INTERMEDIATE ACCOUNTING 2 (CA51010)

PRELIMINARY EXAMINATION REVIEWER

Prepared by the Mentors’ Circle Committee of the UST – Junior Philippine Institute of Accountants
THEORIES (2 pts each) PROBLEM SOLVING (3 pts each)
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
6. 6.
7. 7.
8. 8.
9. 9.
10. 10.
11. 11.
12. 12.
13. 13.
14. 14.
15. 15.
16. 16.
17. 17.
18. 18.
19. 19.
20. 20.
I. Theories.
Multiple Choice. Choose the best answer.

_____________ 1. Which of the following elements is not included in the definition of a liability?

A. Past and present obligation

B. Result of past event
C. There is a probable outflow of resources
D. Reliable estimate can be made regarding the amount of the
obligation

_____________ 2. Which of the following statement/s is/are correct?

S1: Contingent liabilities are those whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future
events wholly within the control of the enterprise.
S2: Contingent liabilities includes liabilities that were not recognized
because they do not meet one or more recognition criteria.
A. I only
B. II only
C. I and II
D. Neither

_____________ 3. Which of the following statement/s is/are incorrect?

S1: Provisions are recognized as liabilities in the face of the financial

statements.
S2: As a general rule, contingent liabilities are recognized in the face of the
financial statements.
S3: Contingent liabilities are disclosed only when the possibility of outflow
of resources is remote.
A. I and II only
B. II and III only
C. I and III only
D. I, II and III
_____________ 4. Which of the following statement/s is/are correct?

S1: Liabilities are usually presented as current and non-current in the

Statement of Financial Position.
S2: Regardless of the presentation based on liquidity is considered more
useful and relevant to the users, liabilities will still be presented as
current and non-current.
S3: To be classified as a current liability, all criteria must be satisfied.
Otherwise, it will be classified as non-current.
A. I only
B. II only
C. III only
D. Neither

______________ 5. Which of the following statement/s is/are incorrect?

S1: Contingent assets are recognized in the financial statement when the inflow
of economic benefits is probable.
S2: Contingent assets are neither recognized nor disclosed in the financial
statements unless virtually certain
S3: Where the inflow of economic benefits is virtually certain, the related asset
will be recognized in the financial statements.
A. I and II
B. II and III
C. I and III
D. I, II and III

______________ 6. Liabilities arising from the purchase of goods and services but are evidenced
by a written promise to pay at a specific date.

A. Accounts Payable
B. Serial Bonds
C. Bonds with Equity Characteristics
D. Notes Payable

_______________7. These are bonds that mature in installments.

A. Installment bonds
B. Term bonds
C. Serial Bonds
D. Bearer bonds
______________ 8. Bonds that are not protected by the pledge of any specific asset of the issuing
corporation

A. Secured bonds
B. Debentures
C. Bearer bonds
D. Convertible bonds

______________ 9. This pertains to the interest rate attached with the note or bond except:

A. Contract rate
B. Nominal interest rate
C. Market Rate
D. Stated rate

_______________10. The bonds will be sold at premium if ______________.

A. Nominal interest rate exceeds Effective Interest Rate

B. Effective interest rate exceeds Nominal interest rate
C. Nominal interest rate equals Effective interest rate
D. I really do not know

_______________11. The following are required to be present in the disclosures of inventory

except:
A. Accounting policies adopted in measuring inventory balances
B. Inventory expensed during the period.
C. Carrying amount of inventory balances carried at fair value less cost
to sell
D. All of the above

______________ 12. Statement 1: On the Date of Retirement, the indebted company will record
a gain on retirement if the Carrying Value of the bonds is less
than the determined retirement price.
Statement 2: After the retirement of some parts of the bonds, the company
will still amortize the bonds as if there is no retirement at all.
A. Statement 1 is True
B. Statement 2 is True
C. Both Statements are True
D. Both Statements are False
 ______________ 13. For bonds with non-detachable share warrants, the equity component is
assigned the residual amount after deducting from the face value of the
compound instrument the amount determined for the liability component.

A. True, because the face value reflects the value of the warrants
B. True, because the face value represents the nominal amount of the
warrants
C. False, because fair value of the compound instrument should be used
D. Answer, cannot be determined

______________ 14. The entity shall disclose the following for each class of financial liability
except:

A. Information about the extent and nature of financial instruments

B. Accounting policies and methods adopted, including criteria for
recognition and basis of measurement applied
C. The amount of any gain or loss recognized in the other
comprehensive income
D. Timing, amount, and certainty of future cash flows

______________ 15. This is when an entity shall derecognize a financial liability from its statement
of financial position when the obligation when specified in the contract is
discharged or cancelled or expires.

A. Bond Refunding
B. Retirement of Bonds
C. Troubled Debt Restructuring
D. Convertible Bonds

______________ 16. The following are forms of troubled debt restructuring EXCEPT:

A. Reducing the amount of principal to be paid

B. Reducing of the stated interest rate or extending of the maturity date
C. Transferring of non-cash assets such as real estate, receivables, or
other assets to settle a debt obligation
D. Issuing of the debtors’ share capital to settle a debt obligation

______________ 17. This is issued at a significantly lower amount than its face value. Also
known as deep-discount bond.

A. Registered Bond
B. Term Bond
C. Serial Bond
 D. Zero Interest Bond

______________ 18. Statement 1: An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be
accounted for as an extinguishment of the original liability and
recognition of a new financial liability.
Statement 2: In Equity Swap, any difference between the fair value used and
the carrying value of the financial liability settled is taken to
profit or loss.
A. Only statement 1 is true.
B. Only statement 2 is true.
C. Both statements are true.
D. Both statements are false.

______________ 19. The following are required in disclosure requirements for bonds issued
with share warrants except:

A. Stated rate
B. Date of maturity
C. Expiry of warrants
D. Cash Discounts

______________ 20. Statement 1: It is necessary to disclose the accounting policies and methods
adopted in recording financial liabilities
Statement 2: An entity shall disclose immaterial items of income, expenses,
gains, and losses resulting from financial liabilities.

A. Only statement 1 is true.

B. Only statement 2 is true.
C. Both statements are true.
D. Both statements are false.
II. Problem Solving.
Supply the answer.

PROBLEM 1
On December 2, 2021, DOH Corporation purchased medical supplies from PANDEMIC INC.
with a stated list price of P500,000. The PANDEMIC INC. have given trade discounts of 20, 10,
15, and 20. Freight charges amounted to P5,000. The terms are FOB Shipping Point 2/10 n/30.
DOH paid on December 12, 2021.
______________1. How much is the related purchase discount arising from the transaction?
______________2. How much is the net amount of purchases of DOH Corporation?

PROBLEM 2
On July 20, 2021, ECQ Corporation bought vaccines from GRANULAR LOCKDOWN INC. with
a list price of P300,000. The latter gave the former trade discounts of 15, 12, 20, 19 due to the high
volume of vaccines that were purchased to give its employees. Freight charges is 5% of the invoice
price. The terms are FOB Destination 3/10 n/30. DOH paid on July 31, 2021.
______________3. How much is the total invoice price from the resulting transaction
purchase?
______________4. How much is the total amount taken to profit or loss in year 2021?

PROBLEM 3
WINARAK Company is a merchandising company of medical equipment intended for COVID-
19 frontliners. On April 30, 2021, it issued a P5,000,000, 10% promissory note for face shields
purchased at KALMA AKO LANG TO Corp. The amount is agreed upon by the parties to be
payable in installment basis together with the interest.
______________5. How much is the total amount that were taken to profit or loss on April 30,
2023?
______________6. How much is the total current liabilities presented on the Statement of
Financial Position on December 31, 2021?

PROBLEM 4
On January 1, 2021, NABI Company issued a five-year, P5,600,000, 12% promissory note for an
equipment purchased from JAE-EON Corporation due on December 31, 2025. The interest is paid
every January 1. At the date of purchase, the fair value of the equipment is unknown. The
equipment was bought on January 2, 2018 for P10,500,000 and is depreciated using the straight-
line method. Its estimated useful life is 8 years and has no salvage value. The market rate of interest
for similar notes is 7%.
______________7. What is the amount of gain or loss on purchase of equipment?
 ______________8. At what amount is the interest expense on 2022 is recorded?
______________9. How much is the carrying value of the note on December 31, 2023.
______________10. How much is the current and non-current portion of the note on
December 31, 2021.

PROBLEM 5
On April 1, 2021, SOL INC. purchased a machine for P5,000,000 from SEOL-A CO. SOL INC.
paid P1,000,000 down and issued a 12% promissory note for the balance payable in 4 equal annual
payments every March 31 of each year. There was no established exchange price for the machine.
The prevailing interest rate for this type of the note was 14%.
The machine had a carrying value of P5,100,000 on January 1, 2021. It was originally bought for
P6,000,000 on July 1, 2019, and is depreciated using the straight-line method. Its estimated useful
life is 10 years.
______________11. What is the gain or loss on purchase of equipment?
______________12. At what amount is the interest expense on 2022 is recorded?
______________13. How much is the carrying value of the note on December 31, 2023.
______________14. How much is the current and non-current portion of the note on
December 31, 2021.

PROBLEM 6
On January 1, 2022, IKAW PARIN ANG BIBI CO. issues a 5-year, 2,000,000, 14% bonds. The
bonds were sold at 112. Interest on the bonds is payable semi-annually, on June 30 and Dec. 31
every year.
PV Factors are as follows:
Rates Present Value of 1 for 10 Present Value of an ordinary annuity of 1 for 10
periods periods
6% 0.5584 7.3601
7% 0.5083 7.0236
12% 0.3220 5.6502
14% 0.2697 5.2161

______________15.How much premium amortization will be debited on June 30, 2023?

(Whole number)
______________16.What will be the carrying value of the bonds payable on December 31,
2025? (Whole number)
PROBLEM 7
On March 1, 2020, the PA VACCINE KA NA Company issued a 6-year bonds of 8,000,000
yielding 10% annually. Interest is payable annually on February 28 at 12%. On March 1, 2023,
PA VACCINE KA NA COMPANY retired 3,000 of its own P1,000 bonds at 102. The accounting
period is the fiscal calendar year and the company uses the effective interest method of
amortization.
______________17. How much is the gain on retirement on February 28, 2023?
______________18. How much is the premium amortization on February 28, 2025?

PROBLEM 8
On January 1, 2020, TOKYO MONEY HAYST Company issued P7,500,000, 12% serial bonds,
to be repaid in the amount of P1,500,000 each year. Interest is payable annually every December
31, and the bonds has a price that yields 10%. The present value factors are the following:

PV of 1 at 10% for one period 0.91 PV of 1 at 10% for four periods 0.68
PV of 1 at 10% for two periods 0.83 PV of 1 at 10% for five periods 0.62
PV of 1 at 10% for three periods 0.75 PV of ordinary annuity of 1 at 10% for
three periods 3.79

______________19. How much is the issue price of the bonds?

______________20. How much is the unamortized premium on bonds payable on December
31, 2021?

PROBLEM 9

RAFFY TULFO issued P3,500,000, 6% 5-year bonds, payable annually at 102. Each P2,000 bond
carried three non-detachable warrants, each entitling the holder to purchase one share of the
entity’s P250 par value ordinary share capital at P300 per share. Similar bonds without equity
components yield 8%

______________21. How much is the total issue price?

______________22. Allocate the issue price between the debt and equity components. How
much is allocated for the warrants?

PROBLEM 10

On January 1, 2019, SANICARE Company bought a land with a fair value of 10,000,000 and a
book value of 9,500,000 from DE JESUS REALTY by issuing a note with a face value of
10,000,000 that will mature on December 31, 2021. The note has a coupon rate of 10% and similar
type of financial instruments are yielding at an annual rate of 12%. Included in the terms of the
note that the interest payments will be made semi-annually and failure to pay the loan on the
maturity date, SANICARE will issue its own share as substitute payment equivalent to the maturity
value and 1-year accrued interest.
On December 31, 2021, due to the Covid-19 pandemic, SANICARE temporarily stopped its
operations and failed to pay the note they issued to DE JESUS has a par value of P50 and P70 per
and fair value per share amounting to P68 and P87 per share respectively.

______________23. How much is credited to equity after the settlement of the note on
December 31, 2021?
______________24. How much is the total amount taken to Profit or Loss Section of the
Statement of Comprehensive Income on December 31, 2021?

PROBLEM 11

STICKER CORPORATION has an overdue notes payable to NCIT Bank of P1,270,000 and
recorded accrued interest of P114,300 as of December 31, 2020. NCIT Bank agreed to the
following restructuring agreement on December 31, 2020 wherein the prevailing market rate
interest rate for similar debt instruments on this date is 13%.
 Reduce the principal obligation by P170,000
 Waive the P114,300
 Extend the maturity date to December 31, 2023
 Annual interest of 7% of the new principal is to be paid annually starting on December
31, 2021.
 Round off the PV factor to four decimal places.
______________25. How much is the initial carrying amount of the restricted notes payable?
(Round off two decimal places)
______________26. How much is the gain on debt restructuring? (Round off to two decimal
places)

PROBLEM 12

DIKI NAYA Company has an overdue note payable to KINA YA Finance Company with face
value of P2,000,000 with an accrued interest of P200,000. DIKI NAYA have been experiencing
financial difficulty that led him to negotiate with KINA YA Finance Company to exchange an
equipment that has a historical value and carrying value of P3,000,000 and P1,850,000
respectively. As of today, it had a fair value of P2,000,000.
______________27. How much should DIKI NAYA Company recognize as gain on debt
restructuring?
______________28. How much should DIKI NAYA Company recognize as gain on disposal of
equipment?
 ANSWER KEY
MULTIPLE CHOICE PROBLEM SOLVING
1. A 1. 4,986 21. 3,570,000
2. B 2. 239,904 22. 349, 501
3. B 3. 145,411 23. 11,000,000
4. A 4. 4,362 24. 1,007,060
5. A 5. 433,334 25. 967,918.60
6. D 6. 1,333,333 26. 416,318.40
7. C 7. 185,634 27. 200,000
8. D 8. 458,395 28. 150,000
9. C 9. 6,106,341
10. A 10. C: 0; NC;6,548,503
11. D 11. 105,172 GAIN
12. D 12. 439,395
13. C 13. 1,949,539
14. C 14. C: 985,431; NC:2,903,104
15. C 15. 12,547
16. A 16. 2,036,689
17. D 17. 89,334
18. C 18. 82,622
19. D 19. 7,863,000
20. A 20. 154,230

“Stick to the fight when you’re hardest hit –

It’s when things seem worse that you must not quit.”
- Don’t Quit by John Greenleaf Whittier

Prepared by:

Cortez, Jewel May Magsombol, Rich Anne Ruiz, Liz Angela

Labeña, Vince Emmanuel Abella, Celson Celis Flores, Lyle
Cabalog, Jane Nicole Bagsik, Caroline Louise
Durana, Kent Patrick Carranza, Erika
Panlilio, Julia Pae Cervantes, Ronilo
Reyes, Jerald Patrick Echague, Dwight Manikan
Hilario, Jen Margaret Monzon, Choseph Aleckzander