. The amount of purchase discounts lost to be recognized is

A. P8,000 C. P32,000
B. P0 D. P40,000
2. The accounts payable balance should be reduced by
A. P8,000 C. P32,000
B. P80,000 D. P40,000
3. The purchases account should be reduced by
A. P32,000 C. P40,000
B. P80,000 D. P8,000
4. The entry to record the conversion is
A. Accounts payable 80,000
Purchases 80,000
B. Purchase discounts lost 32,000
Purchases 32,000
C. Purchase discounts lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
D. Purchase discounts lost 32,000
Account payable 8,000
Purchases 40,000
PROBLEM 4:
ANGLIN CORPORATION must determine the December 31, 2012, year-end accruals for advertising and rent
expenses. A P50,000 advertising bill was received January 10, 2013, comprising costs of P37,500 for
advertisements in December 2012 issues, and P12,500 for advertisements in January 2013 issues of the
newspaper.
A short lease, effective December 16, 2011, calls for fixed rent of P120,000 per month, payable one month from
the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P6,000,000 per calendar
year is payable on January 31 of the following year. Net sales for 2012 were P7,500,000.
What is the total accrued liabilities that should be reported by Anglin Corporation in its statement of financial
position as at December 31, 2012?
A. P185,000 C. P97,500
B. P172,500 D. P110,000
PROBLEM 5:
Ana Rosa, president of the APOKA 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 30%.
1. Determine the amount of Ana Rosa’s bonus.

2. Compute the appropriate provision for income tax for the year.
3. Prepare the entry to record the bonus (which will be paid in the following year.)
PROBLEM 6:
POKWANG COMPANY sold 700,000 boxes if “Puto mix” under a new sales promotional program. Each box
contains one coupon, which if submitted with P40, entities the customer to a kitchen knife. Pokwang pays P60
per knife and P5 for handling and shipping. Pokwang estimates that 70% of the coupons will be redeemed even
though only 250,000 coupons had been processed during 2012.
How much should Pokwang report as liability for unredeemed coupons at December 31, 2012?
A. P6,000,000 C. P15,600,000
B. P9,600,000 D. P12,250,000
PROBLEM 7:
In packages of its products, PLACID, INC. includes coupons that may be presented at retail stores to obtain
discounts on other Placid products. Retailers are reimbursed for the face amount of coupons redeemed plus
10% of that amount for handling costs. Placid honors requests for coupon redemption by retailers up to 3
months after the consumer expiration date. Placid estimates that 60% of all coupons issued will ultimately be
redeemed. Information relating to coupons issued by Placid during 2012 is as follows:
Consumer expiration date December 31. 2012

Total payments to retailers as of December 31, 2012 P 165,000
Liability for unredeemed coupons as of December 31, 2012 P 99,000
What is the total face amount of coupons issued by Placid, Inc. in 2012?
A. P440,000 C. P600,000
B. P400,000 D. P264,000
PROBLEM 8:
OMEGA COMPANY sells its products in expensive, reusable 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. Omega accounts for the containers not returned within the time limit as being sold at the deposit
amount. Information for 2012 is as follows:
Containers held by customer at December 31,

2011, from deliveries in:
2010 85,000
2011 240,000 325,000
Containers delivered in 2012 430,000
Containers returned in 2012 form delivers in:
2010 57,500
2011 140,000
2012 157,000 354,500
1. How much revenue from container sales should be recognized for 2012?
A. P127,500 C. P27,500
B. P267,500 D. P85,000
2. What is the total amount of Omega Company’s liability for returnable containers at December 31, 2012?
A. P373,000 C. P267,500
B. P400,500 D. P30,000
PROBLEM 9:
Described below are certain transactions of ASHLEE COMPANY:
February 2 The company purchased goods from Happy Corp. for P150,000 subject to
cash discount terms of 2/10, n/30. The company records purchases and
accounts payable at net amounts after cash discounts. The invoice was paid
on February 25.
April 1 The company purchased a truck for P120,000 from Broom Motors Corp.,
paying P12,000 in cash and signing a one-year, 12% note for the balance of
the purchase price.
May 1 The company borrowed P240,000 from Manila Bank by signing a P276,000
noninterest-bearing note due one year from May 1.
August 1 The company’s board of directors declared a P900,000 cash dividend that
was payable on September 10 to shareholders of record on August 31.
1. Prepare all the journal entries necessary to record the transactions described above.
2. Assume that Ashby Company’s financial year ends on December 31, and that no adjusting entries relative to
the transactions above have been recorded. Prepare any adjusting journal entries concerning interest that
are necessary to present fair financial statements at December 31.
PROBLEM 10:
Presented below are two independent situations. Answer the questions at the end of each situation.
Situation 1
EGWENE CO., a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract that requires
the company to replace all defective parts and to provide the necessary repair labor at no cost to the customers.
With sales being made evenly throughout the year, Egwene sells for cash 600 machines in 2012 (half of the
warranty expense is incurred in 2012, half in 2013). On the basis of past expenses, the 1-year warranty costs are
estimated to be P510 parts and P660 labor. Assume that in 2012, these warranty costs are incurred exactly as
estimated.
1. What amount of warranty expense would be charged against 2012 revenue?

A. P702,000 C. P153,000
B. P351,000 D. P396,000
2. What amount of warranty liability would appear on the December 31, 2012 statement of financial position?
A. P0 C. P702,000
B. P153,000 D.P351,000
Situation 2
RAND INC., a dealer of household appliances, sells washing machines at an average price of P8,100. The
company also offers to each customer a separate 3-year warranty contract for P810 that requires the company
to provide periodic maintenance services and to replace defective parts. During 2012, Rand sold 300 washing
machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for
parts and P360 for labor.
Assume sales occurred on December 31, 2012. Rand’s policy is to recognize income from the warranties on a
straight-line basis. In 2013, Rand incurred actual costs relative to 2012 warranty sales of P18,000 for parts and
P36,000 for labor.
1. What liability relative to these transactions would appear on the December 31, 2012, statement of financial
position and how would it be classified?
Current Non-current
A. P 145,000 P72,900
B. P 72,900 P72,900
C. P 72,900 P145,800
D. P0 P218,700
2. What amount of warranty expense would be shown on the income statement for the year ended December
31, 2013?
A. P18,000 C. P36,000
B. P0 D. P54,000
3. What liability relative to the 2012 warranties would appear on the December 31, 2013, statement of
financial position and how would it be classified?
Current Non-current
A. P145,000 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0
PROBLEM 11
OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction equipments,
recorded music, and sheet music. To promote the sale of its products, Olson uses two promotion techniques –
premium and warranties.
Premiums:
The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10 spent on
recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player. Olson pays
P340 for each CD player and estimates that 60% of the coupons given to customers will be redeemed. A total of
6,500 CD players used in the premium were purchased during the year and there were 1,200,000 coupons
redeemed in 2012.
Warranties:
Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of
parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and
labor for warranty work totaled P1,640,000 during 2012.
Olson uses accrual method to account for the warranty and premium costs for financial reporting purposes.
Olson’s sales for 2012 totaled P72,000 – P54,000,000 from musical instruments and sound reproduction
equipment and P18,000,000 from recorded music and sheet music. The balances in the accounts related to
warranties and premium on January 1, 2012, were as shown below:
Inventory of premium CD players P 399,500

Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts that will be shown on the 2012 financial statements
for the following:
1. Warranty expense
A. P1,640,000 C. P800,000
B. P1,080,000 D. P360,000
2. Estimated liability from warranties
A. P1,920,000 C. P240,000
B. P1,080,000 D. P800,000
3. Premium expense
A. P1,836,000 C. P756,000
B. P840,000 D. P2,189,500
4. Inventory of premium CD players
A. P399,500 C. P2,210,000
B. P569,500 D. P739,500
5. Estimated premium claims outstanding
A. P364,000 C. P756,000
B. P840,000 D. P672,000
PROBLEM 12:
On December 31, 2012, BAKI COMPANY acquired a piece of equipment from Seller Company by issuing a
P1,200,000 note, payable in full on December 31, 2016. Baki’s credit rating permits it to borrow funds from its
several lines of credit at 10%. The equipment is expected to have a 5-year life and a P150,000, salvage value. The
present value of 1 at 10% for 4 periods is 0.68301.
1. What is the equipment’s book value on December 31, 2014?

A. P551,767 C. P491,767
B. P630,000 D. P341,767
2. What is the carrying value of the note at December 31, 2014?
A. P1,090,903 C. P1,200,000
B. P991,730 D. P819,612
PROBLEM 13:
ORCHID COMPANY purchased machinery on December 31, 2012, paying P80,000 down and agreeing to pay the
balance in four equal installments of P60,000 payable each December 31. Implicit in the purchase price is an
assumed interest of 12%.
The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552
Present value of an annuity of 1 at 12% 3.03735
1. What is the cost of the machine purchased on December 31, 2012?

A. P233,083 C. P262,241
B. P320,000 D. P290,842
2. How much interest should be reported in Orchid’s income statement for the year ended December 31, 2013?
A. P38,131 C. P17,293
B. P21,869 D. P42,707
3. What is the carrying value of the note at December 31, 2014?

A. P120,000 C. P99,310
B. P144,110 D. P101,403
PROBLEM 14:
On October 1, 2012, ALTHOR CORP. issued a P500,000, 12-month, 12% not to ABC Company in payment of
account. On the same date, the company borrowed P1,000,000 form the Asian Bank by signing a 12-month, non-
interest-bearing, P1,120,000 note.
1. Prepare adjusting journal entries at December 31, 2012.

2. What is the total/net liability to be reported in the December 31, 2012, statement of financial position for:
a. The interest-bearing note?
b. The noninterest-bearing note?
PROBLEM 15:
Described below are certain transactions of TUNIC COMPANY.
 On April 1, the corporation bought a truck for P400,000 from General Motors Company, paying P40,000
in cash and signing a one-year, 12% note for the balance of the purchase price.
 On may 1, the corporation borrowed P800,000 from Prudent Bank by signing a P920,000 noninterest-
bearing note due one-year from May 1.
Prepare any adjusting journal entries to present fair financial statements at December 31.
PROBLEM 16:
In conjunction with your firm’s examination of the financial statements of BATA, INC. as of December 31, 2012,
you obtained the information from the company’s voucher register sown in the work paper below.
Item Entry Voucher

No. Date Reference Description Amount Account Charged
1 12.18.12 12-200 Supplies, shipped FOB destination,
12/15/12; received 12/17/12 P 15,000 Supplies on hand
2 12.18.12 12-203 Auto insurance, 12.15.12 – 12/15/13 22,000 Prepaid insurance
3 12.21.12 12-209 Repairs services; received 12/20/12 19,000 Repairs & maintenance
4 12.26.12 12-212 Merchandise, shipped FOB shipping point,
12/20/12; received 12/24/12 123,000 Inventory
5 12.21.12 12-210 Payroll, 12/7/12 – 12/21/12
(12 working days) 69,000 Salaries and wages
6 12.21.12 12-234 Subscription to industry magazine for 2013 5,000 Dues & subscriptions
expense
7 12.28.12 12-236 Utilities for December 2012 24,000 Utilities expense
8 12.28.12 12-241 Merchandise, shipped FOB destination,
12,24,12; received 1/2/13 111,500 Inventory
9 12.28.12 12-242 Merchandise, shipped FOB destination;
10 1.2.13 1-1 Legal services; received 12/28/12 46,000 Legal and professional
fees expense
11 1.2.13 1-2 Medical services for employees for December 2012 25,000 Medical expenses
13 1.10.13 1-4 Payroll, 12/21/12 – 1/5/13 (12 working
days in total, 4 working days in
January 2013) 72,000 Salaries and wages
15 1.12.13 1-8 Merchandise, shipped FOB destination, 38,000
1/3/13; received 1/10/13 Inventory
16 1.13.13 1-9 Maintenance services; received 1/9/13 9,000 Repairs and maintenance
17 1.14.13 1-10 Interest on bank loan, 10/10/12 – 1/10/13 30,000 Interest expense
18 1.15.13 1-11 Manufacturing equipment; installed 12/29/12 254,000 Machinery & equipment
19 1.15.13 1-12 Dividend declared, 12/15/13 160,000 Dividends payable
Accrued liabilities as of December 31, 2012, were as follows:

Accrued payroll P48,000

Accrued interest payable 26,666
Dividends payable 160,000
The accrued payroll and accrued interest payable were reversed effective January 1, 2013.
Required:
Review the data given above and prepare journal entries to adjust the accounts on December 31, 2012. Assume
that the company follows FOB terms for recording inventory purchases.
PROBLEM 17:
You are engaged to audit the December 31, 2012, financial statements of LIZA COMPANY, a manufacturer of
household appliances. Your audit disclosed the following situations.
a. In June 2012, the company began producing and selling a new line of dishwasher. By the end of the year,
it had sold 120,000 to various dealers for P15,000 each. The product was sold under a 1-year warranty,
and the company estimates warranty costs to be P750 per dishwasher. Liza had paid out P30 million in
warranty expenses as of December 31, 2012, which also the amount shown as warranty expense in its
income statement for the current year.
b. In response to your letter of audit inquiry, Liza’s lawyer informed you that the company is involved in a
lawsuit for violation environmental laws regulating hazardous waste. Although the litigation is pending,
Liza’s lawyer is certain that Liza will most probably have to pay cleanup costs and fines of P5,500,000.
Liza neither accrued nor disclosed this loss in the financial statements.
c. Liza is the defendant in a patent infringement suit by Mona Bang over Liza’s use of a hydraulic
compressor in several of its manufactured appliances. Liza’s lawyer informed you that if the suit goes
against your audit client, the loss may be as much as P10 million. However, the lawyer believes that the
loss of this suit is only possible. Liza did not in any way disclose this pending litigation in its financial
statements.
1. What amount of warranty expense should be shown on Liza’s income statement for the year ended
December 31, 2012?
A. P30,000,000 C. P60,000,000
B. P0 D. P90,000,000
2. What amount of warranty liability should be shown on Liza’s statement of financial position as of December
31, 2012?
A. P60,000,000 C. P30,000,000
B. P90,000,000 D. P0
3. What amount of lawsuit liability should be reported as a provision on Liza’s December 31, 2012, statement
of financial position?
A. P10,000,000 C. P15,500,000
B. P5,500,000 D. P0
PROBLEM 18:
On November 1, 2012, 69 passengers on CANYON AIRLINES Flight No. 143 were injured upon landing when the
plane skidded off the runway. Personal injury suits for damages totaling P10,000,000 were filed on January 12,
2013, against the airline by 21 injured passengers. The airline carries no insurance. Legal counsel has studied
each suit and advised Canon that it can reasonably expect to pay 70% of the damages claimed. The financial
statements for the year ended December 31, 2012, were authorized for issue on February 12, 2013. During the
past decade, the company has experienced at least one accident per year and incurred average damages of
P4,100,000.
1. Prepare the journal entry that should be made as of December 31, 2012, to recognized the loss.
2. What liability due to risk of loss from lack of insurance coverage should Canyon Airlines record or disclose?
(Ignore the November 1, 2012, accident.)
PROBLEM 19:
BAGKUS COMPANY has the following three loans payable scheduled to be repaid in February of next year. The
company’s accounting year ends on December 31.
a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In the following
October, the company intends to get a new loan for P80,000 from the same bank.
b. The company intends to refinance Loan 2 for P150,000 when it comes due in February. The refinancing
agreement, for P180,000, will be signed in April, after the financial statements for this year have been
authorized for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual
refinancing for P175,000, took place in January, before the financial statements for this year have been
authorized for issue.
1. As of December 31 of this year, the total current liabilities to be reported in the company’s statement of
financial position should be
A. P100,000 C. P450,000
B. P250,000 D. P125,000
2. As of December 31 of this year, the total noncurrent liabilities to be reported in the company’s statement of
financial position should be
A. P25,000 C. P175,000
B. P0 D. P350,000
PROBLEM 20:
The following are based on the financial statements of CAMEL COMPANY.
Current assets P 750,000

Short-term loan payable 600,000
Total liabilities 3,000,000
Current ratio 1.5
Debt-to-equity-ratio 1.5
Camel Company has arranged with its bank to refinance its short-term loan when it becomes due in 3 months.
The new loan will have a term of 5 years.
1. Compute the following:

A. Total current liabilities
B. Total shareholders’ equity
C. Total noncurrent liabilities
2. As the auditor of camel Company, how would you verify the validity of the short-term loan refinancing?
PROBLEM 21:
CAREY CO. owes P1,998,000 to Loan Shark Corp. the debt is a 10-year 11% note. Because Carey Co. is in
financial trouble, Loan Shark Corp. agrees to accept land and cancel the entire debt. The land has a book value of
P800,000 and affair market value of P1,200,000.
What entry should be made by Carey Co. for the debt restructure?
PROBLEM 22:
NAKARU CORPORATION is having financial difficulty and therefore has asked Naawa Bank to restructure its P3
million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 12%. The
note was issued as its face value.
Presented below are two independent situations. Prepare the journal entry that Nakaru would make for each of
the following types of debt restructuring.
a. Naawa 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
b. Naawa Bank agrees to reduce the principal balance due to P2,000,000 and interest rate to 10%.
The following present value factors are abstracted from the present value tables.
12% 10%
Present value of 1 for 3 periods 0.71178 0.75132
Present value of an ordinary annuity of 1 for 3 periods 2.40183 2.48685
PROBLEM 23:
At December 31, 2012, KISS COMPANY’s liabilities include the following:
 P10 million of 10% notes are due on March 31, 2017. The following agreement contains a covenant that
requires Kiss to maintain current assets at least equal to 200% of its current liabilities. As of December
31, 2012, Kiss has breached this loan covenant. On February 10, 2013, before Kiss’s financial statements
are authorized for issue, Kiss obtained a period of grace form Mayumi Bank until January 31, 2014,
having convinced the bank that the company’s normal 3 to 1 ratio of current assets to current liabilities
will be reestablished during 2013.
 P15 million of noncancelable 12% bonds were issued at face value on September 30, 1991. The bonds
mature on august 31, 2013. Kiss expects to have sufficient cash available to redeem the bonds at
maturity.
 P20 million of 10% bonds were issued at face value on June 30, 1993. The bonds mature on June 30,
2022, but bondholders have the option to call (demand payment on) the bonds on June 30, 2013.
However, the call option is not expected to be exercised, given prevailing market conditions.
What potion of Kiss Company’s debt should be reported as a noncurrent liability?

A. P10 million C. P20 million
B. P30 million D. P0
PROBLEM 24:
Your audit client, SUPA COMPANY, is involved in the situations described below. Supa’s accounting year ends on
December 31, 2012, and its financial statements are authorized for issue on March 20, 2013.
a. Supa is involved in a lawsuit resulting from a dispute with a customer. In January 28, 2013, judgment was
rendered against Supa in the amount of P20 million. Supa plans to appeal the judgment and is unable to
predict its outcome though management believes that it will not have a material adverse effect on the
company.
b. On April 25, 2013, the Bureau of Internal Revenue is in the process of examining Supa’s tax returns for
2010 and 2011, but has not proposed a deficiency assessment. Management feels an assessment is
reasonably possible, and if an assessment is made, an unfavorable settlement of up to P5 million is
reasonably possible.
c. On January 5, 2013, inventory purchased FOB shipping point from a foreign country was detained at that
country’s border because of political unrest. The shipment is valued at P1 million. Supa,s lawyers have
stated that it is probable that Supa will be able to obtain the shipment.
d. On November 1, 2012, a lawsuit was filed by a disgruntled customer who discovered a safety hazard in
one of Supa’s best-selling products. Supa’s lawyers feel it is probable that the company will be liable for
P500,000.
e. On December 5, 2012, Supa initiated a lawsuit seeking P1 million in damages from a patent infringement.
Determine the appropriate means of reporting each situation. Prepare any necessary journal entries on
December 31, 2012:
PROBLEM 25:
LARIO COMPANY issued 10-year bonds on January 1, 2012. The company’s year-end is December 31, and
financial statements are prepared annually. The amortization and interest schedule below reflects the bond
issuance and the subsequent interest payments and charges.
AMORTIZATION SCHEDULE
Interest Interest Amount Carrying
Date paid expense Unamortized Value
01.01.12 --- --- P28,253 P471,747
12.31.12 P 55,000 P 56,610 26,643 473,357
12.31.13 55,000 56,803 24,840 475,160
12.31.14 55,000 57,019 22,821 477,179
12.31.15 55,000 57,261 20,560 479,440
12.31.16 55,000 57,533 18,027 481,973
12.31.17 55,000 57,837 15,190 484,810
12.31.18 55,000 58,177 12,013 487,987
12.31.19 55,000 58,558 8,455 491,545
12.31.20 55,000 58,985 4,470 495,530

12.31.21 55,000 59,470* --- 500,000
* Adjustment due to rounding
1. The bonds were issued at

A. A premium C. Face value
B. A discount D. Par value
2. What amortization method is used in the amortization schedule presented?
A. Straight-line method C. Effective interest method
B. Bonds outstanding method D. Declining balance method
3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2012?
A. 11% C. 10%
B. 12% D. 6%
4. What is the effective interest rate of the bonds issued on January 1, 2012?
A. 11% C. 10%
B. 12% D. 6%
5. On the basis of the schedule presented, what is the journal entry to record the issuance of the bonds on
January 1, 2012?
A. Cash 500,000
Bonds payable 500,000
B. Cash 471,747
Interest expense 28,253
C. Cash 500,000
Premium on bonds payable 28,253
D. Cash 471,747
Discount on bonds payable 28,253
PROBLEM 26:
ELEANOR CORP. has been producing quality disposable diapers for more than two decades. The company’s
fiscal year runs from April 1 to March 31. The following information relates to the obligations of Eleanor as of
March 31, 2012.
Bonds Payable
Eleanor issued P10,000,000 of 10% bonds on July 1, 2010. The prevailing market rate of interest for these bonds
was 12% on the date of issue. The bonds will mature on July 1, 2020. Interest is paid semiannually on July 1 and
January 1. Eleanor uses the effective interest rate method to amortize bond premium or discount.
The following present value factors are taken from the present value tables:
Present value of an annuity of 1 at 12% for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6% for 20 periods 11.46992
Notes Payable
Eleanor has signed several long-term notes with financial institutions. The maturities of these notes are given in
the schedule below. The total unpaid interest for all these notes amounts to P600,000 on March 31, 2012.
Due Date Amount Due

Aril 1, 2012 P 400,000
July 1, 2012 600,000
October 1, 2012 300,000
January 1, 2013 300,000
April 1, 2013 − March 31, 2014 1,200,000
April 1, 2014 − March 31, 2015 1,000,000
April 1, 2015 − March 31, 2016 1,400,000
April 1, 2016 − March 31, 2017 800,000
April 1, 2017 − March 31, 2018 1,000,000
P7,000,000
Estimated Warranties
Eleanor has a one-year product warranty on some selected items in its product line. The estimated warranty
liability on sales made during the 2010 – 2011 fiscal year and still outstanding as of March 31, 2011 amounted
to P180,000. The warranty costs on sales made from April 1, 2011, through March 31, 2012, are estimated at
P520,000. The actual warranty costs incurred during the current 2011 – 2012 fiscal year are as follows:
Warranty claims honored on 2010 – 2011 sales P 180,000

Warranty claims honored on 2011 – 2012 sales 178,000
Total warranty claims honored P 358,000
Other Information
a. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as of
March 31, 2012.
b. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000
Withholding waxes payable 94,000
Other payroll deductions 10,000
Total P 404,000
c. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2012.
d. DIVIDENDS
On March 15, 2012, Eleanor’s board of directors declared a cash dividend of P0.20 per ordinary share and
a 10% share dividend. Both dividends were to be distributed on April 12, 2012, to the shareholders of
record at the close of business on March 31, 2012. Data regarding Eleanor ordinary share capital are as
follows:
Par value P 5.00 per share

Number of shares issued and outstanding 6,000,000 shares
Market values of ordinary shares:

March 15, 2012 P22.00 per share
March 31, 2012 21.50 per share
April 12, 2012 22.50 per share
1. How much was received by Eleanor from the sale of the bonds on July 1, 2010?
A. P8,852,960 C. P10,500,000
B. P10,000,000 D. P10,647,040
2. What is the current portion of Eleanor’s notes payable at March 31, 2012?
A. P2,800,000 C. P1,300,000
B. P1,600,000 D. P3,800,000
3. The balance of the estimated warranties payable at March 31, 2012, is
A. P342,000 C. P520,000
B. P18,000 D. P180,000
4. On March 31, 2012, Eleanor’s statement of financial position would report total current liabilities of
A. P5,286,000 C. P5,336,000
B. P4,386,000 D. P5,642,000
5. On March 31, 2012, Eleanor’s statement of financial position would report total noncurrent liabilities of
A. P14,389,350 C. P14,370,783
B. P14,352,217 D. P14,252,960
PROBLEM 27:
The following data were obtained from the initial audit of HANSTEEN COMPANY:
15%, 10-year, Bonds Payable, dated January 1, 2011

Debit Credit Balance
Cash proceeds from issue on January 1, 2011 of 1,000, P1,000

bonds. The market rate of interest on the date of issue was 12%. P1,172,044 P1,172,044
Bond Interest Expense

Cash paid, 1.2.12 P75,000 P 75,000
Cash paid, 7.1.12 75,000 150,000
Accrual, 12.31.12 75,000 225,000
Accrued Interest on Bonds

Balance, 1.1.12 P 75,000 P 75,000
Accrual, 12.31.12 75,000 150,000
Treasury Bonds
Redemption price and interest to date on 200 bonds
permanently retired on December 31, 2012 P265,000 P265,000
Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2012
A. P831,110 C. P1,151,583
B. P800,000 D. P91,266
2. Loss on bond redemption
A. P4,683 C. P15,000
B. P19,683 D. P34,683
3. Accrued interest on bonds at December 31, 2012
A. P75,000 C. P60,000
B. P135,000 D. P52,500
4. Bond interest expense for the year ended December 31, 2012
A. P150,000 C. P69,745
B. P139,174 D. P160,826
PROBLEM 28:
The long – term debt section of ELMO COMPANY’s statement of financial position as of December 31, 2011,
included 9% bonds payable of P400,000, less unamortized discount of P32,000. Further examination revealed
that these bonds were issued to yield 10%. The amortization of the bonds discount was recorded using the
effective interest method. Interest was paid on January 1, and July 1 of each year. On July 1, 2012, Elmo retired
the bonds at 105 before maturity.
What is the amount of loss to be recognized on the retirement of bonds?

A. P52,400 C. P51,600
B. P20,000 D. P0
PROBLEM 29:
MALOMBE CORP. had outstanding P6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10
years. On July 1, it issued P9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 97. A
portion of the proceeds was used to call the 11% bonds at 103 on August 1. Unamortized bond discount and
issue cost applicable to the 11% bonds were P240,000 and P60,000, respectively.
Required:
Prepare journal entries to record the following:
a. Sale of the new issue
b. Retirement of the old issue
PROBLEM 30:
On January 1, 2012, DIAS COMPANY issued a 3-year, 4,000 convertible bonds at face value of P1,000 per bond.
Interest is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the
holder’s option, into 200 P2 par value ordinary shares at any time up to maturity. On the date of issuance, the
prevailing market interest rate for similar debt without the conversion privilege was 9%. On the same date, the
market price of one ordinary share was P3. The bonds were converted on December 31, 2013.
The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for 3 periods 2.67301 2.53130
Present value of an annuity due of 1 for 3 periods 2.83339 2.75911
1. The liability component of the convertible debt is

A. P4,000,000 C. P1,600,000
B. P3,696,232 D. P3,730,242
2. The equity component of the convertible debt is
A. P303,768 C. P1,600,000
B. P1,973,621 D. P2,400,000
3. The interest expense to be reported on Dias Company’s income statement for the year ended December 31,
2013, is
A. P101,000 C. P240,000
B. P110,107 D. P341,000
4. The entry to record the bond conversion on December 31, 2013, should include a credit to share premium –
issuance of
A. P2,289,893 C. P2,593,661
B. P2,400,000 D. P0
PROBLEM 31:
EYASI, INC. began operating on January 1, 2012. At the end of the first year of operations, Eyasi reported
P7,500,000 income before income taxes on its income statement but only P700,000 taxable income on its tax
return. Analysis of the P6,800,000 difference revealed that P6,200,000 was a permanent difference and
P600,000 was a temporary difference related to a current asset. At the end of 2013, the accumulated temporary
tax liability difference related to future years is P1,100,000. The enacted tax rate is 30% for 2012 and 2013.
1. The journal entry to adjust the deferred tax liability at the end of 2013 should include a
A. Debit to Deferred tax liability of P150,000
B. Credit to Deferred tax liability of P150,000
C. Debit to Deferred tax asset of P150,000
D. Credit to Deferred tax liability of P330,000
2. Assume that at the end of 2013, the accumulated temporary tax liability difference related to future years is
P550,000. What journal entry should be made to adjust the deferred tax liability at the end of 2013?
A. Income Tax expense 165,000
Deferred tax liability 165,000
B. Deferred tax asset 15,000
Income tax benefit 15,000
C. Deferred tax liability 15,000
Income tax expense 15,000
D. Deferred tax liability 15,000
Deferred tax asset 15,000
PROBLEM 32:
At December 31, 2011, GALILEE CORPORATION had a temporary difference (related to depreciation) and
reported a related deferred tax liability of P60,000 on its statement of financial position. At December 31, 2012,
Galilee has four temporary differences. An analysis of these reveals the following:
Temporary Difference Future Taxable (Deductible) Amounts
2013 2013 Later Year

a. Use of straight-line depreciation for accounting
purposes and accelerated depreciation for tax
purposes P160,000 P220,000 P760,000
b. Rent collected in advance; recognized when earned

for accounting purposes and when received for tax
purposes (380,000) --
c. Various expenses accrued when incurred for

accounting purposes; recognized for tax purposes

when paid (90,000) -- --
d. Recognition of gain on installment sales during the

period of sale of accounting purposes and during the
period of collection for tax purposes 276,000 210,000 --
(P34,000) P430,000 P760,000
Assume that the company has income taxes of P435,000 due per the tax return for 2012. The installment
receivable collectible in 2014 is classified as noncurrent. The enacted tax rate is 30% for all periods.
1. What amount of deferred tax asset should be shown on Galilee’s statement of financial position at December
31, 2012?
A. P114,000 C. P141,000
B. P514,800 D. P27,000
2. What amount of deferred tax liability should be shown on Galilee’s statement of financial position at
December 31, 2012?
A. P342,000 C. P141,000
B. P456,000 D. P487,800
3. How much is Galilee’s pretax accounting income for 2012?
A. P1,563,900 C. P1,450,000
B. P2,406,000 D. P2,606,000
4. How much is Galilee’s net income for 2012?
A. P1,971,000 C. P2,406,000
B. P1,684,200 D. P1,450,000
PROBLEM 33:
The following data pertain to the CARROLL COMPANY.
a. At December 31, 2012, the company has a P900,000 liability reported for estimated litigation claims. This
P900,000 balance represents amounts that have been charged to income but are not tax deductible until
they are paid. The company expects to pay the claims and thus have tax-deductible amounts in the future
in the following manner:
Year Payments
2015 P150,000
2016 690,000
2017 60,000
P900,000
b. The company uses different depreciation methods for financial reporting and tax purposes. Consequently,
at December 31, 22012, the company has a cumulative temporary difference due to depreciable property
of P2,400,000. This P2,400,000 cumulative temporary difference is to result in taxable amounts in future
years in the following manner:
Year Payments
2013 P480,000
2014 480,000
2015 480,000
2016 480,000
2017 480,000
P 2,400,000
c. The income tax rate is 30%.

d. Taxable income for 2012 is P2,400,000. The company expects to report taxable income for the nest five
years.
e. No temporary differences existed at the end of 2011.
1. The deferred tax liability to be reported in Carroll’s statement of financial position at December 31, 2012, is
A. P720,000 C. P450,000
B. P480,000 D. P270,000
2. The deferred tax asset to be reported in Carroll’s statement of financial position at December 31, 2012, is
A. P270,000 C. P450,000
B. P150,000 D. P720,000
3. The amount of current income tax payable to be reported in Carroll’s statement of financial position at
December 31, 2012, is
A. P630,000 C. P540,000
B. P546,000 D. P720,000
4. Carroll’s pretax accounting income for 2012 is
A. P3,900,000 C. P2,874,000
B. P900,000 D. P2,400,000
5. Carroll’s net income for 2012 is
A. P2,730,000 C. P1,230,000
B. P3,630,000 D. P4,350,000
PROBLEM 34:
KAMPESCA, INC., in its first year of operations, has the following differences between the carrying value and tax
base of its assets and liabilities at the end of 2012:
Carrying Value Tax Base
Equipment (net) P800,000 P680,000
Estimated warranty liability 400,000 0
Kampesca estimates that the warranty liability will be settled in 2013.
The difference in equipment (net) will result in taxable amounts as shown below:
Year Amounts
2013 P40,000
2014 60,000
2015 20,000
The company has taxable income of P1,040,000 for 2012. He income tax rate is 30%.
1. What amount of deferred tax liability should be reported in Kampesca’s statement of financial position at
December 31, 2012?
A. P36,000 C. P24,000
B. P30,000 D. P84,000
2. What amount of deferred tax asset should be reported in Kampesca’s statement of financial position at
December 31, 2012?
A. P156,000 C. P120,000
B. P0 D. P84,000
3. What is the amount of income tax payable (current) to be reported in Kampesca’s statement of financial
position at December 31, 2012?
A. P228,000 C. P312,000
B. P396,000 D. P156,000
4. What is the total income tax expense for 2012?
A. P228,000 C. P192,000
B. P396,000 D. P348,000
PROBLEM 35:
On December 31, 2011, LEMAN CO. signs a 10-year noncancelable lease agreement to lease a storage building
from Storage Company. The following information pertains to this lease agreement:
a. The agreement requires rental payments of P720,000 beginning on December 31, 2011.
b. The fair value of the building on December 31, 2011, is P4,400,000
c. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Leman depreciates similar buildings on the straight-line method.
d. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
e. The lessor’s implicit rate, known to Leman Co., is 12% per year.
f. The yearly rental payment includes P24,705 of executory costs related to taxes on the property.
The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 1 5.65022
Present value of 1 0.32197
1. What amount should be capitalized as the cost of the leased storage buildings?
A. P4,556,340 C. P4,432,197
B. P4,400,000 D. P0
2. What amount should be included in the current liabilities section of Leman’s statement position at December
31, 2012?
A. P720,000 C. P695,295
B. P414,477 D. P280,818
3. What amount should be included in the noncurrent liabilities section of Leman’s statement of financial
position at December 31, 2012?
A. P3,453,975 C. P5,562,360
B. P3,173,157 D. P0
4. What is the total lease-related expenses to be reported in Leman’s income statement for the year ended
December 31, 2012?
A. P909,270 C. P1,160,000
B. P879,182 D. P464,705
PROBLEM 36:
JUMBO COMPANY enters into a lease agreement with Lessor Co. on July 1, 2012, to lease a machine to be used in
its manufacturing operations.
The following data pertain to this agreement:

a. The term of the noncancelable lease is 3 years, with no renewal option and no residual value at the end
of the lease term. Payments of P212,024 are due on July 1 of each year, beginning July 1, 2012.
b. The fair value of the machine on July 1, 2012, is P620,000. The machine has a remaining economic life of
5 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
c. Jumbo Company elects to depreciate the machine on the straight-line method.
d. Jumbo Company’s incremental borrowing rate is 10% per year, and it has no knowledge of the implicit
rate computed by the lessor.
e. The present value factor of an ordinary annuity of 1 for 3 periods at 10% per year is 2.48685. the
present value factor of an annuity due of 1 for 3 periods at 10% is 2.73554.
How much lease liability should be recognized by Jumbo at the beginning of the lease contract?
A. P0 C. P580,000
B. P527,272 D. P636,072

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Cordillera Career Development College

COLLEGE OF BUSINESS EDUCATION AND ADMINISTRATION

Accounts payable P 680,000

1. The amount of purchase discounts lost to be recognized is

1. Determine the amount of Ana Rosa’s bonus.

Consumer expiration date December 31. 2012

Containers held by customer at December 31,

1. What amount of warranty expense would be charged against 2012 revenue?

Inventory of premium CD players P 399,500

1. What is the equipment’s book value on December 31, 2014?

1. What is the cost of the machine purchased on December 31, 2012?

3. What is the carrying value of the note at December 31, 2014?

1. Prepare adjusting journal entries at December 31, 2012.

Item Entry Voucher

Accrued liabilities as of December 31, 2012, were as follows:

Accrued payroll P48,000

Current assets P 750,000

1. Compute the following:

What potion of Kiss Company’s debt should be reported as a noncurrent liability?

12.31.20 55,000 58,985 4,470 495,530

1. The bonds were issued at

Due Date Amount Due

Warranty claims honored on 2010 – 2011 sales P 180,000

b. PAYROLL RELATED ITEMS

Par value P 5.00 per share

Market values of ordinary shares:

15%, 10-year, Bonds Payable, dated January 1, 2011

Cash proceeds from issue on January 1, 2011 of 1,000, P1,000

Bond Interest Expense

Accrued Interest on Bonds

Based on the preceding information, determine the following:

What is the amount of loss to be recognized on the retirement of bonds?

1. The liability component of the convertible debt is

Temporary Difference Future Taxable (Deductible) Amounts

2013 2013 Later Year

b. Rent collected in advance; recognized when earned

c. Various expenses accrued when incurred for

accounting purposes; recognized for tax purposes

d. Recognition of gain on installment sales during the

c. The income tax rate is 30%.

Kampesca estimates that the warranty liability will be settled in 2013.

Present value of 1 0.32197

The following data pertain to this agreement:

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