1. Which of the following is not considered a characteristic of a liability?

a. Present obligation
b. Arise from past event
c. Results in an outflow of resources
d. Liquidation is reasonably expected to require use of existing resources classified as current
assets

2. Which of the following represents a liability?

a. The obligation to pay for goods that an entity expects to order from suppliers next year.
b. The obligation to provide goods that customers have ordered and paid for during the current
year.
c. The obligation to pay interest on a five-year note payable that was issued the last day of the
current year.
d. The obligation to distribute an entity’s own shares next year as a result of a stock dividend
declared near the end of the current year.

3. Which of the following does not meet the definition of a liability?

a. The signing of a three-year employment contract at a fixed annual salary.
b. An obligation to provide goods or services in the future.
c. A note payable with no specified maturity date.
d. An obligation that is estimated in amount.

4. An entity shall measure initially a financial liability not designated at fair value through profit or loss at
a. Fair value
b. Fair value plus directly attributable transaction costs
c. Fair value minus directly attributable cost
d. Face amount

5. It is a marketing scheme where an entity grants award credits to customers and the entity can redeem
the award credits in exchange for free or discounted goods or services.
a. Customer loyalty program
b. Premium plan
c. Marketing program
d. Loyalty award

6. Under a customer loyalty program, if the entity supplies the award itself, the consideration allocated to
the award credits
a. Shall be recognized as revenue immediately.
b. Shall not be accounted for as revenue separately.
c. Shall be recognized initially as deferred revenue and amortized as revenue over a reasonable
period not exceeding five years.
d. Shall be recognized initially as deferred revenue and subsequently recognized as revenue
upon the redemption of the award credits.
7. The Skywarp Company has the following items included in its receivables and payables account:
Items Debit Credit
Due from customers P 156,000
Payables to creditors for merchandise P 62,000
Note Receivable, Long-term 80,000
Allowance for bad debts 4,000
Due from employees 2,200
Cash Dividend Payable 24,000
Special receivable, dishonored note 22,000
Accrued Wages 2,400
Rent Received in Advance 1,600
Insurance premiums paid in advance 1,200
Mortgage Payable 40,000

Compute the amount to be reported as trade and other payables.

a. P 62,000 b. P 64,400 c. P 86,000 d. 88,400

8. A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift
certificates lapse 1 year after they are issued. How would the deferred revenue account be affected by each of
the following transactions?

a. Redemption of certificates – decrease, Lapse of certificates – decrease

b. Redemption of certificates – no effect, Lapse of certificates – decrease
c. Redemption of certificates – no effect, Lapse of certificates – no effect
d. Redemption of certificates – decrease, Lapse of certificates – no effect

9. During September, El-Tronics sold 100 radios for P50 each. Each radio cost El-Tronics P30 to purchase, and
carried a two-year warranty. If 5% typically need to be replaced over the warranty period and one is actually
replaced during September, for what amount in September would El-Tronics debit Product Warranty Expense?

a. P150 c. P30
b. P120 d. P50
10. The current portion of long-term debt should
a. be paid immediately.
b. be reclassified as a current liability.
c. be classified as a long-term liability.
d. not be separated from the long-term portion of debt.

11. After initial recognition, bonds payable shall be measured at

a. Amortized cost using the effective interest method
b. Fair value through profit or loss
c. Either amortized cost using the effective interest method or Fair value through other
comprehensive income
d. Either amortized cost using the effective interest method or Fair value through profit or loss
12. Unamortized debt discount should be reported as
a. Direct deduction from the face amount of the debt
b. Direct deduction form the present value of the debt
c. Deferred charge
d. Part of the issue cost
13. How would the amortization of discount on bonds payable affect each of the following?
Carrying Amount of Bonds Net Income
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase
14. A bond convertible by the holder into a fixed number of ordinary shares of the issuer is
a. A compound financial instrument
b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
15. In a debt restructuring that is considered an asset swap, the gain on extinguishment is equal to the
a. Excess of the fair value of the asset over the carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset
c. Excess of the fair value of the asset over the carrying amount the debt
d. Excess of the carrying amount of the debt over the carrying amount of the asset
16. An entity shall initially measure equity instruments issued to extinguish a financial liability at
a. Fair value of the equity instrument issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability issued
17. The appropriate valuation of an operating lease in the statement of financial position of the lessee is
a. Zero
b. The absolute amount of the lease payments
c. The present value of the sum of the lease payments discounted at an appropriate rate
d. The market value of the asset
18. Which is not included in minimum lease payments?
a. Any payment required by a bargain purchase option that is reasonably certain
b. Cost of services and taxes to be paid by and reimbursed to the lessor
c. Required payments over the lease term
 d. Any amounts guaranteed by a party related to the lessee
18. What is the interest rate used by the lessee to capitalize a finance lease when the implicit rate cannot be
determined?
a. The prime rate
b. The lessor’s published rate
c. The lessee’s average borrowing rate
d. The lessee’s incremental borrowing rate
19. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value

Problem 1

On December 31, 2016, Atimonan Company issued 8,000 of its 8%, 10-year P1,000 face value bonds with
detachable share warrants at 120. Each bond carried a detachable warrant for two shares of Atimonan’s P100 par
value ordinary shares at a specified option price of P150. Immediately after issuance, the market value of the bonds
ex-warrants was P8,100,000 and the market value of the warrants was P900,000.

21. The issuance of the bonds increase Atimonan’s equity by

Problem 2

Spielberg Inc. signed a P200,000 noninterest-bearing note due in 5 years from a production company eager to do
business. Comparable borrowings have carried an 11% interest rate.

22. At what amount should this debt be carried at its inception?

23. What is the interest expense in the first year?

Problem 3

On December 31, 2016, Camiguin Company shows the following data with respect to its matured obligation.

Note Payable P6,000,000

Accrued Interest Payable 1,500,000

The company is threatened with a court suit if it could not pay its maturing debt. Accordingly, the company enters
into an agreement with the creditor for the issuance of ordinary shares in full settlement of the note payable. The
agreement provides for the issue of 50,000 ordinary shares with par value of P100. The ordinary share is currently
quoted at P150 per share.

24. How much is the gain on extinguishment of debt?

25. How much is the share premium arising from the debt restructuring?

Problem 4

On December 31, 2016, Action Company signed a 7-year finance lease for an airplane. The airplane’s fair value
was 8,415,000. The entity made the first annual lease payment of 1,530,000 on December 31, 2016. The entity’s
incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known by action, was
9%. The present value factor for an annuity due are 5.5 at 9% for 7 years and 5.1 at 12% for 7 years.

26. What amount should be capitalized as cost of the right of use asset?
27. What amount should be reported as finance lease liability on December 31, 2016?
28. What is the interest expense for 2017?
29. What is the carrying amount of lease liability on December 31, 2017?

Problem 5

On January 1, 2017, Olenna Company leased an equipment from a lessor with the following pertinent information:

Annual Rental payable at the end of each year 500,000

Lease term 8 years
 Useful life of equipment 10 years
Implicit interest rate 10%
PV of ordinary annuity of 1 for 8 periods at 10% 5.33
Present value of 1 for 8 periods at 10% .47
The entity has the option to purchase the equipment on January 1, 2025 by paying 500,000. There is reasonable
certainty that the entity shall exercise the option. On January 1, 2017, the entity incurred initial direct cost of
200,000.

30. What is the initial cost of right of use asset?

31. What is the interest expense for 2017?
32. What is the lease liability on December 31, 2017?
33. What is the carrying amount of the right of use asset on December 31, 2017?
34. Prepare journal for the depreciation on December 31, 2017.

Problem 6

Honda Company provided the following data during the first year of operations:

a. Sold 30,000 preference shares, 12%, P100 par, at P140.

b. Sold 100,000 ordinary shares of P50 par at P55.
c. Purchased and retired 10,000 preference shares at P120.
d. Purchased and 15,000 shares at P52 to be held as treasury.
e. Sold 10,000 treasury ordinary shares at P60.
f. Shareholders donated to the entity 20,000 ordinary shares when shares had a market price of P60.
One-half of these shares were sold for P65.
g. Net income for the year was P3,000,000.
h. Appropriated retained earnings equal to the remaining cost of treasury shares.

35-42. Prepare journal entries for each of the above transactions.

43. What amount of Share premium should be presented on the statement of financial position at year-end?

44. What amount of retained earnings should be appropriated?

45. How many shares are outstanding at year-end?

46. What is the total Shareholder’s equity at year-end?

Problem 7

Adverse financial and operating circumstances warrant that Solid Company should undergo a quasi-
reorganization on December 31, 2017.

The following information may be relevant in accounting for the quasi-reorganization:

a. Inventory with fair value of P2,000,000 is currently recorded in the accounts at cost of P2,500,000.
b. Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated
depreciation.
c. Individual shareholders contribute P4,000,000 to create additional paid in capital to facilitate the
reorganization. No new shares are issued.
d. The par value of the share is reduced from P25 to P5.

Immediately before these events, the shareholders’ equity appears as follows:

Share Capital, P25 par, 100,000 shares outstanding 2,500,000

Share Premium 1,750,000
Retained Earnings (Deficit) (3,000,000)

47-51. Prepare journal entries for the quasi-reorganization.

52. What is the balance of the Share Premium after the quasi-reorganization?
53. What is the balance of the retained earnings after the quasi-reorganization?
54. What is the total shareholders’ equity after the quasi-reorganization?
Problem 8

Candel Company owned 10,000 shares of equity securities of XYZ Company with carrying amount of P90 per
share.

On October 31, 2017, Candel Company declared these shares as dividends to be paid on March 31, 2018.

The quoted price for XYZ share is P130 on October 31, 2017, P150 on December 31, 2017 and P110 on March
31, 2018.

Candel Company has 100,000 outstanding shares.

55-57. Prepare journal entries for the above transactions.

58. What amount should be reported as Share Dividends Payable on December 31, 2017?

59. What is the gain/loss on distribution of property dividends on March 31, 2018?

60. How many shares are outstanding after the distribution of dividends?