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FINANCIAL ACCOUNTING & REPORTING 2 LONG QUIZ 1 – SET A 1) Nieva Company had the following liabilities on December 31, 2019: Accounts payable Accrued expenses Note payable – due March 31, 2020 Note payable – due May 1, 2020 Bonds payable – due December 31, 2021 Bonds payable – due December 31, 2020 (net of discount P100,000)

500,000 50,000 1,000,000 800,000 2,000,000 4,900,000

On March 1, 2020 before the 2019 financial statements were issued, the note payable of P1,000,000 was replaced by an 18-month note for the same amount. The company is considering a similar action on the P800,000 note due on May 1, 2019. The bond redemption fund established five years ago for the bonds maturing on December 31, 2019 is equal to the face value of the issue. A. 2,350,000 B. 1,350,000 C. 6,250,000 D. 7,250,000 SOLUTIONS: D Accounts payable Accrued expenses Note payable – due March 31, 2020 – refinanced after December 31 Note payable – due May 1, 2020 Bonds payable – due December 31, 2021 – due beyond 12 months Bonds payable – due December 31, 2020 (net of discount P100,000) Total current liabilities 2) 49ers Company provided the following information on December 31, 2019: Accounts payable, net of creditors’ debit balances P200,000 Accrued expenses Bonds payable due December 31, 2020 Premium on bonds payable Deferred tax liability Income tax payable Cash dividend payable Share dividend payable Note payable – 6%, due March 1, 2020 Note payable – 8%, due October 1, 2020

500,000 50,000 1,000,000 800,000 -4,900,000 7,250,000

2,000,000 800,000 2,500,000 300,000 500,000 1,100,000 600,000 400,000 1,500,000 1,000,000

The financial statements for 2019 were issued on March 31, 2020. On December 31, 2019, the 6% note payable was refinanced on a long-term basis. Under the loan agreement for the 8% note payable, the entity has the discretion to refinance the obligation for at least twelve months after December 31, 2019. What amount should be reported as total current liabilities? A. 7,500,000 B. 9,000,000 C. 8,000,000 D. 6,900,000 SOLUTION: A Current 2,200,000 800,000 2,800,000 -1,100,000 600,000 ---7,500,000

Adjusted accounts payable (2,000,000 + 200,000) Accrued expenses Bonds payable currently maturing (2,500,000 + 300,000) Deferred tax liability Income tax payable Cash dividend payable Share dividend payable 6% note payable – refinanced before year end 8% note payable – discretion Total 3) An analysis of Browns Company’s liabilities disclosed the following: Accounts payable, after deducting debit balances in suppliers’ accounts amounting to P22,500 (accounts payable included non trade liabilities of P32,500) Accrued expenses Credit balances of customer’s account Stock dividends payable Claims for increase in wages and allowances by employees of the company’s covered in a FAR eastern university FINANCIAL ACCOUNTING 2 LONG QUIZ – SET A

Non-current ---500,000 ---1,500,000 1,000,000 3,000,000

105,000 15,000 13,500 70,000 J. S. CAYETANO

pending lawsuit Estimated liabilities for premium

125,000 60,000

How much should be presented as total current liabilities in the statement of financial position? A. 6,000 B. 168,500 C. 183,500 D. 216,000 SOLUTIONS: D Accounts payable – trade and non trade (105,000 + 22,500) Accrued expenses Credit balances of customer’s account Stock dividends payable – equity account Claims for increase in wages and allowances by employees of the company’s covered in a pending lawsuit – contingent liability, disclosure only Estimated liabilities for premium Total 4) Caramilk has the following liabilities as of December 31, 2019: Trade accounts payable, including cost of goods received on consignment of P10,000 Held for trading financial liabilities Bank overdraft Income tax payable Accrued expenses Share dividend payable Advances from affiliates payable in 15 months after year-end Loan of Mumshi, Inc. guaranteed by Caramilk – it is possible that Caramilk will be held liable How much is the total current liabilities? A. 425,000 B. 405,000

C.

415,000

SOLUTIONS: B Trade accounts payable (300,000 – 10,000) Held for trading financial liabilities Bank overdraft Income tax payable Accrued expenses

D.

127,500 15,000 13,500 --60,000 216,000

300,000 50,000 10,000 50,000 5,000 12,000 23,000 45,000

460,000

290,000 50,000 10,000 50,000 5,000 405,000

5) The Friends Company records its trade accounts payable net of any cash discounts. At the end of 2019, Friends had a balance of P300,000 in its trade accounts payable account before any adjustments related to the following items: • Goods shipped to Friends FOB shipping point were in transit on December 31. The invoice price of the goods was 50,000, with a 2% discount allowed for prompt payment. • Goods shipped to Friends FOB destination on December 29 arrived on January 2, 2020. The invoice price of the goods was P8,000, with a 4% discount allowed for payment within 20 days. • On December 10, Friends had recorded a shipment received. The recorded invoice price was P24,750, net, with a 1% discount allowed for payment within 14 days. At the end of the year, payment had not been made. At what amount should Friends report trade accounts payable on its December 31, 2019 balance sheet? A. 349,000 B. 349,250 C. 356,680 D. 356,930 SOLUTIONS: B Accounts payable – unadjusted 300,000 49,000 1. Unrecorded purchase – (assume not recorded until received) 50,000 x 98% 2. No adjustment -250 3. Reversal of discount – exceeded the discount period (24,750 /99%) x 1% Adjusted accounts payable 349,250 6) Kerr Company accounts payable balance at December 31, 2019 was P1,500,000 before considering the following transactions: • Goods were in transit from a vendor to Kerr on December 31, 2019. The invoice price was P70,000, and the goods were shipped FOB shipping point on December 29, 2019. The goods were received on January 4, 2020. • Goods shipped to Kerr FOB shipping point on December 20, 2019, from a vendor were lost in transit. The invoice price was P50,000. On January 5, 2020, Kerr filed a P50,000 claims against the common carrier.

FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

In its December 31, 2019 statement of financial position, Kerr should report accounts payable of A. 1,620,000 B. 1,570,000 C. 1,550,000 D. 1,500,000 SOLUTIONS: A Accounts payable – unadjusted 1,500,000 1. Unrecorded purchase 70,000 2. Unrecorded purchase 50,000 Accounts payable – adjusted 1,620,000 7) The balance in Cowboy Corporation’s accounts payable at December 31, 2019 was P1,350,000 before any necessary year-end adjustment relating to the following: • Goods were in transit to Cowboy from a vendor on December 31, 2019. The invoice cost was P75,000. The goods were shipped FOB shipping point on December 29, 2019 and were received on January 2, 2020. • Goods shipped FOB destination on December 21, 2019, from a vendor to Cowboy, were received on January 6, 2020. The invoice cost was P37,500. • On December 27, 2019, Cowboy wrote and recorded checks totaling P60,000 which were mailed on January 10, 2020. In Cowboy’s December 31, 2019 statement of financial position, how much should be the accounts payable? A. 1,410,000 B. 1,425,000 C. 1,462,500 D. 1,485,000 SOLUTIONS: D Unadjusted Accounts payable 1,350,000 1. Unrecorded purchases, goods in transit 75,000 2. No adjustment -3. Reversal of unreleased check 60,000 Adjusted Accounts payable 1,485,000 8) On December 31, 2021, Cell Company has accounts payable of P4,000,000 before possible adjustment for the following: • Goods in transit from a vendor to Cell on December 31, 2021 with an invoice cost of P200,000 purchased FOB shipping point was not yet recorded. • Goods shipped FOB shipping point from a vendor to Cell was lost in transit. The invoice cost of P80,000 was not yet recorded. • Goods shipped FOB shipping point from a vendor to Cell on December 31, 2021 amounting to P32,000 was recorded and included in the year-end physical count as “goods in transit.” • Goods in transit from a vendor to Cell purchased FOB destination was not yet recorded. The goods were received in January 2022. • Goods with invoice cost of P60,000 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. • Checks drawn but not yet released to payee amounted to P48,000, while checks drawn and released to payees but were postdated amounted to P20,000. • On December 28, 2021, a vendor authorized Cell to return for full credit goods shipped and billed at P100,000 on December 14, 2021. Cell shipped the returned goods on December 31, 2021 but the credit memo was received and recorded on January 3, 2022. • Goods shipped FOB shipping point, freight prepaid from a vendor December 28, 2021 was recorded at invoice cost at shipment date. The invoice cost is P56,000 while the freight cost is P12,000. • Goods shipped FOB destination, freight collect were received on December 29, 2021. The invoice cost of P160,000 was credited to accounts payable on date of receipt and the related freight of P20,000 was debited to an expense account. How much is the adjusted accounts payable on December 31, 2021? A. 4,220,000 C. 4,168,000 B. 4,180,000 D. 4,148,000 SOLUTION: B Unadjusted 1. Unrecorded purchase 2. Unrecorded purchase 3. No adjustment 4. No adjustment FAR eastern university

4,000,000 200,000 80,000 --FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

5. Recorded purchase but should not be recorded (60,000) 6. Reversal of unreleased and postdated check 68,000 7. Unrecorded purchase return (100,000) 8. Unrecorded unpaid freight 12,000 9. Debited to expense instead of accounts payable (20,000) Adjusted 4,180,000 9) In its statement of comprehensive income for the year ended December 31, 2013, Ethan Company showed bonus expense of P466,428 and income after deducting tax and bonus is P6,196,822. Income tax rate is 35% and bonus is computed as percentage of the income after deducting income tax but before deducting bonus. What was the bonus rate? A. 7.53% B. 7.00% C. 5.00% D. 5.67% SOLUTION: B 466,428 / (6,196,822 + 466,428) = 7% 10) Washington Corporation provides an incentive compensation plan under which its president is to receive a bonus equal to 10 percent of Washington’s income in excess of P100,000 before deducing income tax but after deducting bonus. If income before income tax and bonus is P320,000 and the effective tax rate is 40 percent, the amount of the bonus should be A. 20,000 B. 22,000 C. 32,000 D. 44,000 SOLUTION: A B = 10% (320,000 – 100,000 – B) B = 10% (220,000 – B) B = 22,000 – 0.1B 1.1B = 22,000 B = 20,000 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) Popo Company pays its outside salespersons fixed monthly salaries and commissions based on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of sale) and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of December for the three salespersons are as follows: Salesperson Fixed Salaries Net Sales Commission Rate A 10,000 200,000 4% B 14,000 400,000 6% C 18,000 600,000 6% Totals 42,000 1,200,000 What should Popo Company accrue for sales commissions at December 31? A. 70,000 B. 68,000 C. 28,000 SOLUTIONS: C Commission A (200,000 x 4%) Payment to A FAR eastern university

D.

26,000

8,000 (10,000) FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

Excess payment to A

(2,000)

Commission B (400,000 x 6%) Payment to B Payable to B

24,000 (14,000) 10,000

Commission C (600,000 x 6%) Payment to C Payable to C

36,000 (18,000) 18,000

Total commission payable (10,000 + 18,000) 28,000 13) Green Bay Company pays all employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Green Bay Company accrues salaries expenses only at its December 31 year-end. Data relating to salaries earned in December 31, 2021 are as follows: • Last payroll paid on December 26, 2021 for the 2-week period ended December 26, 2021. • Overtime pay earned in the 2-week period ended December 26, 2021 was P10,500. • Remaining work days in 2021 were December 29, 30, and 31, on which days, there was no overtime. • The recurring biweekly salaries totaled P187,500. Assuming a five-day workweek, what amount should Green Bay Company record as accrued salaries at December 31, 2021? A. 56,250 B. 66,750 C. 112,500 D. 123,000 SOLUTIONS: B 10 days salaries 187,500 10 days 10 Daily salaries 18,750 Days unpaid 29, 30, 31 3 Total unpaid 56,250 Overtime 10,500 Total unpaid 66,750 14) Vanny’s Video Mart sells 1 and 2-year mail order 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 17,000,000 21,000,000 Less cancellations 1,000,000 1,000,000 Net sales 16,000,000 20,000,000 Subscriptions expiration: 2016 2017 2018 2019

4,000,000 7,000,000 5,000,000

5,000,000 11,000,000 4,000,000

In Vanny’s December 31, 2017, balance sheet, the balance of unearned subscription revenue should be A. 20,000,000 B. 15,000,000 C. 11,000,000 D. 4,000,000 SOLUTION: A Subscription not yet expired as of December 31, 2017 (subscription that will expire beyond 2017 i.e., 2018 and up): Sold 2016 expire in 2018 5,000,000 Sold 2017 expire in 2018 11,000,000 Sold 2017 expire in 2019 4,000,000 Total unexpired as of 12/31/18 20,000,000 15) Delta Company sells equipment service contracts that cover a two-year period. The sale price of each contract is P600. Delta’s past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Delta sold 1,000 contracts evenly throughout 2019. In its December 31, 2019 balance sheet, what amount should Delta report as deferred service contract revenue? A. 300,000 B. 360,000 C. 480,000 D. 540,000 SOLUTION: C FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

Selling price of contract (1,000 x 600) 600,000 Revenue recognized in 2019 (600,000 x 20%) 120,000 Unearned revenue at December 31, 2019 480,000 16) Brave Company sells appliance service contract, agreeing to repair appliances for two-year period. Brave’s past experience is that, of the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Receipts from service contract sales for the two years ended December 31, 2019, are as follows: 2018 1,500,000 2019 1,800,000 Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales are made evenly during the year. What amount should Brave report as service contract revenue at December 31, 2019? A. 1,080,000 B. 1,110,000 C. 1,440,000 D. 1,890,000 SOLUTION: B Revenue recognized from contract sold in 2018 (1,500,000 x 20%) + (1,500,000 x 30%) 750,000 Revenue recognized from contract sold in 2019 (1,800,000 x 20%) 360,000 Total revenue recognized in 2019 1,110,000 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? A B C D Sales taxes 39,000 39,000 54,000 54,000 Occupancy taxes 6,000 8,200 6,000 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 Room nights for 3 months (fourth quarter) – 1,100 + 1,200 + 1,800 Occupancy tax Total occupancy tax unpaid 18) Perez Company sells products with reusable and expensive containers. container delivered and receives a refund for each container returned Containers held by customers on January 1, 2019 from deliveries in: 2017 2018 Containers delivered in 2019 Containers returned in 2019 from deliveries in: 2017 2018 2019 What is the liability for deposits on December 31, 2019? A. 494,000 B. 584,000

C.

260,000 15% 39,000 4,100 2 8,200

The customer is charged a deposit for each within two years after the year of delivery. 150,000 430,000

90,000 250,000 286,000

674,000

580,000 780,000

626,000

D.

734,000

SOLUTION: C Cash returned to customers Deposit forfeited (150,000 – 90,000) FAR eastern university

Liability for container deposit 626,000 580,000 60,000 780,000

FINANCIAL ACCOUNTING 2



01/01/19 – Beginning balance Cash receipt from customers

LONG QUIZ – SET A

J. S. CAYETANO

674,000

12/31/19 – Ending balance

19) At December 31, 2018, Dolphins Corporation owed notes payable of P2,000,000 with a maturity of April 30, 2019. These notes did not arise from transactions in the normal course of business. On February 1, 2019, Dolphins issued P4,000,000 of ten-year bonds with the intention of using part of the bond proceeds to liquidate the P2,000,000 of notes payable. Dolphins Company’s 2018 financial statements were issued on March 29, 2019. How much of the P2,000,000 notes payable should be classified as current liabilities in Dolphin Company’s statement of financial position at December 31, 2018? A. 6,000,000 C. 2,000,000 B. 4,000,000 D. 0 SOLUTION: C Currently maturing obligation is classified as current liability – general rule, unless: 1. Refinance on or before December 31 – NO 2. Company as a discretion – NO 3. Grace period to rectify a breach of agreement is received on December 31 – NO 20) Jaguars Candy Company bought 8,000 premiums at P2 each to give away in a box top mail-in contest. Two box tops entitle a customer to one premium. Past experience indicates that approximately 45 percent of the available box tops will be redeemed. The number of boxes sold during the current year was 15,200. The amount of premium expenses for the current year would be: A. 8,360 B. 6,840 C. 16,000 D. 16,720 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

15,200 45% /2

Net Cost

In Peso

2

6,840

3,420

21) Willem Company reported the following liabilities at December 31, Year 1: Accounts payable – trade Short-term borrowings Mortgage payable, current portion P100,000 Other bank loan, matures June 30, Year 2

750,000 400,000 3,500,000 1,000,000

The P1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem’s audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1? A. 850,000 B. 1,150,000 C. 1,250,000 D. 2,250,000 SOLUTIONS: D Accounts payable – trade 750,000 Short-term borrowings 400,000 100,000 Mortgage payable – current portion only 1,000,000 Other bank loan – refinanced after December 31 Total current liabilities 2,250,000 22) Kansas Company bought 40,000 dolls at P5 each to give away in a proof of purchase promotion. Two proofs of purchases entitle a customer to one doll. Past experience indicates that approximately 55 percent of the available proof of purchases will be redeemed. The number of proof of purchases on soup boxes sold during the current year was 76,000. The amount of expense to be recognized during the current year would be: A. 104,500 B. 110,000 C. 200,000 D. 209,000 SOLUTIONS: A

FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

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

76,000 55% /2

Net Cost

In Peso

5

104,500

20,900

23) As part of the company’s strategy to increase sales, Poodle Corporation offered a premium of wig for every 10 bottle caps of shampoo plus remittance of P2. Each wig costs P10. Information for the company for year 2017 and 2018 follow: 2017 2018 Bottles of shampoo sold 900,000 1,300,000 Number of wig distributed 30,000 75,000 Number of wig expected to be distributed in future periods, as estimated at year-end 20,000 70,000 How much is the premium expense for the year 2018? A. 1,250,000 C. 1,000,000 B. 1,160,000 D. 400,000 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

1,300,000 ? /10

*Net Cost

In Peso

20,000

8

160,000

SQUEEZE 125,000

8

1,000,000

(75,000) 70,000

8 8

(600,000) 560,000

SQUEEZE

*10 – 2 = 8 24) Marichu Company manufactures a special product. To promote the sale of the product, a premium is offered to customers who send in three wrappers and a remittance of P25. The distribution cost per premium is P5. 5,000 and 7,000 premiums were purchased in 2014 and 2015 respectively. Data for the premiums are: 2014 2015 Sales 20,000,000 25,000,000 Premiums purchased P400,000 P560,000 Number of premiums distributed 4,000 5,500 Number of premiums to be distributed next period 300 500 The premium expense for 2015 should be A. 330,000 B. 342,000

C.

348,000

D.

464,000

SOLUTION: B 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 *400,000/5,000 = 80 + 5 – 25 = 60 FAR eastern university

FINANCIAL ACCOUNTING 2



In Premium 300

*Net Cost 60*

In Peso 18,000

5,700

60

342,000

(5,500) 500

60 60

(330,000) 30,000

LONG QUIZ – SET A

Squeeze

J. S. CAYETANO

25) Clandestine Company owns a car dealership that it uses for servicing cars under warranty. In preparing its financial statements, the entity needs to ascertain the provision for warranty that it would be required to recognized at year-end. The entity’s experience indicates that 60% of all cars sold in a year have zero defect, 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 provision for warranty for the current year? A. 1,400,000 B. 1,750,000 C. 3,500,000 D. 4,000,000 SOLUTION: C Normal defect – 500 x 25% x 10,000 1,250,000 Significant defect – 500 x 15% x 30,000 2,250,000 Total 3,500,000 Use the following information for the next two (2) questions: Sam company started business in 2015. It sells printers with a three-year warranty. Sam company estimates its warranty cost as a percentage of peso sales. Based on past experience, it is estimated that 2% will be repaired during the first year of warranty, 4% will be repaired during the second year of warranty and 6% will be repaired in the third year. In 2015 and 2016, the company was able to sell 7,500 units and 8,400 units, respectively at a selling price of P5,000 unit. The company also incurred actual repair costs of P530,000 and P1,176,000 in 2015 and 2016, respectively. QUESTIONS: 26) What amount should Sam Company report as warranty expense in 2015? A. 7,834,000 B. 5,040,000 C. 4,500,000

D.

3,970,000

27) What is the amount of liability for warranty reported in Sam Company’s December 31, 2016 statement of financial position? A. 7,834,000 B. 5,040,000 C. 4,500,000 D. 3,024,000 SOLUTION: D, A Sales for 2015 7,500 x 5,000 x 12%

4,500,000

Cumulative warranty expense as of 2016 (7,500 + 8,400) x 5,000 x 12% 9,540,000 Cumulative warranty payment as of 2016 (530,000 + 1,176,000) (1,706,000) Warranty expense unpaid 7,834,000 28) 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%) 24,000 Total actual cumulative warranty paid (9,750) Warranty not yet paid 14,250 29) Aljur Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an attorney and determined that there is a 50% chance of losing. The attorney estimated that the amount of any payment would be between P500,000 and P800,000 with P500,000 as the best estimate. What is the required journal entry as a result of this litigation? A. No journal entry is required B. Debit Litigation expense and credit Litigation Liability P250,000. C. Debit Litigation expense and credit Litigation Liability P500,000. D. Debit Litigation expense and credit Litigation Liability P660,000.

FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

SOLUTION: A Since the probability of paying is only possible 50%, the liability should not be recognized.

30) On March 1, 2022, Erik Company issued 10,000 of its P1,000 face value bonds at 95 plus accrued interest. Erik Company paid bond issue cost of P1,000,000. The bonds were dated November 1, 2021, mature on November 1, 2031, and bear interest at 12% payable semiannually on November 1 and May 1. The net amount that Erik receive from the bond issuance is A. 8,900,000 B. 9,000,000 C. 9,500,000 D. 8,500,000 SOLUTION: A Fair value 10,000,000 x 95 Transaction cost Initial carrying amount Accrued interest 10,000,000 x 12% x 4/12 Net cash received

9,500,000 (1,000,000) 8,500,000 400,000 8,900,000

31) On July 1, 2022, Spear Company issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2022 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear received from the bond issuance? A. 1,015,000 B. 1,000,000 C. 990,000 D. 965,000 SOLUTION: A Fair value 1,000,000 x 99% Accrued interest April 1, 2020 – July 1, 2022 (1,000,000 x 10% x 3/12) Total

990,000 25,000 1,015,000

32) 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 What is the carrying value of the bonds on January 1, 2022? A. 9,000,000 B. 9,500,000 C. 10,000,000 SOLUTION: B Fair value 10,000,000 x 105 Bond issuance cost 100,000+400,000+500,000 Initial carrying amount

D.

10,500,000

10,500,000 (1,000,000) 9,500,000

33) On January 2, 2016, Lucban Company issued 9% bonds in the amount of P10,000,000 which mature on January 2, 2026. The bonds were issued for P9,390,000 to yield 10% resulting in a bond discount of P610,000. Interest is payable annually on December 31. Lucban uses the interest method of amortizing bond discount. in its December 31, 2016 statement of financial position, what amount should Lucban report as bond payable? A. 10,000,000 B. 9,451,000 C. 9,390,000 D. 9,429,000 SOLUTION: D Initial carrying amount Effective interest Nominal interest Carrying amount 12/31/16

9,390,000 1.10 (900,000) 9,429,000

34) Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds form the bond issue? (PVF 5 Decimal) A. 6,531,618 B. 5,216,494 C. 5,218,809 D. 5,217,308 SOLUTION: C Present value of principal, 5,000,000 x 0.78120 FAR eastern university

FINANCIAL ACCOUNTING 2

3,906,000



LONG QUIZ – SET A

J. S. CAYETANO

Present value of nominal interest 5,000,000 x 3% x 8.75206 Total

1,312,809 5,218,809

35) Mauban Company has outstanding a 7%, 10-year P10,000,000 face value bond. The bond was originally sold to yield 6% annual interest. Mauan uses the effective internet method to amortize bond premium. On January 1, 2016, the carrying amount of the outstanding bond was P10,500,000. What amount of unamortized premium on bond should Mauban report in its December 31, 2016, statement of financial position? A. 430,000 B. 450,000 C. 570,000 D. 550,000 SOLUTION: A Initial carrying amount Effective interest Nominal interest Carrying amount 12/31/16 Face amount Premium 12//31/16

10,500,000 1.06 (700,000) 10,430,000 10,000,000 430,000

36) The December 31, 2016, statement of financial position of Dodger Corporation includes the following items: 9% bonds payable due December 31, 2024 1,400,000 Unamortized premium on bonds payable 37,800 The bonds were issued on December 31, 2014, at 103, with interest payable on July 1 and December 31 of each year. Dodger uses straight line amortization. On March 1, 2016, Dodger retired P560,000 of these bonds at 98 plus accrued interest. What should Dodger record as a gain on retirement of these bonds? A. 26,320 B. 26,040 C. 15,120 D. 28,000 SOLUTION: A Face amount

1,400,000 1.03 1,442,000 1,400,000 42,000 14/120 4,900 42,000 37,100 1,400,000 1,437,100 560/1,400 574,840 548,800 26,040

Initial carrying amount Face amount Premium at issuance 12/31/14 Amortization issuance to retirement (12/31/14 – 3/1/16) 14 months Amortization issuance to retirement (12/31/14 – 3/1/16) 14 months Premium at issuance 12/31/14 Unamortized at retirement date Face amount Carrying amount at retirement Portion of retired bonds Retirement price 560,000 x 98% Gain

37) On June 30, 2021, Omara Company had outstanding 8%, P3,000,000 face amount, 15-year bonds maturing on June 30, 2031. Interest is payable on June 30 and December 31. The unamortized amount of bond discount on June 30, 2021 was P135,000. On June 30, 2021, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing the gain or loss on this early extinguishment of debt? A. 2,820,000 B. 2,865,000 C. 2,955,000 D. 3,000,000 SOLUTION: B Face amount 3,000,000 Discount (135,000) Carrying amount 6/30/21 2,865,000 38) Ajax made an early extinguishment of a P900,000 debt with a net carrying amount of P884,000 to extinguish the debt, Ajax paid its creditors P887,000 in cash. As a result of this transaction, Ajax will recognize A. P6,000 ordinary gain C. P6,000 extraordinary gain B. P3,000 ordinary loss D. P3,000 extraordinary loss SOLUTION: B Carrying amount Retirement price Loss FAR eastern university

884,000 (887,000) (3,000) FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

39) Mae Jong Corporation issues 1,000 convertible bonds at the beginning of 2021. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of P1,000 per bond (total proceeds received from issuance of the bonds are P1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of P1. The market rate of interest on similar non-convertible debt is 9 percent. Compute the liability component of Mae Jong’s convertible debt. The following present value factors are available. PV of 1 for 4 periods PV of Ordinary Annuity for 4 periods 6% 0.79209 3.46611 9% 0.70843 3.23972 A.

750,000

B.

902,813

C.

916,337

D.

SOLUTION: B FV of compound instrument Present value of principal (1,000,000 x 0.70843) Present value of nominal interest, (1,000,000 x 6% x 3.23972) Value assigned to equity

1,000,000

1,000,000 708,430 194,383

902,813 97,187

40) On April 7, 2019, Kaiser Corporation sold a P2,000,000 twenty-year, 8 percent bond issue for P2,120,000. Each P1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation’s common stock for P30. The stock has a par value of P25 per share. immediately after the sale of the bonds, the corporation’s securities had the following market values: 8% bonds without warrants P1,008 Warrants 21 Common stock 28 What accounts should Kaiser Credit to record the sale of the bonds? A B C Bond payable 2,000,000 2,000,000 2,000,000 Premium on Bonds payable 77,600 80,000 16,000 Paid-in Capital – stock warrants 42,400 40,000 104,000

D 2,000,000 35,200 84,800

SOLUTION: C FV of compound instrument FV of bonds (2,000,000 / 1,000) x 1,008 Value assigned to share warrants

2,120,000 2,016,000 104,000

Face amount 2,000,000 Carrying amount 2,016,000 Premium 16,000 41) Prescott Corporation issued ten thousand P1,000 bonds on January 1, 2018. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Cash Effective interest Decrease in balance Outstanding balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 4 400,000 What is the effective annual rate of interest on the bonds? A. 3% B. 4%

C.

6%

SOLUTION: C 344,632/11,487,747 = 3% semiannual

D.

8%

3% X2 6%

Annual interest 42) On January 1, 2022, Lorry Manufacturing Company purchased equipment from Wales Inc. There was no established cash market price for the equipment which has an 8 year life and no salvage value. Lorry gave Wales P105,000 zerointerest-bearing note payable in 3 equal annual installments of P35,000, with the first payment due December 31, 2022. The prevailing rate of interest for a note of this type is 8%. The present value of the note at 8% was P90,199. Assuming FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

43)

that Lorry uses the straight line method of depreciation, what amount will be reported in the company’s 2022 income statement for interest expense and depreciation expense for the note and equipment? A B C D Interest expense 7,216 7,216 8,400 1,750 Depreciation expense 11,275 30,066 13,125 8,750

SOLUTION: A Initial carrying amount 1/1/22 Effective interest Interest expense

90,199 8% 7,216

Initial cost of PPE 90,199 Useful life 8 years Depreciation 11,275 44) The Melaren Company is going through some financial problems in 2020. A group of creditors holding P1,000,000 of 14% debenture bonds issued by Melaren agreed to accept 80,000 shares of P10 par common share in full payment of the obligation. Interest equivalent to one year period is still outstanding. Melaren share has a market value of P12 per share in 2020. An unamortized premium of P15,000 for the P1,000,000 bonds is outstanding. What amount of gain on restructuring of debt should be reported by Melaren in 2020? A. 0 B. 55,000 C. 195,000 D. 355,000 SOLUTION: C Face amount Premium Carrying amount of the bonds Accrued interest 1,000,000 x 14% Total carrying amount of the liability Equity swap priority 1, (80,000 x 12) Gain Priority 1. 2. 3.

1,000,000 15,000 1,015,000 140,000 1,155,000 (960,000) 195,000

Computation of gain or loss CA of total liability – Total FV of shares issued = gain (loss) CA of total liability – FV of liability = gain (loss) CA of total liability – CA of total liability = gain (loss)

Computation of share premium FV of shares issued – Total Par value of shares issued = SP FV of liability – Total Par value of shares issued = SP CA of total liability – Total Par value of shares issued = SP

45) Due to extreme financial difficulties. Ulee Company has negotiated a restructuring of its 12%,P6,000,000 note payable due on December 31, 2019. The unpaid interest on the note on such date is P720,000. The creditor has agreed to reduce the face value to P5,000,000, forgive the unpaid interest, reduce the interest rate to 10% and extend the due date four years from December 31, 2019. Interest will still be payable on December 31 of each year staring December 31, 2020. The present value of 1 at 12% for four periods is 0.636 and the present value of an ordinary annuity of 1 at 12% for four periods is 3.037. What is the carrying amount of this note payable on December 31, 2020? A. 4,668,350 B. 4,698,500 C. 4,762,320 D. 5,000,000 SOLUTION: C Present value of new principal, 5,000,000 x 0.636 3,180,000 Present value of nominal interest, 5,000,000 x 10% x 3.037 1,518,500 Total – new carrying amount after restructuring – 12/31/19 4,698,500 Effective interest 1.12 Nominal interest (500,000) Carrying amount – 12/31/20 4,762,320 46) Sloth Company has an overdue 8% note payable to Rich Bank at P4,000,000 and accrued interest of P320,000. As a result of a restructuring agreement on January 1, 2018, Rich Bank agreed to the following provisions: Principal obligation is reduced to P3,500,000, the accrued interest is forgiven, the maturity date is extended to December 31, 2021, and the new interest rate increased to 12% to be paid every December 31. The PV of 1 for 4 periods is 0.74 at 8% and 0.64 at 12%. The PV of an ordinary annuity of 1 for 4 periods is 3.31 at 8% and 3.04 at 12%. What is the gain on extinguishment to be recognized for 2018? A. 339,800 B. 803,200 C. 820,000 D. 0 SOLUTION: D Carrying amount note payable FAR eastern university

4,000,000 FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO

Accrued interest 320,000 Carrying amount of total liability 4,320,000 PV of cash flow: Principal, (3,500,000 x 0.74) 2,590,000 Interest, [(3,500,000 x 12%) x 3.31] 1,390,200 3,980,200 Gain 339,800 47) Meta Company owes Pod Bank P4,000,000 plus accrued interest of P360,000. The unamortized discount on the loan is P80,000. The debt is a 10 year, 12% loan. During 2011, Meta’s business deteriorated due to loss of demand for its services. On December 31, 2011, Pod Bank agrees to accept old equipment and cancel the entire debt. The equipment has a cost of P12,000,000, accumulated depreciation of P8,800,000, and fair value of P3,600,000. How much is the gain (loss) on the extinguishment of the debt? A. 1,800,000 loss B. 1,800,000 gain C. 1,080,000 gain D. 760,000 gain QUESTIONS: C Face amount Discount Carrying amount of the note Accrued interest Total carrying amount of the liability Carrying amount of asset transferred (12,000,000 – 8,800,000) Gain 48) On December 31, 2016, Thyro Company shows the following data with respect to its matured obligation. Note payable P5,000,000 Accrued interest payable 500,000

4,000,000 (80,000) 3,920,000 360,000 4,280,000 3,200,000 1,080,000

The company is threatened with court suit if it count not pay its maturing debt. Accordingly, the company enters into an agreement with the creditor for the issuance of share capital in full settlement of the note payable. The agreement provides for the issue of 50,000 ordinary shares with par value of P50. The ordinary share is currently quoted at P70. How much is the share premium arising from the debt restructuring considered as “equity swap”? A. 3,000,000 B. 1,500,000 C. 2,000,000 D. 1,000,000 QUESTIONS: B FV of shares issued 50,000 x 70 Total Par value of shares issued 50,000 x 50 Share premium Priority 1. 2. 3.

3,500,000 2,500,000 1,000,000

Computation of gain or loss CA of total liability – Total FV of shares issued = gain (loss) CA of total liability – FV of liability = gain (loss) CA of total liability – CA of total liability = gain (loss)

Computation of share premium FV of shares issued – Total Par value of shares issued = SP FV of liability – Total Par value of shares issued = SP CA of total liability – Total Par value of shares issued = SP

49) On April 1, 2019, Anne Corporation issued at 99, 2,000 of its 8%, P1,000 bonds. The bonds are dated April 1, 2019, to mature on April 1, 2029, and pay interest on April 1 and November 1. Anne paid transaction cost of P20,000. From the issuance, how much net cash did Anne receive? A. 1,960,000 B. 1,980,000 C. 2,000,000 D. 2,020,000 SOLUTION: A Fair value of bonds (2,000,000 x .99) 1,980,000 Transaction cost paid (20,000) Net cash received 1,960,000 50) When the interest payment dates are March 1 and September 1, and the bonds are issued on July 1, the amount of interest expense reported on the December 31 income statement for the year of issue would be for: A. Four months B. Six months C. Ten months D. Twelve month SOLUTION: B July 1 to December 31, date of loan or January 1 (if loaned last year) to December 31 6 months J END OF LONG QUIZ – SET A SOLUTION J



FAR eastern university

FINANCIAL ACCOUNTING 2



LONG QUIZ – SET A

J. S. CAYETANO