Master Intermediate Accounting 2: Midterm Exam Test Questions
School
University of Phoenix**We aren't endorsed by this school
Course
ACC 2
Subject
Accounting
Date
Dec 11, 2024
Pages
85
Uploaded by ChiefKoalaMaster917
Intermediate Accounting 2BS Accountancy (Urdaneta City University)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityIntermediate Accounting 2BS Accountancy (Urdaneta City University)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
INTERMEDIATE ACCOUNTING 2MIDTERM EXAMTEST QUESTIONSInstruction: Place your answer on the Google Form provided to you. PROBLEM 1On January 1, 2019, Tony Company issued 1,000, P1,000, 10%, 3-year bonds at P951,963. Principal isdue on December 31, 2021 but interests are due annually every year-end. In addition, Tony incurredbond issue costs of P44,829. The effective interest rate is 12% before adjustment for bond issue costsand 14% after adjustment for bond issue costs.Required:a)What is the initial carrying amount of the bonds payable? 907,134b)How much is the interest expense for the year ended December 31, 2019? 126,999c)What is the carrying amount of the bonds payable as of December 31, 2019? 934,133PROBLEM 2Mimi Corporation issued 12%, 3-year, P1,000,000 bonds dated January 1, 2019 on April 1, 2019.Principal is due at maturity but interest is due annually at each year-end. The current market rate is10%.Required:a)What is the initial carrying amount of the bonds payable? 1,045,728b)How much is the interest expense for the year ended December 31, 2019? 78,448c)What is the carrying amount of the bonds payable as of December 31, 2019? 1,034,419PROBLEM 3On January 1, 2019, Clown Company issued 10%, P3,000,000 bonds. Principal on the bonds matures inthree equal annual instalments. Interest is also due annually at each year-end. The effective interestrate on the bonds is 12%.Required:a)What is the initial carrying amount of the bonds payable? 2,900,390b)How much is the interest expense for the year ended December 31, 2019? 348,047c)What is the carrying amount of the bonds payable as of December 31, 2019? 1,948,437PROBLEM 4On January 1, 2017, Joker Inc., issued 5-year, 12%, P1,000,000 bonds for P1,075,816. Principal is due atmaturity but interests are due annually every December 31. The effective interest rate is 10%. On July1, 2019, Joker called in half of the bonds and retired them at 102. The retirement price includespayment for accrued interest.Required:Compute for the gain on retirement of bonds. 82,225Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
PROBLEM 5On January 1, 2019, Alexa Company issued new bonds with a face amount of P10,000,000 forP10,800,000. Alexa used the proceeds to retire an existing 10-year, 12%, P8,000,000 bonds issued fiveyears earlier. The bonds have an unamortized discount of P340,000 on January 1, 2019. Alexa retiredthe entire outstanding bonds at a call premium of P400,000. Cost incurred that are directlyattributable to the retirement amounted to P50,000. Required: Compute for the loss on the retirement of the bonds to be recognized in 2019. 690,000PROBLEM 6On January 1, 2018, Crybaby Company issued 3-year, 12%, P1,000,000 bonds for P1,100,000. EachP1,000 bond has two detachable warrants entitling the holder to purchase one share of Crybaby withpar value of P500 for P520. Without the warrants, the bonds are selling at a yield to maturity rate of10%.On September 21, 2019, half of the warrants were exercised.Required: Compute for the following:a)Net increase in shareholders’ equity as a result of the issuance of bonds. 50,272b)Net increase in shareholders’ equity as a result of the exercise of share warrants. 520,000PROBLEM 7On January 1, 2019, One Mo Gen Inc. issued its 10%, 3-year, P1,000,000 convertible bonds for the faceamount of P1,000,000. Each P1,000 bonds is convertible into 8 shares with par value of P100 per share.When the bonds were issued, they were selling at 98 without the conversion option. One Mo Genincurred P25,000 transaction costs on the issue of the bonds.Required: Compute for the increase in shareholders’ equity as a result of the issuance of convertiblebonds. 19,500PROBLEM 8On January 1, 2018, Caution Company issued its 10%, 3-year, P1,000,000 convertible bonds at 105.Each P1,000 bond is convertible into 8 shares with par value per share of P100. Principal is due onDecember 31, 2020 but interests are due annually every December 31. When the bonds were issued,they were selling at a yield to maturity market rate of 12% without the conversion option.On July 1, 2019, all of the bonds were converted into shares. Conversion costs incurred amounted toP10,000.Required: Compute for the following:a)Net increase in the shareholders’ equity as a result of the conversion. 948,245b)Net increase in Share Premium as a result of the conversion. 148,245c)Net increase in Share Premium general account as a result of the conversion. 246,265Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
PROBLEM 9On December 31, 2019, the bookkeeper of Grand Company provided the following information:Accounts payable, including deposits and advances from customers of P500,000P2,500,000Note payable, including note payable to bank due on December 31, 2022 for P1,000,0003,000,000Share dividends payable800,000Customers’ credit balances400,000Serial bonds, payable in semi-annual instalments of P1,000,00010,000,000Accrued interest on bonds payable300,000Contested BIR tax assessment-possible obligation600,000Unearned rent income100,000Deferred revenue20,000Held for trading financial liabilities50,000Advances from affiliates payable in 15 months after year-end23,000Dividends payable12,000Deferred tax liability-to be reversed in 202027,000Required:In the December 31, 2019 statement of financial position, how much current liabilitiesshould be reported? 7,362,000PROBLEM 10Tangy Candy Company offers a coffee mug as a premium for every ten candy bar wrappers presentedby customers together with P30.00. The purchase price of each mug to the company is P40.00; inaddition it costs P10.00 to mail each mug. The results of the premium plan for the years 2018 and2019 are as follows (assume all purchases and sales are for cash):20182019Coffee mugs purchased720,000800,000Candy bars sold6,000,0006,125,000Wrappers redeemed2,800,0004,200,0002018 wrappers expected to be redeemed in 20192,000,0002019 wrappers expected to be redeemed in 20202,700,000Required:a)What is the premium expense for 2018? 9,600,000b)What is the estimated premium liability on December 31, 2018? 4,000,000c)What is the premium expense for 2019? 9,800,000d)What is the estimated liability on December 31, 2019? 5,400,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Chapter 27Employee Benefits Part 1QUIZ 1:1.It refers to a plan where plan assets, if any, are retained and managed by the employer.a. Funded planc. Unfunded planb. Non-contributory pland. Delicate plan2.These are pool of assets contributed by various unrelated employers to be used to pay retrementbenefts to partcipants without regard to the identty of the contributng employers.a. Mult-employer plans c. Pooling of assets plan b. State plansd. Secret plan3.Mult-employer plans are treated as a. Defned contributon plan c. Hybrid planb. Defned beneft pland. a or b4.These are established by legislaton and are operated by a government agency which is not subjectto control or infuence by the reportng entty. a. State plansb. SSSc. GSISd. Puro plan5.State plans are a.accounted for as defned contributon plan b.accounted for as defned beneft planc.accounted for in the same way as mult-employer plansd.accounted for only by the Commission on Audit6.The accountng for defned contributon plan a.is straightorward – actuarial computatons are not required. b.is complex – actuarial computatons are requiredc.is simple – not accounted ford.is done only by CPAs7.Under a defned contributon plan, the retrement benefts expense isa.equal to an actuarially determined amountb.equal to the agreed periodic contributon to the fundc.equal to the contributon made during the periodd.zero, if no employee retred during the periodDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
8.Employee benefts are all forms of consideraton given by an entty in exchange for service renderedby employees. Which of the following employee benefts is not within the scope of PAS 19?a. Short-term d. Terminaton b. Post-employment e. Share-based paymentsc. Other long-term 9.Which of the following employee benefts is not within the scope of PAS 19?a.Semi-monthly salaries of employeesb.Employer’s share in SSS contributonsc.One sack rice allowanced.Bonus in the form the entty’s shares10.Accumulatng compensated absences are those that a.can be carried over to the next period if not fully used during the year of enttlement. b.expire if not fully used during the year of enttlement. c.can be carried over to the next period if not fully used during the year of enttlement and arepaid in cash when the employee leaves the companyd.are recognized only when actually taken by employees"…Have I not commanded you? Be strong and courageous. Do not be frightened, and do not be dismayed, for the Lord your God is with you wherever you go."(Joshua 1:9)ANSWERS TO QUIZ 1:1.C6.A2.A7.B3.D8.E4.A9.D5.C10.AQUIZ 2:1.The last payday for a frm was December 27 on which it paid ₱40,000 to its employees, the amountearned by employees through the pay period ending December 16. For the period December 17through December 31, the employees earned ₱12,000.The adjustng entry required at December 31would include:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.cr. crash ₱12,000b.dr. wages payable ₱12,000c.dr. wages expense ₱12,000d.dr. wages expense ₱40,0002.Gavin Co. grants all employees two weeks of paid vacaton for each full year of employment. Unusedvacaton tme can be accumulated and carried forward to succeeding years and will be paid at thesalaries in efect when vacatons are taken or when employment is terminated. There was noemployee turnover in 20X6. Additonal informaton relatng to the year ended December 31, 20X6, isas follows:Liability for accumulated vacatons at 12/31/X5 ₱35,000Pre-20X6 accrued vacatons taken from 1/1/X6 to 9/30/X6 (the authorized period for vacatons) 20,000Vacatons earned for work in 20X6 (adjusted to current rates) 30,000Gavin granted a 10% salary increase to all employees on October 1, 20X6, its annual salary increase date.For the year ended December 31, 20X6, Gavin should report vacaton pay expense ofa. 45,000b. 33,500c. 31,500d. 30,0003.ANOMALOUS IRREGULAR Co. grants its employees twelve days paid vacaton leave each year. PerANOMALOUS’s policy, employees are required to take vacaton leave each year, but not necessarilyfor their entre vacaton leave enttlement. Vacaton leaves not taken during a year can be carriedover indefnitely.ADHERE has 500 employees with an average salary of ₱4,000 per day. The average annual pay increase is 5%. During 20x1, total vacaton leaves taken by employees were 5,400 days. Based on past experience,90% of unused vacaton leave for a year are taken in the immediately following year.If unused vacaton leaves vest, how much should ANOMALOUS accrue as liability for unused vacaton leave on December 31, 20x1?a. 2,520,000b. 25,200,000c. 2,268,000 d. 0Use the following informaton for the next four questons:ADHERE TO STICK Co. grants its managerial employees bonus in the form of proft sharing. Informaton on operatons in 20x1 is shown below: Proft before tax₱4,000,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Bonus rate or percentage10%Income tax rate30%4.How much is the bonus “before bonus and before tax?”a. 363,636b. 280,000c. 400,000d. 288,660 5.How much is the bonus “afer bonus and before tax?”a. 400,000 b. 363,636c. 261,684d. 245,7986.How much is the bonus “before bonus and afer tax?”a. 363,636b. 261,684c. 245,798d. 288,660 7.How much is the bonus “afer bonus and afer tax?”a. 363,636b. 261,682c. 245,798d. 288,660 8.ARTIFACT MAN MADE OBJECT Co. provides an incentve compensaton plan under which itspresident receives a bonus equal to 10% of ARTIFACT’s proft before tax but afer deducton of thebonus. ARTIFACT’s proft afer tax and afer bonus for the year is ₱2,545,456. Income tax rate is 30%.How much is the bonus?a. 245,798b. 261,684c. 363,636d. 288,660 Use the following informaton for the next two questons:AMNESTY PARDON Co. has a post-employment benefts plan that is considered as defned contributon plan. According to the plan, AMNESTY agrees to contribute ₱800,000 annually to a retrement fund for the beneft of its employees.On December 31, 20x1, because of poor results of operatons and insufcient working capital, AMNESTY was only able to contribute ₱320,000 to the fund. On December 31, 20x2, because of a proftable year, AMNESTY decided to contribute ₱1,800,000 to the retrement fund. On January 12, 20x3, an employee retred and was eligible to a ₱60,000 retrement benefts based on the operatng efciency and investment earnings of the fund. 9.How much is the retrement benefts expense recognized in 20x2?a. 800,000b. 320,000c. 1,800,000d. 60,000 10.How much is the retrement benefts expense recognized in 20x3?a. 800,000b. 320,000c. 1,800,000d. 60,000 “A wise son heeds his father’s instruction, but a mocker does not respond to rebukes.” -(Proverbs 13:1)- END -Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
SOLUTIONS TO QUIZ 2:1.C2.CSolution:Liability for accumulated vacations at 12/31/X5 35,000Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6 (20,000)Liability to be carried over to the next period15,000Multiply by: Increase in salary level in Oct. 20x610%Additional liability due to the increase in salary level1,500Vacations earned in 20X6 (adjusted to current rates) 30,000Vacation pay expense in 20x6 31,5003.ASolution:Total vacation leaves entitlement of employees in 20x1 (500 employees x 12 days each)6,000Vacation leaves taken in 20x1(5,400)Unused vacation leave carried over indefinitely600Multiply by: Expected pay rate in 20x2 (4,000 x 105%₱*)4,200Liability for unused vacation leaves2,520,000*100% + Average annual pay increase is 5%.4.CSoluton:B = P x BrB = 4,000,000 x 10%B = 400,0005.BSoluton:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
B=P-P1 + BrB=4,000,000-4,000,0001 + 10%B=4,000,000-3,636,364B = 363,6366.DSoluton:B=Px1 - Tr1/Br - TrB=4,000,000x1 - 30%1/10% - 30%B=4,000,000x70%10 - 30%B=4,000,000x70%9.7B = 288,6607.BSoluton:B=PX1 – Tr1/Br - Tr + 1B=4,000,000x70%10 - 30% + 1B=4,000,000x70%10.7B = 261,682Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
8.CSoluton:Squeeze upwardsProft before bonus and before tax 4,000,000 Bonus before tax but afer bonus (3,636,366 x 10%) (363,636)Proft before tax but afer bonus (2,545,456 ÷ 70%) 3,636,366 Income tax(2,545,456 ÷ 70%) x 30% (1,090,909)Proft afer tax and afer bonus 2,545,456 Start9.A 10. AChapter 28Employee Benefits Part 2QUIZ 1:1.Which of the following components should be included in the calculaton of net defned beneft costrecognized for a period by an employer sponsoring a defned beneft pension plan?Actual ReturnAmortzaton ofon Plan Assets,Unrecognized PriorInterestIf AnyService cost, If AnyCosta.No NoYesb.Yes No Yesc.Yes Yes Nod.Yes Yes Yes2.Which of the following concepts for postretrement beneft plans is comparable to the projected unitcredit method of pension plans?a.Accrued beneft method pro-rated on serviceDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b.Expected Postretrement Beneft Obligaton (EPBO)c.Actual return on plan assetsd.Expected return on plan assets3.Which of the following statements is incorrect?a.Minimum (corridor) amortzaton of net unrecognized gain or loss is allowed for postretrementbeneft plans.b.Gains and losses on setlement of defned beneft retrement plans are recognized immediately.c.Actuarial gains and losses are recognized immediately.d.Past service costs are recognized immediately.4.The interest cost component of the net defned beneft cost is determined usinga.the setlement rate of interest.b.the rate of return on high quality corporate bondsc.both a and b.d.neither a or b.5.Financial reportng standards for pension currently in efecta.allow both the accrued beneft and projected beneft methods.b.allow only the accrued beneft method/ projected unit credit method.c.allow only the projected beneft method.d.do not allow either the accrued beneft or projected beneft methods.6.Which of the following is notcorrect?a.PAS 19 does not include any provisions for the recogniton of an additonal minimum liability.b.PAS 19 does not allow for the recogniton of a net pension asset equal to the computed surplusin some circumstances.c.PAS 19 requires the 10% corridor amount in calculatng the amortzaton of deferred gains andlosses.d.PAS 19 requires setlement gains and losses to be recognized immediately as part ofcomprehensive income.7.These are changes in the present value of the defned beneft obligaton resultng from experienceadjustments and the efects of changes in actuarial assumptons.a. Past service costc. Setlement gains and lossesb. Actuarial gains and lossesd. Interest cost8.All of the following are demographic assumptons except:a.future medical costsb.mortality, both during and afer employmentc.rates of employee turnover, disability and early retrementd.claim rates under medical plans9.According to PAS 19, which of the following is not a fnancial assumpton?a.the discount rate b.future salary and beneft levels c.the expected rate of return on plan assets Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
d.the proporton of plan members with dependents who will be eligible for benefts 10. According to PAS 19, the rate used to discount post-employment beneft obligatons shall bedetermined by reference to market yields at the end of the reportng period on a. risk-free ratec. current bank rateb. high quality corporate bonds d. efectve interest rateANSWERS TO QUIZ 1:1.A6.C2.A7.B3.A8.A4.B9.D5.B10.BQUIZ 2:1.The following informaton relates to the defned beneft pension plan of the McDonald Company forthe year ending December 31, 2002:PV of defned beneft obligaton, January 1₱4,600,000PV of defned obligaton, December 314,729,000Fair value of plan assets, January 1 5,035,000Fair value of plan assets, December 315,565,000Interest income on plan assets 450,000Actuarial loss 32,500Employer contributons 425,000Benefts paid to retrees 390,000Discount rate 10%The net amount of remeasurement of the net defned beneft liability (asset) included in the defned beneft cost for 2002 would beDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a. 77,500.b. 47,500.c. 32,500.d. 12,500.2.Flash Inc. has a defned beneft plan for its employees. The following informaton relates to this plan:Present value of defned beneft obligaton, January 1, 200210,000,000Fair value of plan assets, January 1, 2002 10,400,000Service cost - 2002 800,000Actual return on plan assets - 2002 900,000Discount rate based on high quality corporate bonds 10%Expected rate of return on assets 8%An actuarial loss of ₱20,000 was incurred during 2002. There was no unrecognized prior service cost or unrecognized gains or losses. Flash's defned beneft cost for the year wasa. 880,000.b. 920,000.c. 640,000.d. 988,000.3.Informaton on EQUANIMITY COMPOSURE Co.’s defned beneft plan is shown below:PV of defned beneft obligaton, Jan. 1₱480,000PV of defned beneft obligaton, Dec. 31488,000Interest cost10%Benefts paid to retrees200,000Increase in present value of defned beneft obligaton during the year due to changes in actuarial assumptons40,000How much is the current service cost?a. 120,000b. 200,000c. 160,000d. 220,000Use the following informaton for the next two questons:PELLUCID CLEAR Co. agrees to provide lump-sumretrement benefts to employees equal to 6% of fnal salary for each year of service. Informaton on an employee is shown below:Average annual salary level on January 1, 20x1₱12,000,000Average annual salary increase startng January 1, 20x2 and every year thereafer.3%Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Average service lives before enttlement to retrement benefts (January 1, 20x1 to December 31, 20x5)5 yearsDiscount rate per year10%4.How much is the current service cost in 20x2?a. 553,492b. 669,724c. 618,724d. 608,8405.How much is the present value of the defned beneft obligaton on December 31, 20x2?a. 1,298,437 b. 1,217,680c. 1,085,710d. 1,908,117“And we know that in all things God works for the good of those who love him, who have been called according to his purpose.”– (Romans 8:28)- END –SOLUTIONS TO QUIZ 2:1.DSolution:Remeasurements of the net defined benefit liability (asset): (a) Actuarial (gain) loss 32,500(b) Difference between interest income on plan assets and return on plan assets(450,000 - 495,000) (45,000)(c) Difference between the interest on the effect of the asset ceiling and the change in the effect of the asset ceiling -Defined benefit cost recognized in OCI12,500Fair value of plan assetsJan. 15,035,000 Return on plan assets495,000 390,000 Benefits paidContributions to the fund425,000 5,565,000 Dec. 312.CSolution:Service cost800,000Interest cost on the defined benefit obligation (10M x 10%)1,000,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Interest income on plan assets (10.4M x 10%) (1,040,000)Actuarial (gains) and losses 20,000Difference between interest income on plan assets andreturn on plan assets (140,000)Defined benefit cost640,0003.ASoluton:PV of defned beneft obligaton480,000Jan. 1Benefts paid200,000120,000Current service cost(squeeze)48,000Interest cost (480,000 x 10%)40,000Actuarial loss - increase in PV of PBODec. 31488,0004.DSoluton:Final salary level (12M x 103% x 103% x 103% x 103%)13,506,106Multply by: Percentage of beneft per year6%Beneft per year of service810,366Multply by: No. of service years5 Lump sum retrement beneft4,051,832 (13,506,106 x 6%) = 810,366 beneft enttlement per year;(810,366 x PV of 1 @10%, n=3) = 608,840 current service cost in 20x2*(n=3 is from December 31, 20x2 to December 31, 20x5) 5.BSoluton:(13,506,106 x 6%) = 810,366 beneft enttlement per year;(810,366 x 2 years passed x PV of 1 @10%, n=3) = 1,217,680Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Chapter 29Leases Part 1QUIZ:1.Entty A (customer) enters into a contract with Entty B (supplier) for the use of a data processingequipment. According to the contract, Entty A shall operate the equipment only in accordance withthe standard operatng procedures stated in the accompanying user’s manual. In assessing theexistence of a lease, does Entty A have the right to direct the use of the asset?a.No, because the asset’s use is restricted.b.Yes, because Entty A has the right to direct how and for what purpose the asset is used.c.Yes, because the asset’s use is predetermined and Entty B is precluded from changing thatpredetermined use.d.Maybe yes, maybe no, but exactly I don’t know.2.Which of the following is not one of the criteria when determining whether a contract is or containsa lease?a.Identfed assetb.Identfed liabilityc.Right to obtain substantally all of the economic benefts from use of an identfed assetthroughout the period of used.Right to direct the use of the identfed asset throughout the period of use3.Which of the following statements is correct regarding the accountng for leases?a.The lessor depreciates the leased asset under a fnance lease.b.The lessee depreciates the leased asset under a “short-term” or a “low-valued asset” lease.c.When discountng lease payments the lessor and the lessee use the interest rate implicit in thelease.d.An entty can never be both a lessor and a lessee of a same leased asset.4.According to PFRS 16, lease liabilites are presented in the lessee’s statement of fnancial positona.separately from the other liabilites of the lessee.b.together with other liabilites, with disclosure of the line items that include the lease liabilites.c.a or bd.not presented in the lessee’s fnancial statements but only in the lessor’s fnancial statements5.According to PFRS 16, right-of-use assets are presented in the lessee’s statement of fnancial positona.separately from the other assets of the lessee.b.together with other assets as if they were owned, with disclosure of the line items that includethe right-of-use assets.c.a or bDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
d.not presented in the lessee’s fnancial statements but only in the lessor’s fnancial statements6.On January 2, 20x9, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Norirecognized a lease liability of ₱240,000 at the commencement date. This amount includes the₱10,000 exercise price of a purchase opton. At the end of the lease, Nori expects to exercise thepurchase opton. Nori estmates that the equipment's fair value will be ₱20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciaton on similar equipment. For the year endedDecember 31, 20x9, what amount should Nori recognize as depreciaton expense on the leasedasset?a. 48,000b. 46,000c. 30,000d. 27,5007.In the long-term liabilites secton of its balance sheet at December 31, 20x9, Mene Co. reported alease liability of ₱75,000, net of current porton of ₱1,364. Payments of ₱9,000 were made on bothJanuary 2, 2x10, and January 2, 2x11. Mene's incremental borrowing rate on the date of the leasewas 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31,2x10, balance sheet, what amount should Mene report as lease liability, net of current porton?a. 66,000b. 73,500c. 73,636d. 74,2508.Oak Co. leased equipment for its entre nine-year useful life, agreeing to pay ₱50,000 at the start ofthe lease term on December 31, 20x8, and ₱50,000 annually on each December 31 for the nexteight years. The present value on December 31, 20x8, of the nine lease payments over the leaseterm, using the rate implicit in the lease which Oak knows to be 10%, was ₱316,500. The December31, 20x8, present value of the lease payments using Oak's incremental borrowing rate of 12% was₱298,500. Oak made a tmely second lease payment. What amount should Oak report as leaseliability in its December 31, 20x9, balance sheet?a. 350,000b. 243,150c. 228,320d. 09.On January 2, 20x5, Marx Co. as lessee signed a fve-year noncancelable equipment lease withannual payments of ₱200,000 beginning December 31, 20x5. The fve lease payments have apresent value of ₱758,000 at January 2, 20x5, based on interest of 10%. What amount should Marxreport as interest expense for the year ended December 31, 20x5?a. 0b. 48,000c. 55,800d. 75,80010. On January 1, 20x1, ABC Co. enters into a 4-year lease of ofce equipment. The rent in 20x1 is₱10,000 and shall increase by 10% annually startng on January 1, 20x2. Rentals are payable at theend of each year. ABC Co. pays the lessor a lease bonus of ₱5,000 on January 1, 20x1. ABC Co. optsto use the practcal expedient allowed under PFRS 16 for leases of low value assets. How much is thelease expense in 20x1?a. 10,000b. 11,000c. 11,603d. 12,853Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
"I have set the Lord continually before me. Because He is at my right hand, I will notbe shaken."– (Psalm 16:8)SOLUTIONS:1.C2.B3.C - choice (d) is incorrect. Under a sublease, the lessee is also the lessor of the same leased asset.4.C5.C6.DSolution:Cost 240,000Residual value (fair value) (20,000)Depreciable amount 220,000Useful life 8Depreciation expense 27,5007.BSolution:First step:Place the given information on the amortization table.DatePaymentsInt. expenseAmortizationPresent value12/31/x9 1/1/x10 9,00075,000Second step: “Squeeze” for the requirement.Date Payments Int. expense Amortization Present value 12/31/x9 1/1/x10 9,00075,0001/1/x11 9,0007,500 a1,50073,500a(75,000 x 10%)This is the lease obligaton as of Dec. 31, 20x9, net of current porton.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
8.BSolution:Date Payments Int. expense Amortization Present value 12/31/x8 316,50012/31/x8 50,000-50,000266,50012/31/x9 50,00026,65023,350243,1509.D (758,000 x 10%) = 75,80010.D Solution:20x110,000 20x2 (10K x 110%)11,000 20x3 (11K x 110%)12,100 20x4 (12.1K x 110%)13,310 Lease bonus5,000 Total51,410 Divide by:4 Annual lease expense12,853 Chapter 30Leases Part 2QUIZ 1:1.Lessor Co. entered into two contract leases. Lease #1 transfers substantally all the risks and rewardsincidental to ownership of the leased asset. Lease #2 does not transfer substantally all the risks andrewards incidental to ownership of the leased asset. How should Lessor Co. classify the leases?(Lease #1); (Lease #2)a.Finance, Operatngc. Finance, Financeb. Operatng, Financed. Operatng, Operatng2.A lessor’s gross investment in a fnance lease is computed asa.lease payments plus unguaranteed residual valueb.present value of (a)Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
c.diference between (a) and (b)d.sum of (a) and (b)3.A lessor’s unearned interest income in a fnance lease is computed asa.lease payments plus unguaranteed residual valueb.present value of (a)c.diference between (a) and (b)d.sum of (a) and (b)4.Which of the following does not correctly relate to the accountng for leases?a.The underlying asset in a lease contract is recognized by the lessee in its fnancial statements.b.The lessor recognizes a fnance lease receivable equal to the net investment in a fnance lease.c.A manufacturer or dealer lessor recognizes gross proft or loss on commencement of a fnancelease in accordance with its policy for outright sales.d.The lessor recognizes lease payments receivable from an operatng lease as income in the periodearned. e.The lessor contnues to recognize an asset subject to a fnance lease in its fnancial statements.5.Regarding the accountng for the residual value of a leased asset, which of the following statementsis incorrect?a.A lessee accounts for a residual value only if it is guaranteed. b.A lessor accounts for a residual value only if it is guaranteed. c.A lessor accounts for a residual value whether guaranteed or not. d.Both lessee and lessor will account for a residual value only if the leased asset reverts back tothe lessor.6.Under operatng leases, lessors a.recognize rent income using a straight line basis, unless another method is more appropriate. b.recognize interest income using the efectve interest method. c.recognize diferent amounts of rent income each year depending on the contractual paymentsd.any of these7.Security deposits that are refundable a.are treated as unearned income by lessors under an operatng lease.b.are not discounted because they are normally of a short-term nature c.are treated as receivable by lessees and as payable by lessors.d.are discounted only by lessees but not by lessors8.If the lessor recognizes rent income (lease income), then the lease must have been classifed asa. fnance lease c. a or b b. operatng leased. none of these9.Which of the following statements is false regarding the accountng for leases?Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.The lessor may not use the straight line basis for recognizing lease income under an operatnglease if another systematc basis is more representatve of the patern in which beneft from theuse of the underlying asset is diminished.b.The amount of lease income recognized each year under an operatng lease is typically constanteven though the contractual payments increase every year by a certain amount specifed in thecontract. c.It is possible that the lessor does not depreciate the leased asset even if the lease is classifed asan operatng lease.d.Under an operatng lease, the lessor capitalizes inital direct costs. These costs will increase thelease income each year.10.Which of the following is correct regarding the accountng for operatng leases?a.A lessor under an operatng lease may classify the lease as either direct operatng lease or salestype operatng lease.b.A lessor includes a rent collected in advance as part of the cost of the leased asset.c.A lessor includes inital direct costs incurred on the operatng lease as part of the cost of theleased asset to be recognized in proft or loss on the same basis as rent income is recognized.d.A lessor includes inital direct costs incurred on the operatng lease as part of the cost of theleased asset to be recognized in proft or loss on the same basis as depreciaton expense isrecognized."Come to me, all you who are weary and burdened, and I will give you rest."- (Mathew 11:28-30)- END -QUIZ 2:Use the following informaton for the next fve questons:On January 1, 20x1, IMBROGLIO Co. leased equipment to COMPLICATION, Inc. Informaton on the lease is shown below:Cost of equipment₱1,200,000Useful life of equipment5 yearsLease term4 yearsAnnual rent payable at the startof each year400,000Interest rate implicit in the lease10%Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Inital direct costs amounted to ₱80,000. The lease qualifes for sales type leaseaccountng.1.How much is the gross investment in the lease on January 1, 20x1?a. 2,000,000b. 1,600,000d. 1,200,000d. 1,800,0002.How much is the net investment in the lease on January 1, 20x1?a. 1,200,000b. 1,280,000c. 1,394,740d. 1,474,7413.How much is the total interest income (fnance income) to be recognized by IMBROGLIO over the lease term?a. 205,260b. 235,260c. 125,259d. 525,2594.How much is the gross proft from the sale?a. 114,740b. 194,740c. 125,259d. 45,2595.How much is the net proft from the sale?a. 125,259b. 45,259c. 194,740d. 114,740Use the following informaton for the next three questons:On January 1, 20x1, YATAGHAN Financing Co. leased equipment to LONG KNIFE, Inc. Informaton on the lease is shown below:Cost of equipment₱1,322,588Useful life of equipment5 yearsLease term4 yearsAnnual rent payable at the endof each year400,000Interest rate implicit in the lease10%Residual value80,000The equipment will revert back to YATAGHAN at the end of the lease term. The lease is classifed as direct fnancing lease.6.Assuming the residual value is guaranteed, how much is the gross investment in the lease on January1, 20x1?a. 1,600,000b. 1,680,000c. 1,520,000d. 2,080,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
7.Assuming the residual value is unguaranteed, how much is the net investment in the lease?a. 1,322,588b. 1,267,948c. 1,213,308d. 1,345,9818.How much is the total interest income to be recognized by YATAGHAN over the lease term if theresidual value is unguaranteed and guaranteed, respectvely?UnguaranteedGuaranteeda. 357,412341,270b. 341,270357,412c. 341,753341,985d. 357,412357,4129.Wall Co. leased ofce premises to Fox, Inc. for a fve-year term beginning January 2, 20x9. Under theterms of the operatng lease, rent for the frst year is ₱8,000 and rent for years 2 through 5 is₱12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the frst sixmonths of the lease rent-free. In its December 31, 20x9, income statement, what amount shouldWall report as rental income?a. 12,000b. 11,600c. 10,800d. 8,00010.As an inducement to enter a lease, Arts, Inc., a lessor, grants Hompson Corp., a lessee, nine monthsof free rent under a fve-year operatng lease. The lease is efectve on July 1, 20x5, and provides formonthly rental of ₱1,000 to begin April 1, 20x6. In Art's income statement for the year ended June30, 20x6, rent income should be reported asa. 10,200b. 9,000c. 3,000d. 2,550“Rejoice always, pray continually, give thanks in all circumstances; for this is God’s will for you in Christ Jesus.” –(1 Thessalonians 5:16-18)- END -SOLUTIONS TO QUIZ 2:1.B (400,000 x 4 years) = 1,600,0002.C (400,000 x PV annuity due @10%, n=4) = 1,394,7413.A (1,600,000 – 1,394,741) = 205,2594.B (1,394,741 – 1,200,000 = 194,741Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
5.D (194,741 – 80,000 initial direct costs) = 114,7416.B (400,000 x 4) + 80,000 = 1,680,0007.A (400,000 x PV ordinary annuity @10%, n=4) + (80,000 X PV of 1 @10%, n=4) = (1,267,946 + 54,641)= 1,322,5878.D (1,680,000 - 1,322,587) = 357,4139.CSolution:Rent for the first year (8,000 x 6/12) 4,000 Rent for the subsequent years (12,500 x 4) 50,000 Total collection on rentals 54,000 Divide by: 5 Annual rent income 10,800 10.ASolution:Lease term in years 5 Multiply by: No. of months in a year 12 Lease term in months 60 Nine months free rent (9)Total 51 Multiply by: Monthly rental 1,000 Total rental payments on the lease 51,000 Divide by: Lease term in years 5 Annual rent income (July 1 to June 30) 10,200 Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Chapter 31Income TaxesQUIZ 1:1.All of the following can result in a temporary diference between pretax fnancial income and taxableincome exceptfora.payment of premiums for life insurance.b.depreciaton expense.c.provision for pending lawsuits.d.product warranty costs.(Adapted)2.Which of the following items results in a temporary diference deductble amount for a given year?a.Premiums on ofcer's life insurance (company is benefciary)b.Recogniton of unrealized gains on fnancial liabilites that are measured at fair value throughproft or loss.c.Vacaton pay accruald.Accelerated depreciaton for tax purposes; straight-line for fnancial reportng purposes(Adapted)3.Which of the following temporary diferences may result to a deferred tax liability?a.Accrued warranty costsb.Subscripton revenue received in advancec.Unrealized losses on held for trading securitesd.Depreciaton(Adapted)4.When enacted tax rates change, the asset and liability method of interperiod tax allocaton recognizes the rate change asa.a cumulatve efect adjustment.b.an adjustment to be neted against the current income tax expense.c.a separate charge to the current year's net income.d.a separate charge or beneft to income tax expense.(Adapted)5.Current fnancial reportng standards currently are moving toward thea.no-deferral approach.b.partal recogniton approach.c.comprehensive recogniton approach.d.discounted comprehensive recogniton approach.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
(Adapted)6.If all temporary diferences entering into the determinaton of pretax accountng income areconsidered in the computaton of deferred taxes and income tax expense, thena.the no-deferral approach is being applied.b.the comprehensive recogniton approach is being applied.c.the partal recogniton approach is being applied.d.the net-of-tax method is being applied.(Adapted)7.If there is a change in the tax rate applicable in future periods, which of the following statements isincorrect?a.Current tax expense may be equal to taxable proft multplied by the enacted tax rate(s)applicable to the period(s) where the proft was earned.b.Deferred tax asset or liability is computed based on the substantally enacted tax rate that isapplicable in the period where the deferred tax is expected to reverse.c.Income tax expense is equal to accountng proft multplied by the substantally enacted futuretax rate.d.Deferred tax expense (beneft) is equal to the net change in deferred tax asset and deferred taxliability during the year.8.Which of the following situatons would require interperiod income tax allocaton procedures?a.A temporary diference exists because the tax basis of capital equipment is less than its reportedamount in the fnancial statements.b.Proceeds from an insurance policy on capital equipment lost in a fre exceed the book value ofthe equipment.c.Last period's ending inventory was understated causing both net income and income taxexpense to be understated.d.Nontaxable interest payments are received on municipal bonds.(Adapted)9.The result of interperiod income tax allocaton is thata.wide fuctuatons in a company's tax liability payments are eliminated.b.tax expense shown in the income statement is equal to the deferred taxes shown on the balancesheet.c.tax liability shown in the balance sheet is equal to the deferred taxes shown on the previousyear's balance sheet plus the income tax expense shown on the income statement.d.tax expense shown on the income statement is equal to income taxes payable for the currentyear plus or minus the change in the deferred tax asset or liability balances for the year.(Adapted)10.Assuming no prior period adjustments, would the following allocatons afect net income?Interperiod Tax AllocatonIntraperiod Income Tax AllocatonDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.Yes Yesb.Yes Noc.No Yesd.No No(Adapted)“The roots of education are bitter, but the fruit is sweet.” – Aristotle- END -ANSWERS TO QUIZ 1:1.A6.B2.C7.C3.D8.A4.D9.D5.C10.BQUIZ 2:The next two items are based on the following:Bee Corp. prepared the following reconciliaton between book income and taxable income for the year ended December 31, 20x0:Pretax accountng income500,000Taxable income 300,000Diference 200,000Interest on municipal bonds 50,000Lower depreciaton per fnancial statements150,000Total diferences200,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Bee's efectve income tax rate for 20x0 is 30%. The depreciaton diference will reverse equally over the next three years at enacted tax rates as follows:Years Tax rates20x1 30%20x2 25%20x3 25%1.In Bee's 20x0 income statement, the current porton of its provision for income taxes should bea. 150,000b. 125,000c. 90,000d. 75,0002.In Bee's 20x0 fnancial statements, the deferred porton of its provision for income taxes should bea. 60,000b. 50,000c. 45,000d. 40,0003.In its December 31, 20x0 balance sheet, Quinn Co. reported a deferred tax asset of ₱9,000 and nodeferred tax liability. For 20x1, Quinn reported pretax fnancial statement income of ₱300,000.Temporary diferences of ₱100,000 resulted in taxable income of ₱200,000 for 20x1. At December31, 20x1, Quinn had cumulatve taxable diferences of ₱70,000. Quinn's efectve income tax rate is30%. In its December 31, 20x1, income statement, what should Quinn report as deferred income taxexpense?a. 12,000b. 21,000c. 30,000d. 60,0004.On its December 31, 20x1, balance sheet, Shin Co. had income taxes payable of ₱13,000 and adeferred tax asset of ₱20,000 before determining the need for a valuaton account. Shin hadreported a deferred tax asset of ₱15,000 at December 31, 20x0. No estmated tax payments weremade during 20x1. At December 31, 20x1, Shin determined that it was more likely than not that 10%of the deferred tax asset would not be realized. In its 20x1 income statement, what amount shouldShin report as total income tax expense?a. 8,000b. 8,500c. 10,000d. 13,0005.Taf Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20x1, Tafreceived dividends of ₱30,000 from Flame and recorded ₱180,000 as its equity in the earnings ofFlame. Additonal informaton follows:All the undistributed earnings of Flame will be distributed as dividends in future periods.The dividends received from Flame are eligible for the 80% dividends received deducton.There are no other temporary diferences.Enacted income tax rates are 30% for 20x1 and thereafer.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
In its December 31, 20x1, balance sheet, what amount should Taf report for deferred income tax liability?a. 9,000b. 10,800c. 45,000d. 54,0006.Bishop Corporaton began operatons in 20x7 and had operatng losses of ₱200,000 in 20x7 and₱150,000 in 20x8. For the year ended December 31, 20x9, Bishop had pretax book income of₱300,000. For the three-year period 20x7 to 20x9, assume an income tax rate of 40% and nopermanent or temporary diferences between book and taxable income. In Bishop’s 20x9 incomestatement, how much should be reported as total income tax expense?a. 0b. 40,000c. 60,000d. 120,000The next two items are based on the following:Venus Corp.’s worksheet for calculatng current and deferred income taxes for 20x2 follows:20x2 20x3 20x4 Pretax income 1,400 Temporary diferences:Depreciaton (800)(1,200)2,000 Warranty costs 400(100)(300)Taxable income 1,000 (1,300)1,700 Enacted rate 30%30%25%Venus had no prior deferred tax balances. In its 20x2 income statement, what amount should Venus report as:7.Current income tax expense?a. 420b. 350c. 300d. 08.Deferred income tax expense?a. 350b. 300c. 120d. 95Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
9.Black Co., organized on January 2, 20x0, had pretax fnancial statement income of ₱500,000 andtaxable income of ₱800,000 for the year ended December 31, 20x0. The only temporary diferencesare accrued product warranty costs, which Black expects to pay as follows:20x1 ₱100,00020x2 50,00020x350,00020x4100,000The enacted income tax rates are 25% for 20x0, 30% for 20x1 through 20x3, and 35% for 20x4. Black believes that future years' operatons will produce profts. In its December 31, 20x0, balance sheet, whatamount should Black report as deferred tax asset?a. 50,000b. 75,000c. 90,000d. 95,00010. Rom Corp. began business in 20x1 and reported taxable income of ₱50,000 on its 20x1 tax return.Rom's enacted tax rate is 30% for 20x1 and future years. The following is a schedule of Rom'sDecember 31, 20x1, temporary diferences in thousands of dollars:12/31/x1Carryingamountover (under)Tax baseFuture taxable (deductble) amounts20x2 20x3 20x4 20x5 Equipment 10(5)555Warranty liability (20)(10)(10)Deferred compensaton liability (15)(5)(10)Installment receivables 301020Totals 5(5)(10)25(5)What amount should Rom report as total deferred tax asset in its December 31, 20x1, balance sheet?a. 0b. 1,500c. 4,500d. 6,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
"For God has not given us a spirit of fear and timidity, but of power, love, and self-discipline." - (2 Timothy 1:7)- END -SOLUTIONS TO QUIZ 2:1.C (300,000 taxable income x 30%) = 90,0002.DSolution:YearReversals*Tax rate Deferred tax 20x150,00030%15,000 20x2 50,00025%12,500 20x3 50,00025%12,500 40,000 *Lower depreciation per financial statements 150,000Divide by: 3 Equal amounts of reversals 50,000 3.CSolution:Decrease in DTA (the beginning balance) 9,000 Increase in DTL (70K TTD x 30%) 21,000 Deferred tax expense 30,000 4.CSolution:DTA, Dec. 31, 20x1 before adjustment20,000 Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Allowance (20,000 x 10%) (2,000)DTA, Dec. 31, 20x1 after adjustment 18,000 DTA, Dec. 31, 20x0 15,000 Increase in DTA during 20x1 3,000 Income tax expense 10,000(squeeze)Add: Increase in DTA during 20x1 3,000Current tax expense (equal to income tax payable) 13,000(start)5.ASolution:Share in associate’s profit180,000Dividends received(30,000)Share in undistributed earnings150,000Multiply by: Percentage subject to taxation (100% - 80%)20%Taxable temporary difference30,000Multiply by:Substantially enacted tax rate for future periods30%Deferred tax liability – year-end9,0006.D (300,000 pretax income x 40%) = 120,000. The reversal of deferred tax asset affects only the current tax expense but not income tax expense.7.C (1,000 taxable income x 30%) = 3008.DSolution:Depreciation (FI>TI); TTD; DTL (800 x 25% rate in 20x4, the yr. of reversal*) (200)Warranty costs (FI<TI); DTD; DTA (100 x 30% rate in 20x3) + (300 x 25% rate in 20x4) 105Deferred tax expense (95)*Depreciation reverses in 20x4 because it is on this year that the ‘minus’ function becomes an ‘addition’.9.DSolution:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Year of reversal Amounts Tax rate Deferred tax asset 20x1100,00030%30,00020x250,00030%15,00020x350,00030%15,00020x4100,00035%35,00095,00010.ASolution:Concept: If the carrying amount (CA) of an asset exceeds its tax base (TB), the difference is a taxabletemporary differencewhich, if multiplied by the tax rate, results to a deferred tax liability.“For an asset: CA > TB = difference is TTD; TTD x Tax rate = DTL”Consequently:“For a liability: CA < TB = = difference is TTD; TTD x Tax rate = DTL”In all of the items in the problem, the carrying amounts of the assets (i.e., equipment and installment receivables) as of December 31, 20x1 exceed their tax bases (CA>TB). Therefore, the differences are taxable temporary differences which give rise to deferred tax liability and not deferred tax asset.Also, the carrying amounts of the liabilities (i.e., warranty and deferred compensation) as of December 31,20x1 are less than their tax bases. Therefore, the differences are taxable temporary differences which give rise to deferred tax liability and not deferred tax asset.Conclusion: No deferred tax asset is recognized on December 31, 20x1.Chapter 32Shareholders’ Equity (Part 1)QUIZ:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
1.The entry to record the reissuance of treasury shares above their original acquisiton cost includesa.a credit to share premiumb.a debit to share premiumc.a debit to retained earningsd.b and c2.Ten thousand shares of ₱20 par value common stock were initally issued at ₱25 per share.Subsequently, two thousand of these shares were purchased as treasury stock at ₱30 per share.What is the efect of the purchase of the treasury stock on the amount reported in the balance sheetfor each of the following?Share premiumRetained earnings a.No efect No efectb.No efect Decreasec.Decrease No efectd.Decrease Decrease3.The entry to record the retrement of shares at below their original acquisiton cost includesa.a debit to share premium arising from the original issuanceb.a debit to any share premium arising from treasury sharesc.a debit to retained earningsd.all of these including (c) when (a) and (b) are insufcient to ofset any diference between theoriginal issuance price and the retrement price.4.In 20x1, Fogg, Inc., issued ₱10 par value ordinary share for ₱25 per share. No other sharetransactons occurred untl March 31, 20x1, when Fogg acquired some of the issued shares for ₱20per share and retred them. Which of the following statements correctly states an efect of thisacquisiton and retrement?a.20x1 proft is decreased.b.20x1 proft is increased. c.Share premium is decreased.d.Retained earnings is increased.5.Redeemable preference shares are classifed by the issuer as a.fnancial liability b.own equity, presented in shareholders’ equityc.a or bd.reducton of share capital in shareholders’ equity6.In 20x0, Newt Corp. acquired 6,000 shares of its own ₱1 par value ordinary share at ₱18 per share.In 20x1, Newt issued 3,000 of these shares at ₱25 per share. Newt uses the cost method to accountfor its treasury stock transactons. What accounts and amounts should Newt credit in 20x1 to recordthe issuance of the 3,000 shares?Treasury sh. Sh. premium Retained earningsOrdinary sh.a. ₱54,000 ₱21,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b. ₱54,000 ₱21,000c. ₱72,000 ₱3,000d. ₱51,000 ₱21,000 ₱3,0007.On December 1, 20x1, Line Corp. received a donaton of 2,000 shares of its ₱5 par value ordinaryshares from a shareholder. On that date, the stock’s market value was ₱35 per share. The stock wasoriginally issued for ₱25 per share. By what amount would this donaton cause total stockholders’equity to decrease?a. 70,000b. 50,000c. 20,000d. 08.On July 1, 20x1, Vail Corp. issued rights to stockholders to subscribe to additonal share of itscommon stock. One right was issued for each share owned. A stockholder could purchase oneadditonal share for 10 rights plus ₱15 cash. The rights expired on September 30, 20x1. On July 1,20x1, the market price of a share with the right atached was ₱40, while the market price of oneright alone was ₱2. Vail’s stockholders’ equity on June 30, 20x1, comprised the following:Ordinary shares, ₱25 par value, 4,000 shares issued and outstanding…..₱100,000Share premium…………………….……………………………………………..60,000Retained earnings……………..…………………………………………………80,000By what amount should Vail’s retained earnings decrease as a result of issuance of the stock rights on July 1, 20x1?a. 0b. 5,000c. 8,000d. 10,0009.On September 20x1, West Corp. made a dividend distributon of one right for each of its 120,000shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a shareof West's ₱50 variable rate preference share at an exercise price of ₱80 per share. On March 20,20x3, none of the rights had been exercised, and West redeemed them by paying each stockholder₱0.10 per right. As a result of this redempton, West's stockholders' equity was reduced bya. 120b. 2,400c. 12,000d. 36,00010.The following trial balance of Shaw Corp. at December 31, 20x1, has been adjusted except forincome tax expense.Dr.Cr.Cash 675,000Accounts receivable (net) 2,695,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Inventory 2,185,000Property, plant and equipment (net) 7,366,000Accounts payable and accrued liabilites1,801,000Income tax payable 654,000Deferred income tax liability 85,000Ordinary shares2,300,000Share premium3,680,000Retained earnings, 1/1/x1 3,350,000Net sales and other revenues 13,360,000Costs and expenses 11,180,000Income tax expense 1,129,000Totals 25,230,00025,230,000Other fnancial data for the year ended December 31, 20x1:Included in accounts receivable is ₱1,000,000 due from a customer and payable in quarterlyinstallments of ₱125,000. The last payment is due December 30, 20x3.The balance in the deferred income tax liability account pertains to a temporary diference notrelated to a balance sheet account that arose in a prior year, of which ₱15,000 is expected to be paidin 20x2. During the year, estmated tax payments of ₱475,000 were charged to income tax expense. Thecurrent and future tax rate on all types of income is 30%. In Shaw's December 31, 20x1, balancesheet,The working capital and the total shareholders’ equity as of December 31, 20x1 areWorking capitalTotal Shareholders’ Equitya. 2,600,00010,856,000b. 2,881,00010,856,000c. 3,075,0009,330,000d. 3,075,00010,856,000"A cheerful heart is good medicine but a crushed spirit dries up the bones." - (Proverbs 17:22)- END -Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
SOLUTIONS:1.A2.A3.D4.C5.A6.BSolution:Dec. 27,20x1Cash (3,000 x 25)Treasury shares (3,000 x 18)Share premium – Treasury shares75,00054,00021,0007.D8.A9.C (120,000 rights x 0.10) = ₱12,000 debit to share premium10. DSolutions:Cash 675,000 Accounts receivable (net) [2.695M - 1M + (125K x 4)]2,195,000 Inventory 2,185,000 Total current assets 5,055,000 Net sales and other revenues 13,360,000 Costs and expenses (11,180,000)Profit before tax2,180,000 Multiply by: Tax rate30%Income tax expense654,000 Income tax payments during the year(475,000)Adjusted income tax payable179,000 Accounts payable and accrued liabilities 1,801,000 Income tax payable 179,000 Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Total current liabilities 1,980,000 Working capital = Current assets – Current liabilitiesWorking capital = (5,055,000 – 1,980,000) = 3,075,000Net sales and other revenues 13,360,000 Costs and expenses (11,180,000)Profit before tax2,180,000 Income tax expense (30% x 2,180,000)(654,000)Profit after tax1,526,000 Retained earnings, Jan. 13,350,000 Retained earnings, Dec. 314,876,000 Ordinary shares 2,300,000 Share premium 3,680,000 Retained earnings, Dec. 31, 20x1 4,876,000 Shareholders' Equity 10,856,000 Chapter 33Shareholders’ Equity (Part 2)QUIZ:1.On setlement (distributon) date, any diference between the carrying amounts of the propertydividend payable and the non-cash asset distributed is a.ignoredb.recognized in proft or loss c.recognized directly in retained earningsd.recognized but subject to a limit2.Non-current assets declared as property dividends are Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.reclassifed as “non-current assets held for distributon to owners” if the conditons under PFRS 5are met.b.reclassifed as current assets.c.not reclassifed but presented separately from the other assets.d.not reclassifed but disclosed only.3.If shareholders are given a choice of receiving either property dividends or cash dividends, the enttyshall a.estmate the dividend payable by considering both the fair value of each alternatve and theassociated probability of shareholders selectng each alternatve.b.treat the dividends declared as if they are cash dividends.c.treat the dividends declared as if they are property dividends.d.not account for the dividends untl their fnal setlements.4.Which of the following may cause a change in the total shareholders’ equity?a. “small” share dividendsd. “large” share dividendsb. share splitse. none of thesec. recapitalizaton5.Imagine you are a CPA. You are preparing the fnancial statements of your company for the yearended December 31, 20x1. The board of directors declared dividends on February 1, 20x2. Thedividend declaraton is not subject to further approval. The fnancial statements were authorized forissue on April 1, 20x2. How should the dividends declared be accounted for in the 20x1 fnancialstatements?a. included in current liabilitesc. disclosed onlyb. included in noncurrent liabilites d. neither accrued nor disclosed6.Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of ₱2 par valuecommon stock, which had a fair value of ₱5 per share before the stock dividend was declared. Thisstock dividend was distributed 60 days afer the declaraton date. By what amount did Ray’s currentliabilites increase as a result of the stock dividend declaraton?a. 0b. 500c. 1,000d. 2,5007.Efectve April 27, 20x1, the stockholders of Bennet Corporaton approved a two-for-one split of thecompany's common stock, and an increase in authorized common shares from 100,000 shares (parvalue ₱20 per share) to 200,000 shares (par value ₱10 per share). Bennet's stockholders' equityaccounts immediately before issuance of the stock split shares were as follows:Common stock, par value ₱20; 100,000 shares authorized;50,000 shares outstanding ₱1,000,000Share premium (₱3 per share on issuance of ordinary shares) 150,000Retained earnings 1,350,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
What should be the balances in Bennet's additonal paid-in capital and retained earnings accounts immediately afer the stock split is efected?Share premiumRetained earningsa. ₱0 ₱500,000b. ₱150,000 ₱350,000c. ₱150,000 ₱1,350,000d. ₱1,150,000 ₱350,0008.On July 1, 1999, Bart Corporaton has 200,000 shares of ₱10 par ordinary share outstanding and themarket price of the stock is ₱12 per share. On the same date, Bart declared a 1-for-2 reverse stocksplit. The par of the stock was increased from ₱10 to ₱20 and one new ₱20 par share was issued foreach two ₱10 par shares outstanding. Immediately before the 1-for-2 reverse stock split, Bart's sharepremium was ₱450,000. What should be the balance in Bart's share premium account immediatelyafer the reverse stock split is efected?a. 0b. 450,000c. 650,000d. 850,0009.The stockholders' equity secton of Brown Co.'s December 31, 20x1, balance sheet consisted of thefollowing:Ordinary shares, ₱30 par, 10,000 shares authorized and outstanding ₱300,000Share premium 150,000Retained earnings (defcit) (210,000)On January 2, 20x2, Brown put into efect a stockholder-approved quasi-reorganizaton by reducing the par value of the stock to ₱5 and eliminatng the defcit against share premium. Immediately afer the quasi-reorganizaton, what amount should Brown report as share premium?a. (60,000)b. 150,000c. 190,000d. 400,00010. On January 2, 2000, the board of directors of Gimli Mining Corporaton declared a cash dividend of₱1,200,000 to stockholders of record on January 18, 2000, and payable on February 10, 2000. Thedividend is permissible by law in Gimli's state of incorporaton. Selected data from Gimli's December31, 1999, balance sheet follow:Accumulated depleton ₱200,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Capital stock 1,100,000Additonal paid-in capital 800,000Retained earnings 500,000The ₱1,200,000 dividend includes a liquidatng dividend ofa. 800,000.b. 700,000.c. 600,000.d. 200,000."Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own."- (Mathew 6:34)- END -SOLUTIONS:1.B2.A3.A4.E5.C6.A - Stock dividend payable is not a liability.7.C Share splits do not affect total shareholders’ equity. The aggregate par value of outstanding shares remains the same after a share split. The entry to record the share split is as follows:Apr. 27,20x1Common stock (old) (50,000 sh. x 20)₱Common stock (new) (100,000 sh. x 10)₱1,000,0001,000,0008.B Share premium is not affected by share splits.9.CSolution:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
The entries to record the quasi-reorganization are as follows:Jan. 2,20x2Share capital [(₱30 – ₱5) x 10,000 sh.]Share premiumto record the reduction of par value250,000250,000Jan. 2,20x2Share premiumRetained earningsto wipe out the deficit210,000210,000Share premium - Dec. 31, 20x1 150,000Credit (see journal entries above) 250,000Debit (see journal entries above) (210,000)Share premium after quasi-reorganization 190,00010.B (1,200,000 dividends declared – 500,000 retained earnings) = 700,000CHAPTER 1Problem 1 – True or False1.(True)As defned under the Conceptual Framework, a liability is recorded as a result of pastevents or transactons.2.(True) The currently maturing porton of long-term debt should be included in current liabilitesif payment will require the use of current assets. 3.(False) One of the following conditons must be met before a short- term obligaton may beproperly excluded from the current liability classifcaton: (1) management must intend torefnance on a long-term basis or (2) management must demonstrate an ability to refnance theobligaton. 4.(False) The ability to refnance, according to PAS 1, can be demonstrated only by actuallyrefnancing the obligaton between the balance sheet date and the date the statements areissued. 5.(True) Trade payables are normally presented as current liabilites. 6.(True) Conceptually, fnancial liabilites should be valued, subsequent to inital recogniton, atthe present value of all cash to be paid in the future.7.(False) A debtor frm's 12/31/05 balance sheet is to be published 3/1/06. An obligaton due3/4/11 has a due date which can be accelerated by the creditor to the present date if thecurrent rato falls below 2:1. The current rato is now 2.2:1. The obligaton is a current liability.8.(True) A short-term deferred revenue should be classifed as a current liability.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
9.(True) Liability for cash dividends is normally presented as current liabilites except when thecash dividends are clearly due beyond twelve months from the end of the reportng period.10.(True) Before a liability is recognized, there must be a past event that gave rise to a presentobligaton.PROBLEM 21.For a liability to exist, a.a past transacton or event must have occurred. b.the exact amount must be known.c.the identty of the party owed must be known. d.d. an obligaton to pay cash in the future must exist.2.Which of the following does not meet the Conceptual Framework's defniton of a liability? a. The signing of a three-year employment contract at a fxed annual salary b. An obligaton to provide goods or services in the future c. A note payable with no specifed maturity date d. An obligaton that is estmated in amount 3.Which of the following items would be excluded from current liabilites? a. A long-term liability callable or due on demand by the creditor even though the creditor hasgiven no indicaton that the debt will be called. b. Normal accounts payable which had been assigned by the creditor to a fnance company. c. Long-term debt callable within one year or less because the debtor violated a debt provision.d. A short-term debt which at the discreton of the entty can be rolled over at least twelvemonths afer the balance sheet date.4.An entty wants to exclude short-term debt from its current liabilites to improve its current rato.Which of the following would help the entty accomplish its goal? a.Refnance the debt through an existng loan facility before the balance sheet date. b.Enter into a fnancing agreement before the balance sheet date which permits therefnancing of the debt with other debt due 8 months afer the balance sheet date. c.Pay the debt afer the balance sheet date and replenish the cash used to pay the debt withthe proceeds from long- term debt issued before issuance of the balance sheet d.Plan not to pay the debt untl afer the end of the next fscal period.5.Short-term debt expected to be refnanced: a.may be classifed as long-term if refnancing arrangements are completed as of thebalance sheet date. b.must always be reported as a current liability. c.may be classifed as long-term if of-balance sheet fnancing is to be obtained afer thebalance sheet date but before the issue date of the fnancial statements.d.may be classifed as long-term if there is an intent to refnance. 6.Determine the correct classifcaton of the following liabilites: 1) Liability due in 6 months, payable in non-cash assets. Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
2) Liability refnanced with long-term debt between the balance sheet date and date ofissuance of balance sheet. 3) Liability which will be refnanced on a long-term basis between the balance sheetdate and date of issuance of balance sheet through an irrevocable agreement signed by debtor. 4) Liability paid between the balance sheet date and date of issuance of balance sheetwith cash; the cash is replenished with proceeds from long-term debt also between the balancesheet date and date of issuance of balance sheet. a. All are current liabilites. b. All are long-term liabilites. c. Only No.4 is a current liability. d. Only No. 1 is a long-term liability7.Which of the following statements concerning dividends is untrue? a. Once declared, a cash dividend on ordinary shares becomes a liability of the corporaton. b. Since a dividend is generally paid within a month or so, it usually is classifed as current. c. Preference dividends in arrears should not be accrued as a liability. d. Preference dividend declared but not yet paid should be disclosed only in the footnote.8.Included in Wit Corporaton's liability account balances at December 31, 2008 were thefollowing: 14% note payable issued October 1, 2007 maturing September 30, 2009 500,000 16% note payable issued April 1, 2006 maturing April 1, 2009 800,000 Wit's December 31, 2008 fnancial statements were issued on March 1, 2009. On January 15,2009, the entre P800,000 balance of 16% note was refnanced by issuance of a long-termobligaton payable in a lump sum. In additon, on March 10, 2009, Wit consummated a non-cancelable agreement with the lender to refnance the 14%, P500,000 note on a long-term basis,on readily determinable terms that have not yet been implemented. Both partes are fnanciallycapable of honoring the agreement's provisions. On the December 31, 2008 balance sheet, theamount of the notes payable that Wit should classify as current liability is a. 1,300,000 b. 500,000 c. 800,000 d. O9.Red Hot Chili Peppers has the following informaton: Refnancing on a long-term basis of a currently maturing debt in the amount ofP2,000,000 on January 1, 2009. Rectfcaton of a breach of a long-term loan agreement during 2008 on January 3, 2009in the amount of P12,000,000. Receipt from the lender of a grace period ending December 31, 2009 on January 2, 2009on a long-term liability amountng to P3,000,000. The fnancial statements of Red Hot Chili Peppers were issued on March 15, 2009. Of the amountsshown above, how much would be included in the current liabilites secton of Red Hot Chili Pepper's2008 year-end fnancial statements? a. 17,000,000 b. 15,000,000 c. 14,000,000 d. ODownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
10. Included in Levi Corporaton's liability account balances at December 31, 2008, were thefollowing:14% note payable issued October 1, 2007, maturing September 30, 2009 1,250,000 16% note payable issued April 1, 2006 maturing April 1, 2009 2,000,000On December 31, 2008, the company expects to refnance the P2,000,000 by issuance of a long-term note payable in lump sum. The refnancing of the P2,000,000 is at the discreton of theenterprise. Levi's December 31, 2008 fnancial statements were issued on March 31, 2009. OnJanuary 15, 2009, the entre P2,000,000 balance of the 16% note was refnanced by issuance oflong-term obligaton payable. On the December 31, 2008 balance sheet, what amount of the notes payable should Levi classifyas short-term obligaton? a. O b. 1,250,000 c. 1,750,000 d. 2,000,00011.Regal Department Store sells gif certfcates, redeemable for store merchandise, that expire oneyear afer their issuance. Regal has the following informaton pertaining to its gif certfcate sales and redemptons: Unredeemed at 12/31/2007 750,000 2008 sales 2,500,000 2008 redemptons of prior year sales 250,000 2008 redemptons of current year sales 1,750,000 Regal's experience indicates that 10% of gif certfcates sold not be redeemed. In its December 31, 2008balance sheet, 6 amount should Regal report as unearned revenue? a. 1,250,000 b. 1,125,000 c. 1,100,000 d. 500,000 Use the following informaton for the next two questons:Dunne Company sells equipment service contracts that cover a two-year period. The sales price of eachcontract is P600. Dunne's past experience is that, of the total pesos spent for repairs on servicecontracts, 40% is incurred evenly during the frst contract year and 60% evenly during the secondcontract year. Dunne sold 1,000 contracts evenly throughout 2008. 12. In its December 31, 2008 balance sheet, what amount should Dunne report as deferred servicecontract revenue? a. 540,000 b. 480,000 c. 360,000 d. 300,00013. In its December 31, 2009 income statement, what amount should Dunne report as servicecontract revenue? a. 300,000 b. 180,000 c. 480,000 d. ODownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
14. Dunn Trading Stamp Company records stamp service revenue and provides for the cost ofredemptons in the year stamps are sold to licensees. Dunn's past experience indicates that only80% of the stamps are sold to licensees will be redeemed. Dunn's liability for stamp redemptonswas P6,000,000 at December 31, 2007. Additonal informaton for 2008 is as follows: Stamp service revenue from stamps sold to licensees 5,000,000 Cost of redempton (stamps sold prior to 1/1/2008) 2,750,000If all the stamps sold in 2008 were presented for redempton in 2009, the redempton cost willbe P2,250,000. What amount should Dunn report as a liability for stamp redemptons atDecember 31, 2008? a. 7,250,000 b. 5,500,000 c. 5,050,000 d. 3,250,00015. Kent Company, a division of Natonal Reality Corporaton maintains escrow accounts and paysreal estate taxes for Natonal's mortgage customers. Escrow funds are kept in interest-bearingaccounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used toreduce future escrow payments. Additonal informaton for the year 2008 follows: Escrow accounts liability, 1/1 900,000 Escrow payments received 1,500,000 Real estate taxes paid 1,900,000 Interest on escrow funds90,000 What amount should Kent report as escrow accounts liability in it December 31, 2008 balancesheet? a. 491,000 b. 581,000 c. 605,000 d.590,00016. On July 1, 2008, the Quezon City government issued reality tax assessment for its fscal yearended June 30, 2009. On September 1, 2008, Zuma Company purchased a land in Quezon City.The purchase price was reduced by a credit for accrued reality taxes. Zuma does not record theentre year's real estate tax obligaton but instead records tax expenses at the end of each monthby adjustng prepaid real estate taxes or real estate taxes payable as appropriate. On November1, 2008 Zuma paid the frst of two equal installments of P600,000 for realty taxes. What amountof this payment should Zuma record as a debit to real estate taxes payable? a. 200,000 b. 400,000c. 500,000 d. 600,00017. Organ Company requires refundable advance payments with special orders for machineryconstructed to customer's specifcatons. Informaton for 20x8 is as follows: Customers advances - balance, December 31, 2007 885,000 Advances received with orders in 2008 1,380,000 Advances applied to orders shipped in 2008 1,230,000 Advances applicable to orders cancelled in 2008 375,000 What amount should Organ Company report as current liability for customer's deposits in theDecember 31, 2008 balance sheet? a. 0 b. 660,000 c. 1,035,000 d. 1,110,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
PROBLEM 3: EXERCISES1.An entty’s liabilites include the following:Accounts payable500,000Held for trading fnancial liabilites1,000,000Note payable (1M due 20x3)2,800,000Unearned revenue300,000Dividends payable800,000Deferred tax liability200,000Requirement: Compute for the total current liabilites.2.Kew Co.’s accounts payable balance at December 31, 1990, was 2,200,000 beforeconsidering the following data:Goods shipped to Kew F.O.B. shipping point on December 22, 1990, were lost intransit. The invoice cost of 40,000 was not recorded by Kew. On January 7, 1991,Kew fled a 40,000 claim against the common carrier.On December 27, 1990, a shipped and billed at 70,000 on December 3, 1990. Thereturned goods were shipped by Kew on December 28, 1990. A 70,000 creditmemo was received and recorded by Kew on January 5, 1991.Goods shipped to Kew F.O.B. destnaton on December 20, 1990, were receivedon January 6, 1991. The invoice cost was 50,000.Requirement: What amount should Kew report as accounts payable in itsDecember 31, 1990, balance sheet?3.Eliot Corporaton’s liabilites at December 31, 2005, were as follows:Accounts payable and accrued interest1,000,00012% note payable issued November 1, 2004Maturing July 1, 20062,000,00010% debentures payable, next annual principal7,000,000Installment of 500,000 due February 1, 2006On March 1, 2006, Eliot consummated a noncancelable agreement with the lender torefnance the 12% note payable on a long-term basis, on readily determinable terms thathave not yet been implemented. Both partes are fnancially capable of honoring theagreement’s provisions. Eliot’s December 31, 2005 fnancial statements were issued onMarch 31, 2006.Requirement: In its December 31, 2005 balance sheet, what amount should Eliotreport as current liabilites?Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
4.Able, Inc. had the following amounts of long-term debt outstanding at December 31,2008:14% term note, due 200930,00011% term note, due 20111,070,0008% note, due in 11 equal annual principalPayments, plus interest beginning December 31,20091.100,0007% guaranteed debentures, due 20111,000,000Able’s annual sinking-fund requirement on the guaranteed debentures is 40,000 peryear.Requirement: What amount should Able report as current maturites of long-termdebt in its December 31, 2008 balance sheet?5.Taken from the records of Funk Company as of December 31, 2008 are the followinginformaton:Long-term debt of 10,000,000 dated January 1, 2001 due December 31, 2009.Funk expects to refnance this liability on a long-term basis on January 2009. Therefnancing agreement was consummated on February 2, 2009.Note payable due on January 1, 2011 amountng to 6,000,000. The note ispayable on demand.Bank loan of 14,000,000 due December 31, 2013 wherein a breach of loancovenant was commited by Funk during 2008. The Bank agreed on December31, 2008 to provide Funk a grace period to rectfy the breach ending December31, 2009.Serial bonds dated January 1, 2008 totaling 10,000,000 payable in 10 annualinstallments.Requirement: How much would be included in the current liabilites secton ofFunk’s year-end fnancial statements?PROBLEM 4: CLASSROOM ACTIVITY1.VENERABLE RESPECTED co. has the following liabilites of December 31, 20x1.a.Trade accounts payable net of debit balance in supplies account of P10,000, net ofunreleased checks of P8,000 and net of postdated. Checks of P4,000600,000b.Credit balance in customers' accounts 4,000c.Financial liability designated at FVPL 100,000d.Bonds payable maturing in 10 equal annual installments of P200,0002,000,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
e.12%, 5-year note payable issued on October 1, 20x1 200,000f.Deferred tax liability 10,000g.Unearned rent 8,000h.Contngent liability 20,000i.Reserve for contngencies 50,000Requirement: How much is the total current liabilites?2.On December 31, 20x1, THESPIAN ACTOR Co. has accounts payable of P2,000,000 beforepossible adjustment for following:a.Goods in transit from a vendor to THESPIAN December 31, 20x1 with an invoice cost ofP100,000 purchased FOE shipping point was not yet recorded.b.Goods shipped FOB shipping point from a vendor THESPIAN was lost in transit. Theinvoice cost of P40,000 not yet recorded.c.Goods shipped FOB shipping point from a vendor to THESPIAN on December 31, 20x1amountng to P16,000 was recorded and included in the year-end physical count as"goods in transit."d.Goods in transit from a vendor to THESPIAN on December 31, 20x1 with an invoice costof P20,000 purchased FOB destnaton was not yet recorded. The goods were received inJanuary 20x2.e.Goods with invoice cost of P30,000 was recorded and included in the year-end physicalcount as "goods in transit." It was found out that the goods were shipped from a vendorunder FOB destnaton.f.Checks drawn but not yet released to payees amounted to P24,000 while checks drawnand released to payees but were postdated amounted to P10,000g.On December 28, 20x1, a vendor authorized THESPIAN to return for full credit goodsshipped and billed at P50,000 on December 14, 20x1. THESPIAN shipped the returnedgoods on December 31, 20x1 but the credit memo was received and recorded only onJanuary 3, 20x2.h.Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 20x1was recorded at invoice cost at shipment date. The invoice cost is P28,000 while thefreight cost is P6,000. i.Goods shipped FOB destnaton, freight collect were received on December 29, 20x1.The invoice cost of P80,000 was credited to accounts payable on date of receipt and therelated freight of P10,000was debited to an expense account.Requirement: Compute for the adjusted accounts payable on December 31, 20xI.3.AFFLUENT RICH Co. sells service contracts that cover a 2-year period. The sales price of eachcontract is P2,000. AFFLUENT sold 1,000 contracts evenly throughout 20x1. AFFLUENT's pastexperience shows that of the total pesos spent for repairs on service contracts, 40% isincurred evenly during the frst contract year and 60% evenly during second year.Requirements:(a) How much are the current and noncurrent portons of deferred revenue to bepresented in AFFLUENT's statement of fnancial positon?(b) How much is the service revenue recognized in 20x2?Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
PROBLEM 5 MCQ-THEORY1.Liability may be recognized a. only if the entty to which the obligaton is owed is specifcally identfed. b. even if the entty to which the obligaton is owed is not specifcally identfed so longas the liability is probable and can be measured reliably. c. on legal obligatons arising from future events which are probable of occurrence. d. any of these2.Liabilites arise from past events called obligatng events. Obligatng events create a.legal obligatons b.constructve obligatons c.a or b d.d. contractual obligatons 3.Financial liabilites are classifed as a. FVPL or at amortzed cost b. FVPL or FVOCI c. FVPL, FVOCI or at amortzed cost d. none of these4.The most conceptually appropriate method of valuing a liability under the historical cost basis isto a. discount the amount of expected cash outlows that are necessary to liquidate theliability using the market rate of interest at the date the liability was initally incurred. b. discount the amount of expected cash outlows that are necessary to liquidate theliability using the market rate of interest at the date fnancial statements are preparedsubsequent to issuance. c. record as a liability the amount of cash or cash-equivalent value that the companywould be required to pay to eliminate the liability in the ordinary course of business on the dateof the fnancial statements. d. record as a liability the amount of cash or cash-equivalent proceeds actually receivedwhen a liability was incurred.5.Reclassifcaton of fnancial liabilites is a. allowed only if an entty changes its business model b. allowed only if management changes its intenton of holding fnancial instruments c. allowed only if an entty changes its accountng policy on fnancial instruments d. prohibited6. Financial liabilites are initally measured ata.fair value plus transacton costs.b.fair value plus transacton costs, except fnancials liabilites at FVPL whose transactoncos expensed immediately.c.fair value plus transacton costs, except fnancials liabilites at FVOCI whose transactoncosts are recognized in other comprehensive income.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
d.fair value minus transacton costs, except fnancial liabilites at FVPL whose transactoncosts are expensed immediately.7. Deferred tax liabilites area.always presented as noncurrent when an entty presents a classifed statement offnancial positon.b.presented as noncurrent only when the reversal date extends beyond 12 months fromthe end of reportng period.c.always presented as current an entty presents a classifed statement of fnancialpositond.always presented as noncurrent when the deferred tax liabilites are required under thestandards to be recognized directly in equity.8. Share (stock) dividends payablea.are always presented as noncurrent liabilitesb.may or may not be presented as current liability depending on their expected dates ofsetlementc.are not liabilites but rather presented as part of equity as a deducton to share capital.d.are not liabilites but rather presented as part of equity as an additon to share capital.9. A currently maturing obligaton is presented as current. Which of the following instanceswould a currently maturing obligaton is nonetheless presented as noncurrent?a.Refnancing is completed as of the end of reportng periodb.Refnancing made afer the end of reportng period but before authorizaton of fnancialstatements for issues is at the discreton of the entty.c.Grace period is received as of end of reportng period to rectfy breach of loanagreement ending at least 12 months afer the end of reportng period.d.In any of these situatons10. Cali, Inc., had a 4,000,000 note payable due on March 15, 20x2. On January 28, 20x2, beforethe issuance of its 20x1 fnancial statements, Cali issued long-term bonds in the amount of4,500,000. Proceeds from the bonds were used to repay the note when it came due. Howshould Cali classify the note in its December 31, 20x1, fnancial statements?a.As a current liability, with separate disclosure of the note refnancingb.As a current liability, with no separate disclosure required.c.As a noncurrent liability, with separate disclosure of the note refnancing.d.As a noncurrent liability, with no separate disclosure required.PROBLEM 6 COMPUTATIONAL1.At December 31, 20x7, Cain, Inc., owed notes payable of 1,750,000 due on May 15,20x8. Cain expects to retre this debt with proceeds from the sale of 100,000 shares ofDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
its common stock. The stock was sold for 15 per share on March 10, 20x8, prior to theissuance of the year-end fnancial statements. In Cain’s December 31, 20x7, balancesheet, what amount of the notes payable should be excluded from current liabilites?a. 0b. 250,000c. 1,500,000d. 1,750,0002.Pam, Inc., has 1,000,000 of notes payable due June 15, 20x6. At the fnancial statementdate of December 31, 20x5, Pam signed an agreement to borrow up to 1,000,000 torefnance the notes payable on a long-term basis. The refnancing agreement is at thediscreton of Pam, Inc. The fnancing agreement called for borrowings not exceed 80%of the value of the collateral Pam was providing. At the date of issue of the December31, 20x5, fnancial statements, the value of the collateral was 1,200,000 and was notexpected to fall below this amount during 20x6. In its December 31, 20x5, balancesheet, Pam should classify notes payable asShort-termLong-termShort-termLong-terma.01,000,000c. 200,000800,000b. 40,000960,000d. 1,000,00003.Wilk Co. reported the following liabilites at December 31, 20x1:Accounts payable-trade750,000Short-term borrowings400,000Bank loan, current porton 100,0003,500,000Other bank loan, matures June 30, 20x21,000,000The bank loan of 3,500,000 was in violaton of the loan agreement. The creditor had notwaived the rights for the loan. What amount should Wilk report as current liabilites atDecember 31, 20x1?a. 1,250,000b. 2,150,000c. 2,250,000d. 5,650,0004.Regal Department Store sells gif certfcates, redeemable for store merchandise, thatexpire one year afer their issuance. Regal has the following informaton pertaining toits gif certfcates sales and redemptons:Unredeemed at 12/31/x275,00020x3 sales250,00020x3 redemptons of prior year sales25,00020x3 redemptons of current year sales175,000Regal’s experience indicates that 10% of gif certfcates sold will not be redeemed. In itsDecember 31, 20x3 balance sheet, what amount should Regal report as unearnedrevenue?a. 125,000b. 112,500c. 100,000d. 50,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
5. Aneen’s Video Mart sells one and two-year mail order subscriptons for its video-of-the-month business. Subscriptons are collected in advance and credited to sales. Ananalysis of the recorded sales actvity revealed the following:20x220x3Sales420,000500,000Less cancellatons20,00030,000Net sales400,000470,000Subscriptons expiratons:20x2120,00020x3155,000130,00020x4125,000200,00020x5140,000Totals400,000470,000In Aneen’s December 31,20x3 balance sheet, the balance sheet, the balance forunearned subscripton revenue should bea. 495,000b. 470,000c. 465,000d. 340,0006.On July 1, 20x0, Ran County issued realty tax assessments for its fscal year ended June 30, 20x1.On September 1, 20x0, Day Co. purchased a warehouse in Ran County. The purchase price wasreduced by a credit for accrued realty taxes. Day did not record the entre year's real estate taxobligaton, but instead records tax expenses at the end of each month by adjustng prepaid realestate taxes or real estate taxes payable, as appropriate. On November 1, 20x0, Day paid the frstof two equal installments of P12,000 for realty taxes. What amount of this payment should Dayrecord as a debit to real estate taxes payable? a. 4,000 b. 8,000 c. 10,000 d. 12,0007.Black Co. requires advance payments with special orders for machinery constructed to customerspecifcatons. These advances are nonrefundable. Informaton for 20x0 is as follows: Customer advances-balance 1/1/20x0 P118,000 Advances received with orders in 20x0 184,000 Advances applied to orders shipped in 20x0 164,000 Advances applicable to orders canceled in 20x0 50,000In Black's December 31, 20x0, balance sheet, what amount should be reported as a currentliability for advances from customer?a. Ob. 88,000c. 138,000d. 148,0008.Kent Co., a division of Natonal Realty, Inc., maintains escrow accounts and pays real estate taxesfor Natonal's mortgage customers. Escrow funds are kept in interest-bearing account Interest,less a 10% service fee, is credited to the mortgage account and used to reduce future escrowpayments. Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Additonal informaton follows: Escrow accounts liability, 1/1/20x9 700,000Escrow payments received during 20x9 1,580,000Real estate taxes paid during 20x9 1,720,000Interest on escrow funds during 20x9 50,000 What amount should Kent report as escrow accounts liability in its December 31, 20x9, balancesheet? a. 510,000 b. 515,000 c. 605,000 d. 610,0009.Aneen's Video Mart sells 1- and 2-year mail order subscriptons for its video-of-the-monthbusiness Subscriptons are collected in advance and credited to sales. An analysis of the recordedsales actvity revealed the following: 20x6 20x7 Sales420,000 500,000 Less cancellatons20,000 30,000 Net sales 400,000 470,000Subscriptons expiratons: 20x6 120,00020x7155,000130,00020x8125,000200,00020x9 140,000 470,000 400,000 In Aneen's December 31, 20x7, balance sheet, the balance for unearned subscripton revenueshould be a. 495,000 b. 470,000 c. 465,000 d. 340,00010. Lyle, Inc. is preparing its fnancial statements for the year ended December 31, 20x9. Accountspayable amounted to P360,000 before any necessary year-end adjustment related to thefollowing: At December 31, 20x9, Lyle has a P50,000 debit balance in its accounts payable to Ross, asupplier, resultng from a P50,000 advance payment for goods to be manufactured toLyle's specifcatons. Checks in the amount of P100,000 were writen to vendors and recorded on December29, 20x9. The checks were mailed on January 5, 2000. What amount should Lyle report as accounts payable in its December 31, 20x9, balance sheet? a. 510,000 b. 410,000 c. 310,000 d. 210,000CHAPTER 2PROBLEM 1: TRUE OR FALSEDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
FALSE1. Notes payable are obligatons supported by creditor promissory notes. TRUE2. Financial liabilites are initally recognized at fair value minus transacton costs that are directly atributable to the issuance, except for fnancial liabilites measured at FVPL whose transacton costs are expensed immediately.FALSE3. Fair value is the price that would be paid to buy an asset or paid to transfer a liability in an orderly transacton between market partcipants at the measurement date.FALSE4. costs of issuing fnancial liabilites are expensed outright.TRUE5. Short-term notes payable are initally measured either at face amount or present value.FALSE6. All short-term notes payable are initally measured at face amount. TRUE7. A note payable may be measured initally on the basis of the cash price equivalent of the asset obtained in exchange for the note payable.TRUE8. If the cash fows on a note payable are due in lump sum, the most appropriate present value factor is “PV of 1.” FALSE9. If the cash fows on a note payable are due in installments and ,the frst installment is due on inital recogniton, the most appropriate present value factor is “PV of an ordinary annuity of 1.”TRUE10. Originaton fees incurred on issuance of loan payable are deducted from the carrying amount of the loan and subsequently amortzed using the efectve interest method.PROBLEM 2: FOR CLASSROOM DISCUSSION1.Theoretcally, a short-term, non-trade, note payable with no stated rate of interest should bea.Recorded at maturity value.b.Recorded at the face amount.c.Discounted to its present value.d.Reported separately from Other short-term notes payable.2.A short-term note payable may include all of the following except:a.Trade notes payableb.Nontrade notes payablec.Unearned revenued.Current maturity of a long-term liability3.On July 1, 2002, Riviera Manufacturing Co. issued a fve-year note payable with a face amount of and an interest rate of 10 percent. The terms of the note require Riviera to make fve annual payments of plus accrued with the frst payment due June 30, 2003. Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
With respect to the note, the current liabilites secton of Riviera’s December 31, 2002, balance sheet should includea.12,500 b. 50,000c. 62,500d. 75,000 4.On January 1, 20x1, an entty issues a 3-year, noninterest-bearing, note payable amountng to P1,600,000 in exchange for land. The principal on the note is due on December 31, 20x3. The efectve interest rate on January 1, 20x1 is 17%.Requirement: Provide all the entries during the term of the note payable.5.On January 1, 20x1, an entty issues a 3-year, noninterest-bearing, note payable amountng to P1,200,000 in exchange for land. The principal on the note is due in threeequal annual installments of P400,000 payable every December 31. The efectve interest rate on January 1, 20x1 is 17%.Requirements:a.Compute for current and noncurrent portons of the note payable on December 31, 20x1.b.Provide all the entries during the term of the note payable.6.On January 1, 20xI, an entty obtains 12%, P4,000,000 bank loan. The bank charges the entty an 11.19% nonrefundable loan originaton fee. The principal on the loan matures on December 31, 20x4 but interest is due annually every December 31.Requirements:a.Compute for the inital carrying amount of the loan.b.Compute for the efectve interest rate on the loan.c.Compute for the carrying amount of the loan on December 31, 20x1.PROBLEM 3: EXERCISES1.On January 1, 20x1, an entty issues a 3-year, noninterest bearing, note payable amountng to P2,000,000 in exchange for equipment. The principal on the note is due onDecember 31, 20x3. Efectve interest rate on January 1, 20x1 is 16%.Requirement: Provide all the entries during the term of the note payable.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
2.On January 1, 20x1, an entty issues a 4-year, noninterest. Bearing, note payable amountng to P3,000,000 in exchange for equipment. The principal on the note is due on December 31, 20x3. The efectve interest rate on January 1, 20x1 is 17%.Requirement: Provide all the entries during the term of the note payable.3.On January 1, 20x1, an entty issues a 3-year, noninterest bearing, note payable amountng to P3,000,000 in exchange for equipment. The principal on the note is due in three equal annual installments payable every December 31. The efectve interest rate on January 1, 20x1 is 18%.Requirements:a.Compute for current and noncurrent portons of the note payable on December 31, 20xq.b.Provide all the entries during the term of the note payable.4. On January 1, 20x1, an entty issues a 4-year, noninterest bearing, note payable amountng to P4,800,000 in exchange for equipment. The principal on the note is due in three equal annual installments payable every December 31. The efectve interest rate on January 1, 20x1 is 14%.Requirements:a.Compute for current and noncurrent portons of the note payable on December 31, 20x2.b.Provide all the entries during the term of the note payable. 5. An entty issues the following notes payable on January I, 20x1:a.P5,000,000 noninterest-bearing note payable due on December 31, 20x4.b.P4,000,000 noninterest-bearing note payable due in four equal annual installments every December 31. c.P8,000,000 noninterest-bearing note payable due in fve equal annual installments everyJanuary 1. The frst installment is due on January 1, 20x1.The efectve interest rate in all of the notes payable above is 15%.Requirements: Prepare the amortzaton table for each of the notes payable above.7.On January 1, 20x1, an entty obtains an 11%, P5,000,000 bank loan. The bank charges the entty an 8.74% nonrefundable loan originaton fee. The principal on the loan matures on December 31, 20x4 but interest is due annually every December 31.Requirements:Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.Compute for the inital carrying amount of the loan.b.Compute for the efectve interest rate on the loan.c.Compute for the carrying amount Of the loan on December 31, 20x1.8.On December 31, 2001, Internatonal Refning Company purchased machinery having a cash selling price of P85,933.75. The company paid down and agreed to fnance the remainder by making four equal payments each December 31 at the implicit interest rate of 12%.Requirements:a.Determine the amount of the annual payments to be made under the fnancing agreement.b.Prepare the journal entry to record the acquisiton Of the machinery on December 31, 2001.c.Prepare the journal entry at December 31, 2002. (Adapted)CHAPTER 3PROBLEM 1: TRUE OR FALSETRUE1. Zero-interest bonds sell at a signifcant discount that provides an investor with a total interestpayof at maturity.TRUE 2. Callable bonds may be redeemed prior to maturity at the opton of the issuer.FALSE 3. The term "junk bonds" is frequently applied to low-yield bonds.FALSE 4. If the stated interest rate for a bond issue exceeds the efectve interest rate, the bonds will sellat a discount.FALSE 5. Bond issuance costs must be reported separately as deferred charges and charged to expenseover the life of the bond issue.FALSE 6. Convertble bonds can be exchanged for another form of security, such as common stock, at theopton of the issuer.FALSE 7. The amortzaton of bond discount reduces interest expense to an amount less than the interestactually paid to bondholders.TRUE 8. When debt is retred prior to its maturity date, a gain or loss must be recognized for thediference between the carrying amount of the debt security and the amount paid.FALSE 9. Under generally accepted accountng principles, gain or loss must be recognized on theconversion of bonds into equity securites.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
TRUE 10. In-substance defeasance is a process of transferring assets to an irrevocable trust, using theassets and earnings therefrom to satsfy the long-term debt as it comes due.PROBLEM 2: FOR CLASSROOM DISCUSSION1. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will beequal to a. the face amount of the bond.b. the present value of the bond maturity value plus the present value of the interest paymentsto be made during the life of the bond.c. the face amount of the bond plus the present value of the interest payments made during thelife of the bond.d. the sum of the face amount of the bond and the periodic interest payments.2. Unamortzed debt premium should be reported on the balance sheet of the issuer as a a. direct additon to the face amount of the debt.b. direct additon to the present value of the debt.c. deferred credit.d. deducton from the issue costs.3. Which one of the following is true when the efectve-interest method of amortzing bond discount isused?a. Interest expense as a percentage of the bonds' carrying amount varies from period to period.b. Interest expense remains constant for each period.c. Interest expense increases each period.d. The interest rate decreases each period.4. Scot Inc. neglected to amortze the discount on outstanding ten-year bonds payable. What is theefect of the failure to record discount amortzaton on interest expense and bond carrying value,respectvely?a. Understate; understateb. Understate; overstatec. Overstate; overstated. Overstate; understate5. Bond discount should be presented in the fnancial statements of the issuer as a(n)Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a. contra liabilityb. adjunct liability.c. deferred charge.d. contra asset.6. DESTITUTE LACKING, Inc. issued P500,000, 10% bonds to yield 8%. Bond issuance costs were P10,000.How should DESTITUTE calculate the net proceeds to be received from the issuance?a. Discount the bonds at the stated rate of interest.b. Discount the bonds at the market rate of interest.c. Discount the bonds at the stated rate of interest and deduct bond issuance costs.d. Discount the bonds at the market rate of interest and deduct bond issuance costs.7. Any gains or losses from the early extnguishment of debt should bea. recognized in income of the period of extnguishment.b. treated as an increase or decrease in Paid-In Capital.C. allocated between a porton that is an increase (decrease) in Paid-In Capital and a porton thatis recognized in current income.d. amortzed over the remaining original life of the extnguished debt.8. When bonds are retred prior to maturity with proceeds from a new bond issue, gain or loss from theearly extnguishment of debt, if material, should bea. amortzed over the remaining original life of the retred bond issue.b. amortzed over the life of the new bond issue.c. recognized as an extraordinary item in the period extnguishmentd. recognized in income from contnuing operatons in the period of extnguishment.PROBLEM 5: MULTIPLE CHOICE - THEORY1. For a bond issue which sells for less than its par value, the market rate of interest isa. Dependent on rate stated on the bond.b. Equal to rate stated on the bond.c. Less than rate stated on the bond.d. Higher than rate stated on the bond.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
2. The market price of a bond issued at a discount is the present value of its principal amount at themarket (efectve) rate of interesta. Less the present value of all future interest payments at the market (efectve) rate of interest.b. Less the present value of all future interest payments at the rate of interest stated on thebond.c. Plus the present value of all future interest payments at the market (efectve) rate of interest.d. Plus the present value of all future interest payments at the rate of interest stated on thebond.3. The issue price of a bond is equal to the present value of the future cash fows for interest andprincipal when the bond is issuedAt face amountAt a discountAt a premiuma.Yes No Yes b.Yes No No c.No Yes Yes d.Yes Yes Yes 4. Kenwood Co. neglected to amortze the premium on outstanding ten-year bonds payable. What is theefect of the failure to record premium amortzaton on interest expense and bond carrying value,respectvely?a. Understate; understateb. Understate; overstatec. Overstate; overstated. Overstate; understate5. On March 1, 1997, Clark Co. issued bonds a discount. Clark incorrectly used the straight-line methodinstead of the efectve interest method to amortze the discount. How were the following amounts, asof December 31, 1997, afected by the error?Bond carrying amountRetained earningsa.Overstated Overstated b.Understated Understatedc.Overstated Understated d.Understated Overstated 6. If interest-bearing obligatons are issued in between interest dates, the accrued interest solda. should be included in the carrying amount of the liability as a credit to 'interest expense' or'interest payable.'Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b. should not be included in the carrying amount of the liability but rather credited to 'interestexpense' or 'interest payable.'C. interest payable is debitedd. interest income is credited7. The equity component of a compound fnancial instrument is determineda. by allocatng the issue price to the liability and equity components based on their relatve fairvalues.b. by allocatng the equity component its fair value.c. by deductng the fair value of the liability component without the equity feature from the netproceeds from the issuance of the compound instrument.d. none of the above.8. Upon conversion of convertble bonds,a. no gain or loss is recognizedb. any share premium recognized on the conversion feature is transferred directly to retainedearningsc. any unamortzed discount is derecognized by a debitd. a and b9. Upon retrement of convertble bonds,a. no gain or loss is recognizedb. gain or loss is recognized as the diference between the retrement price and the carryingamount of the liability componentc. any share premium recognized on the conversion feature is recognized in proft or lossd. gain or loss is recognized as the diference between the retrement price allocated to theliability component and the carrying amount of the liability component.10.The share premium recognized on a convertble bonda. remains in equity only if the bonds are actually convertedb. reclassifed out of equity to proft or loss if the bonds are not convertedc. remains in equity whether the bonds are actually converted or notd. a and b11.When the equity feature of a compound instrument is exercised, the related share premium isDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a. transferred directly to retained earningsb. transferred to proft or lossc. transferred within equityd. none of these12. In an "asset swap," where a liability is setled through the transfer of noncash asset,a. the gain or loss on setlement is computed as the diference between the carrying amount ofthe liability extnguished and the fair value of the noncash asset transferred.b. the gain or loss on setlement is computed as the diference between the carrying amount ofthe liability extnguished and the carrying amount of the noncash asset transferred.C the gain or loss on setlement is computed as the diference between the carrying amount ofthe liability extnguished and the more clearly determinable between the fair value of theliability extnguished and the carrying amount of the noncash asset transferred.d. no gain or loss is recognized13.In an "equity swap," where a liability is setled through the issuance of equity securites, the equitysecurites issued are measured ata. the fair value of the equity securites issuedb. the fair value of the liability extnguishedc. the carrying amount of the liability extnguishedd. choice a, if this is determinable, if not, then choice b14.In an "equity swap," where a liability is setled through the issuance of equity securites,a. no gain or loss is recognizedb. any apparent gain or loss is recognized in equity as an additon to share premiumC. gain or loss is recognized as the diference between the measurement amount of the equitysecurites issued and the carrying amount of the liability derecognized.d. a and b15. There is substantal modifcaton of a liability if the diference between the present value of the newliability discounted at the original efectve interest rate and the carrying amount of the old liability isa. at least 10%b. more than 10%c. less thann 10%Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
d. none of thesePROBLEM 6: MULTIPLE CHOICE-COMPUTATIONAL1. Blue Corp.'s December 31, 1991, balance sheet contained thefollowing items in the long-term liabilites secton:93/4% registered debentures, callable in 2002, due in 2007 700,000912% collateral trust bonds, convertble into commonstock beginning in 2000, due in 2010 600,00010% subordinated debentures (P30,000 maturingannually beginning in 1997) 300,000What is the total amount of Blue's term bonds?a. 600,000b. 700,000 c. 1,000,000d. 1,300,0002. Hancock Co.'s December 31, 20x0, balance sheet contained the following items in the long-termliabilites secton:Unsecured9.375% registered bonds (P25,000 maturing annuallybeginning in 20x4) 275,00011.5% convertble bonds, callable beginning in 20x9,due 2010 125,000Secured9.875% guaranty security bonds, due 2x10 250,00010.0% commodity backed bonds (P50,000 maturingannually beginning in 20x5) 200,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
What are the total amounts of serial bonds and debenture bonds?Serial bonds Debenture bondsa.475,000400,000b.475,000125,000c.450,000400,000d.200,000650,0003. During 20x9, Lake Co. issued 3,000 of its 9%, P1,00 0 face value bonds at 101%. In connecton withthe sale of these bonds, Lake paid the following expenses:Promoton costs P 20,000Engraving and printng 25,000Underwriters' commissions 200,000What amount should Lake record as bond issue costs to be amortzed over the term of the bonds?a. 0b. 220,000c. 225,000d. 245,0004. On July 1, 20x7, Day Co. received P103,288 for P100,000 face amount, 12% bonds, a price that yields10%. Interest expense for the six months ended December 31, 20x7, should bea. 6,197b. 6,000c. 5,164d. 5,0005. On January 2, 2001, West Co. issued 9% bonds in the amount of P500,000, which mature on January2, 2011. The bonds were issued for P469,500 to yield 10%. Interest is payable annually on December 31.West uses the efectve interest method of amortzing bond discount. In its June 30, 2001, balance sheet,what amount should West report as bonds payable?a. 469,500b. 470,475c. 471,025Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
d. 500,0006. On May 1, 1999, Bolt Corp. issued 11% bonds in the face amount of P1,000,000 that mature on May 1,2009. The bonds were issued to yield 10%, resultng in bond premium of P62,000. Bolt uses the efectveinterest method of amortzing bond premium. Interest is payable semiannually on November 1 and May1. In its October 31, 1999, balance sheet, what amount should Bolt report as unamortzed bondpremium?a. 62,000b. 60,100 c. 58,900d. 58,5907. On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial bonds, to be repaid in the amount ofP40,000 each year, Interest is payable annually on December 31. The bonds were issued to yield 10% ayear. The bond proceeds were P190,280 based on the present values at December 31, 20x0, of the fveannual payments as follows:Amounts dueDue date PrincipalInterest Presentvalueat12/31/9912/31/x140,00016,00050,90012/31/x240,00012,80043,61012/31/x340,0009,60037,25012/31/x440,0006,40031,69012/31/x540,0003,20026,830190,280Arnold amortzes the bond discount by the efectve interest method. In its December 31, 20x1, balancesheet, at what amount should Arnold report the carrying value of the bonds?a. 139,380b. 149,100c. 150,280d. 153,3088. On November 1, 20x4, Mason Corp. issued P800,000 of its 10-year, 8% term bonds dated October 1,20x4. The bonds were sold to yield 10%, with total proceeds of P700,000 plus accrued interest. Interestis paid every April 1 and October 1. What amount should Mason report for interest payable in itsDecember 31, 20x4, balance sheet?Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a. 17,500b. 16,000c. 11,667d. 10,6679. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value bonds at 101 plus accrued interest. Thebonds were dated November 1, 20x8, and bear interest at an annual rate of 9% payable semiannually onNovember 1 and May 1. What amount did Hill receive from the bond issuance?a. 194,500b. 200,000c. 202,000d. 209,50010. The following informaton pertains to Camp Corp.'s issuance of bonds on July 1, 1998:Face amount P800,000Terms 10 yearsStated interest rate 6%Interest payment dates Annually on July 1Yield 9%What should be the issue price for each P1,000 bond?a. 1,000b. 864c. 807d. 700PROBLEM 4: CLASSROOM ACTIVITY1.On January 1,20x1, RESTRAIN TO CURB Co. issued 1,000, P2,000, 10%. 3-year bonds forP1,903,927. Principal is due on December 31, 20x3 but interests are due annually every year-end. The efectve interest rate is 12%.Requirement: Provide the pertnent entries.Jan. 1, 20x1 Cash on hand 1,903,927Discount on bonds payable 96,073Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Bonds payable 2,000,0000Date InterestpaymentInterest expenseAmortzaton Present valueJan. 1, 20x11,903,927Dec. 31, 20x1200,000228,47128,4711,932,398Dec. 31, 20x2200,000231,88831,8881,964,286Dec. 31, 20x3200,000235,71435,7142,000,000Dec. 31, 20x1Interest expenseCash in bankDiscountonbonds payable228,471200,00028,471Dec. 31, 20x2Interest expenseCash in bankDiscountonbonds payable231,888200,00031,888Dec. 31, 20x3Interest expenseCash in bankDiscountonbonds payableBonds payable Cash in bank235,7142,000,000100,00035,7142,000,0002.On January 1, 20x1, INCISE TO CARVE Co. issued 1,000, P2,000, 12%, 3-year bonds forP2,099,474. Principal is due on December 31, 20x3 but interests are due annually every year-end. The efectve interest rate is 10%.Requirement: Provide the pertnent entries.Jan. 1, 20x1 Cash on hand 2,099,474Bonds payable 2,000,000Premium on bonds payable 99,474Date InterestpaymentInterest expenseAmortzaton Present value Jan. 1, 20x12,099,274Dec. 31, 20x1240,000209,94730,0532,069,421Dec. 31, 20x2240,000206,94233,0582,036,364Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Dec. 31, 20x3240,000203,63636,3642,000,000Dec. 31, 20x1Interest expensePremium on bonds payableCash in bank 209,94730,053240,000Dec. 31, 20x2Interest expensePremium on bonds payableCash in bank206,94233,058240,000Dec. 31, 20x3Interest expensePremium on bonds payableCash in bankBonds payable Cash in bank203,63636,3642,000,000240,0002,000,000CHAPTER 4PROBLEM 1: TRUE OR FALSE1.A provision is a liability of uncertain tming or amount.TRUE2.Provisions difer from other liabilites because of the uncertainty about the tming or amount of expenditure required in setlement. TRUE3.Provisions are presented in the statement of fnancial positon as part of the line item “Trade and other payables.”FALSE Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
4.Before a provision is recognized, there must be a present obligaton arising from past events and that it is probable that there will be an outlow of resources embodying economic resources and the amount of outlow can be estmated reliably.TRUE5.A present obligaton that requires an outlow that is reasonably possible may recognized as a provision.FALSE 6.If the outlow of resources from a present obligaton is remote the entty shall disclose a contngent liability.FALSE7.A provision is measured at the best estmate of the outlow needed to setle the obligaton.TRUE8.A provision should never be discounted to the present value of the expected cash outlows needed to setle the obligaton•FALSE9.According to PAS 37, an entty shall recognize contngent assets that are probable.FALSE10.According to PAS 37, restructuring is a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entty; or the manner in which that business is conducted.TRUEPROBLEM 2: FOR CLASSROOM DISCUSSION1.Which of the following sets of conditons would give rise to the accrual of a contngency under PAS 37? a.Amount of loss is reasonably estmable and event occursInfrequently.b.Amount of loss is reasonably estmable and occurrence of event is probable.c.Event is unusual in nature and occurrence of event is probable.d.Event is unusual in nature and event occurs infrequently.2.When can a “provision” be recognized in accordance with PAS 37?Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
a.When there is a legal obligaton arising from a past (obligatng) event, the probability of the outlow of resources is more than remote (but less than probable), and a reliable estmate can be made of the amount of the obligaton.b.When there is a constructve obligaton as a result of a past (obligatng) event, the outlow of resources is probable, and a reliable estmate can be made of the amount of the obligaton.c.When there is a possible obligaton arising from a past event, the outlow of resources is probable, and an approximate amount can be set aside toward the obligaton.d.When management decides that it is essental that a provision be made for unforeseen circumstances and keeping in mind this year the profts were enough but next year theremay be losses.3.A compettor has sued an entty for unauthorized use of its patented technology. The amount that the entty may be required to pay to the compettor if the compettor succeeds in the lawsuit is determinable with reliability, and according to the legal counsel it is less than probable (but more than remote) that an outlow of the resources would be needed to meet the obligaton. The entty that was sued should at yearend:a.Recognize a provision for this possible obligaton.b.Make a disclosure of the possible obligaton in footnotes to the fnancial statements.c.Make no provision or disclosure and wait untl the lawsuit is fnally decided and then expense the amount paid on setlement, if any.d.Set aside, as an appropriaton, a contngency reserve, an amount based on the best estmate of the possible liability.4.In which of the following events shall a provision most likely be recognized?a.An entty is sued for PIOO,()()(),OO() for damages caused by its product.b.An entty receives inventory purchased under FOB destnaton.c.An entty’s building is razed by fre afer the reportng period but before the fnancial statements are authorized for issue. The outlow is probable and can be mea,SU reliably.d.An entty sells a product. The entty has an implied policy of providing warranty for its products. The entty can reliably estmate the probability of product returns and the costof warranty.5.A factory owned by XYZ Inc. was destroyed by fre. XYZ lodged an insurance claim for the value ofthe factory building, plant, and an amount equal to one year’s net proft’During the year there were a number of meetngs with the representatves of the insurance company. Finally, before year-end, it was decided that XYZ Inc. would receive compensaton for 90% of its claim. XYZ Inc. received a leter that the setlement check for that amount had been mailed, but it was not received before year-end. How should XYZ Inc. treat this in its fnancial statements?a.Disclose the contngent asset in the footnotes.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b.Wait untl next year when the setlement check is actually received and not recognize or disclose this receivable at all since at year-end it is a contngent asset. c.Because the setlement of the claim was conveyed by a leter from the insurance company that also stated that the setlement check was in the mail for 90% of the claim,record 90% of the claim as a receivable as it is virtually certain that the contngent asset will be received.d.Because the setlement of the claim was conveyed by a leter from the insurance company that also stated that the setlement check was in the mail for 90% of the claim,record 100% of the claim as a receivable at year-end as it is virtually certain that the contngent asset will be received, and adjust the 10% next year when the setlement check is actually received.PROBLEM 5: MULTIPLE CHOICE – THEORY1.What distnguishes a provision from other types of liabilites? a.A provision must arise from contracts.b.A provision is recognized only if the provision meets the defniton of an element of fnancial statements, it is probable, and can be measured reliably. c.The setlement of a provision requires the delivery of cash or other fnancial instrumentsunder conditons which are potentally unfavorable.d.A provision is a liability of uncertain tming or amount.2.A provision is recognized only whena.It meets the defniton of a liabilityb.There is a probable outlow of resourcesc.It can be measured reliablyd.A, b, and c are present3.Provisions are presenteda.Together with other liabilites under the capton “Trade and other payables.” Disclosures are made in the notes to distnguish the provisions from the other liabilites.b.Always as current liabilites.c.Separately from other liabilites.d.Only in the notes.4.When measuring a provision, an entty uses:a.Best estmateb.Expected valuec.Mid-point.d.Any of these, depending on the case at hand5.A present obligaton which would possibly require an outlow when setled isa.Accruedc. accrued and disclosedDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b. Disclosed onlyd. ignoredPROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL1.Dunn Trading Stamp Co. records stamp service revenue an provides for the cost of redemptons in the year stamps sold to licensees. Dunn’s past experience indicates that only 80% of the 9tamps sold to licensees will be redeemed. Dunn ; liability for stamp redemptons was P6,()00,000 at December 31, 20x5. Additonal informaton for 20x6 is as follows:Stamp service revenue from stamps sold to licensees4,000,000Cost of redemptons (stamps sold prior to 1/1/x6)2,750,000If all the stamps sold in 20x6 were presented for redempton in the redempton cost would be P2,250,000. What amount should Dunn report as a liability for stamp redemptons at December 31, 20x6?a.7,250,000 b. 5,500,000 c. 5,050,000 d. 3,250,0002.During 20x1, Haf Co. became involved in a tax dispute with the BIR. At December 31, 20x1, Haf’s tax advisor believed that an unfavorable outcome was probable. A reasonable estmate of additonal taxes was P200,000 but could be as much as Afer the 20x1 fnancial statements wereissued, Haf received and accepted a BIR setlement ofer of P275,000. What amount of accrued liability should Haf have reported in its December 31, 20x1 balance sheet?a.200,000b. 250,000c. 275,000d. 300,0003.On February 5, 2000, an employee fled a P2,000,000 lawsuit against Steel Co. for damages sufered when one of Steel’s plants exploded on December 29, 1999. Steel’s legal counsel expects the company will lose the lawsuit and estmates the loss to be between P500,()00 and P1,000,000. The employee has ofered to setle the lawsuit out of court for P900,000, but Steel will not agree to the setlement. In its December 31, 1999, balance sheet, what amount should Steel report as liability from lawsuit.a.2,000,000 b. 1,000,000 c. 900,000d. 500,0004.During 2()x7, Gum Co. introduced a new product carrying a two-year warranty against defects: The estmated warranty costs related to peso sales are 2% within 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 20x7 and 20x8, are as follows:Actual warrantyYearSalesexpenditures20x7150,0002,250Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
20x8250,0007,500400,0009,750What amount should Gum report as estmated warranty liability in its December 31, 20x8, balance sheet?a.2,500b. 4,250c. 11,250d. 14,2505.In packages of its products, the Kent Food Company includes coupons which may be presented to grocers for discounts on certain products of Kent on or before a stated expiraton date. The grocers are reimbursed when they send the coupons to Kent. In Kent’s experience, 40% of such coupons are redeemed, and one month generally elapses between the date a grocer receives a coupon from a consumer and the date Kent receives it. During 20x4, Kent issued two series of coupons as follows:Issued on Total value Consumer expiraton date Amount disbursed as of 12/31/x4_____________________________________________________________________________________1/1/x4 100,000 6/30/x4 34,0007/1/x4 120,000 12/31/x4 40,000Kent’s December 31, 20x4, balance sheet should include a liability for unredeemed coupons ofa.0 b. 8,000 c. 14,000 d. 48,000CHAPTER 10- PROBLEMS PROBLEM 1: TRUE OR FALSETRUE1. A corporaton is formed by at least 5 but not exceeding 15 natural persons, all of legal age and a majority of whom are residents of the Philippines.TRUE2. To amend the artcles of incorporaton, a majority vote of the board plus a vote by shareholders representng at least two. thirds (2/3) of the outstanding share capital is needed.FALSE3. Under the memorandum method of accountng for share capital, the entty records its authorized capitalizaton in a debit/credit form.TRUE4. Preferred stock is generally issued with a par value.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
FALSE5. In the Philippines, a corporaton may issue only one class of shares which is the preferred stock.FALSE6. Convertble preferred stock allows the issuing corporaton to redeem the stock.TRUE7. The call price on callable preferred stock is usually specifed in the original agreement and provides for payment of dividends in arrears, if applicable, as part of the repurchase price.FALSE8. Stock Subscriptons Receivable is usually regarded as a current asset.TRUE9. Additonal paid-in capital for the excess of the stock subscripton price over par or stated value is recorded at the tme of subscripton.FALSE10. When capital stock is issued for consideraton in the form Of property other than cash, the carrying amount of the property is used to record the transacton.PROBLEM 2: FOR CLASSROOM DISCUSSION1. The par value of common stock representsa.the liquidaton value of the stock.b.the book value of the stock.c.the legal nominal value assigned to the stock.d. the amount received by the corporaton when the stock was originally issued.2. Which Of the following is not one of the basic shareholders rights?a.The right to partcipate in earnings.b.The right to maintain one's proportonal interest in the corporaton.c.The right to partcipate in the proceeds of the sale of corporate assets upon liquidaton of the corporaton.d.The right to inspect the accountng records of the corporaton.3. The following transactons relate to the stockholders' equity transactons of Lindsay Corporaton for itsinital year of existence.(a)Jan. 7 Artcles of incorporaton are fled with the state. The state authorized the issuance of 10,000 shares of P50 par value preferred stock and 200,0 shares of PIO par value common stock. (b)Jan. 28 40,000 shares of common stock are issued for P14 per share.(c)Feb. 3 80,000 shares of common stock are issued in exchange for land and buildings that have fair values of P250,000 and 1,000,000 respectvely.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
(d)Feb. 24 2,000 shares of common stock are issued to Shane and Winston, Atorneys-at-Law, in payment for legal services rendered in connecton with incorporaton. The company charged the amount to organizaton costs. The market value of the stock was P16 per share.(e)Sep. 12 Received subscriptons for 10,000 shares of preferred stock at P53 per share. A 40 percent down payment accompanied the subscriptons.The balance is due on October I.(f)Oct. I Received the fnal payment for 10,000 shares.Requirements: Prepare journal entries to record the foregoing transactons. Identfy the entries by leter (a - f). Assume the entty uses the "memorandum method. " 4. On February I, authorized common stock was sold a subscripton basis at a price in excess of par value,and 20 percent of the subscripton price was collected. (h May 1, the remaining 80 percent of the subscripton price was collected. Additonal Paid-In Capital would increase onFebruary Maya.NoYesb.NoNoc.YesNod.YesYes(Adapted)5. The entry to record the issuance of common stock for fully paid stock subscriptons isa.a memorandum entry.b.Dr. Common Stock Subscribed; Cr. Common Stock; Cr. Additonal Paid-In Capital c.Dr. Common Stock Subscribed; Cr. Subscriptons Receivabled. Dr. Common Stock Subscribed; Cr. Common Stock6. The issuance of shares of preferred stock to shareholdersa.increases preferred stock outstanding.b. has no efect on preferred stock outstanding.c.increases preferred stock authorized.d.decreases preferred stock authorized.7. Which of the following is an appropriate presentaton treasury stock?a.As a marketable securityDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
b.IAS a deducton at cost from total stockholders' equityc.Asa deducton at cost from total contngent liabilitesd.As a deducton at par from total stockholders' equity8. The data below are from the December 31, 2002, balance sheet of the Handi Corner Corporaton:Common stock, P50 par, 3,000 shares issued and outstanding ………………………P150,OOO Paid-in capital in excess of par…………………….. 45,000Retained earnings…………………………………………………. 75,000During 2003, the following transactons afectng corporate capital were recorded:Aug. 16 Purchased 400 shares of treasury stock at P78 per share. Oct. 23 Purchased 225 shares of stock at P71 per share and immediately retred the stock.Nov. 3 Sold 150 shares of the treasury stock purchased on Aug. 16 at P81 per share.Requirement: Assuming the cost method is used for treasury stock and that retained earnings are to be reduced minimally in stock reacquisiton transactons, provide the entries required to record the above transactons. 9. Gains and losses on the purchase and resale of treasury stock may be refected only ina.paid-in capital accounts.b. paid-in capital and retained earnings accounts.c.income, paid-in capital, and retaining earnings accounts. d. income and paid-in capital accounts.10. At the date of the fnancial statements, common stock share issued would exceed common stock shares outstanding as a result of the a. declaraton of a stock split. b. declaraton of a stock dividend.c.purchase of treasury stock.d.payment in full of subscribed stock.11. When treasury stock is purchased for more than its par value Treasury Stock is debited for the purchase price under which of the following methods?Cost MethodPar Value Methoda. NoNob. NoYesDownloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
c. YesNod. YesYes12. When treasury stock is purchased for cash at more than its par value, what is the efect on total stockholders' equity under each of the following methods?Cost Method Par Value Methoda. No efectDecrease b.Decrease No efectc.Increase Increase d. Decrease Decrease13. Treasury stock was acquired for cash at a price in excess of its par value. The treasury stock was subsequently reissued cash at a price in excess of its acquisiton price. Assuming the cost method of accountng for treasury stock tr is used, what is the efect on retained earnings?Acquisiton of Treasury Stock Reissuance of Treasury Stocka.No efectIncreaseb.IncreaseNo efectc.No efect No efectd.Increase DecreaseCHAPTER 10- EXERCISE 2PROBLEM 3: EXERCISES1.Barker Corp. received a charter authorizing 120,000 shares of common stock at P15 par value per share. During the frst year of operatons, 40,000 shares were sold at P28 per share. 600 shares were issued in payment of a current operatng debt of P18,600. In the frst year, the net income was P142,000.During the year, dividends of P36,000 were paid to stockholders. At the end of the year, total liabilites were P82,000.Requirements:Use the given data to compute the following items at the end of the frst year (show all computatons):(1)Total liabilites and stockholders' equity(2)Stockholders' equity(3)Contributed capital(4)Issued capital stock (par)(5)Outstanding capital stock (par)Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
(6)Unissued capital stock (number of shares)(7)Paid-In capital in excess of par value2. On August 10, Jameson Corporaton reacquired 8,000 shares Of its P100 par value common stock at P134. The stock was originally issued at P110. The shares were resold on November 21at P145.Requirement: Provide the entries required to record the reacquisiton and the subsequent resale of the stock using the cost method of accountng for treasury stock.3. The Perry Company wants to raise additonal equity capital. The company decides to issue 5,000 shares of P25 par preferred stock with detachable warrants. The package of the stock and warrants sells for P105. Each warrant enables the holder to purchase two shares of PIO par common stock at P30 per share. Immediately following the issuance of the stock, the stock warrants are selling at P14 each. The market value of the preferred stock without the warrants is P96. Requirements:(1)Prepare a journal entry for Perry Company to record the issuance of the preferred stock and the detachable warrants.(2)Assuming that all the warrants are exercised, prepare a journal entry for Perry to record the exercise of the warrants.(3)Assuming that only 70 percent of the warrants are exercised, prepare a journal entry for Perry torecord the exercise and expiraton of the warrants.ANSWER1. Solutons:(1)Shares sold (40,000 x 28) ...........................₱1,120,000₱Shares issued in payment of debt (600 x 31) .........₱18,600Net income ...........................................142,000Total liabilites ....................................82,0001,362,600₱Less dividends .......................................36,000Total liabilites & stockholders' equity .............1,326,600₱(2) 1,326,600 - 82,000 = 1,244,600₱₱₱(3)1,120,000 + 18,600 = 1,138,600₱₱₱Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
(4) 40,600 shares x 15 = 609,000₱₱(5) 40,600 shares x 15 = 609,000₱₱(6) 120,000 - 40,600 = 79,400 shares(7) 1,138,600 - 609,000 = 529,600₱₱₱2. SolutonAug. 10 Treasury Stock .....................1,072,000Cash .............................1,072,000Nov. 21 Cash (8,000 145) ................1,160,000₱Treasury Stock .....................1,072,000Paid-In Capital from Sale ofTreasury Stock (8,000 x 11) ... ₱88,0003. Solutons:(1)Cash (5,000 x 105) .........................₱525,000Common Stock Warrants .....................66,818Preferred Stock (5,000 x 25) .............₱125,000Paid-In Capital in Excess of Par-PreferredStock ...................................333,182Value assigned to warrants:14/110 x 105 x 5,000 = 66,818₱₱Value assigned to preferred stock:96/110 x 105 x 5,000 = 458,182₱₱(2)Common Stock Warrants .......................66,818Cash (10,000 x 30) .........................₱300,000Common Stock (10,000 x 10) ...............₱100,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Paid-In Capital in Excess of Par-CommonStock ....................................266,818(3)Common Stock Warrants (70% x 66,818) .......₱46,773Cash (7,000 x 30) ..........................₱210,000Common Stock (7,000 x 10) ................₱70,000Paid-In Capital in Excess of Par-CommonStock ....................................186,773Common Stock Warrants (30% x 66,818) .......₱20,045Paid-In Capital from Expired Stock Warrants 20,045POBLEM 5: MULTIPLE CHOICE – THEORY1. If shares are issued below par or issued value, the defciency of the consideraton received is recorded as "discount on share capital." The discount is presented in the statement of fnancial positon asa.receivable from the shareholdér concernedb.a deducton in shareholders' equityc.an additon in shareholders' equityd.a and b2. Legal capital is the porton of contributed capital that cannot be distributed to the owners during the lifetme of the corporaton unless the corporaton is dissolved and all of its liabilites are setled frst. Forno-par value shares, legal capital isa.the aggregate par value of shares issued and subscribed.b.the total consideraton received or receivable from shares issued or subscribed.c. the aggregate stated value of shares issued and subscribed. d. the aggregate market value of shares issued and subscribed.3. How should the excess of the subscripton price over the par value of ordinary subscribed be recorded?a.As share premium when the subscripton is received.b.As share premium when the subscripton is collected.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
c.As retained earnings when the subscripton is received. d.As share premium when the capital stock is issued.4. Share issuance costs are recognized directly in equity. If the related share premium is insufcient to ofset any share issuance costs, the issuance costs area.recognized as expense in proft or lossb.charged directly to retained earningsc.charged directly to share capitald.a or b5. Treasury shares are accounted for ata. cost b.par value c. market value d. fair valuePROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL 1. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances:Ordinary shares, P3 parP600,0OOShare premium800,000Treasury stock, at cost50,000Accumulated other comprehensive income (Debit)20,000Retained earnings appropriated for uninsured earthquake losses 150,000Retained earnings unappropriated200,000What amount should Zinc report as total stockholders' equity in its December 31, 20xI, balance sheet? a.1,680,000b.1,720,000 c.1,780,000 d.1,820,0002. On April I, 20x9, Hyde Corp., a newly formed company, had the following stock issued had outstanding:•Ordinary shares, PI par value, 20,000 shares originally issued for P30 per share.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
•Preference shares, PIO par value, 6,000 shares originally issued for P50 per share.Hyde's April J, 20x9, statement of shareholders' equity should reportOrdinary shares Preference sharesShare premiuma. P20,OOOP60,OOOP820,OOOb. P20,OOOP300,OOOP580,000c. P600,OOOP300,OOOPOd. P60,000P60,000P240,OOO3. On March I, 20x1, Rya Corp. issued 1,000 shares of its P20 par value ordinary shares and 2,000 shares of its P20 par value convertble preference shares for a total of At this date, Rya's ordinary share was selling for P36 per share, and the convertble preference share was selling for P27 per share. What amount of the proceeds should be allocated to Rya's convertble preference share?a. 60,000b. 54,000c. 48,000d. 44,0004. The stockholders' equity secton of Peter Corporaton's balance sheet at December 31, 20X2, was as follows:Ordinary shares (PIO par value, authorized 1,000,000 shares, issued and outstanding 900,000 shares) P9,000,000Share premium2,700,000Retained earningsP1,300,000On January 2, 20X3, Peter purchased and retred 100,000 shares of its stock for P1,800,000. Immediately afer retrement of these 100,000 shares, the balances in the share premium and retained earnings accounts should beShare premiumRetained earningsa.P900,000P1,300,000b.P1,400,000P800,000c.P1,900,000P1,300,000d.P2,400,000P800,0005. Asp Co. was organized on January 2, 200, with 30,000 authorized shares of PIO par ordinary shares. During 20x1 the corporaton had the following capital transactons:Jan. 5 Issued 20,000 shares at r 15 per share.July 14 Purchased 5,000 shares at PI 7 per share.Dec 27Reissued the 5,000 shares held in treasury at P20 per share.Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574
Asp used the cost method to record the purchase and reissuance of the treasury shares, In its December 31, 20xI, balance sheet, What amount should Asp report as additonal paid-in capital in excess of par?a.100,000b.125,000c.140,000d.115,000Downloaded by Abelyn Cenit (cenitabelyn@gmail.com)lOMoARcPSD|29654574