LA SALLE UNIVERSITY COLLEGE OF BUSINESS AND ACCOUNTANCY Second Semester of A.Y. 2019-2020 INTEGRATED ENHANCEMENT COURSE FOR ACCOUNTANCY FAR: Financial Accounting and Reporting by Lowelle C. Pacot, CPA, MMA MULTIPLE CHOICE 1. Which of the following is not an essential characteristic of a liability? a. A liability is a present obligation of an enterprise b. A liability is payable to a specific party c. A liability arises from past transaction or event d. The settlement of a liability will result to outflow of enterprise resources embodying economic benefits 2. Current liabilities include all of the following, except a. Trade payables and accruals for employee and other operating costs b. Financial liabilities held for trading c. Bank overdraft d. Deferred tax liability 3. Which of the following is a current liability? a. Preferred dividends in arrears b. A cash dividend payable to preferred stockholders c. A dividend payable in the form of additional shares of company’s own stock d. All of these are current liabilities 4. An entity shall measure initially a financial liability not designated at fair value through profit or loss at a. Fair value b. Fair value plus directly attributable transaction costs c. Fair value minus directly attributable transaction costs d. Face amount 5. 6. 7. Transaction costs directly attributable to the issue of a financial liability include all of the following, except a. Fees and commissions paid to agents b. Levies by regulatory agencies c. Transfer taxes and duties d. Financing costs The initial fair value of a financial liability is defined as the a. Amount for which a liability is settled. b. Amount for which a liability is settled in an arm’s length transaction. c. Amount for which a liability is settled between knowledgeable and willing parties. d. Amount for which a liability is settled between knowledgeable and willing parties in an arm’s length transaction. After initial recognition, an entity shall measure a financial liability at a. Amortized cost using the effective interest method. b. Fair value through profit or loss. FAR 6.1MC: CURRENT LIABILITIES c. Either a or b. d. Neither a nor b. 8. Which of the following statements is true in relation to the fair value option of measuring a financial liability? I. At initial recognition, an entity may irrevocably designate a financial liability at fair value through profit or loss. II. The financial liability is measured at every yearend and any changes in fair value are recognized in profit or loss. III. The interest expense on the financial liability is recognized using the effective interest rate. a. I and II only c. I and III only b. II and III only d. I, II and III 9. The discount resulting from the determination of a note payable’s present value should be reported on the balance sheet as a (an): a. Deferred charge separate from the note. b. Direct reduction from the face amount of the note. c. Addition to the face amount of the note. d. Deferred credit separate from the note. 10. Which of the following statements concerning discount on note payable is incorrect? a. Discount on note payable may be credited when an entity discounts its own note with the bank. b. The discount on note payable is a contra liability account which is shown as a deduction from note payable. c. The discount on note payable represents interest charges applicable to future periods. d. Amortizing the discounts on note payable causes the carrying amount of the liability to gradually increase over the life of the note. 11. An entity borrowed cash from a bank and issued to the bank a short-term noninterest-bearing note payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The effective interest rate paid by the entity in this transaction would be a. Equal to the stated discount rate of 10% b. Less than the stated discount rate of 10% c. More than the stated discount rate of 10% d. Independent of the stated discount rate of 10% 12. The following are taken from the records of Frame Co. as of year-end. Accounts payable 2,000 Utilities payable 7,000 Accrued interest expense 6,000 Advances from customers 1,000 Unearned rent 9,000 Page 1 of 6 Warranty obligations Income taxes payable Preference shares issued Constructive obligation Obligation to deliver own shares worth a fixed amount of cash SSS contributions payable Cash dividends payable Property dividends payable Share dividends payable Finance lease liability Bonds payable Discount on bonds payable Security deposit Redeemable preference shares issued Unearned interest on receivables 5,000 2,000 10,000 11,000 10,000 6,000 4,000 7,000 3,000 35,000 120,000 (15,000) 2,000 14,000 3,000 How much is the financial liabilities to be disclosed in the notes? a. ₱171,000 c. ₱178,000 b. ₱185,000 d. ₱192,000 13. Fan Co. has the following liabilities as of December 31, 2017. Trade accounts payable, net of debit balance in supplier’s account of ₱5,000, net of unreleased checks of ₱4,000, and net of postdated checks ₱300,000 of ₱2,000. Credit balance in customers’ accounts 2,000 Financial liability designated at FVPL 50,000 Bonds payable (maturing in 10 equal annual installments of ₱100,000) 1,000,000 12%, 5-year note payable issued on October 1, 2017 100,000 Deferred tax liability 5,000 Unearned rent 4,000 Contingent liability 10,000 Reserve for contingencies 25,000 How much is the total current liabilities? a. ₱467,000 c. ₱470,000 b. ₱477,000 d. ₱480,000 14. Air Co. has the following liabilities as of December 31, 2017 Trade accounts payable, including cost of goods received on consignment of ₱10,000 ₱300,000 Held for trading financial liabilities 50,000 Deferred revenue 20,000 Bank overdraft 10,000 Income tax payable 50,000 Accrued expenses 5,000 Share dividend payable 12,000 Advances from affiliates payable in 15 months after year-end 23,000 Loan of XYZ, Inc. guaranteed by Air – it is possible that Air will be held liable for the guarantee 45,000 How much is the total current liabilities? a. ₱405,000 c. ₱425,000 b. ₱470,000 d. ₱482,000 15. On December 31, 2017, the bookkeeper of Drang Company provided the following information: FAR 6.1MC: CURRENT LIABILITIES Accounts payable, including deposits and advances from customers of ₱500,000 Notes payable, including note payable to bank due on December 31, 2017 for ₱1,000,000 Share dividends payable Credit balance in customers’ accounts Serial bonds, payable in semiannual installments of ₱1,000,000 Accrued interest on bonds payable Contested BIR tax assessment Unearned rent income ₱2,500,000 3,000,000 800,000 400,000 10,000,000 300,000 600,000 100,000 In the December 31, 2017 statement of financial position, how much current liabilities should be reported? a. ₱6,800,000 c. ₱7,300,000 b. ₱7,900,000 d. ₱8,700,000 16. Watch Co. has a 10%, ₱1,000,000 loan payable as of December 31, 2017 that is maturing on July 1, 2018. Interest on the loan is due every July 1 and December 31. On February 1, 2018, Watch Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable of honoring the agreement’s provisions. Watch’s financial statements were authorized for issue on March 15, 2018. How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱50,000 b. ₱100,000 d. ₱1,000,000 (ref.agrem’t – no discretion; disclosed) 17. Watch Co. has a 10%, ₱1,000,000 loan payable as of December 31, 2017 that is maturing on July 1, 2018. Interest on the loan is due every July 1 and December 31. On February 1, 2018, Watch Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable of honoring the agreement’s provisions. Watch has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2017 under an existing loan facility. Watch’s financial statements were authorized for issue on March 15, 2018. How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱50,000 b. ₱100,000 d. ₱1,000,000 (ref.agrem’t w/ discretion) 18. Watch Co. has a 10%, ₱1,000,000 loan payable as of December 31, 2017 that is maturing on July 1, 2018. Interest on the loan is due every July 1 and December 31. On December 1, 2017, Watch Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. The refinancing and roll over transaction was completed on December 31, 2017. Page 2 of 6 How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱50,000 b. ₱100,000 d. ₱1,000,000 (ref.agrem’t: completed at year-end) 19. Watch Co. has a 10%, ₱1,000,000 loan payable as of December 31, 2017 that is maturing on July 1, 2018. Interest on the loan is dated July 1, 2016 and pays annual interest every July 1. On February 1, 2018, Watch Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. Both parties are financially capable of honoring the agreement’s provisions. Watch has the discretion to refinance or roll over the loan for at least twelve months from December 31, 2017 under an existing loan facility. Watch’s financial statements were authorized for issue on March 15, 2018. How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱50,000 b. ₱100,000 d. ₱1,000,000 20. On January 1, 2017, Watch Co. took a 3-year, ₱1,000,000 loan from a bank. The loan agreement requires Watch to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. As of December 31, 2017, Watch’s current ratio is 1.8:1. On January 5, 2018, the bank agreed not to collect the loan in 2018 and gave Watch 12 months to rectify the breach of loan agreement. How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱33,333 b. ₱66,667 d. ₱1,000,000 (grace period received after year-end) 21. On January 1, 2017, Watch Co. took a 3-year, ₱1,000,000 loan from a bank. The loan agreement requires Watch to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. As of December 31, 2017, Watch’s current ratio is 1.8:1. On December 31, 2017, the bank agreed not to collect the loan in 2018 and gave Watch 12 months to rectify the breach of loan agreement. How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱33,333 b. ₱66,667 d. ₱1,000,000 22. On December 31, 2017, Watch Co. has a ₱1,000,000 note payable on demand. However, on December 31, 2017, there is no indication that the payee on the note will demand payment over the next 12 months. FAR 6.1MC: CURRENT LIABILITIES How much is presented as current liability in relation to the loan in Watch’s 2017 year-end financial statements? a. None c. ₱33,333 b. ₱66,667 d. ₱1,000,000 23. On December 31, 2017, Case Co. has accounts payable of ₱1,000,000 before possible adjustment for the following: Goods in transit from a vendor to Case on December 31, 2017 with an invoice cost of ₱50,000 purchased FOB shipping point was not yet recorded. Goods shipped FOB shipping point from a vendor to Case on December 31, 2017 amounting to ₱8,000 was recorded and included in the yearend physical count as “goods in transit”. Goods in transit from a vendor to Case on December 31, 2017 with an invoice cost of ₱10,000 purchased FOB destination was not yet recorded. These goods were received in January 2018. Goods with invoice cost of ₱15,000 was recorded and included in the year-end physical count as “goods in transit”. It was found out that the goods were shipped from a vendor under FOB destination. How much is the adjusted accounts payable on December 31, 2017? a. ₱1,043,000 c. ₱1,035,000 b. ₱1,055,000 d. ₱1,070,000 24. On December 31, 2017, Cone Co. has accounts payable of ₱1,000,000 before possible adjustment for the following: Checks drawn but not yet released to payees amounted to ₱12,000 while checks drawn and released to payees but were postdated amounted to ₱5,000. On December 28, 2017, a vendor authorized Cone to return for full credit goods shipped and billed at ₱25,000 on December 14, 2017, Cone shipped the returned goods on December 31, 2017 but the credit memo was received and recorded only on January 3, 2018. Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 2017 was recorded at invoice cost at shipment date. The invoice cost is ₱14,000 while the freight cost is ₱3,000. Goods shipped FOB destination, freight collect were received on December 29, 2017. The invoice cost of ₱40,000 was credited to accounts payable on date of receipt and the related freight of ₱5,000 was debited to an expense account. How much is the adjusted accounts payable on December 31, 2017? a. ₱987,000 c. ₱990,000 b. ₱992,000 d. ₱994,000 Page 3 of 6 25. The balance in Dowarc Company’s accounts payable account at December 31, 2016 was ₱1,170,000 before any year-end adjustments relating to the following: Goods in transit from a vendor to Dowarc on December 31, 2017. The invoice cost was ₱65,000 and the goods were shipped FOB shipping point on December 29, 2017. The goods were received on January 2, 2018. Goods shipped FOB shipping point on December 20, 2017 from a vendor to Dowarc, were lost in transit. The invoice cost was ₱32,500. On January 5, 2018, Dowarc filed a ₱32,500 claim against the common carrier. Goods shipped FOB destination on December 21, 2017, from a vendor to Dowarc, were received on January 6, 2018. The invoice cost was ₱19,500. What amount should Dowarc report as accounts payable on its December 31, 2017 statement of financial position? a. ₱1,202,500 c. ₱1,222,000 b. ₱1,235,000 d. ₱1,267,500 26. Flat Co. requires non-refundable advance payments for custom-built guitar effects, gadgets, and racks. The records of Flat Co. show the following: Unearned revenue, January 1, 2017 1,000,000 Advances received during 2017 10,000,000 Advances applied to orders shipped in 8,000,000 2017 Advances pertaining to orders 300,000 cancelled in 2017 How much is the current liability on unearned revenue? a. None c. ₱700,000 b. ₱2,700,000 d. ₱3,000,000 27. Flat Co. requires refundable advance payments for custom-built guitar effects, gadgets, and racks. The records of Flat Co. show the following: Unearned revenue, January 1, 2017 1,000,000 Advances received during 2017 10,000,000 Advances applied to orders shipped in 8,000,000 2017 Advances pertaining to orders 300,000 cancelled in 2017 How much is the current liability on unearned revenue? a. None c. ₱700,000 b. ₱2,700,000 d. ₱3,000,000 28. Black Company requires advance payments with special orders for machinery constructed to customer specifications. These advances are nonrefundable. Information for the current year is as follows: Advances from customers – January ₱1,180,000 1 Advances receive with orders 1,840,000 Advances applied to orders shipped 1,640,000 Advances applicable to orders 500,000 cancelled FAR 6.1MC: CURRENT LIABILITIES In the year-end statement of financial position, what amount should be reported as current liability for advances from customers? a. ₱0 c. ₱880,000 b. ₱1,380,000 d. ₱1,480,000 Use the following information to answer the next four questions: Box Co. sells service contracts that cover a 2-year period. the sales price of each contract is ₱1,000. Box sold 1,000 contracts evenly throughout 2017. Box’s past experience shows that of the total pesos spent for repairs on service contracts, 40% in incurred evenly during the first contract year and 60% evenly during the second contract year. 29. How much is the current portion of the deferred revenue to be presented in Box’s 2017 statement of financial position? a. ₱200,000 c. ₱500,000 b. ₱800,000 d. ₱1,000,000 30. How much is the noncurrent portion of the deferred revenue to be presented in Box’s 2017 statement of financial position? a. ₱300,000 c. ₱500,000 b. ₱800,000 d. ₱1,000,000 31. How much is the service revenue recognized in 2017? a. ₱200,000 c. ₱500,000 b. ₱800,000 d. ₱1,000,000 32. How much is the service revenue recognized in 2018? a. ₱200,000 c. ₱500,000 b. ₱800,000 d. ₱1,000,000 Use the following information to answer the next two questions: Glass Co. sells monthly subscriptions for an industry publication. Subscriptions received after the November 1 cut-off date are held for publication in the following year. Receipts during 2017 for subscriptions were made evenly. Information on subscription is shown below: Unearned revenue – January 1, 2017 3,000,000 Receipts from subscriptions during 24,000,000 2017 33. How much is the unearned revenue balance on December 31, 2017? a. ₱4,000,000 c. ₱7,000,000 b. ₱12,000,000 d. ₱23,000,000 34. How much is the revenue from subscriptions during 2017? a. ₱4,000,000 c. ₱15,000,000 b. ₱23,000,000 d. ₱24,000,000 Use the following information to answer the next two questions: Glass Co. sells subscriptions for an industry publication published semiannually and shipped to Page 4 of 6 subscribers on May 1 and November 1. Subscriptions received after the April 1 and October 1 cut-off dates are held for the next publication. Receipts during 2017 for subscriptions were made evenly. Information on subscription is shown below: Unearned revenue – January 1, 2017 3,000,000 Receipts from subscriptions during 24,000,000 2017 35. How much is the unearned revenue balance on December 31, 2017? a. ₱4,000,000 c. ₱7,000,000 b. ₱12,000,000 d. ₱23,000,000 36. How much is the revenue from subscriptions during 2017? a. ₱4,000,000 c. ₱15,000,000 b. ₱23,000,000 d. ₱24,000,000 37. In November and December 2017, Avdent Company received ₱792,000 for 1,000, 3-year subscriptions at ₱264 per issue per year, starting with the January 2018 issue. Avdent elected to include the entire ₱792,000 in its 2017 income statement for tax purposes. What amount should Avdent report in its 2017 statement of financial position as unearned subscription revenue? a. None c. ₱44,000 b. ₱264,00 d. ₱792,000 38. Dunne Company sells equipment service contracts that cover a two-year period. The sales price of each contract is ₱600. Dunne’s past experience is that, of the total pesos spent for repairs on service contract, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout 2017. In its December 31, 2017 statement of financial position, what amount should Dunne report as deferred service revenue? a. ₱300,000 c. ₱360,000 b. ₱480,000 d. ₱540,000 39. Kent Company sells magazine subscriptions of one of three-year periods. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of ₱2,400,000 on December 31, 2016 expire as follows: During 2017 ₱600,000 During 2018 900,000 During 2019 400,000 In its December 31, 2016 statement of financial position, what amount should Kent report as magazine subscriptions collected in advance? a. ₱500,000 c. ₱1,200,000 b. ₱1,900,000 d. ₱2,400,000 40. Greene Company sells office equipment service contracts agreeing to service equipment for a twoyear period. Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the FAR 6.1MC: CURRENT LIABILITIES contracts. Additional information for the year ended December 31, 2017 is as follows: Unearned service contract revenue at 600,000 January 1 Cash receipts from service contracts sold 980,000 Service contract revenue recognized 860,000 Service contract expense 520,000 What amount should be reported as unearned service contract revenue on December 31, 2017? a. ₱460,000 c. ₱480,000 b. ₱490,000 d. ₱720,000 41. Annette Video Company sells 1- and 2-year subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following: 2016 2017 Sales ₱420,000 ₱500,000 Less cancelations 20,000 30,000 Net sales 400,000 470,000 Subscription expirations: 2016 120,000 2017 155,000 130,000 2018 125,000 200,000 2019 _____ 140,000 400,000 470,000 In the December 31, 2017 statement of financial position, what should be reported as unearned subscription revenue? a. ₱340,000 c. ₱465,000 b. ₱470,000 d. ₱495,000 42. Rubber Co. has just opened a novelty store. Rubber decided to sell gift certificates as part of its sales promotion. Transactions relating to the gift certificates during the year are shown below: Sold gift certificates worth ₱100,000. Gift certificates worth ₱80,000 were redeemed. ₱10,000 gift certificates expired. ₱2,000 gift certificates were estimated not to be redeemed. How much is the unearned revenue on gift certificates as of year-end? a. None c. ₱8,000 b. ₱10,000 d. ₱100,000 43. Fell operates a retail grocery store that is required by law to collect refundable deposits of ₱5 on soda cans. Information for the current year follows: Liability for refundable deposit – January 1 150,000 Cans of soda sold 100,000 Soda cans returned 110,000 On February 1, Fell subleased space and received a ₱25,000 deposit to be applied against rent at the expiration of the lease in 5 years. In the December 31 statement of financial position, what amount should be reported as current liability for deposit? a. ₱25,000 c. ₱100,000 Page 5 of 6 b. ₱125,000 d. ₱140,000 44. Koce Co. requires deposits from customers for the containers of goods sold. The customers are refunded for the deposits received when the containers are returned within two years from the date of sale of the related goods. Deposits for containers not returned within the time limit are regarded as proceeds from retirement of the containers. Information in 2017 is as follows: Container deposits at December 31, 2016, from deliveries in: 2015, ₱20,000; and 2016, ₱45,000. Deposits for containers delivered in 2017, ₱90,000. Deposits for containers returned in 2017 from deliveries in: 2015, ₱9,000; 2016, ₱25,000; and 2017, ₱46,000. How much is the liability for deposits on returnable containers on December 31, 2017? a. None c. ₱44,000 b. ₱64,000 d. ₱75,000 45. On the first day of each month, Bell Mortgage Company receives from Kent Company an escrow deposit of ₱250,000 for real estate taxes. Bell records the ₱250,000 in an escrow account. Kent’s 2017 real estate tax is ₱2,800,000, payable in equal installments on the first day of each calendar quarter. On January 1, 2017, the balance in the escrow account was ₱300,000. On September 30, 2017, what amount should be reported as escrow liability? a. ₱150,000 c. ₱450,000 b. ₱850,000 d. ₱1,150,000 46. Clean Co. maintains escrow accounts and pays real estate taxes for its customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Information on escrow accounts are shown: Escrow accounts liability, January 1, 200,000 2017 Escrow payments received during 1,500,000 2017 Real estate taxes paid during 2017 500,000 Interest on escrow funds during 2017 100,000 How much is current liability for escrow accounts on December 31, 2017? a. ₱1,000,000 c. ₱1,200,000 b. ₱1,290,000 d. ₱1,300,000 47. Kemp Company must determine the December 31, 2017 accruals for advertising and rent expense. A ₱50,000 advertising bill was received in January 7, 2018, comprising costs of ₱35,000 for advertisements in December 2017 issues, and ₱15,000 for advertisements in January 2018 issues of the newspaper. A store lease, effective December 16, 2016, calls for a fixed rent of ₱120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over ₱6,000,000 per calendar year is payable on January 31 of the following year. Net sales for 2017 totaled ₱9,000,000. In the December 31, 2017 statement of financial position, what amount should be reported as accrued liabilities? a. ₱185,000 c. ₱210,000 b. ₱245,000 d. ₱260,000 48. Time Co. is preparing its December 31, 2017 yearend financial statements. The following information was gathered: The bill for December’s utility costs of ₱30,000 was received and paid on January 10, 2018. A ₱20,000 advertising bill was received on January 2, 2018. Of the total billing, ₱15,000 pertain to advertisements in December 2017 and ₱5,000 pertain to advisements in January 2018. A lease, effective December 16, 2016, calls for a fixed rent of ₱100,000 per month, payable one month after the commencement of the lease and every month thereafter. In addition, rent equal to 5% of net sales over ₱1,000,000 per year is payable on January 31 of the following year. Total cash sales and collections on accounts amounted to ₱1,000,000. Accounts receivable has a net increase of ₱200,000. Commissions of 15% of sales are paid on the same day cash is received from customers. How much is the accrued liabilities on December 31, 2017? a. None c. ₱125,000 b. ₱135,000 d. ₱140,000 Answer Key: BDBCD DCABA CBCAC DAACD ADCCD BDCCA ACABB CDBBD CCCBC BBB FAR 6.1MC: CURRENT LIABILITIES Page 6 of 6