P1_hshsjskdjhsh

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review Review in Theory of Accounts and Practical Accounting 1

Day 8

LIABILITIES

1. On December 31, 2014, the bookkeeper of Grand Company provided the following information: Accounts payable, including deposit and advances from customers of P 500,000 P 2,500,000  Notes payable, payable, including note payable payable to bank due on December December 31, 2016 for P 1,000,000 3,000,000 Share dividends payable 800,000 Credit balance in customers’ customers’ accounts  accounts  400,000 Serial bonds, payable in semiannual semiannual instalments of P 1,000,000 10,000,000 Accrued interest on bonds payable 300,000 Contested BIR tax assessment assessment 600,000 Unearned net income 100,000 In the December 31, 2014 statement of financial position, how much current liabilities should  be reported? a. P 6,800,000  b. P 7,300,000 c. P 7,900,000 d. P 8,700,000 2. The balance in Stem Corporation’s accounts payable account at December 31, 2014 was P1,350,000 before any necessary year-end adjustments relating to the following: Goods were in transit to Stem from a vendor on December 31, 2014. The invoice cost was P 75,000. The goods were shipped FOB shipping point on December 29, 2014 and were received on January 2, 2015. Goods shipped FOB destination on December 21, 2014, from a vendor to Stem, were received on January 6, 2015. The invoice cost was P 37,500. On December 27, 2014, Stem wrote and recorded checks totalling P 60,000 which were mailed on January 10, 2015. In Stem’s December 31, 2014 statement of financial position, how much should be the accounts  payable? a. P 1,410,000  b. P 1,425,000 c. P 1,462,500 d. P 1,485,000 





DEFERRED REVENUE

Question 3 and 4: Bugs Appliance Company’s has been reviewing the firm’s past television sales. For the past year, Bugs has been offering a special service warranty on all television sold. With the purchase television, the customer customer has the right to purchase a 3-year service contract for an extra P600. Information concerning past television and warranty contract sales is given below: 2015 2014 Television sales in units 550 460 Sales price per unit P 5,000 P 4,000  Number of service service contracts contracts sold 350 300 Expenses relating to television warranties P 38,520 P 13,400 BUGS’ accountant has estimated from past record that the pattern of repairs has been 40% in the year of sale, 36% first year after sale and 24% on 2 nd year of sale. Sales of contracts are made evenly during the year. 3. What is the adjusted balance of the unearned service contract contract as of December December 31, 2015? a. P 111,600

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

 b. P 168,600 c. P 211,200 d. P 243,600 4. How much profit on service contract would be recognized in year 2015? a. P 42,000  b. P 68,400 c. P 71,880 d. P 110,400 5. 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, 2014 600,000 2015 sales 2,000,000 2015 redemptions of prior-year sales 200,000 2015 redemptions of current-year sales 1,400,000 Gallery’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 2015 statement of financial position, what amount should Gallery report as unearned revenue? a. P 400,000  b. P 600,000 c. P 800,000 d. P 1,000,000 ACCRUED LIABILITIES

6. All of Gold Company’s employees are entitled to two weeks of paid vacation for each full year in Gold’s employ. Unused vacation time can be accumulated and carried forward to succeeding years and will be compensated at the salary in effect when the vacation is taken. Silver started her employment with Gold on January 1, 2008. As of December 31, 2014, when Silver’s salary was P 5,000 per week, Silver had used 10 weeks of her accumulated vacation time. In December 2014, Silver notified Gold of Silver’s intention to use her accumulated vacation weeks in June 2015. Gold regularly scheduled salary adjustments in July of each year. Gold properly did not deduct compensation for unused vacations in Silver’s 2014 i ncome tax return. How much Gold report as a liability should at December 31, 2014 for Silver’s accumulated vacation time? a.  None  b. P 5,000 c. P 10,000 d. P 20,000 Question 7 and 8: Governance, Inc. has a bonus plan covering all employees. The total bonus is equal to 10% of Governance’s preliminary (pre-bonus, pretax) income reduced by the income tax (computed on the preliminary income less the bonus itself). Governance’s preliminary income for 2011 is P 1,000,000 and the income tax rate is 32%. 7. How much is the bonus for 2011? a. P 61,200  b. P 68,000 c. P 70,248 d. P100,000 8. What amount should Governance Company recognize as a distribution of profit related to their  bonus plan in 2011? a.  None  b. P 68,000 c. P 70,248 d. P 100,000

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

9. Ball Corporation frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Ball repaid each loan on its scheduled maturity date. Date of Loan Amount Maturity Date Term of Loan 11/01/14 P 500,000 10/30/15 1 year 02/01/15 1,500,000 07/31/15 6 months 05/01/15 800,000 01/31/16 9 months Ball records interest expenses when the loans are repaid. As a result, interest expense of P150,000 was recorded in 2015. If no correction is made, by what amount would 2015 interest expense be understated? a. P 54,000  b. P 62,000 c. P 64,000 d. P 72,000 10. Brown Eyes Company operates a retail store and must determine the proper December 31, 2014, year-end accrual for the following expenses: The store lease calls for fixed rent of P 6,000 per month, payable at the beginning of the month, and an addition rent equal to 6% of net sales over P 1,250,000 per calendar year, payable on January 31 of the following year. Net sales for 2014 were P 2,250,000. An electric bill of P 4,250 covering the period December 17, 2014 through January 16, 2015 was received January 23, 2012. A P 2,000 telephone bill was received on January 2, 2012, covering: Service in advance for January 2015 P 750 Local and toll calls for December 2014 1,250 In its December 31, 2014 statement of financial position, what amount of accrued liabilities should Brown Eyes report? a. P 63,375  b. P 64,125 c. P 65,500 d. P 75,375 





PREMIUM AND WARRANTY LIABILITIES

11. Bangkok Company inaugurated a sales promotion campaign on May 31, 2014, whereby Bangkok placed a coupon in each package of chocolate sold, the coupons being redeemable for a premium. Each premium costs Bangkok P50 and a customer to receive a coupon must present five coupons. Bangkok estimated that only 60% of the coupon issued would be redeemed. For the seven months ended December 31, 2014, the following information is available: Packages of chocolates sold 400,000 Premiums purchased 30,000 Coupons redeemed 100,000 How much is the estimated liability for premium claims outstanding at December 31, 2014? a. P 100,000  b. P 140,000 c. P 180,000 d. P 240,000 12. The Top Bottling Corporation embarked on a promotional program whereby a key chain costing P15 each is given away for every 10 bottle crowns returned plus P5. Top Bottling Corporation estimates that only 40% of the bottles crown in the hands of consumers will be  presented for redemption. The following information is available: Quantity Amount Bottles sold 1,000,000 P 5,000,000 Key chains bought for giveaways 15,000 225,000 Key chain distributed to customers 10,000

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

At the close of the first year, how much should Top Bottling Corporation recognize as estimated liability for promotional items outstanding? a. P 250,000  b. P 300,000 c. P 375,000 d. P 450,000 13. A new product introduced by Beauty Promotions carries a two-year warranty against defects. The estimated warranty costs related to sales are as follows: Year of sale 3% Year after sale 5% Sales and actual warranty expenditures for the years ended December 31, 2014 and 2015 are as follows: Sales Actual Warranty Expenditures 2014 P 800,000 P 20,000 2015 1,000,000 70,000 What amount should Beauty report as its estimated liability as of December 31, 2015? a. P 4,000  b. P 24,000 c. P 54,000 d. P 74,000 PROVISION AND COTINGENT LIABILITIES

14. In May 2014, West Company filed suit against Brown, Inc. seeking P 850,000 damages for  patent infringement. A court verdict in November 2014 awarded West P 600,000 in damages,  but Brown’s appeal is not expected to be decided before 2014. West’s counsel believes it is  probable but not virtually certain that West will be successful against Brown for an estimated amount in the range between P 300,000 and P 450,000 considered the most likely amount. What amount should West record as a contingent asset from lawsuit in the year ended December 31, 2014? a.  None  b. P 300,000 c. P 400,000 d. P 600,000 NOTES PAYABLE

15. On January 1, 2015, Solemn Company sold land to Glory Company. There was no established market price for the land. Glory gave Solemn a P2,400,000 noninterest bearing note payable in three equal annual installments of P800,000 with the first payment due December 31, 2015. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The  present value of a P2,400,000 note payable in three equal installments of P800,000 at a 10% rate of interest in P1,989,600. What is the carrying amount of note payable on December 31, 2015? a. 1,989,600  b. 2,126,400 c. 1,388,560 d. 2,400,000 BONDS PAYABLE

16. On March 1, 2014, Rapine Corporation issued at 103 plus accrued interest, 1,000 of its 9%, P1,000 bonds. The bonds are dated January 1, 2014 and mature on January 1, 2024. Interest is  payable semi-annually on January 1 and July 1. Rapine paid transaction costs of P 5,000. Based

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

on the given information, how much would Rapine realize as net cash receipts from the bond issuance? a. P 1,025,000  b. P 1,030,000 c. P 1,040,000 d. P 1,045,000 Question 17 and 18: On January 1, 2014, MM Company issues a P 100,000,000 face value  bond at an issue price of P 90,000,000. The bond is redeemable on December 31, 2018 at its nominal value of P 100,000,000. The company incurred P 5,000,000 as transaction cost. The  bond pays a fixed coupon rate of 4% per year at the end of each year. At the time of issue the  benchmark interest rate (LIBOR) is 4%. Based on MM Company’s credit rating, the market interest rate for this bond is 6.4% (excluding effects of transaction costs) i.e. a credit spread of 2.4%. On December 31, 2014, LIBOR increases by 1% to 5%. However, due to deterioration of its credit rating, the credit spread of MM Company increases to 5.4%. Thus, the total market interest for the bond on December 31, 2014 is 10.4% and the market value of the bond on this date is P 79,890,000. The effective interest rate after imputing the transaction cost is 7.73%. 17. If MM Company does not designate the bond to be at fair value, at what amount should the financial liability be reported in the statement of financial position as of December 31, 2014? a. P 85,000,000  b. P 87,571,154 c. P 90,340,404 d. P 93,323,717 18. If MM Company designate the bond at fair value to profit or loss, what amount of the gain (loss) should be reported in the entity’s other comprehensive income for the year ended December 31, 2014? a. (P 1,760,000)  b. P 3,170,000 c. P 8,700,000 d. P 10,110,000 Question 19 and 20: On January 1, 2014, Beanstalk Corporation issued 3,000 of its 9%, P1,000  bonds when the prevailing rate of interest was 8%. Interest is payable annually every January 1. The bonds mature on January 1, 2019. Beanstalk paid transaction costs of P 24,460 in relation to the issue of the debts instruments and in effect the yield rate is 8.2%. Beanstalk uses the effective method of amortization. 19. On December 31, 2015 statement of financial position, how much should be shown as the carrying amount of the bonds payable? (Carry present value factors to five decimal places) a. P 3,022,181  b. P 3,042,681 c. P 3,061,631 d. P 3,077,314 20. What is the balance of the unamortized transaction cost or bond issue cost as of December 31, 2015? a. P 5,598  b. P 10,818 c. P 15,676 d. P 20,226 21. On July 1, 2014, Glamorous Corporation issued 11% bonds in the face amount of P 2,000,000 that mature on June 30, 2018. The bonds were issued to yield 5%, and interest is payable every January 1 and July 1. Glamorous Corporation uses the effective interest method of amortizing  bond premium or discount. The following are the value factors: PV of 5% for an ordinary annuity of P1 after 8 periods 6.463 PV of 5% after 8 interest periods .677 What is the carrying value of the debt instruments as of December 31, 2014? a. P 2,043,640

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

 b. P 2,051,086 c. P 2,058,176 d. P 2,064,930 22. On January 2, 2014, Anger Company issued its 9% bonds in the face amount of P 4,000,000 which mature on January 1, 2024. The bonds were issued for P 3,756,000 to yield 10%. Anger uses the interest method of amortizing bond discount. Interest is payable annually on December 31. At December 31, 2015, how much should be Anger’s unamortized bond discount? a. P 192,364  b. P 211,240 c. P 228,400 d. P 244,000 COMPOUND FINANCIAL INSTRUMENT

23. On January 1, 2014, Allison Company issued its 10%, 5-year convertible debt instrument with a face amount of P 5,000,000 for P 5,100,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 50,000 ordinary shares with a par value of P100. When the debt instrument were issued, the prevailing market rate of interest for similar debt without conversion option is 11%. The Company incurred transaction cost P 70,000 related to the issue of the compound instrument. PV of 11% for an ordinary annuity of P1 after 5 periods 3.696 PV of 11% after 5 interest periods .593 How much of the total proceeds represent the equity component? a. P 100,000  b. P 225,500 c. P 283,059 d. P 285,050 24. On January 1, 2014, Emilia Corporation issued its 5-year, 12% P 5,000,000 face value convertible debt instrument for P 4,800,000. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50 per share and can be converted anytime from January 2015 to maturity. At the time of issue, the market rate of interest for a similar instrument is 14%. Interest is payable every six months of January 1 and July 1. On July 1, 2015, the entire debt instrument was converted into equity instrument by the issuance of 80,000 ordinary shares of the enterprise. Transaction costs of P 50,000 were incurred in relation to the issue of new shares. PV of 7% for an ordinary annuity of P1 after 10 periods 7.024 PV of 7% after 10 interest periods .508 What amount should be credited to the share premium account as a result of the conversion? a.  None  b. P 152,800 c. P 831,349 d. P 881,549 Question 25-29: On January 1, 2012, Faith Company issued its 8%, 5-year convertible debt instrument with a face amount of P 8,000,000 for P 7,700,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 50,000 ordinary shares with a par value of P100.When the debt instrument were issued, the prevailing market rate of interest for similar debt without conversion option i s 10%. PV of 10% for an ordinary of P1 after 5 periods 3.791 PV of 10% after 5 interest periods .621 On December 31, 2014, all the convertible debt instruments were retired for P 8,000,000. The  prevailing rate of interest on a similar debt instrument as of December 31, 2011 is 9% without the conversion option. PV of 9% for an ordinary of P1 after 2 periods 1.759 PV of 9% after 2 interest periods .842

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

25. On the date of issue, what amount of the proceeds represents the equity component? a.  None  b. P 100,000 c. P 306,400 d. P 454,800 26. What is the carrying amount value of the debt instrument as of December 31, 2014? a. P 7,393,600  b. P 7,492,960 c. P 7,602,256 d. P 7,722,482 27. On the date of retirement, what amount of the proceeds represents the equity component? a. P 138,240  b. P 139,278 c. P 168,160 d. P 306,400 28. How much is the gain or loss that should be reported in the profit or loss on the retirement of the convertible debt instrument? a. P 138,240  b. P 139,278 c. P 168,160 d. P 306,400 29. How much is the gain on cancellation of the equity component to be reported in the shareholders’ equity? a. P 138,240  b. P 139,278 c. P 168,160 d. P 306,400 Question 30-33: On January 1, 2013, Belief Company issued its 9%, 4-year convertible debt instrument with a face amount of P 4,000,000 for P 4,100,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50. When the debt instrument were issued, the prevailing market rate of interest for similar debt without conversion option is 10%. PV of 10% for an ordinary of P1 after 4 periods 3.170 PV of 10% after 4 interest periods .683 On December 31, 2014, ¼ of the convertible debt instruments were retired for P 1,000,000. Without the conversion option, the debt instrument can be retired at 97%. 30. On the date of issue, what amount of the proceeds represents the equity component? a.  None  b. P 226,800 c. P 3,873,200 d. P 4,100,000 31. What is the carrying amount value of the debt instrument as of December 31, 2014? a. P 3,873,200  b. P 3,900,520 c. P 3,930,572 d. P 3,963,629 32. On the date of retirement, what amount of the proceeds represents the equity component? a. P 12,643  b. P 26,700 c. P 30,000 d. P 56,700 33. What amount of gain or loss that should be reported in the profit or loss on the retirement of the convertible debt instrument? a. P 12,643

MANUEL L. QUEZON UNIVERSITY

School of Accountancy and Business Arts

Integrated Review in Theory of Accounts and Practical Accounting 1

Day 8

 b. P 26,700 c. P 30,000 d. P 56,700 DEBT RESTRUCTURE

Question 40 and 41: Turtle Company is experiencing financial difficulty and is negotiating trouble debt restructuring with its creditors to relieve its financial stress. Turtle has a P5,000,000 note payable to Metrobank. The bank is considering acceptance of an equity interest in Turtle Company in the form of 400,000 ordinary shares with a fair value of P12 per share. The par value of the ordinary share is P10 per share. 34. If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain to be reported by Turtle in its profit or loss statement as a result of the restructuring? a.  None  b. P 200,000 c. P 500,000 d. P 1,000,000 35. If the issue of equity is treated as an extinguishment of an existing debt instrument, what amount of gain or loss should Turtle Company report in its profit or loss statement as a result of the restructuring? a.  None  b. P 200,000 c. P 500,000 d. P 1,000,000 Question 36 and 37: In 2011, Runny Corporation acquired land by paying P 2,000,000 and signing a note with a face value of P 6,000,000. On the note’s due date, December 31, 2013, Runny owed P 480,000 of accrued interest and P 6,000,000 principal on the note. Runny was in financial difficulty and was unable to make any payments. Runny and the bank agreed to amend the note as follows: Extended the maturity to December 31, 2015. The P 480,000 interest due on December 31, 2013 was forgiven Runny would be required to make an annual interest payment of P 540,000 every December 31 starting 2014. Transaction cost incurred that is directly related to the debt restructuring was P 177,420. As of December 31, 2013, the yield based on the restructured debt and after considering the amount of transaction cost is 6.24%. 36. What amount should Runny report as gain, before income taxes, in its 2013 profit or loss? a.  None  b. P 80,000 c. P 375,180 d. P 480,000 37. What is the carrying value of the obligation should Runny Company report in its 2014 statement of financial position? a. P 5,893,150  b. P 6,155,861 c. P 6,302,580 d. P 6,480,000   

