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Ch 2-9 Valix 2023

BS Accountancy (University of Nueva Caceres)

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Problem 2-1 (IAA) Problem 2-4 (AICPA Adapted)

Miracle Company manufacturers a product that is packaged and sold. A plate is offered to customers sending Company started a promotional program. For every 10 box tops returned, customers receive a basketball. The
in three wrappers accompanied by a remittance of P10. entity estimated that only 60% of the box tops reaching the market will be redeemed.
The entity provided the following information for the current year:
Data with respect to the premium offer are summarized below. Units Amount
Sales of product 100,000 30,000,000
2022 2023 Basketball purchased 5,500 4,125,000
Sales 3,600,000 4,200,000 Basketball distributed 4,000
Purchase of premium, P50 per plate 390,000 580,000
Number of plates distributed as premiums 5,000 9,000 Required:
Estimated number of plates to be distributed in subsequent 2,000 3,000 Prepare journal entries to record the transactions relating to the premium plan for the current year.
period Problem 2-5 (IFRS)
Distribution cost P20 per plate Victoria Company sells bedsheets for P3,000 per set. There is a promotion wherein if a customer buys 4 sets
in a single transaction, the customer receives a coupon for one additional set for free. Customers should go to
Required: the entity's website, fill out a request form, input the coupon number and submit online before the expiration
Prepare journal entries that would be made in 2022 and 2023 to record sales, premium purchases and date. It is expected that 80% of the coupons will be redeemed.
redemptions, and year-end adjustments. During 2022, the entity sold 1,000 sets at P3,000 per set of P3,000,000. During 2023, the entity delivered 75
Problem 2-2 (IAA) free additional sets
Cascade Company manufactures a special laundry soap. Required:
1. Compute the stand-alone price of the coupons.
A towel is offered as a premium to customers who send in two proof-of-purchase seals from the soap boxes 2. Allocate the transaction price to the products sold and the coupons.
and a remittance of P20. Distribution cost is P5 per towel. 3. Prepare journal entries for 2022 and 2023.
4. Compute the deferred revenue from coupons on December 31, 2023.
Data for the premium offer are. Problem 2-6 (IFRS)
Anton Company sells one dozen doughnuts for P500 per box. There is a promotion wherein if a customer buys
2022 2023 3 boxes in a 3 boxes in a single transaction, a customer received a coupon for one additional box for free.
Soap sales 2,500,000 3,125,000 Customers can redeem coupons at any time following the month of sale of the 3 boxes before the expiration
Towel purchases, P100 per towel 175,000 200,000 date. It is expected 60% of the customers will redeem the coupons.
Number of towels distributed as premium 1,000 1,800 During 2022, the entity sold 15,000 boxes at P500 per box or P7,500,000. During 2023, the entity delivered
Number of towels expected to be 600 800 2,000 free additional boxes to the customers.
distributed in subsequent period Required:
Required: 1. Compute the stand-alone selling price of the coupons.
1. Prepare journal entries for 2022 and 2023. 2. Allocate the transaction price to the products sold and the coupons.
2. Statement classification of the account balances pertaining 3. Prepare the journal entry to record the sale of the products and issue of the free product coupons in
Problem 2-3 (IAA) 2022.
Pop Company sells banana juice. In order to promote the drink, the entity inaugurated in the current year a 4. Prepare the journal entry to record the delivery of 2,000 free additional boxes in 2023.
premium plan called "Drink-N-Win." Problem 2-7 (IFRS)
For every 10 bottle caps and P5 turned in, customers receive an attractive ball-pen and become eligible for a Sydney Company is a retailer that sells clothing. The entity has launched a promotional campaign wherein if
grand prize of P5,000 in cash awarded for every 100 tops turned in. customers buy clothing with a single purchase of at least P12,000, the entity shall issue "30% discount
The entity estimated that only 25% of bottle caps reaching the hands of customers will be presented for coupons" on selected items for 2 months following the campaign.
redemption.
During the current year, the entity sold 400,000 bottles of banana juice at P9 each, purchased 10,000 ball point During the campaign, the entity sold clothing worth P3,240,000 and had issued 100 "30% discount coupons",
pens for a total cost of P900,000 and incurred nondeferrable costs of P30,000 applicable to the premium plan.
A total of 8,000 pens have been redeemed and thirty grand prizes have been awarded. It is expected that 80% of the coupons will be redeemed and customers using the coupons will buy clothing at
Required: an average price of P15,000.
Prepare journal entries to record the transactions relating to the premium plan for the current year.

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Required: Problem 2-11 (IFRS)

1. Compute the stand-alone selling price of the discount coupons. Marie Company sells gift certificates worth P2,500,000 to customers in exchange for future delivery of its
2. Allocate the transaction price to the products sold and the discount coupons. product.
3. Prepare journal entries for the current year including of the redemption of the coupons.
Problem 2-8 (IFRS) The gift certificates are nonrefundable by the customer and the entity expects that 5% of the gift certificates will
Company is a retailer and has launched a promotional campaign wherein if customers buy clothing with a not be redeemed.
single purchase of at least P4,000, the entity shall issue "40 discount coupons" on selected items.
The coupons may be used for 2 months following the campaign. During the campaign, the entity sold clothing During the current year, the entity redeemed gift certificates worth P1,425,000.
work P1,860,000 and issued 100 "40% discount coupons”
The entity expected that 70% of the coupons will be redeemed and customers using the coupons buy clothing Required:
at an average price of P5,000. 1. Compute the expected value of breakage.
Required: 2. Compute the expected value of gift certificates to be redeemed.
1. Compute the stand-alone price of the discount coupons. 3. Compute the breakage revenue.
2. Allocate the transaction price to the products sold and the discount coupons. 4. Prepare the journal entries to recognize the sale of gift certificates and the redemption of gift
3. Prepare the journal entry to recognize the sale of the products and issue of discount coupons. certificates.
4. Prepare the journal entry to recognize the redemption of coupons. Problem 2-12 (IFRS)
Problem 2-9 (IFRS) Shawn Company sells gift certificates worth P8,000,000 to customers in exchange for future delivery of its
Susan Company is a manufacturer of car shampoo and sells its product through local retailers. The shampoo product.
costs P550 to the retailer. Retailers sell the product to its customers and for each product purchased by the
customer, a coupon of P100 discount is given and may be used on future purchase of the same product. The gift certificates are nonrefundable by the customer and the entity expects that 15% of the gift certificates
will not be redeemed.
Retailers are reimbursed for the discount by the discount by the entity when customers redeem their coupons.
During the current year, the entity redeemed gift certificates worth P2,975,000
During the current year, the entity sold 8,000 products to local retailers at P550 each product or P4,400,000.
The entity expected that 75% of the coupons issued will be redeemed. At year end, the entity paid the retailers Required:
P250,000 as reimbursement. 1. Compute the expected value of breakage.
Required: 2. Compute the expected value of gift certificates to be redeemed.
1. Compute the stand-alone selling price of the rebate coupons. 3. Compute the breakage revenue.
2. Allocate the transaction price to products sold and to the rebate coupons. 4. Prepare the journal entries to record the sale of gift certificates and the redemption of gift
3. Prepare journal entries for the current year. certificates.
4. Compute the rebate liability at year-end.
Problem 2-10 (IFRS) Problem 2-13 (IFRS)
Isabel Company is a manufacturer of deodorant and sells its product through local retailers. The deodorant Arianne Company, a grocery retailer, operates a customer loyalty program. The entity grants program
costs P64 to the retailer. Retailers sell the product to its customers and for each product purchased by the members loyalty points when they spend a specified amount on groceries. Program members can redeem the
customer, a coupon of P20 discount is given and may be used on future purchase of the same product. points for groceries. The points have no expiry date.

Retailers are reimbursed for the discount by the manufacturer when customers redeem their coupons. During 2022, the sales amounted to P7,000,000 based on stand-alone selling price. During 2022, the entity
granted 10,000 points. But management expected that only 80% or 8,000 points will be redeemed. The stand
During the current year, the entity sold 10,000 deodorants to local retailers at P64, each or P640,000. The alone selling price of each loyalty point was estimated at P100.
entity expected that 80% of the coupons issued will be redeemed. At year end, the entity paid the retailers
P50,000 as reimbursement. On December 31, 2022, 4,800 points have been redeemed. In 2023, management revised its expectations and
now expected that 90% or 9,000 points will be redeemed altogether. During 2023, the entity redeemed 2,400
Required: points.
1. Compute the stand-alone selling price of the rebate coupons.
2. Allocate the transaction price between the products sold and the rebate coupons. Required:
3. Prepare journal entries for the current year. Prepare journal entries for 2022 and 2023

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Problem 2-14 (IFRS) The entity estimated at the end the year that it would be probable that 50% of the box tops will be redeemed.
Erika Company operates a customer loyalty program. The entity grants loyalty points for goods purchased. The The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed
loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry during the year.
dates.
What amount should be reported as estimated premium liability at year-end?
During 2022, the entity issued 50,000 award credits and expected that 80% of these award credits shall be a. 3,000,000
redeemed. b. 1,500,000
c. 750,000
The stand-alone selling price of the award credits granted is reliably measured at P1,000,000. In 2022, the d. 500,000
entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone selling price. The Problem 2-17 (AICPA Adapted)
award credits redeemed and the total award credits expected to be redeemed each year are: During the current year, Day Company sold 500,000 boxes of cake mix under a new sales promotional
program. Each box contained one coupon, which entitled the customer to a baking pan upon remittance of
Redeemed Expected to be redeemed P40. The entity paid P50 per pan and P5 for handling and shipping.
2022 15,000 80%
2023 7,950 85% The entity estimated that 80% of the coupons will be redeemed, even though only 300,000 coupons had been
2024 2,550 85% processed during the current year
2025 15,000 90% 1. What amount should be reported as premium expense for current year?
a. 6,000,000
Required b. 7,500,000
Prepare journal entries for 2022, 2023, 2024 and 2025. c. 4,500,000
Problem 2-15 (AICPA Adapted) d. 2,000,000
In an effort to increase sales, Mill Company inaugurated a sales promotional campaign on June 30. The entity 2. What amount should be reported as liability for unredeemed coupons at year-end?
placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost P20 and five a. 1,000,000
coupons must be presented by a customer to receive a premium. b. 1,500,000
c. 3,000,000
The entity estimated that only 60% of the coupons issued will be redeemed. For the six months ended d. 5,000,000
December 31, the following information is available: Problem 2-18 (IAA)
Clam Company offers customers a pottery cereal bowl if they send in three boxtops from its products and P10.
Packages of cereal sold 160,000 The entity estimated that 60% of the boxtops will be redeemed.
Premiums purchased 12,000
Coupons redeemed 40,000 During the current year, the entity sold 675,000 boxes and customers redeemed 330,000 boxtops receiving
110,000 bowls. The cost of each bowl was P25.
1. What amount should be reported as premium expense?
a. 640,000 1. What amount should be reported as premium expense for current year?
b. 384,000 a. 2,025,000
c. 240,000 b. 6,075,000
d. 160,000 c. 4,550,000
2. What amount should be reported as estimated premium liability on December 31? d. 1,650,000
a. 169,000 2. What amount should be reported as liability for outstanding premiums at year-end?
b. 224,000 a. 250,000
c. 288,000 b. 375,000
d. 384,000 c. 625,000
Problem 2-16 (AICPA Adapted) d. 875,000
Baker Company sold consumer products that are packaged in boxes. The entity offered an unbreakable glass
in exchange for two box tops and P50 as a promotion during the current year. The cost of the glass was P200.

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Problem 2-19 (IAA) 2. What amount should be reported as estimated premium liability on December 31, 2022?
Charlene Company included one coupon in each box of laundry soap sold. a. 400,000
b. 200,000
A towel was offered as a premium to customers who send in 10 coupons and a remittance of P10. c. 600,000
d. 300,000
Distribution cost of premium is P5. Experience indicated that only 30% of the coupons will be redeemed. 3. What amount should be reported as premium expense for 2023?
a. 2,400,000
2022 2023 b. 2,000,000
Boxes of soap sold 2,000,000 2,500,000 c. 2,120,000
Number of towels purchased at P50 each 50,000 80,000 d. 1,920,000
Coupons redeemed 400,000 700,000 4. What amount should be reported as estimated premium liability on December 31, 2023?
a. 320,000
1. What amount should be reported as premium expense for 2022? b. 400,000
a. 2,500,000 c. 120,000
b. 2,400,000 d. 520,000
c. 1,800,000 Problem 2-21 (IAA)
d. 2,700,000 Choco Company, a high street chain, is offering a promotion whereby a customer who purchases three boxes
2. What amount should be reported as estimated premium liability on December 31, 2022? of chocolates at P200 per box in a single transaction receives a coupon for one free box of chocolates if the
a. 1,000,000 customer fills out a request form and mails it before a set expiration date. It is expected that 75% of the
b. 1,100,000 coupons will be redeemed.
c. 800,000
d. 900,000 During 2022, the entity sold 30,000 boxes of chocolates at P200 per box or P6,000,000.
3. What amount should be reported as premium expense for 2023?
a. 3,000,000 During 2023, the entity delivered 6,000 additional free boxes of chocolates to the customers.
b. 3,750,000
c. 3,375,000 1. What amount should be reported as stand-alone selling price of the free product coupons?
d. 4,000,000 a. 1,500,000
4. What amount should be reported as estimated premium liability on December 31, 2023? b. 2,000,000
a. 1,000,000 c. 750,000
b. 1,250,000 d. 500,000
c. 1,125,000 2. What amount of the transaction price should be allocated to the free product coupons?
d. 1,375,000 a. 1,000,000
Problem 2-20 b. 1,200,000
Love Company included one coupon in each package of cereal sold. A towel was offered as a premium to c. 500,000
customers who send in 10 coupons. d. 600,000
3. What amount should be reported as sales revenue in 2022?
2022 2023 a. 6,000,000
Packages of cereal sold 500,000 800,000 b. 3,000,000
Number of towels purchased at P40 per towel 30,000 60,000 c. 4,800,000
Number of towels distributed as premium 20,000 50,000 d. 2,400,000
Number of towels to be distributed as premium next period 5,000 3,000 4. What amount should be reported as sales revenue from the delivery of free products in 2023?
1. What amount should be reported as premium expense for 2022? a. 900,000
a. 1,000,000 b. 600,000
b. 1,200,000 c. 480,000
c. 600,000 d. 720,000
d. 500,000

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Problem 2-22 (IFRS) 3. What amount should be reported as sales revenue?

Dress Company is a retailer that sells clothing. The entity has launched a promotional campaign whereby if a. 3,000,000
customers buy clothing with a single purchase of at least P4,000, the entity shall issue "30% discount coupons" b. 4,800,000
on selected items. The coupons may be used for 3 months following the campaign. c. 6,000,000
During the campaign, the entity sold clothing worth P5,400,000 and issued 500 "30% discount coupons". d. 3,600,000
The entity expected that 80% of the coupons will be redeemed and customers using the coupons buy clothing 4. What amount should be reported as rebate liability at year-end?
at an average price of P5,000. a. 1,200,000
1. What amount should be reported as stand-alone selling price of the discount coupons? b. 1,700,000
a. 750,000 c. 700,000
b. 600,000 d. 500,000
c. 400,000 Problem 2-24 (IFRS)
d. 300,000 Alyanna Company operates a customer loyalty program. The entity grants program members loyalty points
2. What amount of transaction price should be allocated to discount coupons? when they spend a specified amount on purchases.
a. 600,000 Program members can redeem the points for further purchases. The points have no expiry date.
b. 500,000 During 2022, the customer earned 60,000 points. Management expects that 100% of these points will be
c. 540,000 redeemed. The stand-alone selling price of each loyalty point is estimated at P20.
d. 270,000 The sales during 2022 amounted to P6,800,000 based on stand-alone selling price.
3. What amount should be recorded initially as sales revenue? On December 31, 2022, 28,800 points have been redeemed in exchange for purchases.
a. 4,860,000 In 2023, the management revised expectations and now expects 90% of the points to be redeemed.
b. 5,400,000 In 2023, the entity redeemed 9,000 points.
c. 2,560,000 1. What amount of the transaction price should be allocated to the points?
d. 1,960,000 a. 1,800,000
4. What amount should be recorded as sales revenue from the redemption of coupons? b. 1,200,000
a. 2,500,000 e. 1,020,000
b. 1,940,000 c. 0
c. 1,750,000 2. What amount should be reported as revenue earned from loyalty points for 2022?
d. 1,400,000 a. 576,000
Problem 2-23 (AICPA Adapted) b. 489,600
Cereal Company is a manufacturer and sells its product to retailers. Retailers sell the product to its customers c. 510,000
and for each product purchased by the customers, a rebate coupon of P50 discount is given and may be used d. 0
on future purchase of the same product. Retailers are reimbursed for the discount by the manufacturer upon 3. What amount should be reported as revenue earned from loyalty points for 2023?
redemption of the coupons. a. 224,400
During the current year, Cereal Company sold 40,000 products to the retailers at P150 each or P6,000,000. b. 714,000
It is expected that 75% of the coupons will be redeemed. At year-end, Cereal Company paid the retailers c. 170,000
P500,000 as reimbursement. d. 0
Problem 2-25 (IFRS)
1. What amount should be reported as stand-alone selling price of the rebate coupons? William Company operates a customer loyalty program. The entity grants loyalty points for goods purchased.
a. 1,800,000 The loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry
b. 1,500,000 date.
c. 1,000,000 During 2022, the entity issued 100,000 award credits and expects that 80% of these award credits shall be
d. 2,000,000 redeemed.
2. What amount of the transaction price should be allocated to the rebate coupons? The total stand-alone selling price of the award credits granted is reliably measured at P2,000,000.
a. 1,200,000 In 2022, the entity sold goods to customers for a total consideration of P8,000,000 based on stand-alone
b. 1,500,000 selling price.
c. 750,000 The award credits redeemed and the total award credits expected to be redeemed each year are as follows:
d. 600,000

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Redeemed Expected to be redeemed Problem 2-27 (IFRS)

2022 30,000 80% Jamaica Company, a retailer of electrical goods, participates in a customer loyalty program operated by an
2023 15,000 90% airline. The entity grants program members one air travel point for every P1,000 spent on electrical goods.
1. What amount should be reported as revenue from points for 2022? Program members can redeem the points fo: travel with the airline subject to availability. The entity pays the
a. 1,600,000 airline P60 for each point.
b. 1,500,000 During the current year, the entity sold electrical goods for consideration totaling P4,500,000 based on stand-
c. 600,000 alone selling price and granted 5,000 points with stand-alone selling price of P100 per point.
d. 480,000 1. What amount should be recognized as product sales revenue?
2. What amount should be reported as revenue from points for 2023? a. 4,500,000
a. 240,000 b. 4,050,000
b. 200,000 c. 5,000,000
c. 120,000 d. 2,500,000
d. 0 2. What amount should be reported as net revenue from points?
Problem 2-26 (IFRS) a. 450,000
Erika Company operates a customer loyalty program. The entity grants loyalty points for goods purchased. The b. 150,000
loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry c. 200,000
date. a. d. 300,000
During 2022, the entity issued 50,000 award credits and expected that 80% of these award credits shall be Problem 2-28 (AICPA Adapted)
redeemed, The total stand-alone selling price of the award credits granted is reliably measured at P1,000,000. Regal Department Store sells gift certificates, redeemable for store merchandise and with no expiration date.
In 2022, the entity sold goods to customers for a total consideration of P7,000,000 based on stand-alone The entity provided the following information pertaining to the gift certificate sales and redemptions:
selling price. The award credits redeemed and the total award credits expected to be redeemed each year are: Unearned revenue on January 1 750,000
Redeemed Expected to be redeemed Sales of gift certificates 2,500,000
2022 15,000 80% Redemptions of prior year sales 250,000
2023 7,950 85% Redemptions of current year sales 1,750,000
2024 2,550 85% What amount should be reported as unearned revenue on December 31?
2025 15,000 90% a. 1,250,000
1. What amount should be reported as revenue from points for 2022? b. 1,125,000
a. 328,125 c. 1,000,000
b. 875,000 d. 500,000
c. 700,000 Problem 2-29 (IFRS)
d. 175,000 During the current year, Isabel Company sold gift certificates to customers worth P6,000,000. The gift
2. What amount should be reported as revenue from points for 2023? certificates are nonrefundable and it is reliably determined that the breakage estimate is P600,000. Before the
a. 472,500 end of the year, the redeemed gift certificates worth P3,600,000.
b. 144,375 1. What amount should be reported as breakage revenue for the current year?
c. 415,625 a. 400,000
d. 236,250 b. 600,000
3. What amount should be reported as revenue from points for 2024? c. 500,000
a. 525,000 d. 0
b. 350,000 2. What amount should be reported as deferred revenue from gift certificates at year-end?
c. 52,500 a. 2,400,000
d. 78,750 b. 2,000,000
4. What amount should be reported as revenue from points for 2025? c. 6,000,000
a. 787,500 d. 0
b. 183.750 Problem 2-30 (AICPA Adapted)
c. 131,250 Cobb Company sells gift certificates redeemable only when merchandise is purchased. Upon redemption,
d. 262,500 Cobb Company recognizes the deferred revenue as realized.

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The entity provided the following information for the current year: c. Selling price of free product
Deferred revenue, January 1 800,000 d. Selling price of free product adjusted for expected redemption
Gift certificates sold 5,000,000 3. What is the stand-alone selling price of discount coupons?
Gift certificates redeemed 4,500,000 a. Discount on customer purchases during the year
Breakage revenue 600,000 b. Discount on customer future purchases
What amount should be reported as deferred revenue from gift certificates on December 31? c. Discount on customer purchases during the year adjusted by expected redemption
a. 700,000 d. Discount on customer future purchases adjusted by expected redemption
b. 500,000 4. What is the stand-alone selling price of rebate coupons?
c. 200,000 a. Discount on products sold during the current year
d. 600,000 b. Discount on products sold during the current year adjusted by expected redemption
Problem 2-31 Multiple choice (IAA) c. Cost of products sold
1. The cost of customer premium offer should be charged to expense d. Fair value of rebate coupons
a. When the related product is sold. 5. The nonredemption of gift certificates is called
b. When the premium offer expires. a. Breakage
c. Over the life cycle of the product. b. Forfeiture
d. When the premium is claimed. c. Rebate
2. The accounting concept that requires recognition of a liability for customer premium offer is a. d. Waiver
a. Time period PROBLEMS
b. Prudence Problem 3-1 (IAA)
c. Historical cost Socorro Company sells color television sets with a two-year repair warranty. The sale price for each set is
d. Matching principle P15,000. The average repair cost per set is P800.
3. Accounting for cost of incentive program for frequent customer purchases involves Research has shown that 20% of all sets sold are the first year and 40% in the second year.
a. Recording an expense and a liability each period. 2022 2023
b. Recording a liability and a reduction of revenue. Number of sets sold 300 500
c. Recording an expense and an asset reduction. Total payments for warranty repairs 40,000 150,000
d. Recording an expense and revenue each period. Required:
4. Accounting for cost of customer incentive program 1. Prepare journal entries in connection with the warranty using the expense as incurred approach.
a. Requires probability estimation. 2. Prepare journal entries in connection with the warranty using the accrual approach.
b. Follows the matching principle. 3. Determine the estimated warranty liability on December 31, 2023 as recorded.
c. Is a loss contingency situation. 4. Analyze the estimated warranty liability on December 31, 2023 to ascertain whether actual warranty costs
d. All of these are correct. approximate the estimate. The sales and warranty repairs are made evenly during the year.
5. Providing a monetary rebate program 5. Prepare journal entry to correct the estimated warranty liability on December 31, 2023.
a. Is accounted for similarly to a premium offer Problem 3-2 (AICPA Adapted)
b. Creates an expense for the seller in the period of sale. In 2022, Dare Company began selling a new calculator that carried a two-year warranty against defects.
c. Creates a liability for the seller at the time of sale. The entity projected the estimated warranty cost as a percent of sales.
a. d. Is normally not recognized First year of warranty 4%
Problem 2-32 Multiple choice (IFRS) Second year of warranty 10%
1. What is the accounting for the transaction price of contract of sale with customer coupons for free Sales and actual warranty repairs were:
product, discount or rebate? 2022 2023
a. Entirely as product sales revenue Sales 5,000,000 9,000,000
b. Allocated to customer options equal to stand-alone selling and the balance to product sales Actual warranty repairs 200,000 560,000
c. Allocated between product sales revenue and coupons based on stand-alone selling price Required:
d. Entirely as coupon revenue 1. Prepare journal entries in connection with the warranty using the expense as incurred approach.
2. What is the stand-alone selling price of free product coupons? 2. Prepare journal entries in connection with the warranty using the accrual approach.
a. Nothing 3. Determine the estimated warranty liability on December 31, 2023 as recorded.
b. Fair value less cost of disposal

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4. Analyze the estimated warranty liability on December 31, 2023 to ascertain if adjustment is necessary. The Problem 3-7 (IAA)
sales and warranty repairs are made evenly during the year. Pink Company had a warranty liability of P350,000 at the beginning of current year and P310,000 at end of
5. Prepare the adjustment to correct the estimated warranty liability on December 31, 2023. current year. Warranty expense was based on 4% of sales which amounted to P50,000,000 for the current year.
Problem 3-5 (AICPA Adapted) What amount of warranty expenditures was incurred for the current year?
Dawson Company manufactures television components and sells them with a 6-month warranty under which a. 2,040,000
defective components will be replaced without charge. b. 1,900,000
On January 1, 2022, the warranty liability had a balance of P620,000. c. 2,000,000
By June 30, 2022, the warranty liability on January 1, 2022 had been reduced to P120, 400 by debits for a. d. 0
estimated net cost of components returned that had been sold in 2021. Problem 3-8 (IAA)
The entity started out in 2022 expecting 7% of sales to be returned. However, due to the introduction of new Carpet Company had a balance of P800,000 in the estimated warranty liability account on December 31, 2022.
models during the year, this estimated percentage of returns was increased to 10% on May 1. The warranty expenditures totaled P2,500,000 for 2023.
It is assumed that no components sold during a given month are returned in that month. The warranty expense was calculated at 6% of sales. Sales amounted to P40,000,000 for 2023.
Each component is stamped with a date at time of sale so that the warranty may be properly administered. What amount should be reported as estimated warranty liability on December 31, 2023?
The following table of percentages indicates the likely pattern of sales returns during the 6-month period of the a. 2,400,000
warranty, starting with the month following the sale of components. b. 3,200,000
Month following sale Percentage of total returns expected c. 700,000
First 30% b. 800,000
Second 20 Problem 3-9 (AICPA Adapted)
Third 20 Mill Company sells washing machines that carry s three-year warranty against manufacturer's defects. Based
Fourth through sixth-10% each month 30 on entity experience, warranty costs are estimated at P300 per machine. During the current year, the entity
100% sold 2,400 washing machines and paid warranty costs of P170,000.
Gross sales of components for the first six months of 2022 were: 1. What amount should be reported as warranty expense for the current year?
Month Amount Month Amount a. 170,000
January 4,200,000 April 3,250,000 b. 240,000
February 4,700,000 May 2,400,000 c. 550,000
March 3,900,000 June 1,900,000 d. 720,000
The warranty also covers the payment of freight cost on defective components returned and on the new 2. What amount should be reported as estimated warranty liability at year-end?
components sent out as replacements. a. 550,000
The freight cost runs approximately 5% of the sales price of the components returned. b. 720,000
The manufacturing cost of the components is roughly 70% of sales price, and the salvage value of returned c. 170,000
components averages 10% of their sales price. d. 0
Returned components on hand on January 1, 2022 were thus valued in inventory at 10% of their original sales Problem 3-10 (AICPA Adapted)
price. Bold Company estimated annual warranty expense at 2% of annual net sales. The net sales for the current
Required: year amounted to P4,000,000.
1. Determine the estimated sales returns subsequent to June 30, 2022. At the beginning of current year, the warranty liability was P60,000 and the warranty payments during the
2. Determine the required estimated warranty liability on June 30, 2022. current year totaled P50,000.
3. Prepare the adjustment of the estimated warranty liability on June 30, 2022. 1. What amount should be reported as warranty expense for the current year?
Problem 3-6 (IAA) a. 70,000
Hanna Company reported warranty expense of P1,900,000 for the current year. The warranty liability account b. 50,000
increased by P200,000 during the current year. c. 80,000
d. 60,000
What amount should be reported for actual warranty expenditures during the current year? 2. What amount should be reported as estimated warranty liability at year-end?
a. 1,900,000 a. 10,000
b. 1,700,000 b. 70,000
c. 2,100,000 c. 80,000
d. 0 d. 90,000

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Problem 3-11 (AICPA Adapted) October November December

On April 1, 2022, Ash Company began offering a new product for sale under a one-year warranty. Units sold 32,000 28,000 40,000
Of the 50,000 units in inventory at April 1, 2022, 30,000 had been sold by June 30, 2022. Known product failures from sales of:
Based on experience with similar products, the entity estimated that the average warranty cost per unit sold October 160 320 160
would be P80. November 80 280
Actual warranty costs incurred from April 1 through June 30, 2022 totaled P700,000. December 180
1. What amount should be reported as warranty expense for 2022? What amount should be reported as estimated warranty liability at year-end?
a. 2,400,000 a. 300,000
b. 4,000,000 b. 123,000
c. 2,000,000 c. 177,000
d. 1,200,000 d. 0
2. On June 30, 2022, what amount should be reported as estimated warranty liability? Problem 3-15 (AICPA Adapted)
a. 1,600,000 In 2022, Dubious Company began selling new line of products that carry a two-year warranty against defects.
b. 3,300,000 Based upon past experience with other products, the entity estimated warranty costs as a percentage of peso
c. 1,700,000 sales.
d. 900,000 First year of warranty 2%
Problem 3-12 (AICPA Adapted) Second year of warranty 5%
Villa Company estimated annual warranty expense at 8% of net sales. The following data relate to the current
year: 2022 2023
Warranty liability, January 1 Sales 5,000,000 7,000,000
Before adjustment 100,000 debit Actual warranty cost 100,000 300,000
After adjustment 540,000 credit
What amount should be reported as net sales for the current year? 1. What amount should be reported as warranty expense for 2022?
a. 8,000,000 a. 350,000
b. 6,750,000 b. 100,000
c. 5,500,000 c. 175,000
d. 1,250,000 d. 150,000
Problem 3-13 (IAA) 2. What amount should be reported as estimated warranty liability on December 31, 2022?
Bass Company manufactures high-end home electronic systems. The entity provides a one-year warranty for a. 150,000
all products sold. b. 250,000
The entity estimated that the warranty cost is P200 per unit sold and reported a liability for estimated warranty c. 125,000
cost of P650,000 at the beginning of the year. d. 0
During the current year, the entity sold 5,000 units for a total of P9,000,000 and paid warranty claims of 3. What amount should be reported as warranty expense for 2023?
P750,000 on current and prior year sales. a. 300,000
What amount should reported as estimated warranty liability at year-end? b. 350,000
a. 250,000 c. 490,000
b. 350,000 d. 140,000
c. 900,000 4. What amount should be reported as estimated warranty liability on December 31, 2023?
d. 750,000 a. 390,000
b. 440,000
Problem 3-14 (AICPA Adapted) c. 490,000
Precise Company sells an electric timer that carries'a 90-day unconditional warranty against product failure. d. 840,000
The warranty costs of known failures have already been reflected in the records. Problem 3-16 (AICPA Adapted)
Based on a reliable statistical analysis, 2% of units sold during the year will require an average cost of P150 During 2022, Namnama Company introduced a new product carrying a two-year warranty against defects.
per unit. The estimated warranty costs related to peso sales are 4% within 12 months following sale and 6% in the
second 12 months following sale.

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The entity reported sales of P5,000,000 for 2022 and P6,000,000 for 2023. Problem 3-18 Multiple choice (IAA)
The actual expenditures incurred amounted to P150,000 for 2022 and P550,000 for 2023. 1. The accrual approach in accounting for warranty
1. What amount should be reported as warranty expense for 2022? a. Is required for income tax reporting.
a. 500,000 b. Is frequently justified on the basis of expediency.
b. 200,000 c. Finds the expense account being charged when the seller performs in compliance with the warranty.
c. 250,000 d. Should be used whenever the warranty is an integral and inseparable part of the sale.
d. 300,000 2. Which of the following best describes the accrual approach of accounting for warranty cost?
2. What amount should be reported as estimated warranty liability on December 31, 2022? a. Expensed when paid
a. 350,000 b. Expensed when warranty claims are certain
b. 150,000 c. Expensed based on estimate in year of sale
c. 100,000 d. Expensed when incurred
d. 50,000 3. Which of the following best describes the expense as incurred approach of accounting for warranty
3. What amount should be reported as warranty expense for 2023? cost?
a. 650,000 a. Expensed based on estimate in year of sale
b. 600,000 b. Expensed when liability is accrued
c. 500,000 c. Expensed when warranty claims are certain
d. 550,000 d. Expensed when incurred
4. What amount should be reported as estimated warranty liability on December 31, 2023? 4. What is the classification of the estimated warranty liability in a three-year warranty?
a. 360,000 a. Noncurrent
b. 400,000 b. Current
c. 240,000 c. Partly current and partly noncurrent
d. 100,000 d. No need for disclosure
Problem 3-17 (PHILCPA Adapted) 5. Which of the following is a characteristic of the accrual of warranty but not the sale of warranty?
Cyprus Company started business in 2022. The entity sells printers with a three-year warranty and estimated a. Warranty liability
its warranty cost as a percentage of peso sales. b. Warranty expense
Based on past experience, it is estimated that 3% will be repaired during the first year of warranty, 5% will be c. Unearned warranty revenue
repaired during the second year of warranty and 10% will be repaired in the third year of warranty. d. Warranty revenue
In 2022 and 2023, the entity was able to sell 7,500 units and 10,000 units, respectively at P4,000 per unit. PROBLEMS
The entity incurred actual repair cost of P800,000 and P2,400,000 in 2022 and 2023, respectively. Sales and Problem 5-1 (IAA)
repairs occurred evenly throughout the period. Supersonic Company was authorized to issue 12%, 10-year bonds payable with face amount of P7,000,000 on
1. What amount was recorded as estimated warranty liability on December 31, 2023? April 1, 2022.
a. 5,400,000 Interest on the bonds is payable semiannually on April 1 and October 1 of each year.
b. 7,200,000 The bonds were sold to underwriters on April 1, 2022 at 106. The entity amortized discount or premium on
c. 9,400,000 bonds payable only at the end of the fiscal year, using the straight line method.
d. 4,800,000 Required:
2. After testing the adequacy of the warranty cost, what amount should be reported as estimated 1. Prepare journal entries for 2022 and 2023 including adjustments at the end of each year. Use memorandum
warranty liability on December 31, 2023? approach.
a. 9,675,000 2. Present the bonds payable in the statement of financial position on December 31, 2023.
b. 9,600,000 Problem 5-2 (IAA)
c. 9,300,000 Interlink Company was authorized to issue 10-year, 12% bonds payable with face amount of P8,000,000. The
d. 8,100,000 bonds are dated January 1, 2022, and interest is payable semiannually on June 30 and December 31. The
3. What amount should be reported as adjusted warranty expense for 2023? bonds were sold on January 1, 2022 and September 1, 2023.
a. 7,200,000
b. 7,475,000 January 1, 2022 5,000,000 at 95
c. 6,925,000 September 1, 2023 2,000,000 at 103 plus accrued interest
d. 7,400,000

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Required: Problem 5-6 (IAA)

1. Prepare journal entries relating to the bonds payable in 2022 and 2023. Mara Company reported the following accounts on December 31, 2022:
Straight line amortization is used, and unissued bonds payable account is set up. Premium on bonds payable 50,000
2. Show how information relative to the bond issue will be reported in the statement of financial position Accrued interest on bonds payable 180,000
prepared on December 31, 2023. Bonds payable, due January 1, 2027, interest at 12% payable semiannually on January 1 3,000,000
Problem 5-3 (IAA) and July 1
Marbel Company was authorized to issue 12% bonds payable with face amount of P5,000,000 on April 1, On December 31, 2022, cash of P3,900,000 was made available from the issue of 10-year 10% bonds payable
2022. with face amount of P4,000,000.
Interest on the bonds is payable semiannually on April 1 and October 1. Bonds mature on April 1, 2027. The cash received from the new issue was used for retirement of the 12% bonds payable at a call price of 102
The entire issue was sold on April 1, 2022 at 98 less bond issue cost of P50,000. plus accrued interest.
On July 1, 2023, bonds of P2,000,000 face amount were purchased and retired at 99 plus accrued interest. Required:
Required: Prepare journal entries to record the bond refunding.
1. Prepare journal entries including any adjustments relating to the issuance of the bonds payable for 2022 and Problem 5-7 (IAA)
2023. White Company issued P8,000,000 12% bonds payable on December 31, 2022 at 96. Interest is payable
Use memorandum approach and the straight line method of amortization. annually on December 31.
2. Present the bonds payable in the statement of financial position on December 31, 2023. Bond maturity
Problem 5-4 (IAA) December 31
On January 1, 2022, Lyka Company issued 12% bonds payable with face amount of P4,000,000 for 2024 1,000,000
P4,200,000. 2025 1,000,000
Interest is payable annually on December 31 and the bonds mature on January 1, 2027. 2026 1,000,000
On December 31, 2022, bonds with face amount of P1,000,000 were redeemed at 95. 2027 1,000,000
The entity used the straight line method of amortization. 2028 2,000,000
Required: 2029 2,000,000
1. Prepare journal entries in 2022 and 2023. 8,000,000
2. Present the bonds payable on December 31, 2023. Required:
Problem 5-5 (AICPA Adapted) a. Prepare a schedule showing the annual amortization of the discount on bonds payable using the bond
Anya Company disclosed the following accounts on December 31, 2022: outstanding method.
b. Prepare journal entries for 2022, 2023, 2024 and 2025.
Problem 5-8 (IAA)
12% Bonds Payable - Due January 1, 2025 On December 31, 2022, Fame Company sold a 12% serial bond issue with face amount of P7,000,000 for
Jan. 1, 2022 Jan. 1, 2015 6,000,000 P7,420,000.
P3,000,000 face amount 2,700,000 The bonds mature in the amount of P1,000,000 on December 31 of each year beginning December 31, 2023
purchased at 90 and retired and interest is payable annually.
On December 31, 2024, the entity retired P1,000,000 of bonds payable due on that date and in addition
purchased at 105 and retired bonds payable with face amount of P1,000,000 which were due on December 31,
Discount on Bonds Payable 2026.
Jan. 1, 2015 300,000 Required:
Prepare journal entries for 2022, 2023 and 2024. The bond outstanding method of amortization is used.
Required: Problem 5-9 (AICPA Adapted)
1. Compute the balance of bonds payable and discount on bonds payable on December 31, 2022. The straight Hancock Company reported the following noncurrent liabilities on December 31, 2022
line method of amortization is used.
Unsecured
2. Compute bond interest expense for the year ended December 31, 2022. Interest is payable semiannually on 9% registered bond, P250,000 maturing annually beginning in 2023 2,750,000
January 1 and July 1. 11% convertible bonds, callable beginning in 2023, due 2024 1,250,000

3. Prepare adjusting entries on December 31, 2022.

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Secured Problem 5-13 (AICPA Adapted)

12% guaranty security bonds, due 2024 2,500,000 On July 1, 2022, Carr Company issued at 104, five thousand 10% bonds payable with face amount of P1,000
10% commodity backed bonds, P500,000 maturing annually beginning in 2023 2,000,000 per bond. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,000.
1. What total amount of term bonds should be reported? On July 1, 2022, what is the carrying amount of the bonds payable?
a. 1,250,000 a. 4,875,000
b. 3,750,000 b. 5,075,000
c. 1,500,000 c. 5,200,000
d. 0 d. 5,325,000
2. What total amount of serial bonds should be reported? Problem 5-14 (AICPA Adapted)
a. 4,750,000 During the current year, Cain Company incurred the following costs in connection with the issuance of bonds:
b. 3,750,000 Promotion cost 200,000
c. 4,500,000 Printing and engraving 150,000
d. 2,000,000 Legal fees 800,000
3. What total amount should be reported as debenture bonds? Fees paid to independent accountants for registration information 100,000
a. 4,000,000 Commissions paid to underwriter 900,000
b. 1,250,000 What total amount should be recorded as bond issue cost?
c. 6,500,000 a. 1,950,000
a. d. 6,000,000 b. 2,150,000
Problem 5-10 (AICPA Adapted) c. 1,800,000
Zola Company had the following long-term debt: d. 2,000,000
Bonds maturing in installments, secured by machinery 1,000,000
Bonds maturing on a single date, secured by realty 1,800,000 Problem 5-15 (IAA)
Collateral trust bonds 2,000,000 Aye Company is authorized to issue P5,000,000 of 6% 10-year bonds payable dated July 1, 2022 with interest
What total amount should be reported as secured bonds? payments on June 30 and December 31.
a. 4,800,000 When the bonds are issued on November 1, 2022, the entity received cash of P5,150,000 including accrued
b. 2,800,000 interest.
c. 3,800,000 What amount should be recorded as discount or premium from the issuance of the bonds?
d. 3,000,000 a. 150,000 bond premium
Problem 5-11 (AICPA Adapted) b. 50,000 bond premium
On October 1, 2022, Shane Company issued 5,000 12% bonds payable with face amount of P1,000 per bond c. 150,000 bond discount
at 110. The bonds which mature on January 1, 2027, pay interest semiannually on January 1 and July 1. The d. No bond premium and discount
entity paid bond issue cost of P200,000. Problem 5-16 (AICPA Adapted)
What amount should be reported as cash received from the issuance of the bonds payable? On November 1, 2022, Mason Company issued P4,000,000 of 10-year, 8% term bonds payable dated October
a. 5,450,000 1, 2022. The bonds were sold to yield 10% with total proceeds of P3,500,000 plus accrued interest. Interest is
b. 5,650,000 paid every April 1 and October 1.
c. 5,300,000 What amount should be reported as accrued interest payable on December 31, 2022?
d. 5,550,000 a. 50,000
Problem 5-12 (AICPA Adapted) b. 80,000
On April 1, 2022, Greg Company issued, at 99 plus accrued interest, 4,000 8% bonds payable with face c. 53,333
amount of P1,000 per bond. The bonds are dated January 1, 2022, mature on January 1, 2032, and pay a. d. 87,500
interest on January 1 and July 1. The entity paid bond issue cost of P140,000.
What amount should be reported as cash received from the bond issuance?
a. 4,040,000
b. 3,960,000
c. 3,900,000
d. 3,820,000

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Problem 5-17 (AICPA Adapted) 3. What is the carrying amount of the bonds payable on December 31, 2022?
On January 31, 2022, Beau Company issued P3,000,000 maturity value, 12% bonds payable for P3,000,000 a. 5,385,000
cash. The bonds are dated December 31, 2021, and mature on December 31, 2031. Interest will be paid b. 5,125,000
semiannually on June 30 and December 31. c. 5,000,000
What amount of accrued interest payable should be reported on September 30, 2022? d. 5,250,000
a. 270,000 4. Prepare journal entries for 2022.
b. 240,000 Problem 5-21 (IFRS)
c. 180,000 On January 1, 2022, Mariel Company issued bonds payable with face amount of P8,000,000 and 10% stated
d. 90,000 interest rate at 95. The entity paid bond issue cost of P150,000. The bonds have a 5-year term and interest is
Problem 5-18 (AICPA Adapted) payable annually every December 31.
On June 30, 2022, King Company had outstanding 9%, bonds payable with face amount of P5,000,000 and The entity elected the fair value option. On December 31, 2022, the fair value of the bonds is 105.
maturing on June 30, 2027. Interest is payable semiannually every June 30 and December 31. It is reliably determined that the fair value increase comprised P150,000 attributable to credit risk and the
On June 30, 2022, after amortization was recorded for the period, the unamortized premium on bonds payable remainder attributable to change in the market interest rate.
was P300,000. On that date, the entity acquired all outstanding bonds payable on the open market at 98 and 1. What amount should be reported as interest expense for 2022?
retired them. a. 800,000
On June 30, 2022, what amount should be recognized as gain on redemption of bonds payable? b. 760,000
a. 300,000 c. 840,000
b. 400,000 d. 880,000
c. 100,000 2. What amount of gain or loss should be recognized for 2022 to conform with the fair value option?
d. 200,000 a. 650,000 gain
Problem 5-19 (AICPA Adapted) b. 650,000 loss
On January 1, 2022, Nilo Company reported bonds payable of P8,000,000 and unamortized discount on bonds c. 800,000 gain
payable of P430,000. d. 800,000 loss
On January 1, 2022, the entity retired P4,000,000 of the outstanding bonds payable at face amount plus a call 3. What is the carrying amount of the bonds payable on December 31, 2022?
premium of P100,000. a. 8,000,000
What amount should be reported as loss on early extinguishment of debt in 2022? b. 7,600,000
a. 0 c. 8,400,000
b. 100,000 d. 7,640,000
c. 215,000 4. Prepare journal entries for 2022.
d. 315,000 Problem 5-22 (AICPA Adapted)
Problem 5-20 (IAA) On January 1, 2022, Ezekiel Company received P1,077,200 for 12% bonds payable with face amount of
On January 1, 2022, Carmina Company received P5,385,000 for a P5,000,000 face amount 12% bonds P1,000,000.The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1.
payable, a price that yields 10%. The bonds pay interest semiannually on June 30 and December 31. The entity elected the fair value option for measuring financial liabilities.
The entity elected the fair value option. On December 31, 2022, the fair value of the bonds payable is On December 31, 2022, the fair value of the bonds payable is P1,064,600. The change in fair value of the
determined to be P5,125,000 based on market and interest factors. bonds payable is attributable to market factors.
1. What amount should be reported as interest expense for 2022?
a. 600,000 1. What is the carrying amount of the bonds payable on January 1, 2022?
b. 500,000 a. 1,000,000
c. 646,200 b. 1,077,200
d. 538,500 c. 500,000
2. What amount should be recognized as gain or loss from change in fair value in 2022? d. 538,600
a. 260,000 gain 2. What amount should be reported as interest expense for 2022?
b. 260,000 loss a. 120,000
c. 600,000 loss b. 100,000
d. 340,000 loss c. 107,720
d. 129,264

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3. What amount should be reported as gain or loss from change in fair value of the bonds payable for c. Fair value minus bond issue cost
2022? d. Face amount
a. 64,600 gain 8. The amortized cost of bonds payable means
b. 64,600 loss a. Face amount plus premium on bonds payable
c. 12,600 gain b. Face amount minus discount on bonds payable
d. 12,600 loss c. Face amount minus bond issue cost
4. What is the carrying amount of the bonds payable on December 31, 2022? d. Face amount plus premium on bonds payable or minus discount on bonds payable
a. 1,064,600 9. Which statement is true about the fair value option for measuring bonds payable?
b. 1,077,200 a. The effective interest method of amortization must be used to calculate interest expense.
c. 1,000,000 b. Discount or premium is disclosed in the notes to the financial statements.
d. 1,064,920 c. The fair value of the bond and the principal obligation value must be disclosed.
5. Prepare journal entries for 2022. d. If the fair value option is elected, it must be applied to all bonds.
Problem 5-23 Multiple choice (IAA) 10. An entity has bonds outstanding in which the market rate of interest has risen. The entity elected
1. Most corporate bonds are the fair value option. What will the entity report for the year?
a. Mortgage bonds a. Interest expense and a gain
b. Debenture bonds b. Interest expense and a loss
c. Secured bonds c. A gain and no interest expense
d. Collateral bonds d. A loss and no interest expense
2. The method used to pay interest depends on whether the bonds are Problem 5-24 Multiple choice (AICPA Adapted)
a. Registered or coupon 1. Bonds that mature on a single date are called
b. Morgaged or unmortgaged a. Term bonds
c. Indebentured or debentured b. Serial bonds
d. Callable or redeemable c. Callable bonds
3. Zero-coupon bonds d. Convertible bonds
a. Offer a return in the form of a deep discount off the face amount 2. Bonds issued with scheduled maturities at various dates are called
b. Result in zero interest expense for the issuer a. Convertible bonds
c. Result in zero interest revenue for the investor b. Terms bonds
d. Are reported as shareholders' equity by the issuer c. Serial bonds
4. To evaluate the risk and quality of an individual bond issue, investors rely heavily on d. Callable bonds
a. Bond ratings provided by investment houses 3. Debentures are
b. Newspaper articles a. Unsecured bonds
c. Bond interest payments b. Secured bonds
d. The audit report c. Ordinary bonds
5. Bonds payable should be reported as noncurrent at d. Serial bonds
a. Face amount less any unamortized discount or plus any unamortized premium. 4. How would the amortization of premium on bonds payable affect the carrying amount of the bonds
b. Current market price payable and net income, respectively?
c. Face amount less any unamortized premium or plus any unamortized discount a. Increase and Decrease
a. d. Face amount less accrued interest since the last interest payment date b. Increase and Increase
6. In the amortization of discount on bonds payable c. Decrease and Decrease
a. The interest expense is less with each successive interest payment d. Decrease and Increase
b. The total effective interest is equal to the amount of the discount plus the total cash interest paid 5. How would the amortization of discount on bonds payable affect the carrying amount of the bonds
c. The carrying amount of the bonds payable declines eventually to face amount payable and net income, respectively?
d. The reduction in the discount is less with each successive interest payment a. Increase and Decrease
7. Bonds payable not designated at fair value through profit loss shall be measured initially at b. Increase and Increase
a. Fair value c. Decrease and Decrease
b. Fair value plus bond issue cost a. d. Decrease and Increase

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6. Unamortized discount on bonds payable should be reported as 4. The amortization of discount on bonds payable
a. Direct deduction from the face amount of the bond a. Decreases the face amount of bonds payable.
b. Direct deduction from the present value of the bond b. Decreases the amount of interest expense.
c. Deferred charge c. Decreases the carrying amount of bonds payable.
d. Part of the bond issue cost a. d. Increases the carrying amount of bonds payable.
7. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on 5. The carrying amount of a bond liability is
June 1, the amount of cash received by the issuer will be a. Call price of the bond plus bond discount or minus bond premium.
a. Decreased by accrued interest from June 1 to November 1 b. Face amount of the bond plus related premium or minus related discount.
b. Decreased by accrued interest from May 1 to June 1 c. Face amount of the bond plus related discount or minus related premium.
c. Increased by accrued interest from June 1 to November 1 d. Maturity value of the bond plus related discount or minus related premium.
d. Increased by accrued interest from May 1 to June 1 6. The proceeds from the issue of the bonds payable
8. The issuer of bonds payable sold at face amount with interest payable February 1 and August 1 a. Will always be equal to the face amount.
should report b. Will always be less than the face amount.
a. Liability for accrued interest c. Will always be more than the face amount.
b. An addition to bonds payable d. May be equal, more or less than the face amount depending on market interest rate.
c. Increase in deferred charge 7. An extinguishment of bonds payable originally issued at a premium is made by purchase of the
d. Contingent liability bonds between interest dates. Which statement is true at the time of extinguishment?
9. A bond payable issued on June 1 has interest payment dates of April 1 and October 1. Bond interest a. Any costs of issuing the bonds payable must be amortized up to the purchase date.
expense for the current year ended December 31 is for a period of b. The premium on bonds payable must be amortized up to the purchase date.
a. Three months c. Interest must be accrued from the last interest date to the purchase date.
b. Four months d. All of these statements are true.
c. Six months 8. When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from
d. Seven months the early extinguishment should be
10. A bond payable was issued at a discount with a call provision. When the bond issuer exercised the a. Amortized over the remaining original life of the retired bond issue.
call provision on an interest date, the amount of bond liability derecognized should have equaled the b. Amortized over the life of the new bond issue.
a. Call price c. Recognized in retained earnings.
b. Call price less unamortized discount d. Recognized in income from continuing operations.
c. Face amount less unamortized discount 9. An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of the
a. d. Face amount plus unamortized discount failure to record discount amortization on interest expense and bond carrying amount, respectively?
Problem 5-25 Multiple choice (IAA) a. Understated and understated
1.When bonds are sold between interest dates, any accrued interest is credited to b. Understated and overstated
a. Interest payable c. Overstated and overstated
b. Interest revenue d. Overstated and understated
c. Interest receivable 10. An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of
d. Bonds payable the failure to record premium amortization on interest expense and bond carrying amount,
2. Which statement is true about accrued interest on bonds payable sold between interest dates? respectively?
a. The accrued interest is computed at the effective rate. a. Understated and understated
b. The accrued interest will be paid to the seller when the bonds mature. b. Understated and overstated
c. The accrued interest is extra income to the buyer. c. Overstated and overstated
d. All of the statements are not true. a. d. Overstated and understated
3. Which statement is true about a premium on bonds payable? PROBLEMS
a. The premium or bonds payable is a contra shareholders' equity account. Problem 6-1 (IAA)
b. The premium on bonds payable is an account that appears only on the books of the investor. Yellow Company received permission on January 1, 2022 issue 12% bonds payable with face amount of
c. The premium on bonds payable increases when amortization entries are made until maturity date. P6,000,000 maturing on January 1, 2032.
d. The premium on bonds payable decreases when amortization entries are made until the balance Interest is payable annually on December 31. The bonds are callable at 102 plus accrued interest.
reaches zero at maturity date. On January 1, 2022, the entity issued the bonds payable for P6,737,000 with an effective yield of 10%.

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The fiscal year of the entity ends December 31. The effective interest amortization is used. Required:
Required: 1. Determine the market price of the bonds payable on January 1, 2022.
1. Prepare journal entries relating to the bonds payable for 2022. 2. Prepare the journal entry to record the issuance of the bonds payable on January 1, 2022.
2. Present the bonds payable on December 31, 2022. 3. Prepare the journal entry to record interest expense on June 30, 2022 using the effective interest method.
Problem 6-2 (IAA) 4. Prepare the journal entry to record interest expense on December 31, 2022 using the effective interest
On January 1, 2022, Orange Company was authorized to issue 6% bonds payable with face amount of method
P5,000,000 maturing on December 31, 2023. Interest is payable semiannually on June 30 and December 31. Problem 6-6. (IAA)
On January 1, 2022, the entity issued all of the bonds payable for P4,818,500 with an effective rate of 8%. On January 1, 2022, Mania Company issued 12% bonds payable with face amount of P20,000,000. The bonds
The fiscal year of the entity is the calendar year and the effective interest method of amortization is used. mature on December 31, 2031.
Required: For bonds payable of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June
1. Prepare a table of amortization for the discount on bonds payable. 30 and December 31.
2. Prepare journal entries for 2022 and 2023. The PV of 1 at 5% for 20 periods is 0.377 and the PV of an ordinary annuity of 1 for 20 periods is 12.46.
Problem 6-3 (IAA) Required:
On January 1, 2022, Blue Company issued, in a private placement with an investment house, P3,000,000 face 1. Determine the market price of the bonds payable on January 1, 2022.
amount of three-year, 16% bonds payable. Interest is payable semiannually on June 30 and December 31 of 2. Prepare the journal entry to record the issuance of the bonds payable on January 1, 2022.
each year. 3. Prepare the journal entry to record interest expense on June 30, 2022 using the effective interest method.
The bonds were issued at a price yielding the entity P2,738,682 which represents an effective interest cost of 4. Prepare the journal entry to record interest expense on December 31, 2022 using the effective interest
20% per year. method.
Required: Problem 6-7 (ACP)
Prepare journal entries to record the issuance of the bonds payable, the interest expense at the end of the first On January 1, 2022, Surigao Company issued bonds payable with face amount of P4,000,000 and stated
six months and the last six months of the bond issue, and the retirement of the bonds payable at maturity. interest rate of 12%. The interest is payable semiannually on June 30 and December 31.
Problem 6-4 (PHILCPA Adapted) The bonds mature on every December 31 at the rate of P2,000,000 per year for 2 years. The prevailing market
On December 31, 2022, Dome Company issued P4,000,000, 8% serial bonds payable, to be repaid in the rate for the bonds payable is 8%.
amount of P800,000 each year. Interest is payable annually on December 31. The bonds were issued to yield Present value of 1 at 4%
10% a year. One period 0.9615
The bond proceeds totaled P3,805,600 based on the present value on December 31, 2022 of five annual Two periods 0.9246
payments. Three periods 0.8990
Due date Principal Interest Present value on 12/31/2022 Four periods 0.8548
12/31/2023 800,000 320,000 1,018,000 Required:
12/31/2024 800,000 256,000 872,200 1. Compute the market price of the bonds payable on January 1, 2022.
12/31/2025 800,000 192,000 745,000 2 Prepare a table of amortization using the effective interest method.
12/31/2026 800,000 128,000 633,800 3. Prepare journal entries for 2022 and 2023.
12/31/2027 800,000 64,000 536,600 Problem 6-8 (IAA)
3,805,600 On March 1, 2022, White Company issued 10% bonds payable with face amount of P7,000,000 to yield 8%.
Interest is payable semiannually on March 1 and September 1. The bonds mature in 10 years. The entity
Required: follows the calendar year.
1. Determine the carrying amount of the bonds payable on December 31, 2023. The interest method of
amortizing discount on bonds payable is used. PV of 1 at 5% for 20 periods 0.377
2. Prepare journal entries for 2023. PV of 1 at 4% for 20 periods 0.456
Problem 6-5 (IAA) PV of an ordinary annuity of 1 at 5% for 20 periods 12.462
On January 1, 2022, Bishop Company issued 10% bonds payable with a face amount of P20,000,000. The PV of an ordinary annuity of 1 at 4% for 20 periods 13.590
bonds matures on December 31, 2031. Required:
For bonds payable of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 1. Determine the market price of the bonds payable.
30 and December 31. 2. Prepare an effective interest amortization table for the first two interest periods.
The PV of 1 at 6% for 20 periods is 0.31 and the PV of an ordinary annuity of 1 at 6% for 20 periods is 11.47. 3. Prepare journal entries for 2022.

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Problem 6-9 (IAA) Problem 6-13 (IAA)

On June 1, 2022, Java Company issued 10% bonds payable with face amount of P6,000,000 to yield 12%. On January 1, 2022, Sun Company issued 10% bonds payable with face amount of P4,500,000. The bonds
Interest is payable annually on June 1 of each year. The bonds mature in 5 years. The entity follows calendar mature on January 1, 2032. The bonds were issued for P3,987,000 to yield 12%, resulting in bond discount of
year. P513,000.
PV of 1 at 10% for 5 periods 0.62 The entity used the effective interest method of amortizing bond discount. Interest is payable semiannually on
PV of 1 at 12% for 5 periods 0.57 January 1 and July 1.
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79 For the six months ended June 30, 2022, what amount should be reported as bond interest expense?
PV of an ordinary annuity of 1 at 12% for 5 periods 3.60 a. 225,000
Required: b. 239,220
1. Determine the market price of the bonds payable. c. 250,650
2. Prepare an effective interest amortization table for the first two interest periods. d. 255,780
3. Prepare journal entries for 2022 and 2023. Problem 6-14 (AICPA Adapted)
Problem 6-10 (IAA) On January 1, 2022, Ward Company issued 9% bonds payable with face amount of P4,000,000, which mature
On January 1, 2022, Dumaguete Company issued bonds payable with face amount of P6,000,000 with 8% on January 1, 2032.
effective yield. The nominal rate of 6% is payable annually on December 31. The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000.
The bonds mature on every December 31 each year at the rate of P2,000,000 for three years. The entity used the interest method of amortizing discount on bonds payable. Interest is payable annually on
Present value of 1 at 8% December 31.
One period 0.93 1. On December 31, 2022, what amount should be reported as discount on bonds payable?
Two periods 0.86 a. 228,400
Three periods 0.79 b. 208,000
c. 206,440
Required: d. 204,000
1. Determine the market price or issue price of the bonds payable. 2. What is the carrying amount of bonds payable on December 31, 2022?
2. Prepare journal entries for 2022. The effective interest method of amortization is used. a. 3,756,000
3. Determine the carrying amount of the bonds payable December 31, 2022. b. 4,000,000
Problem 6-11 (IAA) c. 3,771,600
On January 1, 2022, Marsh Company issued 10% bonds payable with face amount of P6,000,000. The bonds d. 3,740,400
mature on January 1, 2032. The bonds were issued for P5,316,000 to yield 12%, resulting in bond discount of Problem 6-15 (AICPA Adapted)
P684,000. On January 1, 2022. Wolf Company issued 10% bonds payable with face amount of P5,000,000, which mature
The entity used the effective interest method of amortizing discount on bonds payable. Interest is payable on January 1, 2032.
semiannually on June 30 and December 31. The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of P675,000.
For the six months ended June 30, 2022, what amount should be reported as bond interest expense? The entity used the interest method of amortizing premium on bonds payable. Interest is payable annually on
a. 300,000 December 31.
b. 318,960 1. On December 31, 2022, what amount should be reported as premium on bonds payable?
c. 334,200 a. 675,000
d. 341,040 b. 629,000
Problem 6-12 (IAA) c. 607,500
On July 1, 2022, Tara Company issued 4,000 8% bonds payable with P1,000 face amount for P3,504,000. The d. 507,500
bonds were issued to yield 10%. The bonds mature on July 1, 2031. Interest is payable semiannually on 2. What is the carrying amount of bonds payable on December 31, 2022?
January 1 and July 1. a. 5,000,000
What amount of discount on bonds payable should be amortized for the six months ended December b. 5,629,000
31, 2022? c. 4,371,000
a. 30,400 a. d. 5,675,000
b. 24,800
c. 19,840
d. 15,200

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Problem 6-16 (AICPA Adapted) c. 531,600

Webb Company had outstanding 7%, 10-year P5,000,000 face yield 6% annual interest. The entity used the d. 443,000
effective amount bonds payable. The bonds were originally sold to interest method to amortize bond premium. 2. What is the carrying amount of the bonds payable on December 31, 2022?
On January 1, 2022, the carrying amount of the outstanding bonds payable was P5,250,000. a. 4,430,000
1. What amount should be reported as premium on bonds payable on December 31, 2022? b. 4,461,600
a. 225,000 c. 4,462,548
b. 172,500 d. 5,000,000
c. 215,000 Problem 6-20 (IFRS)
d. 52,500 The entity On January 1, 2022, Masbate Company issued 5-year bonds payable with face amount of
2 What is the carrying amount of bonds payable on December 31, 2022? P5,000,000 at 110. The entity paid bond issue cost of P80,000 on same date.
a. 5,250,000 The stated interest rate on the bonds is 8% payable annually every December 31.
b. 4,785,000 The bonds were issued to yield 6% per annum after considering the bond issue cost. The entity used the
c. 5,215,000 effective interest method of amortization.
d. 5,000,000 On December 31, 2022, what is the carrying amount of the bonds payable?
Problem 6-17 (AICPA Adapted) a. 5,000,000
On January 1, 2022, West Company issued 9% bonds payable with face amount of P5,000,000 which mature b. 5,400,000
on January 1, 2032. The bonds were issued for P4,695,000 to yield 10%. c. 5,345,200
Interest is payable annually on December 31. The entity used the interest method. d. 5,430,000
1. What amount should be reported as interest expense for 2022? Problem 6-21 (IFRS)
a. 450,000 On January 1, 2022, Bontoc Company issued P5,000,000, 8% serial bonds payable to be repaid in the amount
b. 469,500 of P1,000,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% a
c. 422,550 year.
d. 500,000 The bonds were issued for P4,757,000 based on the present value at January 1, 2022 of five annual
2. What is the carrying amount of the bonds payable on December 31, 2022? payments. The entity amortized the discount on bonds payable using the interest method.
a. 4,695,000 On December 31, 2022, what is the carrying amount of the bonds payable?
b. 4,704,750 a. 4,832,700
c. 4,714,500 b. 3,832,700
d. 5,000,000 c. 4,805,600
Problem 6-18 (IFRS) d. 3,805,600
On January 1, 2022, Luyang Company issued 3-year bonds payable with face amount of P5,000,000 at 98. Problem 6-22 (AICPA Adapted)
Additionally, the entity paid bond issue cost of P140,000. On January 1, 2022, Arrow Company issued 10% bonds payable with face amount of P5,000,000 that mature
The nominal rate is 10% and the effective rate after considering the bond issue cost is 12%. The interest is on December 31, 2026.
payable annually on December 31. The entity used the effective interest method. The bonds were issued for P4,632,000 to yield 12% resulting in bond discount of P368,000. The entity used
What is the carrying amount of the bonds payable December 31, 2022? the interest method of amortizing bond discount. Interest is payable on June 30 and December 31.
a. 4,840,000 For the year ended December 31, 2022, what amount should be reported as bond interest expense?
b. 4,831,200 a. 557,515
c. 4,848,000 b. 500,000
d. 5,000,000 c. 250,000
Problem 6-19 (AICPA Adapted) d. 555,840
On January 1, 2022, Carrow Company issued 10% bonds payable with face amount of P5,000,000 which Problem 6-23 (IAA)
mature on December 31, 2031. The bonds were issued for P4,430,000 to yield 12%, resulting in bond discount On January 1, 2022, Nixon Company reported 10% bonds payable with carrying amount of P5,700,000. The
of P570,000. bonds had a face amount of P6,000,000 and were issued to yield 12%.
The entity used the interest method. Interest is payable semiannually on June 30 and December 31. The interest method of amortization is used. Interest was paid on January 1 and July 1 of each year.
1. What amount should be reported as interest expense for 2022? On July 1, 2022, the entity retired the bonds payable at 102. The interest payment on July 1, 2022 was made
a. 532,548 as scheduled.
b. 500,000

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1. What is the carrying amount of the bonds payable on July 1, 2022? What amount should be reported as issue price of the bonds payable?
a. 5,700,000 a. 5,000,000
b. 5,742,000 b. 1,927,500
c. 6,000,000 c. 5,614,500
d. 5,658,000 d. 4,385,500
2. What amount should be recorded as loss on the early extinguishent of the bonds payable? Problem 6-27 (AICPA Adapted)
a. 120,000 At the beginning of current year, Margaret Company provided the following information in relation to the
b. 378,000 issuance of bonds payable:
c. 336,000 Face amount P5,000,000
d. 462,000 Term Ten years
Problem 6-24 (IAA) Stated interest rate 6%
On January 1, 2022, Moon Company reported 9% bonds payable of P4,000,000 less unamortized discount of Interest payment date Annually on December 31
P320,000. Yield 9%
These bonds were issued to yield 10%. The effective interest method is used. Semiannual interest was paid on
January 1 and July 1 of each year. At 6% At 9%
On July 1, 2022, the entity retired the bonds payable at 103 before maturity. Present value of 1 for 10 periods 0.558 0.422
What amount should be reported as loss on retirement of the bonds payable on July 1, 2022? Future value of 1 for 10 periods 1.791 2.367
a. 436,000 Present value of an ordinary annuity of 1 for 10 periods 7.360 6.418
b. 440,000
c. 432,000 What amount should be reported as issue price of the bonds payable?
d. 120,000 a. 5,000,000
Problem 6-25 (AICPA Adapted) b. 4,318,000
On January 1, 2022, Angel Company issued 5-year 5,000 bonds payable with face amount of P1,000 per bond c. 4,035,400
for P5,380,000 to yield 10%. Interest of 12% is payable annually every December 31. d. 2,110,000
On June 30, 2023, the entity retired 2,000 bonds at 96 plus accrued interest. The entity used the interest Problem 6-28 Multiple choice (IAA)
method. 1. What is the interest rate written on the face of the bond?
1. What amount should be recognized as gain or loss on retirement of bonds payable on June 30, a. Coupon rate
2023? b. Nominal rate
a. 193,560 gain c. Stated rate
b. 193,560 loss d. Coupon rate, nominal rate or stated rate
c. 179,920 gain 2. What is the rate of interest actually incurred?
d. 179,920 loss a. Market rate
2. What is the carrying amount of the remaining bonds payable on December 31, 2023? b. Yield rate
a. 3,228,000 c. Effective rate
b. 3,190,000 d. Market, yield or effective rate
c. 3,149,880 3. When the effective interest method is used, the periodic amortization would
d. 3,129,420 a. Increase if the bonds were issued at a discount.
Problem 6-26 (AICPA Adapted) b. Decrease if the bonds were issued at a premium.
At the beginning of current year, Colt Company issued ten-year bonds payable with face amount of P5,000,000 c. Increase if the bonds were issued at a premium.
and a stated interest rate of 8% payable annually at every a year-end. The bonds were issued to yield 10%. d. Increase if the bonds were issued at either a discount or a premium.
4. The discount on bond payable is charged to interest expense
PV of 1 for 10 periods at 10% 0.3855 a. Equally over the life of the bond
PV of an ordinary annuity of 1 for 10 periods at 10% 6.145 b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures

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5. Bond issue cost b. Decreases

a. Is included in the measurement of the bonds payable measured at amortized cost. c. Remains the same
b. Is amortized using the interest method over the life of the bonds payable. d. Is equal to the change in carrying amount
c. Increases effectively the market rate of interest. 4. When bonds are sold at a premium and the effective interest method is used, at each interest
d. All of these describe bond issue cost. payment date, the interest expense
6. Under the effective interest method of amortization, the interest expense is equal to a. Remains constant
a. The stated rate of interest multiplied by the face amount of the bonds payable. b. Is equal to the change in carrying amount
b. The market rate of interest multiplied by the face amount of the bonds payable. c. Increases
c. The stated rate of interest multiplied by the beginning carrying amount of the bonds payable. d. Decreases
d. The market rate of interest multiplied by the beginning carrying amount of the bonds payable. 5. The effective interest expense is
7. When interest expense for the current year is more than interest paid, the bonds were issued at a. The effective rate times the carrying amount of the bond payable at the beginning of interest period.
a. A discount b. The stated rate times the face amount of the bond.
b. A premium c. The effective rate times the face amount of the bond.
c. Face amount d. The stated interest rate times the carrying amount of the bond payable at the beginning of interest
d. Cannot be determined period.
8. When interest expense for the current year is less than interest paid, the bonds were issued at Problem 6-30 Multiple choice (AICPA Adapted)
a. A discount 1. What is the effective interest rate of an amortized cost?
b. A premium a. The stated rate of the bond.
c. Face amount b. The interest rate currently charged by the entity or by others for similar bond.
d. Cannot be determined c. The interest rate that exactly discounts estimated future cash payments through the expected life of
9. Bonds usually sell at the bond to the net carrying amount of the bond.
a. Maturity amount d. The basic risk-free interest rate that is derived from observable government bond prices.
b. Face amount 2. For a bond issue which sells for less than face amount the market rate of interest is
c. Present value a. Dependent on rate stated on the bond
d. Statistical expected value b. Equal to rate stated on the bond
10. Which statement is true about bonds payable? c. Less than rate stated on the bond
a. The specific provisions of a bond issue are described in a document called bond indenture. d. Higher than rate stated on the bond
b. Periodic interest expense is the stated interest rate times the face amount of bond outstanding. 3. What is the market rate of interest for a bond issue which sells for more than face amount?
c. Bonds sell for a premium when the market rate of interest exceeds stated rate. a. Less than rate stated on the bond
a. d. The initial issue price of bonds payable represents the sum of all future cash outflows. b. Equal to rate stated on the bond
Problem 6-29 Multiple Choice (IAA) c. Higher than rate stated on the bond
1. When bonds are sold at a premium and the effective interest method is used, at each subsequent d. Independent of rate stated on the bond
interest payment date, the cash paid is 4. If bonds are issued at a premium, this indicates that
a. Less than the effective interest a. The yield rate exceeds the nominal rate
b. Greater than the effective interest b. The nominal rate exceeds the yield rate
c. Equal to the effective interest c. The yield and nominal rates coincide
d. More than if the bonds had been sold at a discount d. No necessary relationship exists between the two rates.
2. When bonds are sold at a discount and the effective interest method is used, at each subsequent 5. Which statement is true for bonds payable maturing on single date when the effective interest
interest payment date, the cash paid is method of amortizing discount on bonds payable is used?
a. More than the effective interest a. Interest expense as a percentage of the bond carrying amount varies from period to period
b. Less than the effective interest b. Interest expense increases each six-month period
c. Equal to the effective interest c. Interest expense remains constant each six-month period
d. More than if the bonds had been sold at a premium d. Nominal interest rate exceeds effective interest rate
3. When bonds are sold at a discount and the effective interest method is used, at each interest 6. In theory, the proceeds from the issuance of bonds payable shall be equal to
payment date, the interest expense a. The face amount of the bonds payable.
a. Increases

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b. The present value of the principal due at the end of the life of the bonds payable plus the present It is reliably determined that the fair value of the share warrants is P30 each at the time of the issuance of the
value of the interest payments made during the life of the bonds payable. bonds payable.
c. The face amount of the bonds payable plus the present value of the interest payments made during The bonds are sold for P5,100,000 with share warrants but I would have sold only at P4,660,000 without the
the life of the bonds payable. share warrants with 14% effective yield.
d. The sum of the face amount of the bonds payable and the periodic interest payments Required:
7. The market price of bonds payable issued at a discount is the present value of the principal amount Prepare journal entries for the current year in connection with the bonds including the exercise of the share
at the market rate of interest warrants. The effective interest method of amortization is used.
a. Less the present value of all future interest payments at the market rate of interest. Problem 7-3 (IFRS)
b. Less the present value of all future interest payments at the rate of interest stated on the bonds. At the beginning of current year, Zamboanga Company issued P8,000,000 of 12% bonds payable maturing in
c. Plus the present value of all future interest payments at the market rate of interest. 5 years.
d. Plus the present value of all future interest payments at the rate of interest stated on the bonds. The bonds pay interest semiannually on June 30 and December 31
8. Under international accounting standard, the valuation method used for bonds payable is The bonds included share warrants giving the bondholder the right to purchase 16,000 P100 par value shares
a. Historical cost for P150 per share within the next three years.
b. Discounted cash flow valuation at current yield rate The bonds and share warrants were issued at 120. The fair value of the share warrants at the time of issuance
c. Maturity amount was P1,500,000. All share warrants were exercised at current year-end.
d. Discounted cash flow valuation at yield rate at issuance The market rate of interest for similar bonds without the share warrants is 10%. The PV of 1 at 5% for ten
9. How should an entity calculate the net proceeds from issuance of bonds payable? periods is 0.61, and the PV of an ordinary annuity of 1 at 5% for ten periods is 7.72.
a. Discount the bonds payable at the stated rate of interest. Required:
b. Discount the bonds payable at the market rate of interest. Prepare journal entries for the currrent year in connection with the bonds. The interest method of amortization
c. Discount the bonds payable at the stated rate of interest and deduct bond issuance cost. is used.
d. Discount the bonds payable at the market rate of interest and deduct bond issuance cost. Problem 7-4 (IFRS)
10. An entity issued bonds payable with a stated rate of interest that is less than the effective interest At the beginning of current year, Silay Company issued 2,000 convertible bonds payable. The bonds have a
rate. The bonds were issued on one of the interest payment dates. What should the entity report on the three-year term and are issued at 110 with a face amount of P1,000 per bond, giving total proceeds of
first interest payment date? P2,200,000.
a. An interest expense that is less than the cash payment made to bondholders. Interest is payable annually in arrears at a nominal annual interest rate of 6%.
b. An interest expense that is greater than the cash payment made to bondholders. Each bond is convertible at any time up to maturity into 25 shares of capital with par value of P20. The bonds
c. A debit to discount on bond payable. are converted at the end of current year.
d. d. A debit to premium on bond payable. When the bonds are issued, the prevailing market rate for similar bonds without conversion privilege is 9%.
PROBLEMS The present value of 1 at 9% for three periods is 0.77 and the present value of an ordinary annuity of 1 at 9%
Problem 7-1 (IAA) for three periods is 2.53.
At the beginning of current year, Monic Company decided to issue 5,000 10-year bonds payable of 8% P1,000 Required:
face amount each with share warrants to acquire equity shares at P30 per share. The interest on the bonds is Prepare journal entry to record issuance of the bonds payable, interest payment, effective amortization and
payable annually every December 31. bond conversion.
Each bond contains one share warrant which can be used to acquire 4 shares of P25 par value share capital. Problem 7-5 (IAA)
It is reliably determined that without share warrants, the bonds payable would sell at 115 with a 6% effective Sunshine Company issued 4-year 12% convertible bonde payable with face amount of P5,000,000 at 105 on
yield. The bond price with share warrants is 120. All warrants are exercised at year-end. January 1, 2022 maturing on January 1, 2027 and paying interest annually on December 31.
Required: It is reliably ascertained that, the bonds would sell P4,700,000 without the conversion feature with an effective
Prepare journal entries for the current year in connection with the bond issuance and the exercise of the share yield of 14%.
warrants. Use effective interest method of amortization. Each P1,000 bond is convertible into 8 equity shares of P100 par value. On December 31, 2022, all of the
Problem 7-2 (IAA) bonds a converted into share capital. At this time, the share has a market value of P150 and the bonds are
At the beginning of current year, Kat Company decided to raise additional capital by issuing P5,000,000 face quoted at 101.
amount 5-year bonds payable with interest rate of 12% payable annually on December 31. Required:
To help the sale of the bonds payable, share warrants are issued - one warrant for each P1,000 bond sold. 1. Prepare journal entry to record the issuance of the bonds payable on January 1, 2022.
The share warrant entitled the holder to purchase five shares at P100 per share. The par value of the share is 2. Prepare journal entry to record the interest payment and amortization for 2022.
P50. 3. Prepare journal entry to record the conversion of bonds payable on December 31, 2022.

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Problem 7-6 (IAA) 1. What amount should be recognized as discount or premium on the original issuance of the bonds
Karen Company showed the following accounts on December 31, 2022. payable?
Bonds payable 5,000,000 a. 342,000 premium
Premium on bonds payable 250,000 b. 342,000 discount
Share capital - 250,000 shares authorized and 200,000 shares issued, P50 par 10,000,000 c. 450,000 premium
Share premium - issuance 2,000,000 d. 450,000 discount
Share premium - conversion privilege 500,000 2. What amount should be recorded as equity component arising from the issuance of bonds payable?
Retained earnings 2,500,000 a. 150,000
The bonds are convertible into 10 equity shares for every P1,000 bond. On December 31, 2022, the entire b. 450,000
bond issue was converted and on this date, the market value of the share is 120 and the market value of the c. 492,000
bonds is 103. The entity paid P200,000 as a result of the bond conversion. d. 0
Required: 3. What amount should be credited to share premium if all of the share warrants are exercised?
Prepare journal entries for the conversion of the bonds payable on December 31, 2022. a. 4,242,000
Problem 7-7 (IAA) b. 3,500,000
On January 1, 2022, Andrea Company issued 4,000 convertible bonds payable with P1,000 face amount per c. 3,600,000
bond. The bonds have a three-year life and are issued at 105 or a total proceeds of P4,200,000. d. 3,950,000
Interest is payable annually at 6% every December 31. Each bond is convertible into 20 ordinary shares with Problem 7-10 (AICPA Adapted)
P50 par value. Moses Company issued P5,000,000 face amount, 5-year bonds payable at 109. Each P1,000 bond was issued
When the bonds are issued, the market rate of interest for similar bonds without conversion option is 8%. The with 10 share warrants, each of which entitled the bondholder to purchase one share of P100 par value at
PV of 1 at 8% for three periods is 0.79, and the PV of an ordinary annuity of 1 at 8% for three periods is 2.58. P120.
Required: Immediately after issuance, the market value of each share warrant was P5.
1. Prepare journal entry to record the original issuance of the convertible bonds payable. The stated interest rate on the bonds is 11% payable annually every end of the year.
2. Prepare journal entry to record the full payment of the convertible bonds at maturity on January 1, 2025. However, the prevailing market rate of interest for similar bonds without warrants is 12%.
Problem 7-8 (IAA) The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for
On January 1, 2022, Arlene Company issued convertible bonds payable with face amount of P5,000,000 for 5 periods is 3.60.
P6,000,000. The bonds are convertible into 50,000 equity shares with P100 par value. The bonds have a 5-
year life with 10% stated interest rate payable annually every December 31. 1. What is the carrying amount of the bonds payable on the date of issuance?
On January 1, 2022, the fair value of the convertible bonds without conversion option is computed at a. 5,450,000
P5,399,300. b. 4,830,000
On December 31, 2024, the convertible bonds were not converted but fully paid for P5,550,000 excluding c. 5,000,000
accrued interest. d. 4,380,000
On such date, the fair value of the bonds without conversion privilege is P5,400,000 and the carrying amount 2. What amount should be recorded initially as discount or premium on bonds payable?
of the bonds payable is P5,178,300. a. 170,000 discount
Required: b. 450,000 premium
1. Prepare journal entry to record the original issuance of the convertible bonds payable on January 1, 2022. c. 450,000 discount
2. Prepare journal entries on December 31, 2024. d. 800,000 discount
Problem 7-9 (AICPA Adapted) 3. What amount should be recorded as equity component arising from the issuance of bonds payable?
At the beginning of current year, Fence Company issued 12% P5,000,000 nonconvertible bonds payable at a. 450,000
103 which are due in 5 years. b. 500,000
In addition, each P1,000 bond was issued 30 share warrants, each of which entitled the bondholder to c. 620,000
purchase for P50 one share of Fence Company, par value P25. Interest is payable annually every end of the d. 0
year. 4. What amount should be credited to share premium if all of the share warrants are exercised?
On the date of issuance, the market value of the share was P40 and the market value of the share warrant was a. 1,000,000
P4. b. 1,450,000
The market rate of interest for similar bonds ex-warrants is 14%. The present value of an ordinary annuity of 1 c. 1,500,000
at 14% for 5 periods is 0.52 and the present value of ordinary annuity of 1 at 14% for 5 periods is 3.43. d. 1,620,000

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Problem 7-11 (AICPA Adapted) What amount should be recorded as equity component arising from the original issuance of the
At the beginning of current year, Case Company issued P5,000,000 of 12% nonconvertible bonds payable at convertible bonds payable?
103 which are due in five years. a. 1,150,000
In addition, each P1,000 was issued with 30 detachable share warrants, each of which entitled the bondholder b. 1,650,000
to purchase, for P50, one ordinary share of Case Company, par value P25. c. 891,000
On the date of issuance, the quoted market value of each share warrant was P4. The market value of the d. 391,000
bonds ex-warrants at the time of issuance is 95. Problem 7-14 (AICPA Adapted)
1. What is the carrying amount of the bonds payable on the date of issuance? On December 31, 2022, Cey Company had outstanding 12% P5,000,000 face amount convertible bonds
a. 5,000,000 payable maturing on December 31, 2027.
b. 4,750,000 Interest is payable on June 30 and December 31. Each P1,000 bond is convertible into 50 shares of Cey
c. 5,250,000 Company with P10 par value.
d. 4,950,000 On December 31, 2022, the unamortized premium on bonds payable was P300,000. No equity component
2. What amount of the proceeds from the bond issue should be recognized as an increase in was recognized from the original issuance of the convertible bonds.
shareholders' equity? On December 31, 2022, 2,000 bonds were converted when the share had a market price of P24. The entity
a. 600,000 incurred P20,000 in connection with the bond conversion.
b. 300,000 What amount should be recorded as share premium arising from the bond conversion?
c. 200,000 a. 1,400,000
d. 400,000 b. 1,100,000
3. What amount should be credited to share premium if all of the share warrants are exercised? c. 1,380,000
a. 3,750,000 d. 1,120,000
b. 4,350,000 Problem 7-15 (AICPA Adapted)
c. 4,150,000 Spare Company had an outstanding share capital with par value of P50,000,000 and 12% convertible bonds
d. 4,250,000 payable with face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and
Problem 7-12 (IAA) December 31.
Moriones Company issued P5,000,000 face amount 12% 5-year-convertible bonds payable at 110 at the The conversion clause in the bond indenture entitled the bondholders to receive 40 shares of Spare Company
beginning of current year, paying interest semiannually on January 1 and July 1. with P20 par value in exchange for each P1,000 bond.
It is estimated that the bonds would sell only at 103 without the conversion feature. Each P1,000 bond is The holders of bonds with face amount of P5,000,000 exercised the conversion privilege at year-end.
convertible into 10 ordinary shares with P100 par value. The market price of the bonds at year-end was P1,100 per bond and the market price of the share was P30.
What amount should be reported as increase in shareholders' equity arising from the original issuance The unamortized discount on bonds payable was P500,000 and the share premium from conversion privilege
of the convertible bonds payable? had a balance of P2,000,000 at the date of conversion.
a. 350,000 What amount of share premium should be recognized by reason of the conversion of bonds payable
b. 500,000 into share capital?
c. 150,000 a. 2,000,000
d. 0 b. 2.750,000
Problem 7-13 (IFRS) c. 3,000,000
At the beginning of current year, Susan Company issued 5,000 convertible bonds payable. The bonds have a d. 1,750,000
three-year term and are issued at 110 with a face amount of P1,000 per bond. Problem 7-16 (AICPA Adapted)
Interest is payable annually in arrears at a nominal 6% interest rate. Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30. Each P1,000 bond was
Each bond is convertible at anytime up to maturity into 100 ordinary shares with par value of P5. convertible into 10 ordinary shares of P50 par value.
When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion On July 1, the interest was paid to bondholders and the bonds were converted into ordinary shares which had
option is 9%. a fair value of P75 per share.
The present value of 1 at 9% for 3 periods is 0.77 and the present value of an ordinary annuity of 1 at 9% for 3 The unamortized premium on bonds payable was P12,000 at the date of conversion. No equity component
periods is 2.53. was recognized when the bonds were originally issued.
What amount should be recorded as increase in share premium as a result of the bond conversion?
a. 312,000
b. 306,000

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c. 162,000 c. The issuer shall classify a compound instrument as a liability in its entirety, until converted into
d. 300,000 equity.
Problem 7-17 (IAA) d. The issuer shall classify a compound instrument as a liability in its entirety.
Isabel Company had outstanding share capital with par value of P50,000,000 and 12% convertible bonds 2. How are the proceeds from issuing a compound instrument allocated between the liability and
payable with face amount of P10,000,000. Interest on the bond is payable annually on December 31. equity?
The conversion clause entitled the bondholders to receive 50 shares of P20 par value in exchange for each a. The liability component is measured at fair value and the remainder of the proceeds is allocated to
P1,000 bond. the equity component.
At year-end, the holders of bonds with face amount of P2,000,000 exercised the conversion privilege. b. The proceeds are allocated to the liability and equity based on fair value.
The market price of the bonds on that date was P1,200 per bond and the market price of the share was P25. c. The proceeds are allocated to the liability and equity based on carrying amount.
The premium on bonds payable at the date of conversion was P3,000,000. The share premium from d. The proceeds are not allocated because the compound instrument is accounted for either as liability
conversion privilege had a balance P1,500,000 at the date of conversion. or equity.
What amount of share premium should be recognized by reason of the bond conversion? 3. The proceeds from an issue of bonds payable with share warrants should not be allocated between
a. 450,000 the liability and equity components when
b. 300,000 a. The fair value of the share warrants is not readily available.
c. 600,000 b. The exercise of the share warrants within the next reporting period seems remote.
d. 900,000 c. The share warrants issued are nondetachable.
Problem 7-18 (IAA) d. The proceeds should be allocated between liability and equity under all of these circumstances.
On December 31, 2022, Tamaraw Company showed thef ollowing balances: 4. When the cash proceeds from bonds payable issued with share warrants exceed the fair value of the
Bonds payable - 6% 4,000,000 bonds payable without the warrants, the excess should be credited to
Discount on bonds payable 500,000 a. Share premium - ordinary
Share premium - issuance 5,000,000 b. Retained earnings
Share premium-conversion privilege 700,000 c. Liability account
The interest is payable annually every December 31. The convertible bonds are not converted but fully paid on d. Share premium - share warrants
December 31, 2022 for P4,200,000 plus accrued interest. 5. When bonds are issued with share warrants, the equity component is equal to
On December 31, 2022, the quoted price of the bonds payable without the conversion privilege is 95. a. Zero
1. What is the carrying amount of the bonds payable on December 31, 2022? b. The excess of the proceeds over the face amount of the bonds payable.
a. 4,000,000 c. The market value of the share warrants.
b. 4,500,000 d. The excess of the proceeds over the fair value of the bonds payable without the share warrants.
c. 3,500,000 Problem 7-20 Multiple choice (IAA)
d. 4,200,000 1. A bond convertible by the holder into a fixed number of ordinary shares of the issuer is
2. What amount should be recorded as gain or loss from extinguishment of bonds payable? a. A compound financial instrument
a. 700,000 gain b. A primary financial instrument
b. 700,000 loss c. A derivative financial instrument
c. 300,000 gain d. An equity instrument
d. 300,000 loss 2. Convertible bonds
3. What amount should be recorded as total payment to the bondholders on December 31, 2022? a. Have priority over other indebtedness.
a. 4,200,000 b. Are usually secured by a mortgage.
b. 4,440,000 c. Pay interest only in the event net income is sufficient to cover the interest.
c. 4,240,000 d. May be exchanged for equity shares.
d. 4,040,000 3. What is the main reason for issuing convertible bond?
Problem 7-19 Multiple choice (IFRS) a. The ease with which convertible bond is sold even if the entity has a poor credit rating.
1. What is the principal accounting for a compound financial instrument? b. The fact that share capital has issue cost and convertible bond has none.
a. The issuer shall classify a compound instrument as either liability or equity. c. Entities can obtain financing at lower rate.
b. The issuer shall classify the liability and equity components of a compound instrument separately as d. Convertible bond always sells at a premium.
liability or equity instrument.

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4. The major difference between convertible bonds payable and bonds payable issued with share Required:
warrants is that upon exercise of the share warrants 1. Prepare the journal entry for the issuance of the note payable by Ontario Company.
a. The shares are held by the issuer for a certain period before issuance to the warrant holder. 2. Prepare the appropriate adjusting entry for the note payable on December 31, 2022.
b. The holder has to pay a certain amount to obtain the shares. 3. Prepare the journal entry for the payment of the note payable at maturity.
c. The shares involved are restricted. Problem 8-2 (IAA)
d. No share premium can be part of the transaction. On October 1, 2022, Home Company issued to Security Bank a P6,000,000, 8-month, noninterest-bearing
5. Convertible bonds note. The note payable was discounted by the bank at 12%.
a. Are separated into the liability component and the expense component. Required:
b. Allow an entity to issue debt financing at lower rate. 1. Prepare the appropriate journal entry by Home Company to record the issuance of the note.
c. Are separated into liability and equity components based on fair value. 2. Prepare the adjusting entry on December 31, 2022.
d. All of the choices are correct. 3. Present the note payable on December 31, 2022.
6. What is the accounting for issued convertible bond? 4. Prepare the journal entry to record the discount amortization and payment of the note payable on June 1,
a. The instrument should be recorded solely as bond. 2023, date of maturity.
b. The instrument should be recorded as either bond or equity but not both. 5. Prepare the journal entry to record the following assuming the note had been structured as a 12% note with
c. The instrument should be recorded solely as equity interest and principal payable at maturity:
d. The instrument should be recorded as part bond and part equity. a. Issuance of the note payable on October 1, 2022
7. Issued convertible bonds are b. Accrued interest payable on December 31, 2022
a. Separated into liability and equity components with the liability component recorded at fair value and c. Payment of the note payable on the date of maturity
the residual assigned to the equity component Problem 8-3 (IAA)
b. Always recorded using the fair value option On September 1, 2022, Trinoma Entertainment borrowed P24,000,000 cash to fund a new Fun Park. The loan
c. Recorded at face amount for the liability granted by Solid Bank under a noncommitted short-term line of credit arrangement.
d. Recorded at the par value of shares Trinoma issued a 9-month, 12% promissory note. Interest was payable at maturity. The fiscal period is the
8. The carrying amount of bonds converted was greater than the par value of the ordinary shares calendar year
issued. Which correctly states an effect of the conversion? Required:
a. Shareholders' equity increased 1. Prepare the journal entry for the issuance of the note by Trinoma.
b. Share premium decreased 2. Prepare the appropriate adjusting entry for the note on December 31, 2022.
c. Retained earnings increased 3. Prepare the journal entry for the payment of the note at maturity.
d. A loss is recognized Problem 8-4 (IAA).
9. The conversion of bonds payable into ordinary shares is commonly recorded by Rose Company provided the following selected transaction
a. Incremental method related to liabilities:
b. Proportional method
c. Fair value method 2022
d. Book value or carrying amount method Feb. 1 Negotiated a revolving credit agreement with Second Bank which can be renewed annually
10. When convertible bond is not converted but paid at maturity upon bank approval.
a. A gain or loss is recorded for the difference between the carrying amount of the bond and the The amount available under the line of credit is P30,000,000 at the prime bank rate.
present value April 1 Arranged a 3-month bank loan of P12,000,000 with Second Bank under the line of credit
b. The amount allocated to equity is recorded as a gain agreement with interest rate of 8% payable at maturity.
c. The amount allocated to equity is recorded as a loss July 1 Paid the 8% note at maturity.
d. The carrying amount of the bond equal to face amount is derecognized. Nov. 1 Supported by the credit line, Rose Company issued P20,000,000 of commercial paper on
PROBLEMS nine-month note. Interest was discounted at issuance at a 6% discount rate.
Problem 8-1 (IAA) Dec. 31 Recorded any necessary adjusting entry.
Ontario Company, a natural energy supplier, borrowed P8,000,000 cash on November 1, 2022 to fund a 2023
geological survey. The loan was granted by United Bank under a short-term credit line. Aug. 1 Paid the commercial paper at maturity.
Ontario Company issued a 9-month, 12% promissory note with interest payable at maturity. The fiscal period is
the calendar year. Required:
Prepare the appropriate journal entries through the maturity of each liability.

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Problem 8-5 (ACP) Problem 8-10 (IAA)

On January 1, 2022, West Company acquired a tract of land for P1,000,000. Joshua Company bought a new machine and agreed to pay in equal annual installment of P600,000 at the end
The entity paid P100,000 down and signed a two-year promissory note for the balance plus 10% interest of each of the next five years. The prevailing interest rate for this type of transaction is 12%.
compounded annually. The note matures on January 1, 2024. The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an ordinary
Required: annuity of 1 at 12% for five periods is 6.35. The present value of 1 at 12% for five periods is 0.567.
Prepare journal entries to record: 1. What amount should be reported as note payable if financial statements were prepared today?
1. Purchase of land on January 1, 2022 a. 1,700,000
2. Accrued interest on December 31, 2022 b. 2,160,000
3. Accrued interest on December 31, 2023 c. 3,000,000
4. Full payment of the note on January 1, 2024 d. 3,810,000
Problem 8-6 (ACP) 2. What amount should be reported as interest expense for the first year?
On January 1, 2022, North Company acquired a machinery with cash price of P750,000 for P1,000,000. a. 259,200
The entity paid P200,000 and signed a noninterest bearing promissory note for the balance which is payable in b. 187,200
4 equal installments every December 31 of each year. c. 360,000
Required: d. 457,200
Prepare journal entries for 2022. Problem 8-11 (AICPA Adapted)
Problem 8-7 (IAA) Mann Company reported a 10% note payable of P3,600,000 on June 30, 2022. The note is dated October 1,
On January 1, 2022, South Company acquired a building for P5,000,000. The entity paid P500,000 down and 2020 and payable in three equal annual payments of P1,200,000 plus interest.
signed a noninterest bearing note for the balance which is payable in 3 equal annual installments every The first interest and principal payment was made on October 1, 2021.
December 31 of each year. On June 30, 2022, what amount should be reported as accrued interest payable for this note?
The prevailing interest rate for a note of this type is 12%. The present value of an ordinary annuity of 1 for a. 270,000
three periods is 2.4018. b. 180,000
Required: c. 90,000
Prepare journal entries to record purchase of building on January 1, 2022, first installment payment on d. 60,000
December 31, 2022 and interest expense for 2022. Problem 8-12 (AICPA Adapted)
Problem 8-8 (IAA) On December 31, 2022, Bart Company purchased a machine from Fell Company in exchange for a noninterest
On January 1, 2022, Manila Company acquired a tract of land for P5,250,000. The entity paid P1,250,000 bearing note payable requiring eight payments of P200,000.
down and signed a noninterest bearing note payable for the balance which is due on January 1, 2025. The first payment was made on December 31, 2022 and the others are due annually on December 31.
There was no established exchange price for the land and the note had no ready market. The prevailing At date of issuance, the prevailing rate of interest for this type of note was 11%.
interest rate for this type of note was 12%. The present value of 1 at 12% for 3 periods is 0.7118. PV of an ordinary annuity of 1 at 11% for 8 periods 5.146
Required: PV of an annuity of 1 in advance at 11% for 8 periods 5.712
Prepare journal entries to record purchase of land on January 1, 2022, interest expense for 2022 and full On December 31, 2022, what is the carrying amount of the note payable?
payment of the note on January 1, 2025. a. 1,142,400
Problem 8-9 (AICPA Adapted) b. 1,029,200
On January 1, 2022, Heritage Company had a note payable to bank in the amount P2,800,000. c. 1,046,200
Transactions during 2022 and other information relating to liabilities are: d. 942,400
a. Principal amount of the note payable to bank is P2,800,000 and bears a 12% interest. The note is Problem 8-13 (AICPA Adapted)
dated April 1, 2021 and is payable in four equal annual installments beginning April 1, 2022. The first At the beginning of current year, Pares Company borrowed P3,600,000 from a major customer evidenced by a
principal and interest payment was made on April 1, 2022. noninterest bearing note payable due in three years.
b. On July 1, 2022, the entity issued for P1,774,000 a P2,000,000 face amount note payable to a The entity agreed to supply the customer's inventory needs for the loan period at an amount lower than market
wealthy shareholder. The note was dated July 1, 2022 and matures on July 1, 2023. No explicit price.
interest rate is stated in the note and the entire face amount of the note is payable at maturity date. At the 12% imputed interest rate for this type of loan, the present value of the note is P2,550,000 at the date of
Required: issuance.
a. Prepare journal entries for 2022. What amount of interest expense should be reported for the current year?
b. Compute the total current liabilities on December 31, 2022. a. 432,000
c. Determine the interest expense for 2022. b. 350,000

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c. 306,000 Problem 8-18 (AICPA Adapted)

d. 0 On January 1, 2022, Easy Company reported a note payable of P1,200,000.
Problem 8-14 (AICPA Adapted) The note is dated October 1, 2021, bears interest at 15%, and is payable in three equal annual payments of
At year-end, Roth Company issued a P1,000,000 face amount note payable in exchange for services P400,000.
rendered. The first interest and principal payment was made on October 1, 2022.
The note payable, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at What amount should be reported as interest expense for 2022?
the annual rate of 3%. a. 165,000
The market interest rate is 8%. The compound interest factor of 1 due in nine months at 8% is 0.944. b. 180,000
At what amount should the note payable be reported at year-end? c. 135,000
a. 1,030,000 d. 30,000
b. 1,000,000 Problem 8-19 (AICPA Adapted)
c. 965,200 Loob Company frequently borrowed from the bank in order to maintain sufficient operating cash. The loans
d. 944,000 were at a 12% interest rate, with interest payable at maturity.
Problem 8-15 (AICPA Adapted) The entity recorded interest expense when the loans are repaid. As a result, interest expense of P150,000 was
On September 1, 2021, Pine Company issued a note payable in the amount of P1,800,000, bearing interest at recorded in 2022. The entity repaid each loan on the scheduled maturity date.
12%, and payable in three equal annual principal payments of P600,000. On this date, the prime rate was Date Amount Maturity Term
11%. 11/1/2021 500,000 10/31/2022 1 year
The first interest and principal payment was made on September 1, 2022. 2/1/2022 1,500,000 7/31/2022 6 months
On December 31, 2022, what amount should be reported as accrued interest payable? 5/1/2022 800,000 1/31/2023 9 months
a. 44,000 If no correction is made, by what amount would interest expense for 2022 be understated?
b. 48,000 a. 54,000
c. 66,000 b. 62,000
d. 72,000 c. 64,000
Problem 8-16 (AICPA Adapted) d. 72,000
On March 1, 2021, Alpha Company borrowed P1,000,000 and signed a 2-year note payable bearing interest at Problem 8-20 (AICPA Adapted)
12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2023. Jason Company offered a contest in which the winner would receive P1,000,000 payable over twenty years.
What amount should be reported as accrued interest payable on December 31, 2022? On December 31, 2022, Jason Company announced the winner of the contest and signed a note payable to
a. 100,000 the winner for P1,000,000 payable in P50,000 installments every January 31.
b. 120,000 On December 31, 2022, Jason Company purchased an annuity for P418,250 to provide the P950,000 prize
c. 232,000 remaining after the first P50,000 installment which was paid on January 31, 2023.
d. 240,000 On December 31, 2022, what amount should be reported as note payable-contest winner, net of current
Problem 8-17 (IAA) portion?
On January 1, 2022, Solemn Company sold land to Glory Company. There was no established market price for a. 468,250
the land. b. 418,250
Glory Company gave Solemn Company a P2,400,000 noninterest bearing note payable in three equal annual c. 900,000
installments of P800,000 with the first payment due December 31, 2022. d. 950,000
The note had no ready market. The prevailing rate of interest for a note of this type is 10%. Problem 8-21 (AICPA Adapted)
The present value of a P2,400,000 note payable in three equal annual installments of P800,000 at a 10% rate On September 30, 2023, World Company borrowed P1,000,000 on a 9% note payable. The entity paid the first
of interest is P1,992,000. of four quarterly payments of P264,200 when due on December 31, 2023.
What is the carrying amount of the note payable on December 31, 2022? 1. What amount should be reported as interest expense for 2023?
a. 1,992,000 a. 90,000
b. 1,192,000 b. 22,500
c. 1,391,200 c. 67,500
d. 1,600,000 d. 30,000
2. On December 31, 2023, what is the carrying amount of the note payable?
a. 758,300

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b. 750,000 Problem 8-24 (IAA)

c. 825,800 On January 1, 2022, Katniss Company borrowed P5,000,000 on a 10% three-year interest-bearing note. The
d. 735,800 net proceeds from the borrowing amounted to P5,000,000. Interest is payable annually every December 31.
Problem 8-22 (AICPA Adapted) The entity elected the fair value option in measuring the note payable.
On January 1, 2022, Justine Company borrowed P2,000,000 on a 10% five-year interest-bearing note. On On December 31, 2022 and 2023, the risk factors indicated that the rate of interest applicable to the note was
December 31. 2022, the fair value of the note is determined to be P1,900,000. 8% and 12% respectively.
The entity irrevocably elected the fair value option in measuring the note payable PV of 1 8% 4 periods 0.735
1. What amount should be reported as interest expense for 2022? PV of an ordinary annuity of 1 8% 4 periods 3.312
a. 100,000 PV of 1 12% 3 periods 0.712
b. 200,000 PV of an ordinary annuity of 1 12% 3 periods 2.402
c. 190,500 1. What amount should be reported as interest expense for 2022?
d. 150,750 a. 533,100
2. What is the carrying amount of the note payable on December 31, 2022? b. 500,000
a. 2,000,000 c. 250,000
b. 1,900,000 d. 600,000
c. 950,000 2. What amount should be reported as gain or loss from change in fair value for 2022?
d. 900,000 a. 400,000 gain
3. What amount should be reported as gain or loss from change in fair value of the note payable for b. 400,000 loss
2022? c. 331,000 loss
a. 100,000 gain d. 331,000 gain
b. 100,000 loss 3. What amount should be reported as gain or loss from change in fair value for 2023?
c. 150,000 gain a. 570,000 gain
d. 150,000 loss b. 570,000 loss
4. Prepare journal entries for 2022. c. 239,000 gain
Problem 8-23 (AICPA Adapted) d. 239,000 loss
On January 1, 2022, Davao Company borrowed P4,000,000 the borrowing amounted to P3,677,600. Interest is 4. Prepare journal entries for 2022 and 2023.
payable on a 6% 4-year interest-bearing note. The net proceeds from annually every December 31. Problem 8-25 Multiple choice (AICPA Adapted)
The entity elected the fair value option. On December 31, 2022, the bonds are quoted at 95. 1. When an entity issued a note payable solely in exchange for cash, the present value of the note
1. What amount should be reported as interest expense for 2022? payable at issuance is equal to
a. 240,000 a. Face amount
b. 120,000 b. Face amount discounted at the prevailing interest rate
c. 294,208 c. Proceeds received
d. 220,256 d. Proceeds received discounted at the prevailing interest rate
2. What amount should be reported as gain or loss from change in fair value for 2022? 2. If the present value of a note payable issued in exchange for a property is less than face amount, the
a. 322,400 gain difference should be
b. 322,400 loss a. Included in the cost of the asset
c. 122,400 gain b. Amortized as interest expense over the life of the note
d. 122,400 loss c. Amortized as interest expense over the life of the asset
3. What is the carrying amount of the note payable on December 31, 2022? d. Included in interest expense in the year of issuance
a. 3,677,600 3. An entity borrowed cash from a bank and issued to the bank a short-term noninterest bearing note
b. 3,800,000 payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The effective
c. 3,493,720 interest rate paid by the entity in this transaction would be
d. 4,000,000 a. Equal to the stated discount rate of 10%
4. Prepare journal entries for 2022. b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

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4. At issuance date, the present value of a promissory note is equal to the face amount if the note The entity and the bank agreed on a "dacion en pago" arrangement. Thus, the mortgaged land and building
a. Bears a stated rate of interest which is realistic. were given by the entity as full payment for the loan including accrued interest.
b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes. The cost of the land is P1,500,000 and the building, P6,000,000 with accumulated depreciation of P1,800,000.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar The fair value of the land and building is reliably determined at P5,900,000.
notes. Required:
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar 1. Compute the gain or loss on extinguishment of debt.
notes. 2. Prepare journal entry to record the dacion en pago.
5. Which statement concerning discount on note payable is incorrect? Problem 9-2 (ACP)
a. Discount on note payable may be debited when entity discounts its own note with the bank. Rainbow Company showed the following data with respect to a matured obligation:
b. The discount on note payable is a deduction from the face amount note payable. Note payable 1,000,000
c. The discount on note payable represents interest charges applicable to future periods. Accrued interest payable 200,000
d. Amortizing the discount on note payable gradually decreases the carrying amount of the liability over The entity was in financial distress and negotiated with the creditor for the settlement of the note payable.
the life of the note. Consequently, the entity transferred a patent to the creditor in full satisfaction of the note payable.
6. When a note payable with no ready market is exchanged for property whose fair value is currently The patent had a carrying amount of P600,000 and a fair value of P1,100,000.
indeterminable Required:
a. The present value of the note payable must be approximated using an imputed interest rate. Prepare journal entry to record the asset swap on the books of Rainbow Company.
b. The note payable should not be recorded until the fair value of the property becomes evident. 1. Under IFRS
c. The entity receiving the property should estimate a value for the property. 2. Under USA GAAP
d. Both entities involved in the transaction should negotiate a value to be assigned to the property. Problem 9-3 (IAA)
7. When a note payable is issued for property, the present value of the note is measured by Sundown Company had bonds payable with face amount of P5,000,000 and a carrying amount of P5,150,000.
a. The fair value of the property In addition, unpaid interest on the bonds had been accrued in the amount of P300,000.
b. The fair value of the note payable The creditor agreed to the settlement of the bonds payable in exchange for land with fair value of P4,500,000
c. Using an imputed interest rate to discount all future payments on the note payable and historical cost of P3,200,000.
d. All of these are considered in measuring the present value of the note payable Required:
8. When a note payable is exchanged for property, the stated interest rate is presumed to be fair when Prepare journal entry necessary on the books of Sundown Company to record the settlement of the bonds
a. No interest rate is stated. payable.
b. The stated interest rate is unreasonable. Problem 9-4 (IAA)
c. The face amount of the note is materially different from the cash sale price for similar property. Star Company had outstanding a P6,000,000 note payable to an investment entity. Accrued interest payable
a. d. The stated interest rate is equal to the market rate. on the note amounted to P600,000.
9. The discount resulting from the determination of the present value of a note payable should be Because of financial difficulties, the entity negotiated with the investment entity to exchange inventory of
reported as machine parts to satisfy the debt.
a. Deferred credit The inventory transferred was carried of P3,600,000 with estimated fair value of P5,600,000. The perpetual
b. Direct deduction from the face amount of the note inventory system was used.
c. Deferred charge Required:
d. Addition to the face amount of the note Prepare journal entry necessary on the books of Star Company to record the settlement of the note payable.
10. Which statement is correct when an entity issued a note payable with no stated interest rate in Problem 9-5 (IAA)
exchange for a depreciable asset? Sunshine Company showed the following data with respect to a matured obligation:
a. The asset should be depreciated over the term of the note payable. Mortgage payable 5,000,000
b. If fair value is unavailable, the note payable should be recorded at present value discounted at the Accrued interest payable 500,000
market rate of interest. The entity was threatened with a court suit if it could not pay its maturing debt. Accordingly, the entity entered
c. Both the note and the asset are recorded at the face amount of the note payable. into an agreement with the creditor for the issuance of share capital in full settlement of the mortgage payable.
d. The note payable is recorded at face amount even if the fair value of the asset is readily available. The agreement provided for the issue of 35,000 shares with par value of P100 and current quoted price at
PROBLEMS P130. The fair value of the liability was P4,700,000.
Problem 9-1 (ACP) Required:
Youth Company is in financial trouble and could not meet maturing installments and interest on its bank loan of Prepare journal entry to record the equity swap:
P5,000,000. The accrued interest on the loan to date is P1,000,000. 1. If the fair value of the share capital is used.

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2. If the fair value of the liability is used for the equity swap. 3. Determine the discount on the new note payable.
3. If the carrying amount of the liability is used. 4. Determine the gain or loss on extinguishment.
Problem 9-6 (IAA) 5. Prepare journal entries for 2022.
Quest Company was threatened with bankruptcy due to the inability to meet interest payments and fund Problem 9-10 (IAA)
requirements to retire P5,000,000 note payable with accrued interest payable of P400,000. White Company was indebted to the bank for P6,000,000 on January 1, 2022. The principal and accrued
The entity entered into an agreement with the creditor to exchange equity instruments for the financial liability. interest of P600,000 were overdue. The interest on the note was 10%. The entity negotiated with the bank for
The terms of the exchange were 300,000 ordinary shares with P5 par value and P10 market value, and,25,000 the restructuring of the obligation.
preference shares with P10 par value and P60 market value. The fair value of the liability was P4,800,000. a. The principal obligation is not reduced.
Required: b. The accrued interest of P600,000 is waived.
Prepare journal entry to record the equity swap. c. The new date of maturity is December 31, 2023.
1. If the fair value of the equity instruments is used. d. The entity shall pay an annual interest of 12% every December 31.
2. If the fair value of the liability is used. The present value of 1 at 10% for two periods is 0.83 and the present value of an ordinary annuity of 1 at 10%
3. If the carrying amount of the liability is used. for two periods is 1.74.
Problem 9-7 (IAA) The market rate of interest is 9%. The PV of 1 at 9% for two periods is 0.84 and the PV of an ordinary annuity
Sunset Company had bonds payable with face amount of P5,000,000 and a carrying amount of P4,800,000. of 1 at 9% for two periods is 1.76.
In addition, unpaid interest on the bonds was accrued in the amount of P250,000. Required:
The creditor agreed to the settlement of the bonds payable in exchange for 50,000 shares of P50 par value. Prepare journal entries for 2022.
The shares had a current market value of P4,500,000. The fair value of the bonds payable was P4,600,000. Problem 9-11 (AICPA Adapted)
Required: Hull Company is indebted to Apex Company under a P5,000,000, 12%, three-year note dated December 31,
Prepare journal entry on the books of Sunset Company to record the settlement of the bonds payable: 2020 with accrued interest of P600,000 on December 31, 2022.
1. If the fair value of the equity instruments is used. On December 31, 2022, Apex Company agreed to settle the note and accrued interest for a tract of land with
2. If the fair value of the bonds is used. fair value of P4,500,000 and acquisition cost of P3,600,000.
3. If the carrying amount of the financial liability is used. What amount of gain on extinguishment should Hull Company report for 2022?
Problem 9-8 (IAA) a. 2,000,000
Baguio Company was experiencing financial difficulty and was renegotiating debt restructuring with the creditor b. 1,400,000
to relieve its financial stress. c. 1,100,000
The entity had a P5,000,000 note payable to First Bank. The bank was considering two alternatives. d. 900,000
1. Acceptance of land owned by the entity valued at P4,000,000 and carried at historical cost of P2,800,000.
2. Acceptance of an equity interest in the entity in the form of 40,000 shares with fair value of P120 per share Problem 9-12 (AICPA Adapted)
and par value of P100 per share. Knob Company transferred real estate to Mene Company in full liquidation of Knob Company's liability to Mene
Required: Company:
Prepare journal entry that Baguio Company would make under each alternative. Carrying amount of liability liquidated 1,500,000
Problem 9-9 (IFRS) Carrying amount of real estate transferred 1,000,000
Due to extreme financial difficulties, Red Company negotiated a restructuring of a 12% P5,000,000 note Fair value of real estate transferred 1,200,000
payable due on January 1, 2022. The accrued interest on the note payable on such date was P600,000. What amount of gain on extinguishment should be recognized by Knob Company?
The creditor agreed to forgive the accrued interest, reduce the interest rate to 8% and extend the due date five a. 300,000
years from January 1, 2022. b. 500,000
The market rate of interest for similar liability is 10%. On January 1, 2022, the entity paid P100,000 to the c. 200,000
creditor as an arrangement fee. d. 0
PV of 1 at 12% for 5 periods 0.57 Problem 9-13 (AICPA Adapted)
PV of an ordinary annuity of 1 at 12% for 5 periods 3.60 During 2022, Mann Company experienced financial difficulties and is likely to default on a P5,000,000, 15%
PV of 1 at 10% for 5 periods 0.62 three-year note dated January 1, 2020 payable to Summit Bank.
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79 On December 31, 2022, the bank agreed to settle the note and unpaid interest of P750,000 for P4,100,000
Required: cash payable on January 31, 2023.
1. Determine whether there is a substantial modification of terms. What amount should be reported as gain from extinguishment of debt in the 2022 income statement?
2. Determine the fair value of the new liability based on the 10% market interest rate. a. 1,650,000 b. 2,400,000 c. 750,000 d. 900,000

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Problem 9-14 (AICPA Adapted) 2. What is the discount or premium or the new note payable on December 31, 2022?
On January 1, 2022, Sunrise Company was experiencing extreme financial pressure and was in default in a. 228,600 premium
meeting interest payment on a long term note of P6,000,000 due on December 31, 2022. b. 228,600 discount
The interest rate is 12% payable every December 31. The accrued interest payable on January 1, 2022 is c. 441,000 premium
P720,000. d. 441,000 discount
In an agreement with the creditor, the entity obtained the following changes in the terms of note: 3. What amount should be reported as interest expense for 2023?
a. The accrued interest on January 1, 2022 is forgiven. a. 360,000
b. The principal is reduced by P500,000. b. 487,080
c. The new interest rate is 8% payable every December 31. c. 427,140
d. The new date of maturity is December 31, 2025. d. 540,000
e. The prevailing market rate of interest is 10%. 4. What is the carrying amount of the note payable on December 31, 2023?
The present value of 1 at 12% for four periods is 0.64 and the present value of an ordinary annuity of 1 at 12% a. 4,500,000
for four periods is 3.04. b. 3,931,920
The PV of 1 at 10% for 4 periods is 0.68 and the PV of an ordinary annuity of 1 at 10% for 4 periods is 3.17. c. 4,186,080
1. What amount should be recognized as gain on extinguishment for 2022? d. 4,338,540
a. 1,585,200 5. Prepare journal entries for 2022 and 2023.
b. 1,862,400 Problem 9-16 (AICPA Adapted)
c. 1,220,000 On January 1, 2022, Granada Company had an overdue 10% note payable to First Bank at P8,000,000 and
d. 1,500,000 accrued interest payable of P800,000.
2. What amount should be reported as interest expense for 2022? As a result of a restructuring agreement on January 1, 2022, First Bank agreed to the following provisions:
a. 440,000  The principal obligation is reduced to P6,000,000.
b. 513,480  The accrued interest of P800,000 is forgiven.
c. 720,000  The date of maturity is extended to December 31, 2025.
d. 550,000  Annual interest of 12% is to be paid for 4 years every December 31.
3. What is the carrying amount of the note payable on December 31, 2022? The present value of 1 at 10% for 4 periods is 0.68 and the present value of an ordinary annuity of 1 at 10% for
a. 5,500,000 4 periods is 3.17.
b. 5,061,320 The market rate of interest for similar note is 9%. The PV of 1 at 9% for 4 periods is .71 and the PV of an
c. 5,208,280 ordinary annuity of 1 at 9% for 4 periods is 3.24.
d. 5,000,512 1. What amount should be reported as present value of the new note payable on January 1, 2022?
4. Prepare journal entries for 2022. a. 6,592,800
Problem 9-15 (AICPA Adapted) b. 6,000,000
Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a 10% P5,000,000 c. 6,362,400
note payable due on December 31, 2022. The unpaid interest on the note on such date was 1500,000. d. 4,260,000
The creditor agreed to reduce the face amount to P4,500,000, forgive the unpaid interest, reduce the interest 2. What amount should be reported as gain on extinguishment of debt for 2022?
rate to 8% and extend the due date three years from December 31, 2022. a. 2,000,000
Armada Company paid P200,000 to the creditor as arrangement fee. b. 2,800,000
The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at c. 2,207,200
10% for three periods is 2.49. d. 2,437,600
The prevailing market rate of interest is 12% for similar note. The PV of 1 at 12% for 3 periods is 0.71 and the 3. What amount should be reported as interest expense for 2022?
PV of an ordinary annuity of 1 at 12% for 3 periods is 2.40. a. 720,000
1. What amount should be reported as gain on extinguishment for 2022? b. 659,280
a. 1,228,600 c. 636,240
b. 1,028,000 d. 593,352
c. 1,441,000 4. Prepare journal entries for 2022.
d. 1,241,000

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Problem 9-17 (IFRS) 1. What amount of loss on modification should be recognized for 2022?
On January 1, 2022, Everlast Company had an overdue of 10% note payable at P6,000,000 and accrued a. 409,000
interest payable P600,000. As a result of a restructuring agreement on January 1, 2022, the creditor agreed to b. 119,000
the following concessions. c. 291,000
a. Accrued interest of P600,000 is forgiven. d. 0
b. The new principal is P4,000,000. 2. What amount should be reported as interest expense for 2022?
c. The new interest rate is 6% payable every December 31 a. 700,000
d. The new maturity date of the note is December 31, 2024 b. 632,900
e. The entity paid P350,000 as an arrangement fee to the creditor. c. 561,900
The PV of 1 at 10% for 3 periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for 3 periods is 2.49. d. 639,480
The market rate of interest for similar note is 14%. The PV of 1 at 14% for 3 periods is 0.67 and the PV of an 3. What is the carrying amount of the modified note payable on December 31, 2022?
ordinary annuity of 1 at 14% for 3 periods is 2.32. a. 5,268,480
1. At what amount should the new note payable be initially measured? b. 5,480,900
a. 3,597,600 c. 5,329,000
b. 3,947,600 d. 5,000,000
c. 3,236,800 4. Prepare journal entries for 2022.
d. 4,000,000 Problem 9-19 Multiple choice (IFRS)
2. What amount of gain on extinguishment should be recognized for 2022? 1. In an asset swap, the gain on extinguishment is
a. 3,363,200 a. Excess of fair value of asset over its carrying amount
b. 3,013,200 b. Excess of carrying amount of the debt over the fair value of the asset
c. 2,652,400 c. Excess of the fair value of the asset over the carrying amount of the debt
d. 3,002,400 d. Excess of the carrying amount of the debt over the carrying amount of the asset
3. What amount should be reported as interest expense for the 2022? 2. For a debt restructuring involving substantial modification of terms, it is appropriate for a debtor to
a. 453,152 recognize a gain when the carrying amount of the debt
b. 394,760 a. Exceeds the total future cash payments specified by the new terms.
c. 359,760 b. Is less than the total future cash payments specified by the new terms.
d. 240,000 c. Exceeds the present value of the future cash payments specified by the new terms.
4. What is the carrying amount of the new note payable on December 31, 2022? d. Is less than the present value of the future cash payments specified by the new terms.
a. 3,449,952 3. For substantial modification of terms, which would be compared to the carrying amount of the debt
b. 4,000,000 to determine if the debtor should report a gain on extinguishment?
c. 3,786,848 a. The total future cash payments
d. 3,689,952 b. The present value of the new debt at the original interest rate
Problem 9-18 (IFRS) c. The present value of the new debt at the modified interest rate
On January 1, 2022, Kingdom Company had an overdue 10% note payable of P5,000,000 and accrued d. The present value of the new debt at the market interest rate.
interest payable of P500,000. The entity is granted by the creditor in a debt restructuring agreement the 4. Under a debt restructuring involving substantial modification of terms, the present value of the new
following concessions: debt shall be determined using the
a. Accrued interest of P500,000 is forgiven. a. Original effective interest rate
b. The new interest rate is 14% payable annually every December 31. b. Interest rate under the new terms
c. The new maturity date of the note is December 31, 2025. c. Market rate of interest
d. The entity paid P290,000 to the creditor as arrangement fee or modification cost. d. Prime interest rate
e. Considering the effect of the modification cost or arrangement fee, the new effective interest rate is 5. There is nonsubstantial modification of terms if the gain or loss on modification is
12%. a. At least 10% of the old liability
f. The market rate of interest for similar note is 9%. b. Less than 10% of the old liability
9% 10% 12% c. At least 10% of the new liability
PV of 1 for 4 periods 0.71 0.68 0.64 d. Less than 10% of the new liability
PV of an ordinary annuity of 1 for 4 periods 3.24 3.17 3.04

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Problem 9-20 Multiple choice (IFRIC 19) If the entity loses, management believed damages will fall somewhere in the range of P3,000,000 to
1. An entity shall initially measure equity instruments issued to extinguish a financial liability at P4,000,000 with each amount in that range equally likely to occur.
a. Fair value of the equity instruments issued Required:
b. Fair value of the liability extinguished Indicate how the entity would disclose or account for the four lawsuits under IFRS in the financial statements
c. Par value of the equity instruments issued for the year ended December 31, 2022.
d. Carrying amount of the liability extinguished Problem 4-2 (IAA)
2. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments Bourne Company provided the following selected transactions related to contingencies. The fiscal year ends
issued to extinguish a financial liability shall be measured at on December 31, 2022 and financial statements are issued on March 31, 2023.
a. Fair value of the liability extinguished  Bourne is involved in a lawsuit resulting from a dispute with a customer over a 2022 transaction. On
b. Par value of the equity instruments issued December 31, 2022, attorneys advised that it was probable that Bourne would lose P3,000,000 in an
c. Carrying amount of the liability extinguished unfavorable outcome.
d. Book value of the equity instruments issued On February 15, 2023, judgment was rendered against Bourne in the amount f P4,000,000 plus
3. If both the fair value of the equity instruments issued and the fair value of the financial liability interest P500,000. Bourne did not plan to appeal the judgment.
extinguished cannot be measured reliably, the equity instruments issued shall be measured at  Since August 2022, Bourne had been involved in labor dispute. Negotiations between the entity and
a. Carrying amount of the liability extinguished the union have not produced a settlement. Since January 2022, strikes have been ongoing at these
b. Par value of equity instruments issued facilities.
c. Carrying amount of the equity instruments issued It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be
d. Value assigned by the Board of Directors adequately predicted.
4. The difference between the carrying amount of the financial liability extinguished and the fair value  Bourne is the defendant in a lawsuit filed in January 2023 in which the plaintiff seeks P5,000,000 as
of equity instruments issued shall be accounted for as an adjustment to the purchase price related to the sale of Bourne's hardwood division in 2022.
a. Gain or loss on extinguishment The lawsuit alleged that Bourne misrepresented the division's assets and liabilities.
b. Other comprehensive income Legal counsel advised that it is reasonably possible that Bourne could lose P2,000,000 but that it is
c. Retained earnings extremely unlikely it could lose the P5,000,000 asked for.
d. Share premium  On March 1, 2023, the provincial government is in the process of investigating the possibility of
5. The gain or loss from extinguishment of a financial liability by issuing equity instruments is environmental violation by Bourne but has not proposed a penalty assessment.
presented as Management believed an assessment is reasonably possible and if an assessment is made, a
a. Other income or other expense settlement of up to P4,000,000 is probable.
b. Separate line item in the income statement Required:
c. Component of other comprehensive income Prepare journal entries that should be recorded as a result of the contingencies.
d. Component of finance cost Problem 4-3 (IAA)
PROBLEMS Eastern Company provided the following information on December 31, 2022.
Problem 4-1 (IAA)  In May 2022, Eastern Company became involved in litigation. In December 2022, the court assessed
Toy Company provided the following facts regarding pending litigation on December 31, 2022: a judgment for P1,600,000 against Eastern Company. The entity is appealing the amount of the
 The entity is defending against a first lawsuit and believed there is a 51% chance it will lose in court. judgment.
The entity estimated the damages from the lawsuit at P1,000,000. The attorneys believed it is probable that the assessment can be reduced on appeal by 50%. The
 The entity is defending against a second lawsuit for which management believed it is virtually certain appeal is expected to take at least a year.
to lose in court.  In July 2022, Pasig City brought action against Eastern Company for polluting the Pasig River with its
If it loses the lawsuit, management estimated damages will fall somewhere in the range of waste products.
P3,000,000 to P5,000,000 with each amount in that range equally likely to occur. It is probable that Pasig City will be successful but the amount of damages the entity might have to
 The entity is defending against a third lawsuit but the relevant loss will only occur far into the future. pay should not exceed P1,500,000.
The present values of the endpoints of the range are P1,500,000 and P2,500,000.  Eastern Company signed as guarantor for a P1,000,000 loan by First Bank to Northern Company, a
The management believed the effects of time value of money on these amounts are material but also principal supplier to Eastern Company.
believed the timing of these amounts is uncertain. At this time, there is a only a remote likelihood that Eastern Company will have to make payment on
 The entity is defending against a fourth lawsuit and believed there is only a 25% chance it will lose in behalf of Northern Company.
court.  Eastern Company owned a manufacturing site that had now been discovered to be contaminated
with toxic waste.

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The entity had acknowledged its responsibility for the contamination. Western Company reached a settlement with the city government authorites to pay P4,200,000 in
An initial clean up feasibility study has shown that it will cost at least P500,000 to clean up the toxic penalties on February 15, 2023.
waste.  Western Company is the plaintiff in a P4,000,000 lawsuit filed against a customer for costs and lost
 Eastern Company had been sued for patent infringement and lost the case. A preliminary judgment profit from contracts rejected in 2022.
of P300,000 was issued and is under appeal. The lawsuit is in final appeal and attorneys advised that it is probable that Western Company will be
The entity's attorneys believed that it is probable that the entity will lose this appeal. awarded P3,000,000.
Required: Required:
Prepare journal entries to recognize any provision at the end of current year. Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no
Problem 4-4 (IFRS) journal entry is indicated, state the reason why.
Troy Company decided on November 1, 2022 to restructure the entity's operations. Problem 4-6 (IAA)
 Mindanao Branch would be closed down November 30, * 2022 to concentrate on Manila operations. Baron Company is involved with several situations about contingencies. The fiscal year ends December 31,
 200 employees working in Mindanao Branch would be retrenched on November 30, 2022, and would 2022 and the financial statements are issued on March 31, 2023.
be paid their accumulated entitlements plus three months' wages.  On March 1, 2023, the city government is in the process of investigating possible chemical leaks at
 The remaining 50 employees working in Mindanao Branch would be transferred to Manila, which Baron Company's facilities but has not proposed a deficiency assessment.
would continue operating. Management believed an assessment is reasonably possible and if an assessment is made an
 Five executives would be retrenched on December 31, 2022, and would be paid their accumulated unfavorable settlement of up to P4,000,000 is reasonably possible.
entitlements plus three months' wages.  Baron Company is the plaintiff in a P3,000,000 lawsuit filed against Faye Company for damages due
 The 200 retrenched employees have left and their accumulated entitlements have been paid. to lost profit from rejected contracts and for unpaid accounts receivable.
However, an amount of P1,500,000, representing a portion of the three months' wages for the The case is in final appeal and legal counsel advised that it is probable that Baron Company will
retrenched employees, has still not been paid. prevail and be awarded P2,500,000.
 Costs of P400,000 were expected to be incurred in transferring the 50 employees to their new work  In July 2022, the provincial government filed suit against Baron Company seeking civil penalties and
in Manila. The transfer is planned for January 15, 2023. injunctive relief for violation of environmental law regulating hazardous waste. On February 15, 2023,
 Four of the five executives who have been retrenched have had their accumulated entitlements paid, Baron Company reached a settlement with state authorities.
including the three months' wages. However, one remains in order to complete administrative tasks Based upon discussions with legal counsel, Baron Company believed it is probable that P2,000,000
relating to the closure of Mindanao Branch and the transfer of staff to Manila. The executive is will be required to cover the cost of violation.
expected to stay until January 31, 2023. His salary for January will be P50,000 and his retrenchment Baron Company believed that the ultimate settlement of this claim will not have a material adverse
package will be P200,000, all of which will be paid on the day he leaves. He estimates that he would effect.
spend 60% of his time administering the closure of Mindanao Branch, 30% on administering the  Baron Company was involved in a lawsuit resulting from a dispute with a customer.
transfer of staff to Manila, and the remaining 10% on general administration. On January 5, 2023, judgment was rendered against Baron Company in the amount of P1,500,000
Required: plus interest of P300,000.
Prepare journal entry to record the provision for restructuring. Baron Company planned to appeal the judgment but was unable to predict its outcome though it is
Problem 4-5 (IAA) not expected to have a material adverse effect on the entity.
Western Company provided the following selected transactions related to contingencies. Required:
The fiscal year ends December 31, 2022. Financial statements are issued on April 1, 2023. Prepare any necessary journal entries to recognize the situations involving contingencies.
 No customer accounts have been shown to be uncollectible as yet but Western Company estimated Problem 4-7 (IAA)
that 3% of credit sales may eventually prove uncollectible Credit sales amounted P30,000,000 for On January 1, 2022, Petron Company purchased on oil tanker depot at a cost of P6,000,000. The entity is
2022. expected to operate the depot for 5 years after which it is legally required to dismantle the depot and remove
 Western Company offered a one-year warranty against manufacturer's defects for all its products. the underground storage tanks. The oil tanker depot is depreciated using straight line with no residual value.
Industry experience indicated that warranty costs approximated 2% of credit sales. It is reliably estimated that the cost of decommissioning the depot will amount to P1,500,000. The appropriate
Actual warranty expenditures totaled P350,000 in 2022 and were recorded as warranty expense discount rate is 10%. The present value of 1 at 10% for 5 periods is 0.62.
when incurred.
 In December 2022, Western Company became aware of an engineering flaw in a product that poses On December 31, 2026, after 5 years of operating the depot, the entity paid a demolition entity to dismantle the
a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost depot at a price of P1,700,000.
the entity P1,500,000. Required:
 In November 2022, the City of Manila filed suit against Western Company asking civil penalties and 1. Prepare all journal entries for 2022.
injunctive relief for violations of clean water laws. 2. Prepare all journal entries on December 31, 2026.

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Problem 4-8 (IAA) Of the sales of P70,000,000 for the year, the entity estimated that 3% will have major defect, 5% will have
On January 1, 2022, Stanford Company purchased a mining site that will have to be restored to certain minor defect and 92% will have no defect.
specifications when the mining production ceases. The cost of repairs would be P5,000,000 if all the products sold had major defect and P3,000,000 if all had
The cost of the mining site is P8,000,000 and the restoration cost is expected to be P2,000,000. It is estimated minor defect. What amount should be recognized as warranty provision?
that the mine will continue in operation for 10 years. a. 8,000,000
The appropriate discount rate is 8%. The present value of 1 at 8% for 10 periods is 0.4632. b. 5,600,000
On December 31, 2031, the entity contracted with another entity for the restoration of the mining site in c. 300,000
accordance with specifications at a cost of P1,800,000. d. 190,000
Required: Problem 4-12 (IFRS)
1. Prepare all journal entries for 2022. During 2022, Odyssey Company is the defendant in a patent infringement lawsuit.
2. Prepare journal entry to record the settlement of the decommissioning liability on December 31, 2031. The entity's lawyers believed there is a 30% chance that the court will dismiss the case and the entity will incur
Problem 4-9 (IAA) no outflow of economic benefits.
On January 1, 2022, Camille Company purchased a gas detoxification facility for P9,000,000. However, if the court rules in favor of the claimant, the lawyers believed that there is a 20% chance that the
The cost of cleaning up the routine contamination caused by the initial location of gas on the property is entity will be required to pay damages of P200,000 and an 80% chance that the entity will be required to pay
estimated to be P1,500,000. damages of P100,000. Other outcomes are unlikely.
This cost will be incurred in 10 years when all of the existing stockpile of gas is detoxified and the facility is The court is expected to rule in late December 2023. There is no indication that the claimant will settle out of
decommissioned. court.
Additional contamination may occur in succeeding years that the facility is in operation. A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect
On January 1, 2024, additional contamination clean up cost is estimated at P200,000. the uncertainties in the cash flow estimates.
The appropriate discount rate is 6%. An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95.
The present value of 1 at 6% is 0.63 for 8 periods and 0.56 for 10 periods. 1. What amount should be recognized as undiscounted cash flows for the provision?
On December 31, 2031, the entity paid a contractor an amount of P2,000,000 for the decommissioning of the a. 200,000
detoxification facility. b. 100,000
Required: c. 150,000
1. Prepare journal entries in 2022 in relation to the detoxification facility and the decommissioning liability. d. 89,880
2. Prepare journal entries in 2024 in relation to the detoxification facility and decommissioning liability. 2. What amount should be reported as provision for lawsuit on December 31, 2022?
3. Prepare journal entries on December 31, 2031 to record the derecognition of the detoxification facility and a. 95,000
the settlement of the decommissioning liability. b. 79,800
Problem 4-10 (IFRS) c. 53,200
Toyo Company owns a car dealership that it uses for servicing cars under warranty. d. 85,386
In preparing the financial statements, the entity needs to ascertain the provision for warranty that it would be Problem 4-13 (IFRS)
required to provide at the end of the year. During 2022, Libya Company is the defendant in a breach of patent lawsuit.
The entity's experience with warranty claims is: The lawyers believed there is an 80% chance that the court will not dismiss the case and the entity will incur
60% of all cars sold in a year have zero defect, 25% of all cars sold in a year have normal defect, and 15% of outflow of benefits.
all cars sold in a year have significant defect. If the court rules in favor of the claimant, the lawyers believed that there is a 60% chance that the entity will be
The cost of rectifying a normal defect in a car is P10,000. The cost of rectifying a significant defect in a car is required to pay damages of P2,000,000 and a 40% chance that the entity will be required to pay damages of
P30,000. P1,000,000. Other amounts of damages are unlikely.
The entity sold 500 cars during the year. There is no indication that the claimant will settle out of court. The court is expected to rule in late December
What amount should be reported as expected value of the warranty provision for the current year? 2023.
a. 3,500,000 A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash
b. 1,750,000 flow estimates.
c. 1,400,000 The appropriate discount rate is 10%. The PV of 1 at 10% for one period is 0.91.
d. 4,000,000 1. What amount should be recognized as undiscounted cash flows for the provision?
Problem 4-11 (IFRS) a. 1,369,600
Chato Company sells electrical goods covered by a one-year warranty for any defects. b. 1,280,000
c. 1,600,000

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d. 1,712,000 After the 2022 financial statements were issued, the entity received and accepted a BIR settlement offer of
2. What amount should be reported as provision for lawsuit on December 31, 2022? P550,000.
a. 2,730,000 What amount of accrued liability should be reported on December 31, 2022?
b. 1,456,000 a. 650,000
c. 1,246,336 b. 550,000
d. 1,164,800 c. 500,000
Problem 4-14 (IAA) d. 0
Newton Company is involved in litigation regarding a faulty product sold in a prior year. Problem 4-18 (AICPA Adapted)
The entity has consulted with an attorney and determined that the entity may lose the case. The attorney On February 5, 2023, an employee filed a P2,000,000 lawsuit against Steel Company for damages suffered
estimated that there is a 50% chance of losing. when a plant of the entity exploded on December 29, 2022.
If this is the case, the attorney estimated that the amount of any payment would be P5,000,000. The entity's legal counsel believed the entity will probably lose the lawsuit and estimated the loss to be
What is the required journal entry as a result of this litigation? P500,000.
a. Debit litigation expense and credit litigation liability P5,000,000. The employee has offered to settle the lawsuit out of court for P900,000 but the entity will not agree to the
b. No journal entry is required. settlement.
c. Debit litigation expense and credit litigation liability P2,000,000. On December 31, 2022, what amount should be reported as accrued liability?
d. Debit litigation expense and credit litigation liability P3,000,000. a. 2,000,000
Problem 4-15 (AICPA Adapted) b. 1,000,000
On March 1, 2022, a suit was filed against Dean Company for patent infringement. c. 900,000
Dean Company's legal counsel believed an unfavorable outcome is probable and estimated that the entity will d. 500,000
have to pay between P850,000 and P900,000 in damages. Problem 4-19 (AICPA Adapted)
However, Dean Company's legal counsel was of the opinion that P600,000 would be a better estimate than On November 25, 2022 an explosion occurred at a Rex Company plant causing extensive property damage to
any than other amount in the range. area buildings. By March 10, 2023, claims had been asserted against Rex Company.
The situation was unchanged when the December 31, 2022 financial statements were released on February The management and counsel concluded that it is probable Rex Company will be responsible for damages,
15, 2023. and that P3,500,000 would be a reasonable estimate of the liability. Rex Company had a P10,000,000
What amount should be accrued as liability on December 31, 2022 in connection with this suit? comprehensive public liability policy with P500,000 deductible clause. The financial statements for 2022 were
a. 900,000 issued on March 25, 2023.
b. 600,000 1. What amount of loss from lawsuit should be reported in the income statement for 2022?
c. 500,000 a. 3,500,000
d. 0 b. 3,000,000
Problem 4-16 (AICPA Adapted) a. 500,000
During 2022, Manfred Company guaranteed a supplier's P500,000 loan from a bank. b. 0
On October 1, 2022, the entity was notified that the supplier had defaulted on the loan and filed for bankruptcy 2. What amount of liability from lawsuit should be reported on December 31, 2022?
protection. Counsel believed the entity will probably have to pay P250,000 under its guarantee. a. 3,500,000
As a result of the supplier's bankruptcy, the entity entered into a contract in December 2022 to retool its b. 1,750,000
machines so that the entity could accept parts from other suppliers. Retooling costs are estimated to be c. 1,500,000
P300,000. d. 750,000
What amount should be reported as accrued liability on December 31, 2022? Problem 4-20 (IAA)
a. 250,000 Winter Company is being sued for illness caused to local residents as a result of negligence on the entity's part
b. 450,000 in permitting the local residents to be exposed to highly toxic
c. 550,000 chemicals from its plant.
d. 750,000 The entity's lawyer stated that it is probable that tile entity will lose the suit and be found liable for a judgment
Problem 4-17 (AICPA Adapted) costing the entity anywhere from P1,200,000 to P6,000,000.
During 2022, Beal Company became involved in a tax dispute with the BIR. On December 31, 2022, the However, the lawyer estimated that the most probable cost is P3,600,000.
entity's tax advisor believed that an unfavorable outcome was probable and the best estimate of additional tax What amount should be accrued and disclosed?
was P500,000 but could be as much as P650,000. a. A loss contingency of P1,200,000 and disclose an additional contingency of up to P4,800,000.
b. A loss contingency of P3,600,000 and disclose an additional contingency of up to P2,400,000.

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c. A loss contingency of P3,600,000 but not disclose any additional contingency. d. 9,500,000
d. No loss contingency but disclose a contingency of P1,200,000 to P6,000,000. Problem 4-25 (AICPA Adapted)
Problem 4-21 (AICPA Adapted) Tone Company was the defendant in a lawsuit filed by Witt Company in 2021 disputing the validity of copyright
At year-end, Mith Company was a defendant in a pending lawsuit. held by Tone Company.
In the opinion of the entity's attorney, it is probable that Mith Company will have to pay P500,000 and it is On December 31, 2021, Tone Company determined that Witt Company would probably be successful for an
reasonably possible that Mith Company will have to pay P600,000 as a result of this lawsuit. estimated amount of P400,000.
What should be reported in year-end financial statements? Appropriately, a P400,000 loss was accrued by Tone Company by a charge to income for the year ended
a. An accrued liability of P500,000 only. December 31, 2021.
b. An accrued liability of P500,000 and disclosure of a contingent liability of P100,000 On December 31, 2022, Tone Company and Witt Company agreed to a settlement providing for cash payment
c. An accrued liability of P600,000 only. of P250,000 by Tone Company to Witt Company and transfer of Tone Company's copyright to Witt Company.
d. No information about this lawsuit. The carrying amount of the copyright of Tone Company was P50,000 on December 31, 2022.
Problem 4-22 (AICPA Adapted) What would be the effect of the settlement on Tone's income before tax in 2022?
In May 2022, Caso Company filed suit against Wayne Company seeking P1,900,000 damages for patent a. 150,000 increase
infringement. b. 150,000 decrease
A court verdict in November 2022 awarded Caso Company P1,500,000 in damages but Wayne Company c. 100,000 increase
appealed the verdict and the appeal is not expected to be decided before 2023. d. 100,000 decrease
The legal counsel believed it is probable that Caso Company will be successful against Wayne Company for Problem 4-26 Multiple choice (IFRS)
an estimated amount in the range between P800,000 and P1,100,000, with P1,000,000 considered the most 1. Which is the correct definition of a provision?
likely amount. a. A possible obligation arising from past events
What amount should Caso Company record as income from the lawsuit for the year ended December b. A liability of uncertain timing or uncertain amount
31, 2022? c. A liability which cannot be easily measured
a. 1,500,000 d. An obligation to transfer funds to an entity
b. 1,100,000 2. A provision shall be recognized when
c. 1,000,000 a. An entity has a present obligation as a result of a past event.
d. 0 b. It is probable that an outflow of resources embodying economic benefits will be required to settle the
Problem 4-23 (AICPA Adapted) obligation.
During 2022, Smith Company filed suit against West Company seeking damages for patent infringement. c. The amount of the obligation can be measured reliably.
On December 31, 2022, the legal counsel believed that it was probable that Smith Company would be d. All of these are required for the recognition of a provision liability.
successful against West Company for an estimated amount of P1,500,000. 3. A legal obligation is an obligation that is derived from all of the following, except
On March 31, 2023, Smith Company was awarded P1,000,000 and received full payment thereof. The financial a. Legislation
statements were issued March 1, 2023. b. A contract
In Smith Company's 2022 financial statements, how should this award be reported? c. Other operation of law
a. As a receivable and revenue of P1,000,000. d. An established pattern of practice
b. As a receivable and deferred revenue of P1,000,000. 4. An entity has an established pattern of practice or stated policy that has created valid expectation
c. As a disclosure of a contingent asset of P1,000,000. that it will accept certain financial responsibility.
d. As a disclosure of a contingent asset of P1,500,000 a. Constructive obligation
Problem 4-24 (AICPA Adapted) b. Legal obligation
During the current year, Haze Company won a litigation award for P1,500,000 which was tripled to P4,500,000 c. Onerous obligation
to include punitive damages. d. Possible obligation
The defendant, who is financially stable, has appealed only the P3,000,000 punitive damages. 5. It is an event that creates a legal or constructive obligation because the entity has no other realistic
Haze Company was awarded P5,000,000 in an unrelated suit it filed, which is being appealed by the alternative but to settle the obligation.
defendant. Counsel is unable to estimate the outcome of these appeals. a. Obligating event
What amount of pretax gain should be reported? b. Past event
a. 1,500,000 c. Subsequent event
b. 4,500,000 d. Current event
c. 5,000,000 6. An outflow of resources embodying economic benefits is regarded as probable when

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a. The probability that the event will occur is greater than the probability that the event will not occur. 4. An entity has been served a legal notice at year-end by the Department of Environment and Natural
b. The probability that the event will not occur is greater than the probability that the event will occur. Resources to fit smoke detectors in its factory on or before middle of the next year. The cost of fitting smoke
c. The probability that the event will occur is the same as the probability that the event will not occur. detector can be measured reliably.
d. The probability that the event will occur is 90% likely. How should the entity treat this in the financial statements at year-end?
7. Where there is a continuous range of possible outcomes, and each point in that range is as likely as a. Recognize a provision for the current year equal to the estimated amount.
any other, the range to be used is the b. Recognize a provision for the current year equal to one-half only of the estimated amount.
a. Minimum c. No provision is recognized at year-end because there is no present obligation for the future
b. Maximum expenditure since the entity can avoid the future expenditure by changing the method of operations,
c. Midpoint but disclosure is required.
d. Summation of the minimum and maximum d. Ignore the event.
8. When the provision involves a large population of items, the estimate of the amount 5. An entity operates chemical plants. The published policies include a commitment to making good any
a. Reflects the weighting of all possible outcomes by their associated probabilities. damage caused to the environment by its operations. The entity has always honored this commitment.
b. Is determined as the individual most likely outcome. Which of the following scenarios relating to the entity would give rise to a provision?
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes. a. On past experience it is likely that a chemical spill which would result in having to pay fines and
d. Midpoint of the possible outcomes. penalties will occur in the next year.
9. When the provision arises from a single obligation, the estimate of the amount b. Recent research suggests there is a possibility that the entity's actions may damage surrounding
a. Reflects the weighting of all possible outcomes by their associated probabilities. wildlife.
b. Is determined as the individual most likely outcome. c. The government has outlined plans for a new law requiring all environmental damage to be rectified.
c. Is the individual most likely outcome adjusted for the effect of other possible outcomes. d. A chemical spill from one of the entity's plants has caused harm to the surrounding area and wildlife.
d. Midpoint of the possible outcomes. Problem 4-28 Multiple choice (AICPA Adapted)
10. The present value in a range of possible outcomes all discounted using the same rate would be 1. An entity did not record an accrual for a present obligation but disclose the nature of the obligation
a. The most-likely outcome and the range of the loss. How likely is the loss?
b. The maximum outcome a. Remote
c. The minimum outcome b. Reasonably possible
d. The sum of probability-weighted present value c. Probable
Problem 4-27 Multiple choice (IFRS) d. Certain
1. A provision shall be recognized for 2. The likelihood that the future event will or will not occur can be expressed by a range of outcome.
a. Future operating losses Which range means that the future event occurring is very slight?
b. Obligations under insurance contracts a. Probable
c. Reductions in fair value of financial instruments b. Reasonably possible
d. Obligations for plant decommissioning costs c. Certain
2. Provisions shall be recognized for all of the following, except d. Remote
a. Cleaning-up costs of contaminated land when an oil entity has a published policy that it will 3. An expropriation of asset which is imminent and for which the amount of loss can be reasonably
undertake to clean up all contamination that it causes. estimated should be
b. Restructuring costs after a binding sale agreement. a. Accrued
c. Rectification costs relating to products sold. b. Disclosed
d. Future refurbishment costs due to introduction of a new computer system. c. Accrued and disclosed
3. An entity is closing one of its operating divisions, and the conditions for making restructuring provision have d. Ignored
been met. The closure will happen in the first quarter of the next financial year. 4. A present obligation that is probable and for which the amount can be reliably estimated should
At the current year-end, the entity has announced the formal plan publicly and is calculating the restructuring a. Not be accrued but disclosed in the notes to the financial statements.
provision. b. Be accrued by debiting an appropriated retained earnings account and crediting a liability account.
Which of the following costs should be included in the restructuring provision? c. Be accrued by debiting an expense account and crediting an appropriated retained earnings
a. Retraining staff continuing to be employed account.
b. Relocation costs relating to staff moving to other divisions d. Be accrued by debiting an expense account and crediting a liability account.
c. Contractually required costs of retiring staff being made redundant from the division being closed 5. General or unspecified contingencies should
d. Future operating losses of the division being closed up to the date of closure a. Be accrued in the financial statements and disclosed.

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b. Not be accrued and need not be disclosed. d. Remote and measurable contingent loss
c. Not be accrued but should be disclosed. 9. An entity received notification of legal action. How should the probable and measurable loss be
d. Be accrued but need not be disclosed. reported?
Problem 4-29 Multiple choice (IAA) a. As a loss recorded in other comprehensive income
1. Contingent liability will or will not become actual liability depending on b. As a loss in the income statement and a contingent liability
a. Whether probable and measurable. c. As a loss in the income statement and a provision
b. The degree of uncertainty. d. In the notes to financial statements
c. The present condition. 10. Which of the following is not considered when evaluating whether or not to record a liability for
d. The outcome of a future event. pending litigation?
2. A contingent liability shall be recognized when a. Time period of the underlying cause of action
a. Any lawsuit is actually filed against an entity. b. The type of litigation involved
b. It is certain that funds are available to pay the amount of the claim. c. The probability of an unfavorable outcome
c. It is probable that a liability has been incurred but the amount cannot be reliably measured. d. The ability to make a reliable estimate of the loss
d. The amount of the loss can be reliably measured and it is probable prior to issuance of financial Problem 4-30 Multiple choice (IAA)
statements that a liability has been incurred. 1. Contingent asset is usually recognized when
3. How should a contingent liability be reported in the financial statements when it is reasonably a. Realized
possible? b. Occurrence is reasonably possible and the amount can be reliably measured
a. As a deferred liability c. Occurrence is probable and measurable
b. As an accrued liability d. The amount can be reliably measured
c. As a disclosure only 2. Which is the proper treatment of contingent asset?
d. As an account payable a. An accrued account
4. Reporting in the financial statements is required for b. Deferred income
a. Loss contingency that is probable and measurable c. An account receivable
b. Loss contingency that is remote and measurable d. A disclosure only
c. Loss contingency that is possible and measurable 3. Gain contingency that is remote and measurable
d. All loss contingencies a. Must be disclosed in a note to financial statements.
5. A contingent liability b. May be disclosed in a note to financial statements.
a. Definitely exists as a liability but the amount and due date are indeterminable. c. Must be reported in the body of the financial statements.
b. Is accrued even though not reasonably estimated. d. Should not be reported or disclosed.
c. Is the result of a loss contingency. 4. Which is the proper way to report a contingent asset, receipt of which is virtually certain?
d. Is not recognized in the financial statements. a. As an asset
6. A contngent liability is b. As unearned revenue
a. An estimated liability. c. As a disclosure only
b. An event which is not recognized because it is not probable that an outflow will be required or the d. No disclosure and no accrual
amount cannot be reliably estimated. 5. What is the proper treatment of a patent infringement case of the plaintiff with probable favorable
c. A potential large liability. outcome and measurable settlement?
d. A potential small liability. a. No reporting is required at this time
7. A contingent liability b. Disclosure
a. Has a most probable value of zero but may require a payment if a given future event occurs. c. A gain for the minimum settlement
b. Definitely exists as a liability. d. A gain for the probable settlement
c. Is reported as current liability.
d. Is not disclosed in the financial statements.
8. Disclosure is usually not required for
a. Probable and measurable contingent gain
b. Possible and measurable contingent loss
c. Probable and immeasurable contingent loss

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