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NAME: Date: Professor: Section: Score:INTERMEDIATE ACCOUNTING 2FIRST GRADING EXAMINATION1. The accounting standards used in the Philippines are adapted from the standards issued by the a. Federal Accounting Standards Board (FASB). b. International Accounting Standards Board (IASB). c. Philippine Ins...

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NAME: Professor:

Section:

Date: Score:

INTERMEDIATE ACCOUNTING 2 FIRST GRADING EXAMINATION 1. The accounting standards used in the Philippines are adapted from the standards issued by the a. Federal Accounting Standards Board (FASB). b. International Accounting Standards Board (IASB). c. Philippine Institute of Certified Public Accountants (PICPA). d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC). 2. The PFRSs consist of all of the following except a. PFRSs. b. PASs. c. Interpretations. d. Conceptual Framework. 3. The issuance of financial reporting standards in the Philippines is the responsibility of the a. PICPA b. FRSC c. AASC d. CPE Council 4. On November 1, 20x1, a company purchased a new machine that it does not have to pay for until November 1, 20x3. The total payment on November 1, 20x3, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? a. PV of annuity of ₱1. c. FV of annuity of ₱1. b. PV of ₱1. d. FV of ₱1. 5. Interest payment dates of a bond issue are March 1 and September 1, 20x1. The bond was issued on June 1, 20x1. Interest expense for the year ended December 31, 20x1 would be for: a. four (4) months c. seven (7) months b. six (6) months d. ten (10) months 6. When a note payable is issued for property, goods, or services, the note is initially measured at a. the fair value of the property, goods, or services. b. the fair value of the note. c. using an imputed interest rate to discount all future payments on the note. d. choice (a) except when this is not determinable, in which case, whichever is the more clearly determinable between (b) and (c). 7. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable.

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c.

the stated face amount of the note is materially different from the current cash sales price for similar items or from current market value of the note. d. any of these.

8. When debt is issued at a discount, interest expense over the term of the debt equals the cash interest paid: a. Minus discount. c. Plus discount. b. Minus discount minus face amount. d. Plus discount plus face amount. 9. Which of the following statements is true? a. A noninterest-bearing note sometimes is called a discounted note because the cash received is more than the face amount of the note. b. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31, 20x2. An obligation with a due date of December 31, 20x6 is also due on demand by the creditor. At December 31, 20x1, there is no indication that the creditor intends to call in the debt. The obligation is a current liability. c. The market rate of interest is the interest rate used to determine the amount of cash interest that will be paid on the principal. d. A debtor’s December 31, 20x1 statement of financial position is to be published on March 31, 20x2. An obligation due December 31, 20x6 has a due date which can be accelerated by the creditor to the present date if the current ratio falls below 2:1. The current ratio on December 31, 20x1 is 2.2:1. The obligation is a current liability. 10. A short-term note payable may include all of the following except: a. trade notes payable. c. unearned revenue. b. nontrade notes payable. d. a current maturity of a long-term liability. 11. Interest expenses are a. incurred only on interest-bearing obligations b. incurred due to passage of time. c. not incurred on redeemable preference shares issued d. incurred only when the effective interest rate is stated in the instrument 12. Which of the following is not true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d. All of these are true. 13. Which of the following statements is not correct? a. The principal amount of a debt is the cash or cash equivalent amount borrowed. b. When a noncash asset is acquired and the stated rate of interest is different from the current market rate of interest, the cost of the asset is the present value of the future cash payments discounted at the current market rate of interest rather than at the stated interest rate. c. A company that receives cash in an amount less than the face amount of a noninterestbearing note payable should record the note at its discounted present value.

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d. The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as time goes by. Use the following information for the next five questions: On January 1, 20x1, ABRIDGE TO SHORTEN Company issued a 4-year, ₱1,000,000 noninterest bearing note payable due in four equal annual installments. The effective interest rate is 12%. ABRIDGE prepared the following pro-forma amortization table on an electronic spreadsheet: A B C D E 1 Date Cash paid Interest expense Amortization Present value 2 Jan. 1, 20x1 3 Dec. 31, 20x1 4 Dec. 31, 20x2 5 Dec. 31, 20x3 6 Dec. 31, 20x4 14. The amount to be placed on cell E2 is a. (1M ÷ 4 x PV of ordinary annuity of ₱1 @ 12%, n=4) b. (1M x PV of ₱1 @12%, n=4) c. (1M x PV of ordinary annuity of ₱1 @12%, n=4) d. (1M x PV of ₱1 @12%, n=4) + (1M x 10% x PV of ordinary annuity of ₱1 @ 12%, n=4) 15. The amount to be placed on cell E6 is a. (1M ÷ 4 x PV of ordinary annuity of ₱1 @ 12%, n=4) b. (1M x PV of ₱1 @12%, n=4)

c. 1M d. 0

16. Interest expense recognized in 20x2 is computed as a. 12% x E3 c. C4 – D4 b. 12% x E4 d. 1M x 12% 17. The carrying amount of the note payable on December 31, 20x2 is equal to a. E3 – D4 c. E4 – D4 b. E3 + D4 d. 1M 18. The value placed in cell B4 is equal to a. 1M x 12% b. 250,000

c. 1M – D3 d. E4 – D5

19. The current portion of the note payable as of December 31, 20x2 is equal to a. D4 c. D5 b. D3 d. E5 20. The noncurrent portion of the note payable as of December 31, 20x2 is equal to a. E4 c. E3 b. D5 d. E5 Use the following information for the next nine questions:

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On January 1, 20x1, HEARTEN ENCOURAGE CHEER Company issued a 4-year, ₱1,000,000, noninterest-bearing note due on December 31, 20x4. The effective interest rate is 12%. HEARTEN prepared the following pro-forma amortization table on an electronic spreadsheet: A 1 2 3 4 5 6

Date

B Interest expense

C Discoun t

D Present value

Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3 Dec. 31, 20x4

21. The amount to be placed on cell B4 is a. 10% x E3 b. 12% x D3

c. ₱1M ÷ 4 d. same with B3

22. The amount to be placed on cell D2 is computed as a. (1M x PV of ₱1 @12%, n=4) + (1M x PV of ordinary annuity of ₱1 @ 12%, n=4) b. (1M x PV of ₱1 @12%, n=4) c. (1M x PV of ordinary annuity of ₱1 @12%, n=4) d. (1M x PV of ₱1 @12%, n=4) + (1M x 10% x PV of ordinary annuity of ₱1 @ 12%, n=4) 23. Interest expense recognized in 20x3 is computed as a. 12% x D3 c. C4 – D4 b. 12% x D4 d. 1M x 12% 24. The amount to be placed in cell C3 is computed as a. C2 + B3 c. equal to C4 b. C2 – B3 d. I’m confused 25. The carrying amount of the note payable on December 31, 20x2 is equal to a. D3 – B4 c. B4 + C4 b. D3 + B4 d. D3 + C4 26. The current portion of the note payable as of December 31, 20x2 is equal to a. D4 c. D5 b. D3 d. none 27. The noncurrent portion of the note payable as of December 31, 20x2 is equal to a. E4 c. E3 b. D5 d. none of these 28. The sum of cell C4 and cell D4 is a. equal to D3 b. equal to D5

c. 1M d. none of these

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29. The value of cell D6 is a. equal to D3 b. equal to D5

c. 1M d. zero

30. Which of the following statements about noninterest-bearing notes is false? a. The face amount of a noninterest-bearing note may include both the principal and interest as a single amount to be paid back at maturity date. b. The principal amount of a noninterest-bearing note is its future cash flows discounted at its effective interest rate. c. The effective rate on a short-term noninterest-bearing note, with a specified term, cannot be determined unless it is given on the face of the note. d. Noninterest bearing is not a descriptive designation for this type of note because such notes do bear interest. 31. Inter Company sells its products in reusable, expensive containers. The customer charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Inter accounts for the containers not returned within the time limit as being retired by sale at the deposit amount. Information for 2006 is as follows: Deposits for containers at December 31, 2005 from deliveries in: 2004 P 150,000 2005 430,000 P Deposits for containers delivered in 2006 Deposits for containers returned in 2006 form deliveries in: 2004 P 90,000 2005 250,000 2006 286,000

580,000 780,000

626,000

What amount should Inter Company report as a liability for deposits on returnable containers at December 31, 2006? a. 494,000 b. 644,000 c. 674,000 d. 734,000 C (430,000 + 780,000 – 250,000 – 286,000) = 674,000 32. Impressed Company, a division of Philippine Realty Corporation maintains escrow accounts and pays real estate taxes for Philippine’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, January 1, 2008 Escrow payments received during 2008 Real estate taxes paid during 2008 Interest on escrow funds during 2008

P 900,000 1,500,000 1,900,000 90,000

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What amount should Impressed report as escrow accounts liability in its December 31, 2008 balance sheet? a. 491,000 b. 500,000 c. 581,000 d. 590,000 C 900,000 + 1,500,000 – 1,900,000 + (90,000 x 90%) = 581,000 33. Gallery Department Store sells gift certificates, redeemable for store merchandise that expires one year after their issuance. Gallery has the following information pertaining to its gift certificates sales and redemptions: Unearned at December 31, 2005 2006 sales 2006 redemptions of prior-year sales 2006 redemptions of current-year sales

P 600,000 2,000,000 200,000 1,400,000

Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 2006 balance sheet, what amount should Gallery report as unearned revenue? a. 400,000 b. 600,000 c. 800,000 d. 1,000,000 A 2,000,000 – 1,400,000 – (2,000,000 x 10%) = 400,000 34. Ivy Co. operates a retail store. All items are sold subject to a 6% state sales tax, which Ivy collects and records as sales revenue. Ivy files quarterly sales tax returns when due, by the 20th day following the end of the sales quarter. However, in accordance with state requirements, Ivy remits sales tax collected by the 20th day of the month following any month such collections exceed ₱500. Ivy takes these payments as credits on the quarterly sales tax return. The sales taxes paid by Ivy are charged against sales revenue. Following is a monthly summary appearing in Ivy's first quarter 2002 sales revenue account: Debit Credit January 10,600 February March

600 600

7,420 8,480 26,500

In its March 31, 20x2, balance sheet, what amount should Ivy report as sales taxes payable a. 600 b. 900 c. 1,500 d. 1,590 B Solution:

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Total sales inclusive of sales tax (total credit) Multiply by: Total sales taxes collected

26,500 6%/106 % 1,500

Remittance of sales tax in February Sales taxes payable

(600) 900

35. On January 1, 20x1 WRECK RUIN Co. acquired land by issuing a three-year, 12%, ₱4,000,000 note payable. Principal and interest are due on December 31, 20x3. How much is the interest expense in 20x2? a. 1,017,600 c. 537,600 b. 960,000 d. 764,213

C (4,000,000 x 112% x 12%) = 537,600 36. Karma Company sells televisions at an average price of P7,500 and also offers to each customer a separate 3-year warranty contract for P750 that requires the company to perform periodic services and to replace defective parts. During 2006, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warranty costs as P200 for parts and P400 for labor and accounts for warranties separately. Assume sales occurred on December 31, 2008, income is recognized on the warranties, and straight line recognition of warranty revenues occurs. What amount of current and non-current liability relative to warranty revenue would appear on the December 31, 2009 balance sheet, respectively? a. 0 and 202,500 b. 67,500 and 135,000 c. 135,000 and 67,500 d. 202,500 and 0 B (P750 x 270)= P202,500 / 3 = P67,500 to be earned in 2009 (sale occurred on December 31, 2008) P135,000 (P67,500 x 2) will be earned in 2010 and 2011. 37. ABC Co. is contemplating on issuing a 12%, 3-year, ₱1,000,000 bonds. Principal is due at maturity but interest is due semi-annually every July 1 and December 31. ABC determines that the current market rate on January 1, 20x1 is 14%. How much is the estimated issue price of the bonds assuming ABC issues bonds on January 1, 20x1? a. 666,342 b. 285,992 c. 952,334 d. 962,563 Solution: Issue price of bonds = Present value of future cash flows Future cash flows PV @ 7%, n=6 Principal 1M PV of ₱1 Interest 60K PV of ordinary annuity of ₱1 Estimated issue price of the bonds on Jan. 1, 20x1

PV factors 0.666342 4.766540

Present value 666,342 285,992 952,334

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Use the following information for the next three questions: On January 1, 20x1, SCRAWNY SKINNY Co. issued 1,000, ₱4,000, 10%, 3-year bonds for ₱3,807,852. Principal is due on December 31, 20x3 but interests are due annually every year-end. In addition, SCRAWNY incurred bond issue costs of ₱179,316. The effective interest rate is 12% before adjustment for bond issue costs and 14% after adjustment for bond issue costs. 38. How much is the carrying amount of the note on initial recognition? a. 3,628,536 b. 4,000,000 c. 3,635,340 d. 3,754,309

A (3,807,852 – 179,316) = 3,628,536 39. How much is the interest expense in 20x1? a. 435,424 b. 576,240 c. 507,995

d. 400,000

C Solution: Date

Interest payments

Interest expense

Amortization

Jan. 1, 20x1 Dec. 31, 20x1

400,000

507,995

107,995

Present value 3,628,536 3,736,531

40. How much is the carrying amount of the note on December 31, 20x1? a. 3,401,832 b. 3,391,580 c. 3,288,776 d. 3,736 ,531

D (See amortization table above)

41. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000. Each ₱1,000 bond is convertible into 10 shares with par value of ₱60 per share. On issuance date, the bonds are selling at 102 without the conversion option. What is the value allocated to the equity component on initial recognition? a. 2,040,000 b. 540,000 c. 560,000 d. 460,000 Solution: Issue price Fair value of debt instrument without equity feature (2M x 102%)

Equity component

2,600,000 (2,040,000) 560,000

42. On September 30, 20x1, ADMONISH WARN Co. issued new bonds with face amount of ₱10M for a net issuance proceeds of ₱43,200,000. ADMONISH used the proceeds to retire an existing 10-year, 12%, ₱32,000,000 bonds issued five years earlier. The bonds have an unamortized discount of ₱1,360,000 as of September 30, 20x1. ADMONISH reacquired the entire outstanding bonds at a call premium of ₱1,600,000. Costs incurred that are directly attributable to the retirement amounted to ₱200,000. ADMONISH has an income tax rate of 30%. How much is the gain (loss) on the retirement of the bonds to be recognized in 20x1? a. 3,160,000) b. (2,960,000) c. 2,960,000 d. (3,160,000)

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D Solution: Jan. 1, Bonds payable – old 20x1

32,000,000 3,160,000

Loss on extinguishment of bonds (squeeze)

1,360,000 33,800,000

Discount on bonds payable – old Cash in bank (32M + 1.6M call premium + 200K reacquisition costs)

43. On January 1, 20x1, POTENT POWERFUL Co. issued 5-year, 12%, ₱4,000,000 bonds for ₱4,303,264. Principal is due at maturity but interests are due annually. The effective interest rate is 10%. On July 1, 20x3, POTENT called in the entire bonds and retired them at 102. The retirement price includes payment for any accrued interest. How much is the gain (loss) on the extinguishment of the bonds? a. 328,897 b. (328,896) c. (118,948) d. 118,948

A Solution: Date Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2 July 1, 20x3

Interest payments 480,000 480,000 240,000

Interest expense 430,328 425,360 209,948

Carrying amount of bonds retired: (see table above) Retirement price (Call price): Retirement price including payment for accrued interest (4M x 102%) Accrued interest (4M x 12% x 6/12) Gain on extinguishment of bonds

Amortization 49,672 54,640 30,052

Present value 4,303,264 4,253,592 4,198,948 4,168,896

4,168,896

4,080,000 (240,000)

3,840,000 328,896

44. On January 1, 20x1, TIPSY UNSTEADY Co. issued 10%, ₱12,000,000 bonds for ₱11,601,220. Principal on the bonds matures in three equal annual installments. Interest is also due annually at each year-end. The effective interest rate on the bonds is 12%. How much is the carrying amount of the bonds on December 31, 20x1? a. 7,844,635 b. 7,793,366 c. 7,683,343 d. 7,543,341

B Solution: Date Dec. 31, 20x1 Dec. 31, 20x2 Dec. 31, 20x3

Date Jan. 1, 20x1 Dec. 31, 20x1

Principal payments 4,000,000 4,000,000 4,000,000 Total payments 5,200,000

Interest on outstanding principal balance 12,000,000 x 10% 8,000,000 x 10% 4,000,000 x 10% Interest expense 1,392,148

Interest payments 1,200,000 800,000 400,000 Amortization 3,807,852

Total payments 5,200,000 4,800,000 4,400,000 Present value 11,601,220 7,793,368

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45. Liabilities arise from either legal or constructive obligation. Which of the following is a source of constructive obligation? a. contract c. quasi-contract b. law d. an established pattern of past practice 46. According to PAS 37, provisions are measured at a. the entity’s best estimate of the settlement amount. b. the expected value of the settlement amount. c. the mid-point amount of a range of estimates. d. any of these, whichever is most appropriate 47. According to PAS 37, a provision does not arise from a. restructuring. c. product warranties. b. future operating losses. d. constructive obligation. 48. According to PAS 37, a provision is a. a present obligation that cannot be measured reliably. b. a possible obligation that arises from past events. c. a liability of uncertain timing or amount. d. all of these 49. According to PAS 37, contingent liabilities are a. recognized and disclosed. b. always disclosed. c. disclosed only, if their expected occurrence is probable. d. not disclosed if their expected occurrence is remote. 50. Which of the following statements is correct? a. A provision is recognized only when it represents a present obligation. b. An event or transaction that meets both the “probable outflow of economic benefits” and “reliable measurement” criteria is always recognized. c. A contingent asset that is possible is ignored. d. A contingent liability that is possible is ignored. 51. In 20x1, EXHAUSTIVE COMPLETE Co. received a...