Intermediate Accounting 2 PDF

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INTERMEDIATE ACCOUNTING 2MIDTERM EXAMTEST QUESTIONSInstruction: Place your answer on the Google Form provided to you.PROBLEM 1 On January 1, 2019, Tony Company issued 1,000, P1,000, 10%, 3-year bonds at P951,963. Principal is due on December 31, 2021 but interests are due annually every year-end. In...

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INTERMEDIATE ACCOUNTING 2 MIDTERM EXAM TEST QUESTIONS Instruction: Place your answer on the Google Form provided to you. PROBLEM 1 On January 1, 2019, Tony Company issued 1,000, P1,000, 10%, 3-year bonds at P951,963. Principal is due on December 31, 2021 but interests are due annually every year-end. In addition, Tony incurred bond issue costs of P44,829. The effective interest rate is 12% before adjustment for bond issue costs and 14% after adjustment for bond issue costs. Required: a) What is the initial carrying amount of the bonds payable? 907,134 b) How much is the interest expense for the year ended December 31, 2019? 126,999 c) What is the carrying amount of the bonds payable as of December 31, 2019? 934,133

PROBLEM 2 Mimi Corporation issued 12%, 3-year, P1,000,000 bonds dated January 1, 2019 on April 1, 2019. Principal is due at maturity but interest is due annually at each year-end. The current market rate is 10%. Required: a) What is the initial carrying amount of the bonds payable? 1,045,728 b) How much is the interest expense for the year ended December 31, 2019? 78,448 c) What is the carrying amount of the bonds payable as of December 31, 2019? 1,034,419

PROBLEM 3 On January 1, 2019, Clown Company issued 10%, P3,000,000 bonds. Principal on the bonds matures in three equal annual instalments. Interest is also due annually at each year-end. The effective interest rate on the bonds is 12%. Required: a) What is the initial carrying amount of the bonds payable? 2,900,390 b) How much is the interest expense for the year ended December 31, 2019? 348,047 c) What is the carrying amount of the bonds payable as of December 31, 2019? 1,948,437

PROBLEM 4 On January 1, 2017, Joker Inc., issued 5-year, 12%, P1,000,000 bonds for P1,075,816. Principal is due at maturity but interests are due annually every December 31. The effective interest rate is 10%. On July 1, 2019, Joker called in half of the bonds and retired them at 102. The retirement price includes payment for accrued interest. Required: Compute for the gain on retirement of bonds. 82,225

PROBLEM 5 On January 1, 2019, Alexa Company issued new bonds with a face amount of P10,000,000 for P10,800,000. Alexa used the proceeds to retire an existing 10-year, 12%, P8,000,000 bonds issued five years earlier. The bonds have an unamortized discount of P340,000 on January 1, 2019. Alexa retired the entire outstanding bonds at a call premium of P400,000. Cost incurred that are directly attributable to the retirement amounted to P50,000. Required: Compute for the loss on the retirement of the bonds to be recognized in 2019. 690,000

PROBLEM 6 On January 1, 2018, Crybaby Company issued 3-year, 12%, P1,000,000 bonds for P1,100,000. Each P1,000 bond has two detachable warrants entitling the holder to purchase one share of Crybaby with par value of P500 for P520. Without the warrants, the bonds are selling at a yield to maturity rate of 10%. On September 21, 2019, half of the warrants were exercised. Required: Compute for the following: a) Net increase in shareholders’ equity as a result of the issuance of bonds. 50,272 b) Net increase in shareholders’ equity as a result of the exercise of share warrants. 520,000

PROBLEM 7 On January 1, 2019, One Mo Gen Inc. issued its 10%, 3-year, P1,000,000 convertible bonds for the face amount of P1,000,000. Each P1,000 bonds is convertible into 8 shares with par value of P100 per share. When the bonds were issued, they were selling at 98 without the conversion option. One Mo Gen incurred P25,000 transaction costs on the issue of the bonds. Required: Compute for the increase in shareholders’ equity as a result of the issuance of convertible bonds. 19,500 PROBLEM 8 On January 1, 2018, Caution Company issued its 10%, 3-year, P1,000,000 convertible bonds at 105. Each P1,000 bond is convertible into 8 shares with par value per share of P100. Principal is due on December 31, 2020 but interests are due annually every December 31. When the bonds were issued, they were selling at a yield to maturity market rate of 12% without the conversion option. On July 1, 2019, all of the bonds were converted into shares. Conversion costs incurred amounted to P10,000. Required: Compute for the following: a) Net increase in the shareholders’ equity as a result of the conversion. 948,245 b) Net increase in Share Premium as a result of the conversion. 148,245 c) Net increase in Share Premium general account as a result of the conversion. 246,265

PROBLEM 9 On December 31, 2019, the bookkeeper of Grand Company provided the following information: Accounts payable, including deposits and advances from customers of P500,000 Note payable, including note payable to bank due on December 31, 2022 for P1,000,000 Share dividends payable Customers’ credit balances Serial bonds, payable in semi-annual instalments of P1,000,000 Accrued interest on bonds payable Contested BIR tax assessment-possible obligation Unearned rent income Deferred revenue Held for trading financial liabilities Advances from affiliates payable in 15 months after year-end Dividends payable Deferred tax liability-to be reversed in 2020

P2,500,000 3,000,000 800,000 400,000 10,000,000 300,000 600,000 100,000 20,000 50,000 23,000 12,000 27,000

Required: In the December 31, 2019 statement of financial position, how much current liabilities should be reported? 7,362,000 PROBLEM 10 Tangy Candy Company offers a coffee mug as a premium for every ten candy bar wrappers presented by customers together with P30.00. The purchase price of each mug to the company is P40.00; in addition it costs P10.00 to mail each mug. The results of the premium plan for the years 2018 and 2019 are as follows (assume all purchases and sales are for cash): 2018 2019 Coffee mugs purchased 720,000 800,000 Candy bars sold 6,000,000 6,125,000 Wrappers redeemed 2,800,000 4,200,000 2018 wrappers expected to be redeemed in 2019 2,000,000 2019 wrappers expected to be redeemed in 2020 2,700,000 Required: a) What is the premium expense for 2018? 9,600,000 b) What is the estimated premium liability on December 31, 2018? 4,000,000 c) What is the premium expense for 2019? 9,800,000 d) What is the estimated liability on December 31, 2019? 5,400,000

Chapter 27 Employee Benefits Part 1 QUIZ 1: 1. It refers to a plan where plan assets, if any, are retained and managed by the employer. a. Funded plan c. Unfunded plan b. Non-contributory plan d. Delicate plan 2. These are pool of assets contributed by various unrelated employers to be used to pay retirement benefits to participants without regard to the identity of the contributing employers. a. Multi-employer plans c. Pooling of assets plan b. State plans d. Secret plan 3. Multi-employer plans are treated as a. Defined contribution plan c. Hybrid plan b. Defined benefit plan d. a or b 4. These are established by legislation and are operated by a government agency which is not subject to control or influence by the reporting entity. a. State plans b. SSS c. GSIS d. Puro plan 5. State plans are a. accounted for as defined contribution plan b. accounted for as defined benefit plan c. accounted for in the same way as multi-employer plans d. accounted for only by the Commission on Audit 6. The accounting for defined contribution plan a. is straightforward – actuarial computations are not required. b. is complex – actuarial computations are required c. is simple – not accounted for d. is done only by CPAs 7. Under a defined contribution plan, the retirement benefits expense is a. equal to an actuarially determined amount b. equal to the agreed periodic contribution to the fund c. equal to the contribution made during the period d. zero, if no employee retired during the period

8. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees. Which of the following employee benefits is not within the scope of PAS 19? a. Short-term d. Termination b. Post-employment e. Share-based payments c. Other long-term 9. Which of the following employee benefits is not within the scope of PAS 19? a. Semi-monthly salaries of employees b. Employer’s share in SSS contributions c. One sack rice allowance d. Bonus in the form the entity’s shares 10. Accumulating compensated absences are those that a. can be carried over to the next period if not fully used during the year of entitlement. b. expire if not fully used during the year of entitlement. c. can be carried over to the next period if not fully used during the year of entitlement and are paid in cash when the employee leaves the company d. are recognized only when actually taken by employees

"…Have I not commanded you? Be strong and courageous. Do not be frightened, and do not be dismayed, for the Lord your God is with you wherever you go." (Joshua 1:9)

ANSWERS TO QUIZ 1: 1.

C

6.

A

2.

A

7.

B

3.

D

8.

E

4.

A

9.

D

5.

C

10.

A

QUIZ 2: 1. The last payday for a firm was December 27 on which it paid ₱40,000 to its employees, the amount earned by employees through the pay period ending December 16. For the period December 17 through December 31, the employees earned ₱12,000.The adjusting entry required at December 31 would include:

a. b. c. d.

cr. crash ₱12,000 dr. wages payable ₱12,000 dr. wages expense ₱12,000 dr. wages expense ₱40,000

2. Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated. There was no employee turnover in 20X6. Additional information relating to the year ended December 31, 20X6, is as follows: Liability for accumulated vacations at 12/31/X5

₱35,000

Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6 (the authorized period for vacations)

20,000

Vacations earned for work in 20X6 (adjusted to current rates)

30,000

Gavin granted a 10% salary increase to all employees on October 1, 20X6, its annual salary increase date. For the year ended December 31, 20X6, Gavin should report vacation pay expense of a. 45,000

b. 33,500

c. 31,500

d. 30,000

3. ANOMALOUS IRREGULAR Co. grants its employees twelve days paid vacation leave each year. Per ANOMALOUS’s policy, employees are required to take vacation leave each year, but not necessarily for their entire vacation leave entitlement. Vacation leaves not taken during a year can be carried over indefinitely. ADHERE has 500 employees with an average salary of ₱4,000 per day. The average annual pay increase is 5%. During 20x1, total vacation leaves taken by employees were 5,400 days. Based on past experience, 90% of unused vacation leave for a year are taken in the immediately following year. If unused vacation leaves vest, how much should ANOMALOUS accrue as liability for unused vacation leave on December 31, 20x1? a. 2,520,000 b. 25,200,000 c. 2,268,000 d. 0

Use the following information for the next four questions: ADHERE TO STICK Co. grants its managerial employees bonus in the form of profit sharing. Information on operations in 20x1 is shown below: Profit before tax

₱4,000,000

Bonus rate or percentage Income tax rate

10% 30%

4. How much is the bonus “before bonus and before tax?” a. 363,636 b. 280,000 c. 400,000 d. 288,660

5. How much is the bonus “after bonus and before tax?” a. 400,000 b. 363,636 c. 261,684 d. 245,798 6. How much is the bonus “before bonus and after tax?” a. 363,636 b. 261,684 c. 245,798 d. 288,660 7. How much is the bonus “after bonus and after tax?” a. 363,636 b. 261,682 c. 245,798 d. 288,660 8. ARTIFACT MAN MADE OBJECT Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of ARTIFACT’s profit before tax but after deduction of the bonus. ARTIFACT’s profit after tax and after bonus for the year is ₱2,545,456. Income tax rate is 30%. How much is the bonus? a. 245,798 b. 261,684 c. 363,636 d. 288,660 Use the following information for the next two questions: AMNESTY PARDON Co. has a post-employment benefits plan that is considered as defined contribution plan. According to the plan, AMNESTY agrees to contribute ₱800,000 annually to a retirement fund for the benefit of its employees. On December 31, 20x1, because of poor results of operations and insufficient working capital, AMNESTY was only able to contribute ₱320,000 to the fund. On December 31, 20x2, because of a profitable year, AMNESTY decided to contribute ₱1,800,000 to the retirement fund. On January 12, 20x3, an employee retired and was eligible to a ₱60,000 retirement benefits based on the operating efficiency and investment earnings of the fund. 9. How much is the retirement benefits expense recognized in 20x2? a. 800,000 b. 320,000 c. 1,800,000 d. 60,000 10. How much is the retirement benefits expense recognized in 20x3? a. 800,000 b. 320,000 c. 1,800,000 d. 60,000

“A wise son heeds his father’s instruction, but a mocker does not respond to rebukes.” - (Proverbs 13:1) - END -

SOLUTIONS TO QUIZ 2: 1. C 2. C Solution: Liability for accumulated vacations at 12/31/X5 Pre-20X6 accrued vacations taken from 1/1/X6 to 9/30/X6

Liability to be carried over to the next period Multiply by: Increase in salary level in Oct. 20x6

35,000 (20,000) 15,000 10%

Additional liability due to the increase in salary level

1,500

Vacations earned in 20X6 (adjusted to current rates)

30,000

Vacation pay expense in 20x6

31,500

3. A Solution: Total vacation leaves entitlement of employees in 20x1

6,000

(500 employees x 12 days each)

Vacation leaves taken in 20x1 Unused vacation leave carried over indefinitely Multiply by: Expected pay rate in 20x2 (₱4,000 x 105%*) Liability for unused vacation leaves *100% + Average annual pay increase is 5%.

4. C Solution: B = P x Br B = 4,000,000 x 10% B = 400,000

5. B Solution:

(5,400) 600 4,200 2,520,000

P B

=

P 1 + Br 4,000,000

B

=

4,000,000

1 + 10%

B

=

B

= 363,636

4,000,000

-

3,636,36 4

6. D Solution: 1 - Tr B

=

P

x 1/Br - Tr 1 - 30%

B

=

4,000,000

x 1/10% - 30% 70%

B

=

4,000,000

x 10 - 30%

70% B

=

4,000,000

x 9.7

B

=

288,660

7. B Solution: B

=

P

1 – Tr

X

1/Br - Tr + 1 70% B

=

4,000,000

x 10 - 30% + 1 70%

B

=

4,000,000

x 10.7

B

=

261,682

8. C Solution: Squeeze upwards

Profit before bonus and before tax

4,000,000

Bonus before tax but after bonus (363,636)

(3,636,366 x 10%)

Profit before tax but after bonus 3,636,366

(2,545,456 ÷ 70%)

Income tax (2,545,456 ÷ 70%) x 30%

(1,090,909)

Profit after tax and after bonus

2,545,456

Start

9. A 10. A

Chapter 28 Employee Benefits Part 2

QUIZ 1: 1. Which of the following components should be included in the calculation of net defined benefit cost recognized for a period by an employer sponsoring a defined benefit pension plan? Actual Return

Amortization of

on Plan Assets,

Unrecognized Prior

Interest

If Any

Service cost, If Any

Cost

a. b. c. d.

No Yes Yes Yes

No No Yes Yes

Yes Yes No Yes

2. Which of the following concepts for postretirement benefit plans is comparable to the projected unit credit method of pension plans? a. Accrued benefit method pro-rated on service

b. Expected Postretirement Benefit Obligation (EPBO) c. Actual return on plan assets d. Expected return on plan assets 3. Which of the following statements is incorrect? a. Minimum (corridor) amortization of net unrecognized gain or loss is allowed for postretirement benefit plans. b. Gains and losses on settlement of defined benefit retirement plans are recognized immediately. c. Actuarial gains and losses are recognized immediately. d. Past service costs are recognized immediately. 4. The interest cost component of the net defined benefit cost is determined using a. the settlement rate of interest. b. the rate of return on high quality corporate bonds c. both a and b. d. neither a or b. 5. Financial reporting standards for pension currently in effect a. allow both the accrued benefit and projected benefit methods. b. allow only the accrued benefit method/ projected unit credit method. c. allow only the projected benefit method. d. do not allow either the accrued benefit or projected benefit methods. 6. Which of the following is not correct? a. PAS 19 does not include any provisions for the recognition of an additional minimum liability. b. PAS 19 does not allow for the recognition of a net pension asset equal to the computed surplus in some circumstances. c. PAS 19 requires the 10% corridor amount in calculating the amortization of deferred gains and losses. d. PAS 19 requires settlement gains and losses to be recognized immediately as part of comprehensive income. 7. These are changes in the present value of the defined benefit obligation resulting from experience adjustments and the effects of changes in actuarial assumptions. a. Past service cost c. Settlement gains and losses b. Actuarial gains and losses d. Interest cost 8. All of the following are demographic assumptions except: a. future medical costs b. mortality, both during and after employment c. rates of employee turnover, disability and early retirement d. claim rates under medical plans 9. According to PAS 19, which of the following is not a financial assumption? a. the discount rate b. future salary and benefit levels c. the expected rate of return on plan assets

d. the proportion of plan members with dependents who will be eligible for benefits 10. According to PAS 19, the rate used to discount post-employment benefit obligations shall be determined by reference to market yields at the end of the reporting period on a. risk-free rate c. current bank rate b. high quality corporate bonds d. effective interest rate

ANSWERS TO QUIZ 1:

1.

A

6.

C

2.

A

7.

B

3.

A

8.

A

4.

B

9.

D

5.

B

10.

B

QUIZ 2:

1. The following information relates to the defined benefit pension plan of the McDonald Company for the year ending December 31, 2002: PV of defined benefit obligation, January 1

₱4,600,00 0

PV of defined obligation, December 31

4,729,000

Fair value of plan assets, January 1

5,035,000

Fair value of plan assets, December 31

5,565,000

Interest income on plan assets Actuarial loss

450,000 32,500

Employer contributions

425,000