UNIVERSITY OF LUZON

COLLEGE OF ACCOUNTANCY
PRELIMINARY EXAMINATION
ACC204

NAME: ________________________________________________DATE: ____________SCORE: _____________

INSTRUCTION: ENCIRCLE THE LETTER OF YOUR FINAL ANSWER; STRICTLY NO ERASURES.

1. 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.

2. 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

3. 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).

4. 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.
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.

5. 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.

6. 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.

7. 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.

8. 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

9. 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.
10. 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 noninterest-bearing note payable should
record the note at its discounted present value.
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

11. 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)

12. The amount to be placed on cell E6 is

a. (1M ÷ 4 x PV of ordinary annuity of ₱1 @ 12%, n=4) c. 1M
b. (1M x PV of ₱1 @12%, n=4) d. 0

13. Interest expense recognized in 20x2 is computed as

a. 12% x E3 c. C4 – D4
b. 12% x E4 d. 1M x 12%

14. 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

15. The value placed in cell B4 is equal to

a. 1M x 12% c. 1M – D3
b. 250,000 d. E4 – D5

16. The current portion of the note payable as of December 31, 20x2 is equal to
a. D4 c. D5
b. D3 d. E5

17. 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:

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 B C D
Interest Present
Date Discount
1 expense value
2 Jan. 1, 20x1
3 Dec. 31, 20x1
4 Dec. 31, 20x2
5 Dec. 31, 20x3
6 Dec. 31, 20x4
18. The amount to be placed on cell B4 is
a. 10% x E3 c. ₱1M ÷ 4
b. 12% x D3 d. same with B3

19. 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)

20. Interest expense recognized in 20x3 is computed as

a. 12% x D3 c. C4 – D4
b. 12% x D4 d. 1M x 12%

21. 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

22. 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

23. The current portion of the note payable as of December 31, 20x2 is equal to
a. D4 c. D5
b. D3 d. none

24. 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

25. The sum of cell C4 and cell D4 is

a. equal to D3 c. 1M
b. equal to D5 d. none of these

26. The value of cell D6 is

a. equal to D3 c. 1M
b. equal to D5 d. zero

27. 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.
28. 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

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.

29. 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

30. How much is the interest expense in 20x1?

a. 435,424 b. 576,240 c. 507,995 d. 400,000

31. 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
32. 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

33. 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)

34. 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

35. 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

36. On January 1, 20x1, PAGEANT SHOW Co. issued 10%, ₱12,000,000 bonds at a yield to maturity interest of 18%.
Principal and interest are due on December 31, 20x3. How much is the carrying amount of the bonds on initial
recognition?
a. 15,972,000 b. 9,721,052 c. 9,028,341 d. 9,183,273

37. On January 1, 20x1, VIGILANT WATCHFUL Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds for the face
amount of ₱4,000,000. Each ₱4,000 bond is convertible into 8 shares with par value of ₱400 per share. When the
bonds were issued, they were selling at 98 without the conversion option. VIGILANT incurred ₱200,000 transaction
costs on the issue of the bonds. How much is the equity component of the compound instrument?
a. 80,000 b. 200,000 c. 76,000 d. 123,489

38. On January 1, 20x1, CRYSTALLINE TRANSPARENT Co. issued its 10%, 3-year, ₱4,000,000 convertible bonds at
105. Each ₱4,000 bond is convertible into 8 shares with par value per share of ₱400. Principal is due on December 31,
20x3 but interests are due annually at each year-end. When the bonds were issued, they were selling at a yield to
maturity market rate of 12%without the conversion option. On December 31, 20x2, all of the bonds were converted
into equity. Conversion costs incurred amounted to ₱80,000.

How much is the net increase in equity on December 31, 20x2 due to the conversion of the bonds?
a. 3,392,148 b. 3,234,998 c. 3,894,759 d. 3,848,571

Use the following information for the next three questions:

On January 1, 20x1, ELABORATE COMPLICATED Co. issued 3-year, 10%, ₱4,000,000 convertible bonds for
₱4,400,000. Principal is due at maturity but interest is payable every year-end. The bonds are convertible into 6,000
ordinary shares with par value of ₱400. At issuance date, the prevailing market rate of interest for similar debt without
conversion feature is 12%.

On December 31, 20x2, all the convertible bonds were retired for ₱4,000,000. The prevailing rate of interest on a similar
debt instrument as of December 31, 20x2 is 11% without the conversion feature.

39. How much is gain (loss) on the extinguishment of the bonds on December 31, 20x2?
a. 35,392 b. (35,392) c. 32,413 d. (32,413)

40. How much is the net credit to “share premium” account on December 31, 20x2?
a. 556,110 b. 541,167 c. 514,571 d. 557,368

41. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012, contained the following accounts.
5-year Bonds Payable 8% $2,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
 Mortgage Payable ($15,000 due currently) 200,000
Salaries and wages Payable 18,000
Income Taxes Payable (due 3/15 of 2013) 25,000

The total long-term liabilities reported on the balance sheet are

a. $2,365,000. c. $2,465,000.
b. $2,350,000. d. $2,450,000.

42. On June 30, 2013, Omara Co. had outstanding 8%, $4,000,000 face amount, 15-year bonds maturing on June 30,
2023. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred
bond issue costs accounts on June 30, 2013 were $140,000 and $40,000, respectively. On June 30, 2013, Omara
acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss
on this early extinguishment of debt?
a. $3,960,000. c. $3,820,000.
b. $3,860,000. d. $3,760,000.

Use the following information for the next two questions:

On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%,
payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% ..................................................... .627
Present value of 1 for 8 periods at 8% ..................................................... .540
Present value of 1 for 16 periods at 3% ................................................... .623
Present value of 1 for 16 periods at 4% ................................................... .534
Present value of annuity for 8 periods at 6% ........................................... 6.210
Present value of annuity for 8 periods at 8% ........................................... 5.747
Present value of annuity for 16 periods at 3% ......................................... 12.561
Present value of annuity for 16 periods at 4% ......................................... 11.652

43. The present value of the principal is

a. $1,068,000. c. $1,246,000.
b. $1,080,000. d. $1,254,000.

44. The present value of the interest is

a. $689,640. c. $745,200.
b. $699,120. d. $753,660.

45. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pay
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the
bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $3,000,000 c. $3,131,285
b. $3,129,896 d. $3,130,385

46. Feller Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are
dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue
date?
a. $9,700,000 c. $9,850,000
b. $10,225,000 d. $9,550,000

47. Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pays
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the
bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. $15,000,000 c. $15,656,427
b. $15,649,482 d. $15,651,924

48. Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds
are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue
date?
 a. $19,400,000 c. $19,700,000
b. $20,450,000 d. $19,100,000

49. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and
December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, how much interest
expense will be recognized in 2012?
a. $585,000 c. $1,176,374
b. $1,170,000 d. $1,176,249

50. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and
December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, what will be the
carrying value of the bonds on the December 31, 2012 balance sheet?
a. $14,709,482 c. $14,718,844
b. $15,000,000 d. $14,706,232

END OF EXAMINATION

The testing of your faith produces perseverance.

-James 1:3

MERRY CHRISTMAS AND A HAPPY NEW YEAR!