FINANCIAL ACCOUNTING & REPORTING 2
PX – SET G SOLUTION
1) Diamondback Company provided the following information on December 31, 2017:
Income taxes withheld from employees
Cash balance at First State Bank
Cash overdraft at Harbor Bank
Accounts receivable with credit balance
Estimated expenses of meeting warranties on merchandise previously sold
Estimated damages as a result of unsatisfactory performance on a contract
Accounts payable
Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual
installments of P500,000 due April 1 and October 1 of each year, the last bond to be
paid on October 1, 2023. Interest is also paid semiannually.
Stock dividend payable
What is the total current liabilities on December 31, 2017?
A. 8,100,000
B. 8,950,000
C.
8,150,000
D.
SOLUTIONS: A
Income taxes withheld from employees
Cash balance at First State Bank – Cash, Current asset
Cash overdraft at Harbor Bank
Accounts receivable with credit balance
Estimated expenses of meeting warranties on merchandise previously sold
Estimated damages as a result of unsatisfactory performance on a contract
Accounts payable
Deferred serial bonds, issued at par and bearing interest at 12%, payable in semiannual
installments of P500,000 due April 1 and October 1 of each year, the last bond to be
paid on October 1, 2023. Interest is also paid semiannually. – if the last payment
will be on October 1, 2023, then if you count it carefully the first payment will
be on April 1, 2019, which is beyond 12 months from the date asked
(12/31/17)
Interest on the bonds (5,000,000 x 12% x 3/12)
Stock dividend payable – Equity
Total current liabilities
2) Rockies Company provided the following information on December 31, 2017:
Accounts payable after deducting debit balance in suppliers’ account of P100,000
Accrued liabilities
Note payable – due March 31, 2018
Note payable – due May 1, 2018
Bonds payable – due December 31, 2019
900,000
2,500,000
1,300,000
750,000
500,000
1,500,000
3,000,000
5,000,000
2,000,000
9,000,000
900,000
--1,300,000
750,000
500,000
1,500,000
3,000,000
--150,000
--8,100,000
500,000
50,000
1,000,000
800,000
2,000,000
On March 1, 2018 before the 2017 financial statements were issued, the note payable of P1,000,000 was replaced by
an 18-month note for the same amount. The entity is considering similar action on the P800,000 note due on May 1,
2018. The financial statements were issued on March 31, 2018. What total amount should be presented as current and
non current liabilities at year-end 2017?
A.
B.
C.
D.
Current Liabilities
2,250,000
2,250,000
1,650,000
2,450,000
Noncurrent Liabilities
2,000,000
2,800,000
2,800,000
2,000,000
SOLUTION: D
Current
600,000
50,000
1,000,000
800,000
--2,450,000
Accounts payable – adjusted
Accrued liabilities
Note payable – due March 31, 2018
Note payable – due May 1, 2018
Bonds payable – due December 31, 2019
Total
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
Noncurrent
------2,000,000
2,000,000
•J. S. CAYETANO™•
3) The trial balance of Beatriz Company reflected the following liability account balances on December 31, 2018:
Accounts payable
3,800,000
Accrued expense
400,000
Unearned interest income
100,000
Bonds payable
6,800,000
Premium on bonds payable
400,000
Deferred tax liability
800,000
Dividends payable
1,000,000
Income tax payable
1,800,000
Note payable, due January 31, 2019
1,200,000
Note payable, due March 15, 2020
2,000,000
Mortgage payable
1,500,000
Total amount of current liabilities in the statement of financial position as at December 31, 2018 is:
A. 14,700,000
B. 9,100,000
C. 8,700,000
D. 8,300,000
SOLUTIONS: D
Accounts payable
Accrued expense
Unearned interest income
Dividends payable
Income tax payable
Note payable, due January 31, 2019
Total current liabilities
3,800,000
400,000
100,000
1,000,000
1,800,000
1,200,000
8,300,000
4) Marron Company has the following liabilities as of December 31, 2011.
Trade accounts payable net of debit balance in supplier’s account of P20,000, net of unreleased
checks of P16,000
Credit balance in customers’ accounts
Financial liability designated at FVPL
Bonds payable maturing in 10 equal annual installments of P400,000
12%, 5-year note payable issued on October 1, 2011
Deferred tax liability
Unearned rent
Contingent liability
Reserve for contingencies
How much is the total current liabilities?
A. 1,880,000
B. 1,872,000
C.
1,868,000
D.
SOLUTIONS: B
Adjusted accounts payable (1,200,000 + 20,000 + 16,000)
Credit balance in customer’s account (advances from customer)
Financial liability measured at FVPL
Current portion of long term debt (400,000 / 10)
Interest payable on notes (400,000 x 12% x 3/12)
Unearned rent
Total current liability
1,200,000
8,000
200,000
4,000,0000
400,000
20,000
16,000
40,000
100,000
1,860,000
1,236,000
8,000
200,000
40,000
12,000
16,000
1,872,000
5) Denver Corporation’s accounts payable at December 31, 2019, totaled P1,600,000 before any necessary year-end
adjustments relating to the following transactions:
• On December 27, 2019, Denver wrote and recorded checks to creditors totaling P700,000 causing an overdraft of
P200,000 in Denver’s bank account at December 31, 2019. The checks were mailed out on January 10, 2020.
• On December 28, 2019, Denver purchased and received goods for P300,000, term 2/10, n/30. Denver records
purchases and accounts payable at net amount. The invoice was recorded and paid January 2, 2020.
• Goods shipped FOB destination on December 20, 2019 from a vendor was received January 2, 2020. The invoice
price was P130,000.
At December 31, 2019, what amount should Cowboy report as total accounts payable?
A. 1,900,000
B. 2,100,000
C. 2,594,000
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
D.
2,724,000
•J. S. CAYETANO™•
SOLUTIONS: C
Unadjusted Accounts payable
1. Reversal of unreleased check
2. Unrecorded purchases as of 12/31/19 (300,000 x 98%)
3. No adjustments
Adjusted Accounts payable
1,600,000
700,000
294,000
-2,594,000
6) Saints Company’s accounts payable at December 31, 2016 totaled P1,000,000 before any necessary year-end
adjustments relating to the following transactions and information:
• On December 27, 2016, Saints wrote and issued checks to creditors totaling P350,000. The issuance of the
checks was recorded on January 3, 2017.
• On December 28, 2016, Saints purchased and received goods for P150,000, terms 2/10, n/30. Saints records
purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 2017.
• Goods shipped FOB destination on December 20, 2016 from a vendor to Saints were received January 2, 2017.
The invoice cost was P65,000. The purchase was recorded on January 2, 2017.
• Goods costing P120,000 were purchased from Vikings Trading. The goods were shipped by Vikings on December
28, 2016, FOB shipping point. The goods, together with the invoice, were received by Saints on January 4, 2017.
• The accounts payable general ledger balance of P1,000,000 is net of P80,000 debit balance in one supplier’s
account representing deposit on goods to be delivered in February 2017.
What amount should Saints Company report as total accounts payable at December 31, 2016?
A.
1,697,000
C. 1,062,000
B.
997,000
D. 1,857,000
SOLUTIONS: B
Unadjusted Accounts payable
1. Unrecorded payment
2. Unrecorded purchases as of 12/31/16
3. No adjustment
4. Unrecorded purchases as of 12/31/16
5. Supplier’s debit balance
1,000,000
(350,000)
147,000
--120,000
80,000
997,000
7) On December 31, 2019, Goten Company has accounts payable of P1,000,000 before possible adjustment for the
following:
• Checks drawn but not yet released to payees amounted to P12,000 while checks drawn and released to payees
but were postdated amounted to P5,000.
• On December 28, 2019, a vendor authorized Goten to return for full credit goods shipped and billed at P25,000 on
December 14, 2019. Goten shipped the returned goods on December 31, 2019 but the credit memo was received
and recorded on January 3, 2020.
• Goods shipped FOB shipping point, freight prepaid from a vendor on December 28, 2019 was recorded at invoice
cost at shipment date. The invoice cost is P14,000 while the freight cost is P3,000.
• Goods shipped FOB destination, freight collect were received on December 29, 2019. The invoice cost of P40,000
was credited to accounts payable on date of receipt and the related freight of P5,000 was debited to an expense
account.
What is the adjusted accounts payable on December 31, 2019?
A.
1,020,000
C. 990,000
B.
995,000
D. 984,000
SOLUTION: C
Unadjusted accounts payable 12/31/19
1,000,000
1. Reversal of unreleased and postdated checks (12,000 + 5,000)
17,000
2. Unrecorded purchase return as of 12/31/19
25,000
3. Unrecorded accounts payable for freight*
3,000
4. Overstatement of accounts payable **
(5,000)
Adjusted accounts payable 12/31/19
990,000
*Goten should shoulder the freight (since it was shipping point) but it was paid by the vendor (since it was freight
prepaid) thus, this will increase the liability of Goten.
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
8) Krillin, Inc. is preparing its financial statements for the year ended December 31, 2019. Accounts payable amounted to
P200,000 before any necessary year-end adjustment related to the following:
• At December 31, 2019, Krillin has a P50,000 debit balance in its accounts payable to Vegito, a supplier, resulting
from a P50,000 advance payment for goods to be manufactured to Krillin specifications.
•
On December 27, 2019, Krillin wrote and recorded checks to creditors totaling P30,000 that were mailed on
January 10, 2020.
•
Checks in the amount of P25,000 were written to vendors and recorded on December 29, 2019. The checks were
dated January 5, 2020.
What amount should Krillin report as accounts payable in its December 31, 2019 statement of financial position?
A. 305,000
B. 280,000
C. 275,000
D. 205,000
SOLUTIONS: A
Recorded Accounts Payable – 12/31/19
a. Add back of suppliers debit balance
b. Reversal of unreleased checks
c. Reversal of postdated checks
Adjusted Accounts Payable – 12/31/19
200,000
50,000
30,000
25,000
305,000
Use the following information for the next two (2) questions:
Twins, Inc. distributes annual bonuses to its sales managers and two sales agents. The company reported P2,000,000
profit for 2019 before bonuses and income taxes. Income taxes of Twins, Inc. average 30%.
QUESTIONS:
9) How much is the total amount of bonus if bonus of each is computed at 15% of profit after taxes and bonuses?
A. 190,045
B. 200,957
C. 479,087
D. 570,135
10) How much should the sales manager and each sales agent receive, respectively, if the sales manager gets 15% and
each sales agent gets 10% of profit after bonuses but before income taxes?
A
B
C
D
Manager
857,143
518,519
222,222
222,222
Each sales agent
571,428
518,519
148,148
296,296
SOLUTION: C, C
T = 0.30 (2,000,000 – B)
B = 0.45 (2,000,000 – B – T)
B = 0.45 [2,000,000 – B – (0.30 (2,000,000 – B)]
B = 0.45 [2,000,000 – B – 600,000 + 0.30B]
B = 900,000 – 0.45B – 270,000 + 0.135B
B = 630,000 – 0.315B
1.315B = 630,000
B = 479,087
B = 0.35 (2,000,000 – B)
B = 700,000 - 0.35
1.35B = 700,000
B = 518,518
Manager, 518,518 x 15/35 = 222,222
Each sales agent, 518,518 x 10/35 = 148,148
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
11) Generous Company pays bonuses to its chief operating officer (COO) and sales manager. According to the incentive
agreement, the COO gets 10% and the sales manager gets 8%. The basis for computing bonuses would be the net
income after tax and bonuses. Income tax rate is 35%. The net income before tax and bonuses is P5,000,000 for the
year 2019. How much is the bonus for the sales manager?
A. 274,262
B. 223,724
C. 294,450
D. 232,766
SOLUTION: D
T = 0.35 (5,000,000 – B)
B = 0.18 (5,000,000 – B – T)
B = 0.18 [5,000,000 – B – (0.35 (5,000,000 – B)]
B = 0.18 [5,000,000 – B – 1,750,000 + 0.35B]
B = 900,000 – 0.18B – 315,000 + 0.063B
B = 585,000 – 0.117B
1.117B = 585,000
B = 523,724
523,724 x 8/18 = 232,766
12) Tatay Company is preparing its December 31, 2019 financial statements. The following information was gathered:
• The bill for December’s utility cost of P120,000 was received and paid on January 10, 2020.
• A P80,000 advertising bill was received on January 2, 2020. Of the total billing, P60,000 pertain to advertisements
in December 2019 and P20,000 pertain to advertisements in January 2020.
• A lease, effective December 16, 2018, calls for a fixed rent of P400,000 per month, payable one month after the
commencement of the lease and every month after thereafter. In addition, rent equal to 5% of net sales over
P4,000,000 per year is payable on January 31 of the following year.
• Total cash sales and collections on accounts amounted to P4,000,000 and accounts receivable has a net increase
of P800,000 Commissions of 15% of sales are paid on the same day cash is received from customers.
What is the accrued liabilities on December 31, 2019?
A.
420,000
C. 540,000
B. 340,000
D. 620,000
SOLUTION: B
Utility expense for December 2019
Advertising costs incurred in December 2019
Rent expense from December 16 to 31, 2019 (400,000 / 2)
Contingent rent expense (*4,800,000 – 4,000,000) x 5%
Commission expense not yet paid
Total accrued liabilities
Beginning
Sales
Ending (increase
SQUEEZE
120,000
60,000
200,000
40,000
**120,000
540,000
Accounts receivable
4,000,000
*4,800,000
800,000
Collections
Total commission expense (4,800,000 total sales x 15%)
Commission expense paid (4,000,000 cash collections x 15%)
Commission not yet paid
720,000
(600,000)
**120,000
Use the following information for the next two (2) questions:
Swamp Co. sells computer to various computer rental businesses. Swamp also has been offering a special service
warranty on computer units it sold. With the purchase of the computer unit, the customer has the right to purchase 3-year
service contract for additional amount of P600. Data concerning sales of computer and warranty contract are as follows:
2019
2020
Computer units sold
550
460
Sales price per unit
5,000
4,000
Number of service contracts sold
350
300
Swamp Company has estimated based on the available past records that the pattern of repairs has been: 24% for the first
year, 36% on the second year, and the remainder is on the third year. Sales of the contracts are made evenly during the
year.
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
QUESTIONS:
13) What is the net income from service contract for the year ended December 31, 2021?
A.
131,400
C. 117,000
B. 133,800
D. 148,200
14) How much is the unearned revenue form service contract to be presented in 2020 statement of financial position?
A.
200,200
C. 280,200
B. 288,200
D. 226,200
SOLUTION: B, C
Revenue recognized in 2021 Jan.1 to Jul. 1 from sale of 2019 (600 x 350 x 36% x 6/12)
Revenue recognized in 2021 Jul. 1 to Dec. 31 from sale of 2019 (600 x 350 x 40% x 6/12)
Revenue recognized in 2021 Jan.1 to Jul. 1 from sale of 2020 (600 x 300 x 24% x 6/12)
Revenue recognized in 2021 Jul. 1 to Dec. 31 from sale of 2020 (600 x 300 x 36% x 6/12)
Total revenue recognized in 2021
37,800
42,000
21,600
32,400
133,800
Unearned as of 12/31/20 from sale on 2019 (600 x 350 x 58%)
Unearned as of 12/31/20 from sale on 2020 (600 x 300 x 88%)
Total unearned as of 12/31/20
121,800
158,400
280,200
15) Andrew Company sells 3-year service contracts for air-conditioning units for P1,800 each. Sales of service contract are
made evenly throughout each year. The company estimated that 5% of repairs are done in the first year from the date
of sale, 30% in the second year and 65% in the third year.
Service contracts sold are as follows:
Number of service contracts sold
2014
1,840
2015
2,110
How much revenue from service contracts sold in 2014 realized in 2016?
A. 2,235,600
B. 2,152,800
C. 1,573,200
2016
2,550
D.
SOLUTIONS: C
Contracts sold in 2014 earned in 2016, 1,840 x 1,800 x 47.5% (half of 30% + half of 65%)
1,076,400
1,573,200
16) Wild Company has just opened a novelty store. Wild 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 P100,000.
• Gift certificates worth P80,000 were redeemed.
• P10,000 gift certificates expired.
• P2,000 gift certificates were estimated not to be redeemed.
What is the unearned revenue from gift certificates as of December 31, 2019?
A.
20,000
C. 10,000
B. 90,000
D.
8,000
SOLUTION: D
Unearned Revenue from Gift Certificates
Redemption
80,000
0
Expiration
10,000
100,000
Amount estimated not to be redeemed
2,000
--8,000
Beginning balance
Cash receipt from customers
Ending balance
17) Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a P2 per room, per night, occupancy tax.
Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the
end of each calendar quarter. On January 3, Year 2, Hudson paid its November Year 1 sales taxes and its fourth
quarter Year 1 occupancy taxes. Additional information pertaining to Hudson’s operations is
Year
Room Rentals
Room Nights
October
100,000
1,100
November
110,000
1,200
December
150,000
1,800
What amount should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, Year 1
statement of financial position?
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
Sales taxes
Occupancy taxes
A
39,000
6,000
B
39,000
8,200
C
54,000
6,000
D
54,000
8,200
SOLUTION: C
Room rentals for November and December (110,000 + 150,000)
Sales tax
Sales taxes paid on January 2, Year 2, - therefore unpaid as of December 31, Year 1
260,000
15%
39,000
Room nights for 3 months (fourth quarter) – 1,100 + 1,200 + 1,800
Occupancy tax
Total occupancy tax unpaid
4,100
2
8,200
18) Perez Company sells products with reusable and expensive containers. The customer is charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of delivery.
Containers held by customers on January 1, 2019 from deliveries in:
2017
150,000
2018
430,000
580,000
Containers delivered in 2019
780,000
Containers returned in 2019 from deliveries in:
2017
90,000
2018
250,000
2019
286,000
626,000
What is the liability for deposits on December 31, 2019?
A. 494,000
B. 584,000
C.
674,000
D.
734,000
SOLUTION: C
Cash returned to customers
Deposit forfeited (150,000 – 90,000)
Liability for container deposit
626,000
580,000
60,000
780,000
674,000
01/01/19 – Beginning balance
Cash receipt from customers
12/31/19 – Ending balance
19) T’Chaka Company reported the following liabilities on December 31, 2017:
Accounts payable
Short-term borrowings
Mortgage payable, current portion P100,000
Bank loan payable, due June 30, 2018
750,000
400,000
3,500,000
1,000,000
The P1,000,000 bank loan was refinanced with a 5-year loan on January 15, 2018, with the first principal payment due
January 15, 2019. The financial statements were issued February 28, 2018. What total amount should be reported as
current liabilities on December 31, 2017?
A. 1,150,000
B. 2,250,000
C. 1,250,000
D. 850,000
SOLUTION: B
Current
750,000
400,000
100,000
1,000,000
2,250,000
Accounts payable
Short-term borrowings
Mortgage payable, current portion P100,000
Bank loan payable, due June 30, 2018
Total
Noncurrent
----3,400,000
--3,400,000
20) Xoliswa Company manufactures a product that is packaged and sold. A plate is offered to customers sending in three
wrappers accompanied by a remittance of P10. Data with respect to the premium offer are summarized below:
21)
2018
2019
Sales
3,600,000
4,200,000
Purchase of premium, P50 per plate
390,000
580,000
Number of plates distributed as premiums
5,000
9,000
Estimated number of plates to be distributed in next period
2,000
3,000
Distribution cost P20 per plate
What is the premium expense for 2019?
A. 600,000
B. 400,000
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
C.
700,000
•SET – G•
D.
720,000
•J. S. CAYETANO™•
SOLUTION: A
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit
% of redemption
# of coupons required for each premium
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending
Squeeze
In Premiums
2,000
Net Cost
60
In Peso
120,000
10,000
60
600,000
(9,000)
3,000
60
60
(540,000)
180,000
50 20 – 10 = 60
22) Amond Inc., places a coupon in each box of its product. Customers may send in ten coupons and P3.00 and the
company will send them a CD. Sufficient CDs were purchased at P5.40 apiece. During 2019, 1,260,000 boxes sold. It
was estimated that a total of 5% of the coupons will be redeemed. In 2019, 18,000 coupons were redeemed. How
much is the premium expense for the year 2019 and the liability for premiums outstanding as of December 31, 2019?
Premium Expense
Premium Payable
A.
63,000
43,200
B.
34,020
24,300
C.
15,120
10,800
D.
10,800
10,800
SOLUTIONS: C
In Premium
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit
% of redemption
# of coupons required for each premium
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending
1,260,000
5%
/10
18,000
/10
Net Cost
In Peso
0
2.40
0
6,300
2.40
15,120
(1,800)
4,500
2.40
2.40
(4,320)
10,800
23) Phoenix Company sold 4,200,000 boxes of banana-nangka pie mix under a new sales promotional program. Each box
contains one coupon, in which 10 coupons, submitted with P5 entitles the customer to a baking pan. Phoenix
Company pays P16 per pan and P3 for handling and shipping. Phoenix company estimates that 80% of the coupons
will be redeemed, even though only 850,000 coupons had been processed during 2019. The liability for Unrdeemed
Coupons in its December 31, 2019 is
A.
2,761,000
C. 4,690,000
B. 3,514,000
D. 4,704,000
SOLUTIONS: B
In Premium
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit
% of redemption
# of coupons required for each premium
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending
•FAR eastern university•
4,200,000
80%
/10
•FINANCIAL ACCOUNTING 2•
850,000
/10
*Net Cost
In Peso
0
0
0
336,000
*14
4,704,000
(85,000)
251,000
14
14
(1,190,000)
3,514,000
•SET – G•
•J. S. CAYETANO™•
24) Yankee Corporation embarked on a promotional program whereby a “T” shirt costing P150 each is given away for
every 100 bottle crowns returned plus P50. Yankee Corporation estimates that only 40% of the bottle crowns in the
hands of consumers will be presented for redemption. The following information is available to you:
Quantity
Amount
Bottles sold
1,000,000
5,000,000
“T” shirt bought for give away
1,500
225,000
“T” shirt distributed to customers
1,000
What is the estimated premium liability for the year-end December 31, 2019?
A.
300,000
C. 450,000
B. 250,000
D. 150,000
SOLUTIONS: A
In Premium
Premium Payable – beginning
Premium Expense:
# of units sold x coupon in each unit
% of redemption
# of coupons required for each premium
Total
Premiums Distributed/Paid:
# of coupons redeemed
# of coupons required for each premium
Premium Payable – Ending
*Net Cost
In Peso
0
0
0
4,000
100
400,000
(1,000)
3,000
100
100
(100,000)
300,000
1,000,000
40%
/100
25) Night Company owns a car dealership that it uses for servicing cars under warranty. In preparing the financial
statements, the entity needs to ascertain the provision for warranty that it would be required to provide at the end of the
year. The entity’s experience with warranty claims is as follows:
60% of all cars sold in a year have zero defects, 25% of all cars sold in a year have normal defect, and 15% of all cars
sold in a year have significant defect. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a
“significant defect” in a car is P30,000. The entity sold 500 cars during the year. What is the “expected value” of the
warranty provision for the current year?
A. 3,500,000
B. 1,750,000
C. 1,400,000
D. 4,000,000
SOLUTION: A
Normal defect 500 x 25% x 10,000
Significant defect 500 x 15% x 30,000
Total
1,250,000
2,250,000
3,500,000
26) During 2017, Colts Company introduced a new product carrying a two-year warranty against defects. The estimated
warranty costs related to 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 year ended December 31, 2017 and 2018, are as followings:
Sales
Actual expenditures
2017
150,000
2,250
2018
250,000
7,500
400,000
9,750
What amount should Colts report as estimated warranty liability in the December 31, 2018, balance sheet?
A. 2,500
B. 4,250
C. 11,250
D. 14,250
SOLUTIONS: D
Total cumulative warranty expense as of the date asked 12/31/18 (400,000 x 6%)
Total actual cumulative warranty paid
Warranty not yet paid
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
24,000
(9,750)
14,250
•J. S. CAYETANO™•
27) On January 2, 2019, Athletics Company introduced a new line of products that carry a three-year warranty against
factory defects. Estimated warranty costs related to peso sales are as follows: 1% of sales in the year of sale, 2% in the
year after sales and 3% in the second year after sale. Sales and actual warranty expenditures for the period 2019 to
2021 were as follows:
Sales
Actual warranty Expenditures
2019
200,000
1,500
2020
500,000
7,500
2021
700,000
22,500
1,400,000
31,500
What amount should Athletics report as warranty expense in 2021?
A. 52,500
B. 22,500
C. 23,000
D.
42,000
SOLUTION: D
Warranty expense for 2021 700,000 x 6%
42,000
28) During 2019, Angles company guaranteed a supplier’s P750,000 loan from a bank. On October 1, 2019, Angels was
notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believes Angels will
probably have to pay between P375,000 and P675,000 under its guarantee. As a result of the supplier’s bankruptcy,
Angels entered into a contract in December 2019 to retool its machines to that Angles could accept parts from other
suppliers. Retooling costs are estimated to be P450,000. What amount should Angels report as a liability in its
December 31, 2019, statement of financial position?
A. 375,000
B. 525,000
C. 675,000
D. 975,000
SOLUTION: B
Provision for litigation should be recorded because the chances of paying is probable.
Measurement (depends on the given information or use the level of priority)
1. Actual amount paid (if known before authorization of financial statement) –
2. Best/reasonable estimate (if given) – √
3. Mid point (if range is given) –
4. Weighted average probability (if various outcomes is given) –
The company has to obligation to retool its own Machine.
29) On November 1, 2019, Ever Corporation was awarded a judgment of P3,000,000 in connection with a lawsuit. The
decision is being appealed by the defendant, and it is expected that the appeal process will be completed by the end of
2020. Ever’s attorney feels that it is highly probable that an award will be upheld on appeal, but the judgment may be
reduced by an estimated 40%. In addition to a footnote disclosure, what amount should be reported as a receivable in
Ever’s balance sheet at December 31, 2019
A. 1,800,000
B. 1,200,000
C. 0
D. 3,000,000
SOLUTION: C
Rule on Contingent Asset:
1. Virtually certain – recognize gain and asset.
2. Probable – disclosure. 3,000,000 x 40 = 1,200,000, reasonably probable only
3. Possible and remote – do nothing.
30) On January 15, 2015, an explosion occurred at the Aizel Company plant causing extensive property damage to area
buildings. By March 1, 2016, no claims hand been asserted against the entity but management and counsel concluded
that it is likely that claims will be asserted and that it is probable that the entity will be responsible for damages.
Management believed that P1,250,000 would be a reasonable estimate of the liability. The entity’s P5,000,000
comprehensive public liability policy has a P250,000 deductible clause. The financial statements for 2015 were issued
on March 31, 2016. What amount of loss from lawsuit should be reported in the income statement for 2015?
A.
1,250,000
C. 250,000
B. 1,000,000
D.
0
SOLUTION: C
The insurance company will be the only liable for the claims, except for the deductible clause that will be paid
by the company.
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
Use the following information for the next four (4) questions:
On January 1, 2021, Rowlet Corporation. Issued a 3 year, 8,000, P1,000 convertible bonds at 110. Interest is to be paid
annually at the stated coupon rate of 12% every December 31. Each bond is convertible, at the holder’s option, into 30,
P25 par value common share at any time up to maturity. On the date of issuance, prevailing market interest rate for similar
debt without the conversion privilege was 9%. On the same date market price of one common share was P30. (PVF 4
Decimal)
QUESTIONS:
31) What is the equity component of the convertible debt?
A. 192,352
B. 800,000
C.
422,335
32) What is the resulting bonds payable carrying value as of December 31, 2021?
A. 8,607,648
B. 8,220,346
C. 8,422,336
D.
0
D.
8,340,100
33) Assuming that the convertible bonds above were converted on January 1, 2023, how much should be credited to
Share premium from the equity conversion?
A. 2,614,688
B. 2,412,698
C. 2,414,698
D. 2,416,688
SOLUTION: A, C B
FV of the compound instrument – 8,000,000 x 110%
Present value of principal, 8,000,000 x 0.7722
Present value of nominal, 8,000,000 x 12% 2.5313
Value assigned to equity
8,800,000
6,177,600
2,430,048
8,607,648
192,352
Carrying amount at 1/1/21
Effective interest
Nominal interest 8,000,000 x 12%
Carrying amount 12/31/21
8,607,647
1.09
(960,000)
8,422,336
Carrying amount 12/31/21
Effective interest
Nominal interest 8,000,000 x 12%
Carrying amount 12/31/22
Value assigned to equity
Total consideration
Total par value 8,000 x 30 x 25
SP- excess over par
8,422,336
1.09
(960,000)
8,220,345
192,352
8,412,697
6,000,000
2,412,687
Use the following information for the next two (2) questions:
On July 1, 2019, Blink182 Company issued 5,000 of its 6 year, P1,000 face value 10% convertible bonds at par. Interest is
payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without
the conversion option is 12%. On July 1, 2020, an investor in Blink182’s convertible bonds tendered 1,500 bonds for
conversion into 15,000, P1 par value, ordinary shares of Blink182.
QUESTIONS: (PVF 4 Decimal)
34) The carrying amount of the bonds payable on December 31, 2019 is
A. 4,992,333
B. 4,615,400
C. 4,732,875
D.
4,605,860
35) The conversion of the bonds payable on July 1, 2020 will increase net share premium by
A. 1,485,000
B. 1,415,054
C. 1,374,664
D.
1,377,697
SOLUTION: A, C
Fair value of the compound instrument – issued at par
Present value of principal, 5,000,000 0.4970
Present value of nominal interest, 5,000,000 x 5% x 8.384
Value assigned to the equity
5,000,000
2,485,000
2,096,000
4,581,000
419,000
Carrying amount of the of bonds at 7/1/19
Effective interest
Nominal interest 5,000,000 x 10% x 6/12
Carrying amount 12/31/19
4,581,000
1.06
(250,000)
4,605,860
Carrying amount 12/31/19
Effective interest
4,605,860
1.06
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
Nominal interest 5,000,000 x 10% x 6/12
Carrying amount 7/1/19
Converted bonds
Carrying amount of the converted bonds
Value of equity assigned to conversion exercised 419,000 x 1,500/5,000
Total consideration received
Total par value of shares issued 15,000 x 1
SP – excess over par (increase)
SP – conversion privilege canceled (decrease)
Net increase in SP
(250,000)
4,632,212
1,500/5,000
1,389,664
125,700
1,515,364
15,000
1,500,364
125,700
1,364,664
36) Sanji, Inc. issued P100,000 of its 8%, five year bonds on January 1, 2015, at 98. Interest is paid on January 1 and July
1. The bonds are callable at 103 and straight line amortization is used. The bonds are recallable on April 1, 2017. The
journal entry to record the reacquisition of the bonds will include a:
A. DR. Loss 5,500
B. CR. Gain 5,000
C. CR. Discount 1,100
D. DR. Loss 4,200
SOLUTION: C
Discount 100,000 x 2%
No of months for amortization 5 x 12
Amortization per month
# of months amortized 1/1/15 – 4/1/17
Total amortization
Discount
Unamortized discount
2,000
60
33.33
27
900
2,000
1,100
37) Nami, Inc., issued 2,000 of its 5 year P1,000 face value 11% bonds on January 1, 2013. These bonds were sold for
P2,155,800 a price that yields 9%. The bonds were dated January 1, 2013 and pay interest annually every December
31. On July 1, 2015, 1,000 of the bonds were retired, the company paying P1,100,000 inclusive of accrued interest.
What amount of gain or (loss) on retirement of bonds payable during 2015?
A. 1,963 loss
B. 56,963 loss
C. 5,753 loss
D. 1,963 gain
QUESTIONS: A
Carrying amount of the bonds 1/1/13
Effective interest
Nominal interest 2,000,000 x 11%
Effective interest
Nominal interest 2,000,000 x 11%
Effective interest x 6/12
Nominal interest 2,000,000 x 11% x 6/12
Carrying amount at 7/1/15
Half of the bonds were retired
Carrying amount of the retired bonds
Accrued interest 1,000,000 x 11% x 6/12
Total liability
Total retirement price plus accrued interest
Loss
2,155,800
1.09
(220,000)
1.09
(220,000)
1.045
(110,000)
2,086,074
½
1,043,036
55,000
1,098,036
(1,100,000)
1,963
38) Pomeranian Company issued 10-year bonds on January 1, 2010. The amortization and interest schedule below reflects
the bond issuance and the subsequent interest payments and charges:
Date
Interest Paid
Interest Expense
Amount Unamortized
Carrying Value
01.01.10
--28,253
471,747
12.31.10
55,000
56,610
26,643
473,357
12.31.11
55,000
56,803
24,840
475,160
12.31.12
55,000
57,019
22,821
477,179
12.31.13
55,000
57,261
20,560
479,440
12.31.14
55,000
57,533
18,027
481,973
12.31.15
55,000
57,837
15,190
484,810
12.31.16
55,000
57,177
12,013
487,987
12.31.17
55,000
58,558
8,455
491,545
12.31.18
55,000
58,985
4,470
495,530
12.31.19
55,000
59,470
-500,000
If all the bonds were retired at 103 plus accrued interest on March 31, 2016, how much would be the gain/loss on
retirement of bonds?
A. 29,396 gain
B. 29,396 loss
C. 43,146 gain
D. 43,146 loss
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
SOLUTION: B
Carrying amount 3/31/15
Amortization 3 months 487,987 – 484,810 x 3/12
Carrying amount
Retirement 500,000 x 103%
Loss
484,810
794
485,604
515,000
29,396
39) On January 1, 2019, Julie Company issued 3-year bonds with face amount of P5,000,000 at 98. Additionally, Julie
Company paid bond issue cost of P140,000. The nominal rate is 10% and the effective rate is 12%. The interest is
payable annually on December 31. The effective interest method is used in amortizing discount and issue cost. What
amount of discount is amortized for the year ended December 31, 2019?
A. 71,200
B. 88,000
C. 83,200
D. 0
SOLUTION: A
Initial Carrying amount (5,000,000 x 98% - 140,000)
Effective interest
Interest expense
Nominal interest (5,000,000 x 10%)
Amortization
4,760,000
12%
571,200
500,000
71,200
40) Franzia Company issues P10,000,000, 7.8%, 20-year bonds to yield 8% on July 1, 2022. Interest is paid on July 1
and January 1. The proceeds from the bonds are P9,802,073. What amount should be reported for the bonds
payable account on the December 31, 2022 statement of financial position?
A. 9,806,322
B. 9,804,156
C. 9,806,239
D. 9,414,156
SOLUTION: C
Initial carrying amount 7/1/22
Effective
Nominal interest
Carrying amount 12/31/22
9,802,073
1.04
780,000
9,804,156
41) A P1,000 bond’s carrying amount at the end of 2014 is P940, and P955 at the end of 2015. The bond pays interest
annually at December 31 and the straight line method is used to amortized bond discount and premium. The bond
matures on December 31, 20__.
A. 16
B. 17
C. 18
D. 19
SOLUTION: C
Discount to amortize 1,000 – 940
Amortization per year 955- 940
# of years to amortize
Issuance
# of years to amortize
Maturity
60
15
4 years
2014
4
2018
42) On January 1, 2022, Marimar Company issued 10,000 of its 12%, P1,000 face value 5-year bonds at 105.
Interest on the bonds is payable annually every December 31. In connection with the sale of these bonds, Marimar
paid the following expenses:
Promotion costs
100,000
Engraving and printing
400,000
Underwriter’s commissions
500,000
Using the straight line method, what amount should Marimar report as bond interest expense for the year 2022?
A. 1,100,000
B. 1,200,000
C. 1,300,000
D. 1,600,000
SOLUTION: C
Fair value 10,000,000 x 105
10,500,000
Bond issuance cost 100,000+400,000+500,000
(1,000,000)
Initial carrying amount
9,500,000
Face amount
10,000,000
Discount
500,000
Nominal interest 10,000,000 x 12%
Amortization of net discount 500,000 / 5
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
1,200,000
100,000
•SET – G•
•J. S. CAYETANO™•
Total
1,300,000
43) Lappay Company issued a P5,000,000, 10%, 10-year bonds on July 1, 2016 for 113.6 when the effective interest rate
was 8%. Interest payable on June 30 and December 31. How much is the interest expense should Lappay report in
profit or loss for the year ended December 31, 2016?
A. 284,000
B. 250,000
C. 227,200
D. 200,000
SOLUTION: C
Carrying amount at beginning 5,000,000 x 113.6%
Effective interest
July – Dec.
Interest expense
5,680,000
8%
6/12
227,200
44) Star Company has outstanding a P6,000,000 note payable to an investment entity. Accrued interest payable on this
note amounted to P600,000. Because of financial difficulties, the entity negotiated with the investment entity to
exchange inventory of machine art to satisfy the debt. The inventory transferred is carried of P3,600,000. The estimated
retail value of the inventory is P5,600,000. The perpetual inventory system is used. What amount of pretax gain on
extinguishment should Sundown Company report as component of income from continuing operations in 2017?
A. 3,000,000
B. 1,000,000
C. 2,400,000
D. 400,000
SOLUTION: A
Carrying amount of the note
Unpaid interest
Total liability
Carrying amount of asset transferred
Gain
6,000,000
600,000
6,600,000
3,600,000
3,000,000
45) On January 1, 2017, Sunrise Company is experiencing extreme financial pressure and is in default in meeting interest
payment on a long term note of P6,000,000 due on December 31, 2018. The interest rate is 12% payable every
December 31. The accrued interest payable on January 1, 2017 is P720,000. In an agreement with the creditor, the
entity obtained the following changes in the terms of note:
• The accrued interest on January 1, 2017 is forgiven.
• The principal is reduced by P500,000.
• The new interest rate is 8% payable every December 31.
• The new date of maturity is December 31, 2020. (PVF 4 Decimal)
46) What is the gain on extinguishment of debt to be recognized for 2017?
A. 1,570,588
B. 1,591,800
C. 1,220,000
D.
1,888,338
Use the following information for the next two (2) questions:
Turt Company is experiencing financial difficulty and is negotiating trouble debt restructuring with its creditor to relieve its
financial stress. Turt has a P5,000,000 note payable to Metrobank. The bank is considering acceptance of an equity
interest in Turt Company in the form of 400,000 ordinary shares with a fair value of P12 per share. The par value of the
ordinary share is P10 per share.
QUESTIONS:
47) If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain to be reported by Turt in
its profit or loss statement as a result of the restructuring?
A. 1,000,000
B. 500,000
C. 200,000
D. 0
48) If the issue of equity is treated as an extinguishment of an exiting debt instrument, what amount of gain or loss should
Turt Company report in its profit or loss statement as a result of the restructuring?
A. 1,000,000
B. 500,000
C. 200,000
D. 0
Use the following information for the next three (3) questions:
Daft Punk purchased machinery on December 31, 2016, paying P80,000 down and agreeing to pay the balance in 4 equal
installments of P60,000 payable each December 31. Implicit in the purchase price is an assume interest of 12%.
QUESTIONS: (PVF 5 Decimal)
49) How much interest expense should be reported in Daft Punk’s income statement for the year December 31, 2017?
A. 38,131
B. 21,869
C. 17,293
D. 42,707
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•
50) What is the carrying amount of the note at December 31, 2017?
A. 120,000
B. 144,110
C. 99,310
D.
101,403
SOLUTION: B, D
PV of principal, 60,000 x 3.03735
Cash paid
Initial measure of machine
182,241
80,000
262,241
Initial measure of note 12/31/16
Effective interest
Interest expense 2017
182,241
12%
17,293
Carrying amount of the note 12/31/16
Effective interest
Principal payment
Carrying amount of the note 12/31/17
144,110
1.12
(60,000)
101,403
J END OF PRELIM EXAM SET – G SOLUTION J
•FAR eastern university•
•FINANCIAL ACCOUNTING 2•
•SET – G•
•J. S. CAYETANO™•