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Chapter 1Problem 2 For a liability to exist, a. A past transaction or event must have occurred Which one of the following does not meet the Conceptual Framework’s definition of a liability? a. The signing of a three-year employment contract at a fixed annual salary Which of the following items would...

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Chapter 1 Problem 2 1. For a liability to exist, a. A past transaction or event must have occurred 2. Which one of the following does not meet the Conceptual Framework’s definition of a liability? a. The signing of a three-year employment contract at a fixed annual salary 3. Which of the following items would be excluded from current liabilities? d. A short-term debt which at the discretion of the entity can be rolled over at least twelve months after the balance sheet date. 4. An entity wants to exclude short-term debt from its current liabilities to improve its current ratio. Which of the following would help the entity accomplish its goal? a. Refinance the debt through an existing loan facility before the balance sheet date. 5. Short-term debt expected to be refinanced: a. May be classified as long-term if refinancing arrangements are completed as of the balance sheet date. 6. Determine the correct classification of the following liabilities:  Liability due in 6 months, payable in non-cash assets  Liability refinanced with long-term debt between the balance sheet date and date of issuance of balance sheet.  Liability which will be refinanced on a long-term basis between the balance sheet date and date of issuance of balance sheet through an irrevocable agreement signed by debtor  Liability paid between the balance sheet date and date of issuance of balance sheet with cash; the cash is replenished with proceeds from longterm debt also between the balance sheet date and date of issuance of balance sheet a. All are current liabilities 7. Which of the following statements concerning dividends is untrue? d. Preference dividend declared but not yet paid should be disclosed only in the footnote. 8. Included in Witt Corporation’s liability account balances at December 31, 2008 were the following:

14% note payable issued October 1, 2007 maturing September 30, 2009 – 500,000 16% note payable issued April 1, 2016 maturing April 1, 2009 – 800,000 Witt’s December 31, 2008 financial statements were issued on March 1, 2009. On January 12, 2009, the entire P800,000 balance of 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2009, Witt consummated a non-cancellable agreement with the lender to refinance the 14%, P500,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honouring the agreement’s provisions. On the December 31, 2008 balance sheet, the amount of the notes payable that Witt should classify as current liability is a. 1,300,000 9. Red hot chili peppers has the following information:  Refinancing on a long-term basis of a currently maturing debt in the amount of P2,000,000 on January, 2009  Rectification of a breach of long-term loan agreement during 2008 on January 3, 2009 in the amount of P12,000,000  Receipt from the lender of a grace period ending December 31, 2009 on January 3, 2009 on a long-term liability amounting to P3,000,000 The financial statements of red hot chili peppers were issued on March 15, 2009. Of the amount shown above, how much would be included in the current liabilities section of Red Hot Chili Pepper’s 2008 year-end financial statements? a. 17,000,000 10. Included in Levi Corporation’s liability account balances at December 31, 2008, were the following: 14% note payable issued October 1, 2007, maturing September 30, 2009 – 1,250,000 16% note payable issued April 1, 2006 maturing April 1, 2009 – 2,000,000 On December 31, 2008, the company expects to refinance the P2,000,000 by issuance of a long-term note payable in lump sum. The refinancing of the 2,000,000 is at the discretion of the enterprise. Levi’s December 31, 2008 financial statements were issued on March 31, 2009. On January 15, 2009, the entire 2,000,000 balance of the 16% note was refinanced by issuance of a longterm obligation payable. On the December 31, 2008 balance sheet, what amount of the notes payable should Levi classify as short-term obligation? b. 1,250,000

11. Regal Department Store sells gift certificates, redeemable for store merchandise that expire one year after their issuance. Regal has the following information pertaining to its gift certificate sales and redemptions: Unredeemed at 12/31/2007 – 750,000 2008 sales – 2,500,000 2008 redemption of prior year sales – 250,000 2008 redemptions of current year sales – 1,750,000 Regal’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 2008 balance sheet, what amount should Regal report as unearned revenue? d. 500,000 Use the following information for the next two questions: Dunne Company sells equipment service contracts that cover a two-year period. The sales price of each contract is P600. Dunne’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. Dunne sold 1,000 contracts evenly throughout 2008. 12.In its December 31, 2008 balance sheet, what amount should Dunne report as deferred service contract revenue? b. 480,000 13.In its December 31, 2008 balance sheet, what amount should Dunne report as deferred service contract revenue? a. 300,000 14.Dunn Trading Stamp Company records stamp service revenue and provides the cost of redemptions in the year stamps are sold to licensees. Dunn’s past experience indicates that only 80% of the stamps are sold to licensees will be redeemed. Dunn’s liability for a stamp redemptions was P6,000,000 at December 31, 2007. Additional information for 2008 is as follows: Stamp service revenue from stamps sold to licensees – 5,000,000 Cost of redemption (stamps sold prior to 1/1/2008) – 2,750,000 If all the stamps sold in 2008 were presented for redemption in 2009, the redemption cost will be 2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, 2008. c. 5,050,000

15.Kent Company, a division of National Reality Corporation maintains escrow accounts and pays real estate taxes for National’s mortgage 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. Additional information for the year 2008 follows: Escrow accounts liability, 1/1 – 900,000 Escrow payments received – 1,500,000 Real estate taxes paid – 1,900,000 Interest on escrow funds - 90,000 What amount should Kent report as escrow accounts liability in its December 31, 2008 balance sheet? c. 605,000 16.On July 1, 2008, the Quezon City government issued reality tax assessment for its fiscal year ended June 30, 2000. On September 1, 2008, Zuma company purchased a land in Quezon City. The purchase price was reduced by a credit for accrued reality taxes. Zuma does not record the entire year’s real estate tax obligation but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable as appropriate. On November 1, 2008 Zuma paid the first two equal instalments of P600,000 for realty taxes. What amount of this payment should Zuma record as a debit to real estate taxes payable? b. 400,000 17.Organ Company requires refundable advance payments with special oders for machinery constructed to customer’s specification. Information for 20x8 is as follow: Customers advances – balance, December 31, 2007 – 885,000 Advances received with orders in 2008 – 1,380,000 Advances applied to orders shipped in 2008 – 1,230,000 Advances applicable to orders cancelled in 2008 – 375,000 What amount should Organ Company report as current liability for customer’s deposits in the December 31, 2008 balance sheet? b. 1,035,000

Problem 5 1. Liability may be recognized b. even if the entity to which the obligation is owed is not specifically identified so long as the liability is probable and can be measured reliably. 2. Liabilities arise from past events called obligating events. Obligating events create c. a or b (legal obligations & constructive obligations) 3. Financial liabilities are classified as a. FVPL or at amortized cost 4.

The most conceptually appropriate method of valuing a liability under the historical cost basis is to a. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the market rate of interest at the date the liability was initially incurred.

5. Reclassification of financial liabilities is d. prohibited 6. Financial liabilities are initially measured at d. fair value minus transaction costs, except financial liabilities at FVPL whose transaction costs are expensed immediately. 7. Deferred tax liabilities are a. Always presented as noncurrent when an entity presents a classified statement of financial position 8. Share (stock) dividends payable d. are not liabilities but rather presented as part of equity as an addition to share capital

9. A currently maturing obligation is presented as current. Which of the following instances would a currently maturing obligation is nonetheless presented as noncurrent? a. Refinancing is completed as of the end of reporting period b. Refinancing made after the end of reporting period but before authorization of financial statements for issue is at the discretion of the entity c. Grace period is received as of end of reporting period to rectify breach of loan arrangement ending at least 12 months after the end of reporting period.

d. In any of these situations

10. Cali, Inc had a P4,000,000 note epayable due on March 15, 20x2. How should Cali classify the note in its December 31, 20x1 financial statements? a. As a noncurrent liability, with separate disclosure of the note refinancing.

Problem 6 1.

At December 31, 20x7, Cain, Inc., owed notes payable of P1,750,000 due on May 15, 20x8. Cain expects to retire this debt with proceeds from the sale of 100,000 shares. Of its common stock. The stock was sold for P15 per share on March 10, 20x8 prior to the issuance of the year-end financial statements. In Cain’s December 31, 20x7 balance sheet what amount of the notes payable should be included from current liabilities? a. 0

2. Pam, Inc., has P1,000,000 of notes payable due June 15, 20x6. At the financial statement date of December 31, 20x5, Pam signed a agreement to borrow up to P1,000,000 to refinance the notes payable on a long term basis. The refinancing agreement is at the discretion of Pam, Inc. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Pam was providing. At the date of issue of the December 31, 20x5, financial statements, the value of the collateral was P1,200,000 and was not expected to fall below this amount during 20x6. In its December 31, 20x5, balance sheet, Pam should classify notes payable as b. Short term 40,000 | Long term 960,000 3. Wilk Co reported the following liabilities at December 31, 20x1: Accounts payable-trade – 750,000 Short-term borrowings – 400,000 Bank loan, current portion P100,000 – 3,500,000 Other bank loan, matures June 30, 20x2 – 1,000,000 The bank loan of 3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31, 20x1? d. 5,650,000

4. Regal Department Store sells gift certificates, redeemable for store merchandise that expire one year after their issuance. Regal has the following information pertaining to its gift certificate sales and redemptions: Unredeemed at 12/31/20x2 – 75,000 2008 sales – 250,000 2008 redemption of prior year sales – 25,000 2008 redemptions of current year sales – 175,000 Regal’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 20x3 balance sheet, what amount shoul Regal report as unearned revenue? d. 50,000 5. Aneen’s Video Mart sells one and two 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: Sales Less: Cancellations Net Sales Subscriptions expirations: 20x2 20x3 20x4 20x5 Totals

20x2 420,000 20,000 400,000 120,000 155,000 125,00 400,000

20x3 500,000 30,000 470,000 130,000 200,000 140,000 470,000

In Aneen’s December 31, 20x3 balance sheet, the balance for unearned subscription revenue should be c. 465,000 6.

On July 1, 20x0, Ran Country issued realty tax assessments for its fiscal year ended June 30, 20x1. On September 1, 20x0,Day Co purchased a warehouse in Ran Country. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year’s real estate tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November1, 20x0, Day paid the first of two equal instalments of P12,000 for realty taxes. What amount of this payment should Day record as a debit to real estate taxes payable? a. 8,000

7. Black Co. requires advance payments with special orders for machinery constructed to customer specifications. These advances are non-refundable. Information for 20x0 is as follow: Customers advances – balance, 1/1/20x0 – 118,000 Advances received with orders in 20x0 – 184,000 Advances applied to orders shipped in 20x0 – 164,000 Advances applicable to orders cancelled in 20x0 – 50,000 In Black’s December 31, 20x0 balance sheet, what amount should be reported as a current liability for advances from customer? b. 88,000 8. Kent Co., a division of Nationality Realty, Inc. maintains escrow accounts and pays real estate taxes for National’s mortgage 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. Additional information follows: Escrow accounts liability, 1/1/20x9 – 700,000 Escrow payments received during 20x9– 1,580,000 Real estate taxes paid during 20x9 – 1,720,000 Interest on escrow funds during 20x9 - 50,000 What amount should Kent report as escrow accounts liability in its December 31, 20x9 balance sheet? c. 605,000 9. Aneen's Video Mart sells 1- and 2-year mail order subscriptions for its subscriptions for its video-of-the-month business. Subscription are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:

Sales Less cancellations Net sales

20x6 420,000 20,000 400,000

20x7 500,000 30,000 470,000

In Aneen's December 31, 20x7, balance sheet, the balance for unearned subscription revenue should be c. 465,000

10.Lyle Inc. is preparing its financial statements for the year ended December 31, 20x9. Accounts payable amounted 360,000 before any necessary year-end adjustments related to the following:  At December 31, 20x9, Lyle has a P50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a P50,000 advance payment for goods to be manufactured to Lyle’s specifications.  Checks in the amount of P100,000 were written to vendors and recorded on December 20, 20x9. The checks were mailed on January 5, 2000. What amount should Lyle report as accounts payable in its December 31, 20x9 balance sheet? a. 510,000

Chapter 2 Problem 2 1. Theoretically, a short-term, non-trade, note payable with no stated rate of interest should be c. discounted to its present value 2. A short-term note payable may include all of the following except: c. Unearned revenue 3. On July 1, 2002, Riviera Manufacturing Co issued a five-year note payable with a face amount of P250,000 and an interest rate of 10 percent. The terms of the note require Riiviera to make five annual payments of P50,000 plus accrued interest, with the first payment due on June 30, 2003. With respect to the note, the current liabilities section of Riviera’s December 31, 2002 balance sheet should include c. 62,500

Prelim Exam On August 1, 20x1, an entity acquired a new equipment that it does not have to pay for until September 1, 20x5. The total payment on September 1, 20x5, will include both principal and interest. The initial measurement of the note and the equipment is a. payment for the principal multiplied by Present value of ₱1 b. payment for interest multiplied by Present value of ordinary annuity of ₱1 c. a plus b d. total payment on the note multiplied by Present value of ₱1

Which of the following represents a liability? a. The obligation to pay interest on a five-year note payable that was issued the last day of the current year. b. The obligation to pay for goods that a company expects to order from suppliers next year. c. The obligation to provide goods that customers have ordered and paid for during the current year. d. The obligation to distribute share of a company's own common stock next year as a result of a stock dividend declared near the end of the current year. Interest expenses are incurred a. only on interest-bearing liabilities b. only on liabilities which are discounted to their present values c. only on liabilities which are initially and subsequently measured at amortized cost d. only due to passage of time When interest expense is calculated using the effective-interest amortization method, interest expense (assuming that interest is paid annually) always equals the a. actual amount of interest paid. b. carrying amount of the note multiplied by the stated interest rate. c. carrying amount of the note multiplied by the effective interest rate. d. maturity value of the note multiplied by the effective interest rate. Loan origination fees are a. added to the carrying amount of the loan payable and subsequently amortized using the straight-line method. b. recognized immediately as income c. added to the carrying amount of the loan payable and subsequently amortized using the effective interest method. d. deducted from the carrying amount of the loan payable and subsequently amortized using the effective interest method. An entity issued a note solely in exchange for cash. Assuming that the items listed below differ in amount the present value of the note at issuance is equal to a. Face amount b. Face amount discounted at the prevailing interest rate c. Proceeds received d. Proceeds received discounted at the prevailing interest rate If the present value of a note issued in exchange for a property is less than face amount, the difference should be a. Included in the cost of the asset

b. Amortized as interest expense over the life of the note c. Amortized as interest expense over the life of the asset d. Included in interest expense in the year of issuance 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. More than the stated discount rate of 10% c. Less than the stated discount rate of 10% d. Independent of the stated discount rate of 10% At issuance date, the present value of a promissory note is equal to the face amount of the note if the note a. Bears a stated rate of interest which is realistic. b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes. c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar notes. d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes. Which of the following statements concerning discount on note payable is incorrect? a. Discount on note payable may be debited when entity discounts its own note with the bank. b. The discount on note payable is a deduction from the face amount note payable. c. The discount on note payable represents interest charges applicable to future periods. d. Amortizing the discount on note payable causes the carrying amount of ...