Intermediate accounting 2 final exam PDF

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Liabilities
Provision
Lease accounting
Bonds payable
Accounting for income tax...

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Name:

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INTERMEDIATE ACCOUNTING II: FINAL EXAMINATION 1. Contingent liability will or will not be recognized as a provision (liability) depending on? A. The degree of uncertainty B. The outcome of future event C. Whether they are probable and estimable D. The present condition suggesting a liability 2. Contingent liability will or will not become actual liabilities depending on A. The outcome of future event B. The degree of uncertainty C. The present condition suggesting a liability D. Whether they are probable and estimable 3. Which of the following is the most likely candidate for a contingent liability that can be accrued? A. Potential liability on a product still in the planning stage (no items have been sold) B. Potential liability for a lawsuit in which the firm is a defendant C. Property tax payable D. Warranty liability 4. Which of the following is NOT a relevant consideration when evaluating whether to derecognize a financial liability? A. Whether the obligation has expired B. Whether the obligation has been canceled C. Whether the obligation has been discharged D. Whether sustainability all the risks and rewards of the obligation have been transferred 5. How do you call a taxable temporary difference? A. Deferred tax liability B. Deferred tax asset C. Current tax liability D. Current tax asset 6. The deferred tax expense is the A. Increase in balance of deferred tax asset minus the increase in balance of deferred tax liability B. Increase in balance of deferred tax liability minus increase in balance of deferred tax asset C. Increase in balance of deferred tax asset plus the increase in balance of deferred tax liability D. Decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY 7. Under current GAAP, which approach is used to determine income tax expense? A. Asset and liability approach B. A “with and without” approach C. Net of tax approach D. Periodic expense approach 8. An employer’s obligation for post-retirement health benefits that are expected to be provided to an employee must be fully accrued by the date the A. Employee is fully eligible for benefits B. Employee retires C. Benefits are utilized D. Benefits are paid 9. Under current GAAP, which approach is used to bifurcate compound financial liability instruments? A. Asset and liability approach B. A “with and without” approach C. Net of tax approach D. Periodic expense approach 10. Upon retirement of bonds any resulting gain on retirement bonds should be reported in income statement when A. Retirement price is less than the carrying value of the bonds B. Retirement price is greater than the carrying value of the bonds C. Retirement price is equal to the carrying amount of the bonds D. None of the above 11. How would the carrying value of a bond payable be affected by amortization of each of the following? DISCOUNT PREMIUM A. No effect No effect B. Increase No effect C. Increase Decrease D. Decrease Increase 12. Under the effective interest method of bond discount or premium amortization, the periodic interest expense is equal to A. The stated rate of interest multiplied by the face value of bonds B. The effective rate of interest multiplied by the face value of bonds C. The stated rate multiplied by the beginning of the period carrying amount of the bonds D. The effective rate multiplied by the beginning of the period carrying amount of the bonds 13. Lessee Company leased a machine with an estimated useful life of 20 years from Lessor Company. The 10-year noncancelable lease provides that the title to the machine transfers to the Lessee Company at the end of the lease term. Lessee Company accounted for the lease as finance lease and recorded an asset and a liability in its records. The leased asset should be depreciated by Lessee Company over A. 10 years B. 20 years C. 15 years D. 50 years

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Use the following information for questions 14 and 17. You were assigned to audit the various current liability accounts of Fascual Liberty Corp., a washing machine manufacturer, for the year ended December 31, 2019. Upon your request, the following schedule was furnished to you by the accountant: Accounts payable

P 1,250,000

Estimated warranties payable

980,000

Accrued salaries payable

450,000

Provision for litigation cases

3,000,000

Audit notes: a. The accounts payable includes a P250,000 purchase in transit as of December 31 from a supplier under FOB Destination term and is net of a P70,000 debit balance with a supplier resulting from an overpayment. b. The estimated warranties payable balance was the accrued amount in the previous year. It is the company’s policy to carry a one-year warranty on its products against manufacturers defects. Based on Company’s experience, 60% of units sold are ultimately returned for repairs and that warranty costs per unit is at P300. During the current year which was charged to warranty expense was at P1,910,000. From the warranty costs incurred in the current year, P890,000 relates to the product warranties in for items sold in the prior year. c.

During 2019, Fascual Liberty Corp., was sued by a competitor for P5,000,000 infringement suit of a trademark. Based on the legal counsel’s advice, Fascual accrued the sum of P3,000,000 as a provision. On February 15, 2020, the court decided in favor of the party alleging the infringement and ordered the defendant to pay the aggrieved party a sum of P3,500,000. The amount was ultimately settled in May 1, 2020. The financial statements of Fascual Liberty Corp. were approved by the BOD for issue on April 15, 2020.

d. The accrued salaries payable is a 10% current year bonus to key officers computed based on an unadjusted net income after bonus and after tax (30%).

Questions for items 14 to 17: 14. What is the correct balance of the accounts payable as of December 31, 2019? A. P1,000,000 B. P930,000 C. P1,040,000 D. P1,070,000 15. What is the correct estimated warranties payable as of December 31,2019? A. P1,130,000 B. P1,190,000 C. P1,140,000 D. P1,230,000

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY 16. How much is the correct provision from litigation cases as of December 31, 2019? A. None B. P3,000,000 C. P3,250,000 D. P3,500,000 17. What is the correct profit-sharing bonus to be accrued as of December 31, 2019? A. P423,178 B. P451,546 C. P414,286 D. P464,286 Use the following information for questions 18 and 20. The following information were extracted from Torre Inc.’s trial balance as of December 31, 2019: Cash in Bank, Metrobank

P353,032

Cash in Bank, BPI

25,190

Cash in Bank, BDO

(91,200)

Accounts receivable, net of P24,300 credit balance

231,300

Inventories

524,000

Prepaid expenses

23,100

Equipment

1,200,000

Accumulated Depreciation

400,000

Accounts payable, net of 30,900 debit balance

290,800

Provision for premiums

118,750

Provision for unasserted claims

4,000,000

Notes Payable, bank 10% due March 31, 2019

500,000

Interest on Notes payable

37,500

Audit notes: a. The provision for premiums is related to the following promotional program: The company started a promotional program in 2019 whereby for every 5 product labels a customer surrenders with P25 cash, a customer shall receive a specially designed umbrella. The company sold 40,000 units of the product covered by the said promotional program and purchased 5,000 umbrellas in anticipation for the premium’s redemption which the company appropriately debited to premiums inventory account. Each umbrella costs P95. The Company estimates 75% of the product labels accompanying sales shall ultimately be presented for the redemption of premiums. 1,250 umbrellas remained on hand as of December 31, 2019, as such the company accrued the cost of the remaining umbrellas as the year-end estimated premiums liability: Premiums expense Estimated premiums liability

118,750 118,750

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Actual redemptions during the year were appropriately recorded as: Premium expense 262,500 Cash 93,750 Premiums inventory 356,250 b. The provision for unasserted claims is in relation to an explosion which has occurred on November of 2019 at the company’s plant totally damaging the plant and causing additional damages to adjacent neighbors. The carrying value of the plant on the company’s books on the date of explosion was at P5M. It had a prevailing fair value of P6M prior to the explosion. No claims had been yet asserted against the company as of the date of authorization of the financial statements. The management as corroborated by their counsel, however, believes that it is probable that the company would be responsible for damages to its neighbors and that P4,000,000 would be a reasonable estimate of its liability. The company had an insurance covering this type of accident. The insurance shall reimburse the company at 80% of the prevailing fair value of the asset prior to the fire while the company has a 40% participation/deductible clause on any payments to be made for damages caused to neighbors. The reimbursements are virtually certain and that the company is no longer principally liable over the portion to be reimbursed for damages to other parties. c.

The 10%, Notes payable to the bank is dated March 1, 2017 and shall mature on March 1, 2020. As of December 31, 2019, Torre Inc. has the right to refinance the obligation by issuing a two-year note payable to the same bank the proceeds of which shall be used to pay out the obligation. On March 1, 2020 the company managed to issue a 12%, P300,000, two-year note payable. The bank charged 10% of the principal amount as loan processing and other related fees deducted directly from the loan proceeds. The net proceeds from the loan were directly used to pay out the notes maturing on the same date. Any balance was paid out from the company’s working capital.

Questions for items 18 to 20: 18. What is the correct balance of the provision for premiums as of December 31, 2019? A. P157,500 B. P87,500 C. P213,500 D. P114,286 19. What is the correct balance of the provision for unasserted claims as of December 31, 2019? A. P4,000,000 B. P1,600,000 C. P2,400,000 D. P3,200,000 20. How much from the Notes payable, bank shall be presented as current liability as of December 31, 2019? A. P500,000 B. P300,000 C. P270,000 D. P230,000

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Use the following information for questions 21 and 24. Ivory Company is a domestic corporation operating in the Philippines for the first time this 2019. Since April 15, 2020 is fast approaching, Ivory Company is in the process of preparing the reconciliation of income per books with income per income tax return for its first year of operations the year ended December 31, 2019. Data below were gathered by the Company: a. Ivory Company acquired an equipment at a cost of P500,000 on January 1, 2019. Depreciation was recorded using the straight-line method with no expected residual value for an estimated useful life of 5 years. For income tax purposes, the double-declining balance method was used. The carrying amount and tax base of the said equipment were P400,000 and P300,000, respectively. b. Sales, cost of sales, operating expenses are recognized under the accrual method for both financial and income tax reporting purposes, except for the following items:

c.

i.

Rent income is recognized for financial reporting under PAS 17 while for income tax purposes rent income is recognized when collected. In 2019, Jam Company reported rent income of P140,000, while rent collected totaled to P90,000. The Company recognized a Rent receivable amounting to P50,000 based on PAS 17.

ii.

Warranty costs are recognized for financial reporting purposes under the accrual method and provide an expense equal to 5% of sales. For income tax purposes, warranty costs are recognized when actual payment is made. Total warranty expenditures incurred for 2019 was P320,000. At year end, Pabebe Company reported an estimated warranty obligation of P40,000.

iii.

Bad debts expense reported during the year for financial reporting was P65,000. For income tax purposes, bad debts are recognized as deductions only upon actual write-off which amounted to P30,000 during the year. The carrying amount and tax base of the receivables were P200,000 and P235,000, respectively.

Current and future regular income tax rate is 30%.

d. Per Company’s estimate, it is probable that future taxable income will be available against which the future deductible amounts, any unused tax losses and unused tax credits can be utilized. e. Net income before income tax was determined to be P50,000. Applying PAS 12 – Income Taxes, determine the following items: 21. Temporary difference resulting into future deductible amounts in 2019 is A. P75,000 B. P85,000 C. P140,000 D. P150,000 22. Temporary difference resulting into future taxable amounts in 2019 is A. P125,000 B. P135,000 C. P140,000 D. P150,000

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY

23. The deferred tax liability reported in the December 31, 2019 statement of financial position is A. P15,000 B. P22,500 C. P30,000 D. P45,000 24. The deferred tax asset reported in the December 31, 2019 statement of financial position is A. P15,000 B. P22,500 C. P30,000 D. P45,000 Use the following information for questions 25 and 27. On January 1, 2019, Dela Cruz Corporation issued 5,000 of its 5-year, P1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Dela Cruz uses the effective interest method of amortization. On December 31, 2020, the 3,000 bonds were extinguished early through acquisition on the open market by Dela Cruz for P2,970,000 plus accrued interest. Questions for items 25 to 27: Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.) 25. The issue price of the bonds on January 1, 2019 is A. P5,388,835 B. P4,630,655 C. P5,282,135 D. P5,000,000 26. The carrying amount of the bonds on December 31, 2019 is A. P4,755,930 B. P5,453,840 C. P5,323,830 D. P5,000,000 27. The gain on early retirement of bonds on December 31, 2020 is A. P116,442 B. P266,811 C. P181,785 D. P0

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Use the following information for questions 28 and 32. On January 2, 2019, the Mauban, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will mature on January 1, 2023 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6, P100 par value, ordinary shares in exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 10%. On January 1, 2023, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42. Questions for items 28 to 32: Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places.) 28. The proceeds from the issuance of convertible bonds to be allocated to the liability component is A. P1,366,000 B. P1,778,336 C. P1,873,184 D. P2,000,000 29. The proceeds from issuance of convertible bonds payable to be allocated on equity component is A. P634,000 B. P221,664 C. P126,816 D. P0 30. The carrying amount of the bonds payable on December 31, 2019 is A. P2,000,000 B. P1,796,617 C. P1,389,400 D. P1,900,502 31. The interest expense for the year 2020 is A. P160,000 B. P179,617 C. P138,940 D. P190,050 32. The gain to be recognized on conversion of the bonds is? A. P126,816 B. P400,000 C. P463,408 D. P0

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY

Use the following information for questions 33 and 36. The following differences enter into the reconciliation of accounting profit and taxable profit of Mangunay Company for the year ended December 31, 2019, its first year of operations. Life insurance expense Excess tax depreciation Warranty expense Litigation accrual Unamortized computer software Unearned rent income deferred on the books but Appropriately recognized in taxable profit Interest income from long-term certificate of deposit

P100,000 2,000,000 200,000 500,000 3,000,000 400,000 200,000

Additional information: a. On July 1, 2019 Mangunay paid insurance premium of P200,000 on the life of an officer with Mangunay Company as beneficiary. b. Excess tax depreciation will reverse equally over four-year period 2020-2023. c. The warranty liability is the estimated warranty cost that was recognized as expense in 2019 but deductible for tax purposes when actually paid. d. It is estimated that the litigation liability will be paid in 2023. e. In January 2019, Mangunay Company incurred P4,000,000 of computer software cost. Considering the technical feasibility of the project, this cost was capitalized and amortized over 4 years for accounting purposes. However, the total amount was expensed for 2019 for tax purposes. f. Rent income will be recognized during the last year of the lease, 2023. g. Interest income from the long-term certificate of deposit is expected to be P200,000 each year until their maturity at the end of 2023. h. Accounting profit for 2019 is P10,000,000. Tax rate is 35%. Questions for items 33 to 36: Based on the above and the result of your audit, compute for the following: 33. Deferred tax liability P1,750,000 34. Deferred tax asset P385,000 35. Current tax expense P2,100,000 36. Tax expense P3,465,000

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METRO MANILA COLLEGE COLLEGE OF BUSINESS AND ACCOUNTANCY Use the following information for questions 33 and 36. The accounting profit before tax for the year ended December 31, 2019 for Mighty Corporation amounted to P175,900 and included: Interest income Long service leave expense Doubtful debt expense Depreciation – plant (15%p.a) Rent expense Entertainment expense (non-deductible)

P11,000 7,000 4,200 33,000 22,800 3,900

The draft statement of financial position at December 31, 2019 contained the following assets and liabilities: Cash Accounts receivable Allowance for doubtful debts Inventory Interest receivable Prepaid rent Plant Accumulated depreciation – plant Deferred tax asset Accounts payable Provision for long-service leave Deferred tax liability

2019 P9,000 83,000 (5,000) 67,100 1,000 2,800 220,000 (99,000) ? 71,200 64,000 ?

2018 P7,500 76,800 (3,200) 58,300 2,400 220,000 (66,000) 30,360 73,600 61,000 720

Additional information a. b. c.

The tax depreciation rate for plant is 10% p.a., straight line. The tax rate is 30% The company has P15,000 in tax losses carried forward from previous year.

Questions for items 37 to 40: Based on the above and the result of your audit, compute for the following as of and for the year ended December 31, 2019. 37. Current tax liability P53,760 38. Deferred tax liability P1,140 39. Deferred tax asset P30,600 40. Deferred tax expense P180

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METRO MANILA COLL...