UNIVERSITY OF THE EAST

Caloocan Campus
COLLEGE OF BUSINESS ADMINISTRATION
DEPARTMENT OF ACCOUNTANCY, BUSINESS LAW AND TAXATION
www.ue.edu.ph/caloocan 105 Samson Road, Caloocan City

BAC 214 – FINANCIAL ACCOUNTING AND REPORTING, PART II

2ND SEMESTER, SCHOOL YEAR 2015 - 2016
FINAL DEPARTMENTAL EXAMINATION

GENERAL DIRECTION: You are given a two – part examination, consisting of Theory
Part and Problem Solving Part. Read and analyze the foregoing questions and choose the
best answer by shading the letter of your choice in your respective Scantron Answer
Sheet. Strictly no erasures allowed in the Scantron Answer Sheet.

THEORIES (30 Items)

1. The residual interest in a corporation belongs to the

A. Management. C. Ordinary Shareholders
B. Creditors. D. Preference Shareholders

2. Total shareholders' equity represents

A. A claim to specific assets contributed by the owners.
B. The maximum amount that can be borrowed by the enterprise.
C. A claim against a portion of the total assets of an enterprise.
D. Only the amount of earnings that have been retained in the business.

3. Equity is generally classified into two major categories:

A. Contributed capital and appropriated capital.
B. Appropriated capital and retained earnings.
C. Retained earnings and unearned capital.
D. Earned capital and contributed capital.

4. Which of the following statements about the rights of a shareholder is/are correct?
I. Shareholders have a right to share in the earnings of the corporation.
II. Shareholders have a right to vote in the elections of directors and in the
determination of certain corporate policies.
III. Shareholders have a right to subscribe for additional share issues.
IV. Shareholders have a right to share in the net assets of the corporation upon
liquidation.
A. I and III only C. I,II and III only
B. II and IV only D. I,II,III and IV

5. Which of the following statements about accounting for share issuance is/are
incorrect?
I. When shares of stocks are sold at a price below par or stated value, the
discount is considered a loss to the issuing corporation to be charged against
accumulated profits and losses. False
II. PFRS 2 provides that for equity-settled share-based payments transactions, the
entity shall measure the goods and services received and the corresponding
increase in equity directly at the fair value of the shares issued. False
III. PAS 32 provides that transaction costs that are directly attributable to the
issuance of new shares shall be deducted from equity, net of any related income
tax benefit. True
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 IV. PAS 32 provides that preference shares having mandatory redemption feature
or that gives the holder the right to require the issuer to redeem the instrument
for a fixed or determinable amount at a future date have legal form of an equity
instrument but meets the definition of a financial liability. True
A. I and II only C. I and III only
B. II and III only D. II and IV only

6. A primary source of shareholders' equity is

A. income retained by the corporation.
B. appropriated retained earnings.
C. contributions by shareholders.
D. both income retained by the corporation and contributions by holders.

7. Which of the following statements about accumulated profits and losses is/are
correct?
I. Retained earnings represent the cumulative balance of periodic profit or loss,
dividend distributions, prior period errors, changes in accounting policy and other
capital adjustments. True
II. Retained earnings may be appropriated due to reasons including legal,
contractual or voluntary or discretionary. True
III. The statement of retained earnings is not part of the component of basic
financial statements but incorporated already in the statement of changes in
shareholders’ equity. True
IV. Legally, dividends can be declared from retained earnings and share capital.
False
A. I and III only C. I, II and III only
B. II and IV only D. I, II, III and IV

8. Which of the following statements about accounting for dividends and retained
earnings is/are correct?
I. IFRIC 17 provides that an entity shall measure a liability to distribute noncash
asset as a dividend to its owners at the fair value of the asset to be distributed
and that at the end of each reporting period and at the date of settlement, the
entity shall review and adjust the carrying amount of the dividend payable with
any change recognized in equity as adjustment to the amount of distribution.
True
II. Generally, if a share dividend declared is less than 20%, entities whose shares
are registered with the Philippine Securities and Exchange Commission
(Philippine SEC) and are listed in the Philippine Stock Exchange (PSE) may
account for such share dividend by transferring from retained earnings to share
capital and share premium the fair value on the date of declaration of the
additional shares issued. True
III. PAS 32 provides that distribution to holders of an equity instrument shall be
debited by the entity as finance expense. False
IV. In quasi-reorganizations, the retained earnings subsequent to such quasi-
reorganization shall be restricted to the extent of the deficit wiped out during the
reorganization and therefore cannot be declared as dividend. True
A. I and II only C. II, III, and IV only
B. I, II and IV only D. IV only

9. Liabilities are
A. any accounts having credit balances after closing entries are made.
B. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
C. obligations to transfer ownership shares to other entities in the future.
D. present obligations arising from past events and results in an outflow of resources.

10. Which of the following represents a liability?

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 A. The obligation to pay for goods that a company expects to order from suppliers next
year.
B. The obligation to provide goods that customers have ordered and paid for during
the current year.
C. The obligation to pay interest on a five-year note payable that was issued the last
day of the current year.
D. The obligation to distribute shares of a company's own common stock next year as
a result of a stock dividend declared near the end of the current year.

11. Which of the following does not meet the definition of a liability?
I. The signing of a three-year employment contract at a fixed annual salary
II. An obligation to provide goods or services in the future
III. A note payable with no specified maturity date
IV. An obligation that is estimated in amount
A. I only C. III only
B. I and IV only D. Neither I, II, III nor iv

12. Which of the following statements about accounting and analysis for liabilities is/are
incorrect?
I. A company can exclude a short-term obligation from current liabilities if it intends
to refinance the obligation and has an unconditional right to defer settlement of
the obligation for at least 12 months following the due date. False
II. Constructive obligations, in which the company has created a valid expectation
on the part of other parties that it will discharge certain responsibilities, are
disclosed in the notes to the financial statements. False
III. The debt to total assets ratio will go up if an equal amount of assets and
liabilities are added to the balance sheet. True
IV. The IASB's position is that fair value measurement for financial liabilities is more
relevant and understandable than amortized cost. True
A. I only C. I and II only
B. II only D. II and III only

13. Which of the following may be a current liability?

A. Withheld Income Taxes C. Unearned Revenue
B. Deposits Received from Customers D. All of these

14. Which of the following should not be included in the current liabilities section of the
statement of financial position?
A. Trade notes payable
B. Short-term zero-interest-bearing notes payable
C. Unearned revenues
D. All of these are included

15. Which of the following statements related to accounting for current liabilities is/are
correct?
I. Magazine subscriptions and advance airline ticket sales both ordinarily result in
unearned revenues. True
II. All long-term debt maturing within the next year must be classified as a current
liability on the statement of financial position. False
III. Preference dividends in arrears are not a liability until declared by the Board of
Directors, but should be disclosed in the notes to the financial statements. True
A. I and III only C. II only
B. I only D. I, II and III

16. Which of the following terms is associated with recognizing a provision?

A. Possible but not probable. C. Remote
B. Likely. D. Probable

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17. Trinidad Corporation has a provision to accrue. The amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of the accrual should be
A. zero. C. the minimum of the range
B. the mid point of the range. D. the maximum of the range

18. Which of the following statements related to accounting for provisions is/are
correct?
I. A company must accrue a liability for sick pay that accumulates but does not
vest. False
II. Companies should recognize the expense and related liability for compensated
absences in the year earned by employees. True
III. A provision differs from other liabilities in that there is greater uncertainty about
the timing and amount of settlement. True
A. I only C. I, II and III
B. II and III only D. Neither I, II nor III

19. The covenants and other terms of the agreement between the issuer of bonds and
the lender are set forth in the
A. bond indenture. C. registered bond
B. bond debenture. D. bond coupon

20. The term used for bonds that are unsecured as to principal is
A. junk bonds. C. indebenture bonds
B. debenture bonds. D. callable bonds

21. The interest rate written in the terms of the bond indenture is known as the
A. coupon rate. C. stated rate
B. nominal rate. D. all of the above

22. On November 1, 2013, a company purchased a new machine that it does not have
to pay for until November 1, 2015. The total payment on November 1, 2015, will include
both principal and interest. Assuming interest at a 10% rate, the cost of the machine
would be the total payment multiplied by what time value of money concept?
A. Present value of annuity of P1. C. Future amount of annuity of P1.
B. Present value of P1. D. Future amount of P1.

23. The market price of a bond issued at a discount is the present value of its principal
amount at the market (effective) rate of interest
A. Less the present value of all future interest payments at the market (effective) rate
of interest.
B. Less the present value of all future interest payments at the rate of interest stated
on the bond.
C. Plus the present value of all future interest payments at the market (effective) rate of
interest.
D. Plus the present value of all future interest payments at the rate of interest stated on
the bond.

24. When the effective-interest method is used to amortize bond premium or discount,
the periodic amortization will
A. increase if the bonds were issued at a discount.
B. decrease if the bonds were issued at a premium.
C. increase if the bonds were issued at a premium.
D. increase if the bonds were issued at either a discount or a premium.

25. When a note payable is issued for property, goods, or services, the present value of
the note is measured by
A. the fair value of the property, goods, or services.
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 B. the fair value of the note.
C. using an imputed interest rate to discount all future payments on the note.
D. any of these.

26. A discount on notes payable is charged to interest expense

A. equally over the life of the note.
B. only in the year the note is issued.
C. using the effective-interest method.
D. only in the year the note matures.

27. Which of the following instruments would not be classified as a financial liability?
A. A preference share that will be redeemed by the issuer for a fixed amount of cash
on a future date (i.e., the entity has an outstanding share that it will repurchase at a
future date).
B. A contract for the delivery of as many of the entity's ordinary shares as are equal in
value to P1,000,000 on a future date (i.e., the entity will issue a variable number of
own shares in return for cash at a future date).
C. A written call option that gives the holder the right to purchase a fixed number of the
entity's ordinary shares in return for a fixed price (i.e., the entity would issue a fixed
number of own shares in return for cash, if the option is exercised by the holder, at
a future date).
D. An issued perpetual debt instrument (i.e., a debt instrument for which interest will be
paid for all eternity, but the principal will not be repaid).

28. A debt instrument with no ready market is exchanged for property whose fair value
is currently indeterminable. When such a transaction takes place:
A. The present value of the debt instrument must be approximated using an imputed
interest rate.
B. It should not be recorded on the books of either party until the fair value of the
property becomes evident.
C. The board of directors of the entity receiving the property should estimate a value
for the property that will serve as a basis for the transaction.
D. The directors of both entities involved in the transaction should negotiate a value to
be assigned to the property.

29. When bonds are sold at a premium and the effective interest method is used, at
each interest payment date, the interest expense:
A. Remains constant. C. Increases.
B. Is equal to the change in book value. D. Decreases.

30. When bonds are retired prior to maturity with proceeds from a new bond issue, gain
or loss from the early extinguishment of debt, if material, should be
A. Amortized over the remaining original life of the retired bond issue.
B. Amortized over the life of the new bond issue.
C. Recognized as an extraordinary item in the period of extinguishment.
D. Recognized in income from continuing operations in the period of extinguishment.

PROBLEMS (35 Items @ 2 points each)

31. The effective interest on a 12-month, zero-interest-bearing note payable of

P300,000, discounted at the bank at 10% is
A. 10.87% C. 9.09%
B. 10% D. 11.11%

Maturity value P300,000

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 Discount amount (P300,000 x .10) (30,000)
Net proceeds P270,000

Interest cost P30,000

÷ Net proceeds 270,000
Effective rate 11.11%

32. On September 1, Sineskwela Company purchased P9,500 of inventory items on

credit with the terms 1/15, net 30, FOB destination. Freight charges were P200.
Payment for the purchase was made on September 18. Assuming Sineskwela
Company uses the perpetual inventory system and the net method of accounting for
purchase discounts, what amount is recorded as accounts payable from this purchase?
A. P9,405 C. P9,700
B. P9,605 D. P9,500

Purchases P9,500 x 0.99 net of discount = P9,405

FOB destination, freight charges are borne by the seller.

33. Hirayamanawari Corp. manufactures high-end whole home electronic systems. The
company provides a one-year warranty for all products sold. The company estimates
that the warranty cost is P200 per unit sold and reported a liability for estimated
warranty costs P6.5 million at the beginning of this year. If during the current year, the
company sold 50,000 units for a total of P243 million and paid warranty claims of
P7,500,000 on current and prior year sales, what amount of liability would the company
report on its statement of financial position at the end of the current year?
A. P 2,500,000 C. P 9,000,000
B. P 3,500,000 D. P 10,000,000

Estimated warranty liability, beginning P6,500,000

Warranty expense during the year
(50,000 units x P200) 10,000,000
Actual payments (7,500,000)
Estimated warranty liability, ending P9,000,000

Use the following information for the next 2 questions:

Math Tinik Co. includes one voucher in each spa session a customer avails. In return for
eight vouchers, customers receive a limited edition towel. The towel cost Math Tinik Co.
P2.00 each. Math Tinik Co. estimates that 40 percent of the vouchers will be redeemed.
Data for 2014 and 2015 are as follows:
2014 2015
Spa sessions availed 500,000 600,000
Towels purchased 18,000 22,000
Vouchers redeemed 120,000 150,000

34. The premium expense for 2014 is

A. P25,000 C. P35,000
B. P30,000 D. P50,000

Spa sessions availed 2014 500,000

x redemption rate 40%
Estimated vouchers to be redeemed 200,000
÷ Conversion rate 8
No. of premium to be distributed 25,0000
x cost of premium P2
Premium expense 2014 P50,000

35. The estimated premium liability at December 31, 2015 is

A. P11,250 C. P22,500
B. P21,250 D. P42,500
Page 6 of 16
 Estimated premium liability, 1/1/14 P–
Expense – 2014 50,000
Redeemed – 2014(120,000 ÷ 8 x 2) (30,000)
Estimated premium liability, 12/31/14 P20,000
Expense – 2015 (600,000 x 40% ÷ 8 x 2) 60,000
Redeemed – 2015 (150,000 ÷ 8 x 2) (37,500)
Estimated premium liability, 12/31/15 P42,500

36. Jejomar Co. sells external hard disk drives (external HDD). For the past years,
Jejomar Co. also offers a 2-year warranty contract for the external HDDs sold if the
customer will add additional P500.

Information concerning past external HDDs and warranty contract sales as follows:

2015 2014
External HDDs sold in units 1,350 1,210
Sales price per unit P5,000 P4,900
No. of warranty contracts sold 900 850
Warranty related expenses P123,000 P76,400

Jejomar Co. estimates that the pattern of repairs over its external HDDs has been 40%
in the year of sale and 60% in the year after. Sales of warranty contracts are made
evenly during the year.

Which of the following statements is/are correct:

I. Total revenue earned from warranty contracts in 2014 is P85,000. True
II. Total revenue earned from warranty contracts in 2014 is P170,000. False.
III. Unearned warranty contract as of December 31, 2015 is P270,000. False
IV. Unearned warranty contract as of December 31, 2015 is P487,500. True
A. II and IV only C. II and III only
B. I and III only D. I and IV only

37. Epol Co. issued 1,000 shares of its P5 par common stock to Apple as compensation
for 1,000 hours of legal services performed. Apple usually bills P160 per hour for legal
services. On the date of issuance, the stock was trading in Philippine Stock Exchange
at P140 per share. By what amount should the additional paid-in capital account
increase as a result of this transaction?
A. P135,000 C. P155,000
B. P140,000 D. P160,000

Total fair value of shares (1,000 x P140) P140,000

Par value (1,000 x P5) 5,000
Increase in APIC P135,000
Price at stock exchange is more objective.

38. On March 1, 2015, Bagets Corp. issued 1,000 shares of its P20 par value ordinary
shares and 2,000 shares of its P20 par value convertible preference shares for a total
of P80,000. At this date, Bagets’s ordinary shares was selling for P36 per share, and
the convertible preference shares was selling for P27 per share. What amount of the
proceeds should be allocated to Bagets’s convertible preference shares?
A. P60,000 C. P44,000
B. P54,000 D. P48,000

No. of shares Market price Total Fair value Fraction Allocation

Ordinary shares 1,000 P36 P36,000 3.6/9 P32,000
Convertible preference shares 2,000 27 54,000 5.4/9 48,000
Total P90,000 P80,000

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39. At December 31, 2014, Wansapanataym Corp. had 20,000 shares of P1 par value
treasury stock that had been acquired in 2014 at P12 per share. In May 2015,
Wansapanataym Corp. issued 15,000 of these treasury shares at P10 per share. The
cost method is used to record treasury stock transactions. Wansapanataym Corp. is
located in a jurisdiction where laws relating to acquisition of treasury stock restrict the
availability of retained earnings for declaration of dividends.

At December 31, 2015, what amount should Wansapanataym Corp. show in notes to
financial statements as a restriction of retained earnings as a result of its treasury stock
transactions?
A. P 5,000 C. P10,000
B. P60,000 D. P90,000

Remaining Treasury stock 5,000 (20,000 – 15,000 reissued) x P12 cost = P60,000

40. Berks Corp. issued 20,000 shares of P5 par ordinary shares at P10 per share. On
December 31, 2014, Berks’s retained earnings were P300,000. In March 2015, Berks
reacquired 5,000 of its ordinary shares at P20 per share. In June 2015, Berks sold
1,000 of these shares to its corporate officers for P25 per share. Berks uses the cost
method to record treasury shares. Profit for the year ended December 31, 2015, was
P60,000. At December 31, 2015, what amount should Berks report as retained
earnings?
A. P360,000 C. P375,000
B. P365,000 D. P380,000

Retained earnings, 12/31/14 P300,000

Profit – 2014 60,000
Retained earnings, 12/31/15 P360,000
Treasury shares reissued above its cost will affect APIC and not Retained Earnings

41. Oki Dok Corp.’s outstanding capital stock at December 15, 2015, consisted of the
following:

• 30,000 shares of 5% cumulative preferred stock, par value P10 per share, fully
participating as to dividends. No dividends were in arrears.

• 200,000 shares of ordinary shares, par value P1 per share.

On December 15, 2015, Oki Dok declared dividends of P100,000. What was the
amount of dividends payable to Oki Dok’s ordinary shareholders?
A. P40,000 C. P34,000
B. P10,000 D. P47,500

Preference Ordinary Total

Dividend declared P100,000

Current dividend
Preference (30,000 x P10 par x 5%) P15,000 15,000
Ordinary (200,000 x P1 x 5%) P10,000 10,000

Allocation
Preference (300/500)* x P75,000** 45,000 45,000
Ordinary (200/500)* x P75,000** 30,000 30,000
Total P60,000 P40,000 P100,000
*Relative outstanding par
**Remaining dividend after current dividends

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42. At December 31, 2014 and 2015, Batibot Co. had 3,000 shares of P100 par, 5%
cumulative preferred stock outstanding. No dividends were in arrears as of December
31, 2013. Batibot did not declare a dividend during 2014. During 2015, Batibot paid a
cash dividend of P10,000 on its preferred stock. Batibot should report dividends in
arrears in its 2015 financial statements as a(n)
A. Accrued liability of P15,000.
B. Disclosure of P15,000.
C. Accrued liability of P20,000.
D. Disclosure of P20,000.
2014 preferred dividends entitlement (3,000 shares x 100 x 5%) P15,000
2015 preferred dividends entitlement (3,000 shares x 100 x 5%) P15,000
2015 dividend payment (10,000)
In arrears, 12/31/2015 P20,000

43. On January 1, 2015, Tara Tena Construction, Inc. changed to the percentage-of-
completion method of income recognition for financial statement reporting but not for
income tax reporting. Tara Tena can justify this change in accounting principle. As of
December 31, 2014, Tara Tena compiled data showing that income under the
completed-contract method aggregated P700,000. If the percentage-of-completion
method had been used, the accumulated income through December 31, 2014, would
have been P880,000. Assuming an income tax rate of 40% for all years, the cumulative
effect of this accounting change should be reported by Tara Tena in the 2015
A. Retained earnings statement as a P180,000 credit adjustment to the beginning
balance.
B. Retained earnings statement as a P108,000 credit adjustment to the beginning
balance.
C. Income statement as a P180,000 credit.
D. Income statement as a P108,000 credit.
P180,000 increase income x 60% net of tax adjustment to beginning RE = P108,000

44. On September 1, 2014, Gimik Company issued a note payable to National Bank in
the amount of P10,000,000, bearing interest at 15%, and payable in five equal annual
principal payments of P2,000,000. On this date, the bank’s prime rate was 12%. The
first payment for interest and principal was made on September 1, 2015. At December
31, 2015, Gimik should record accrued interest payable of
A. P1,400,000 C. P 400,000
B. P1,120,000 D. P 320,000
September 1, 2014 balance P10,000,000
Principal payment 9/1/15 (2,000,000)
Outstanding, 9/1/15 8,000,000

P8 million outstanding 9/1/15 x 15% stated rate x 4/12 = P400,000

45. The following information relates to Art Angel Inc.’s payroll as of December 31,
2015. Determine the amount if any, that should be reported as current liability in Art
Angel Inc’s December 31, 2015 statement of financial position.

Accrued salaries and wages P485,000

Payroll deductions for:
Income taxes withheld 35,000
SSS contributions 40,000
Philhealth contributions 10,000
Advances to employees 50,000

A. P485,000 C. P570,000

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 B. P620,000 D. P520,000
46. Lovely Day Company’s president gets an annual bonus of 10% of net income after
bonus and income tax. Assume the tax rate of 30% and the correct income before
bonus and tax is P6,000,000. Determine the amount if any, that should be reported as
current liability in Lovely Day Company’s December 31, 2015 statement of financial
position.
A. P451,600 C. P247,000
B. P392,500 D. 1,400,000

B = 10% (P6,000,000 – B – T)
T = 30% (P6,000,000 – B)
B = 10% [P6,000,000 – B – (30% (P6,000,000 – B))]
B = 10% [P6,000,000 – B – (P1,800,000 – 0.30B)]
B = 10% (P6,000,000 – B – P1,800,000 + 0.30B)
B = 10% (P4,200,000 – 0.7B)
B = P420,000 – 0.07B
1.07B = P420,000
B = P392,523 (420,000 ÷ 1.07)

Use the following information for the next 3 questions

On January 1, 2015, Kakabakaba Co. issued eight-year bonds with a face value of
P1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and
December 31. The bonds were sold to yield 8%. (Round off present value factors to three
(3) decimal places)

47. The present value of the principal is

A. P534,000 C. P623,000
B. P540,000 D. P627,000

PV of Principal (P1 million x 0.534 PV factor of 1 at 4% for 16 periods)

48. The present value of the interest is

A. P344,820 C. P372,600
B. P349,560 D. P376,830

PV of interest (P1 million x 3% x 11.652 PV factor of annuity of 1 at 4% for 16 periods)

49. The issue price of the bonds is

A. P883,560 C. P889,560
B. P884,820 D. P999,600

PV of principal P534,000 + PV of interest P349,560 = P883,560 issue price

50. Buttercup Company issues P20,000,000 of 10-year, 9% bonds on March 1, 2015 at

97 plus accrued interest. The bonds are dated January 1, 2015, and pay interest on
June 30 and December 31. What is the total cash received on the issue date?
A. P19,400,000 C. P19,700,000
B. P20,450,000 D. P19,100,000
Issue price (P20 million x 0.97) P19,400,000
Accrued interest (P20 million x 0.09 x 2/12) 300,000
Total cash received P19,700,000

51. On March 1, 2015, Grace Co. issued P1,000,000 of 12 percent bonds dated
January 1, 2015 Interest is payable semiannually on January 1 and July 1. Total
proceeds from the issuance is P1,039,284. The bonds mature in ten years. Grace is a
calendar-year corporation. (Round off present value factor to four (4) decimal places)

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 Which of the following statements is/are correct:
I. The effective rate of interest is 11.5%. True
II. II. The carrying amount of the bonds as of December 31, 2015 is close to
P1,027,605. True
III. Total interest expense for 2015 is close to P118,321. False
IV. The proceeds on March 1, 2015 include accrued interest of P15,000. False
A. I and II only C. I, II, III and IV
B. I, II and III only D. None of the above

52. On December 31, 2015, Cedi Company issued 8,000 of its 8%, 10-year P1,000 face
value bonds with detachable share warrants at 120. Each bond carried a detachable
warrant for two shares of Cedi’s P100 par value ordinary shares at a specified option
price of P150. Immediately after issuance, the market value of the bonds ex-warrants
was P8,100,000 and the market value of the warrants was P900,000. The issuance of
the bonds increased Cedi’s equity by
A. P 900,000 C. P1,500,000
B. P 960,000 D. P 0
Issue price with (P8 million x 1.20) P9,600,000
Issue price without (8,100,000)
Equity P1,500,000

53. An entity issued 2,000 convertible bonds on January 1, 2015. The bonds have a
three-year term, and are issued at par with a face value of P1,000 per bond. Interest is
payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond
is convertible at any time up to maturity into 250 ordinary shares. The entity has an
option to settle the principal amount of the convertible bonds in ordinary shares or in
cash. When the bonds are issued, the prevailing market interest rate for similar debt
without a conversion option is 9 per cent. At the issue date, the market price of one
ordinary share is P3. The issuance of convertible bonds increased the entity’s equity
by (Round off present value factors to four (4) decimal places).
A. P 0 C. P896,025
B. P151,844 D. P134,872

Issue price of compound financial instrument P2,000,000

Price of bond without conversion feature* (1,848,156)
Equity feature P151,844

*Computation of bond without conversion feature

PV of principal
(P2 million x 0.7722 PV factor of 1 at 9% for 3
periods) P1,544,400
PV of interest
(P2 million x 0.06 x 2.5313 PV factor of ordinary
annuity of 1 at 9% for 3 periods) 303,756
Total P1,848,156

54. On July 1, 2015, Blue Blink Co. issued a five-year note payable with a face amount
of P250,000 and an interest rate of 10 percent. The terms of the note require Blue
Blink Co. to make five annual payments of P50,000 plus accrued interest, with the first
payment due June 30, 2016. With respect to the note, the current liabilities section of
Blue Blink's December 31, 2015, statement of financial position should include
A. P12,500 C. P62,500
B. P50,000 D. P75,000
Principal amount due 6/30/16 (P250,000 ÷ 5 years) P50,000
Accrued interest (P250,000 x 10% x 6/12) 12,500
Total current liabilities P62,500

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55. Gt-X Company was authorized to issue share capital of P5,000,000 divided into
50,000 shares with par value of P100. The following transactions occurred during
2015:

(a) issued 10,000 shares for cash consideration of P1.2 million.

(b) received subscriptions to 10,000 shares at P115 per share receiving 25% down
payment.
(c) collected full payment for 3,000 shares originally subscribed.
(d) reacquired 2,500 shares for P75 per share.

Which of the following statements regarding equity transaction of Gt-X Company is/are
correct?
I. Contributed capital totaled P1,746,250. True
II. Legal capital amounts to P2,350,000. False
III. III Issued shares totaled 10,500 shares. False
IV. Outstanding shares totaled 13,000 shares. False
V. Share premium on subscription increased when the subscriptions were fully
collected on transaction letter (c). False
VI. Total shareholder’s equity at the end of the year is P1,558,750. True
A. I, II and IV only C. I and VI only
B. II, IV and V only D. III, V, and VI only

56. Akazukin Inc. has 10,000 shares issued and outstanding, with P100 par value. The
shares are split up 2 to 1. Which of the following statements is/are incorrect?
I. Total share capital will increase by P1 million. False.
II. The new capitalization would be 20,000 shares with P50 par value. True
III. The new capitalization would be 5,000 shares with P200 par value. False
IV. The share capital will remain the same before and after the share split in the
absence of other transactions. True
A. I and III only C. I only
B. II and IV only D. IV only

57. Peter Pan Company established real estate practice in 2015 and have it VAT-
registered. Peter Pan Company records commission revenue gross of VAT amounts.
Peter Pan Company files VAT declaration on a monthly basis and remits output VAT on
such sales depending on the availability of funds from collections but should be settled
upon quarterly filing. Payments made for each declaration are taken as credits on the
quarterly VAT returns. Peter Pan Company records VAT remittance as charge against
commission revenue. The information below summarizes Peter Pan Company’s
commission transaction during 1st quarter of 2015:

Commission Revenue
Month Debit Credit
January P8,000 P112,000
February – 5,600
March – 89,600

On March 31, 2015, which of the following statements are correct?

I. Total commission revenue exclusive of VAT amount to P182,336.
II. Total commission revenue exclusive of VAT amount to P185,000. True
III. The value added taxes payable as of March 31, 2015 amount to P14,200. True
IV. The value added taxes payable as of March 31, 2015 amount to P16,864.
A. I and IV only C. II only
B. II and III only D. None of the above

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Use the following the information to answer the next 2 questions:
A company issues P5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2015.
Interest is paid on June 30 and December 31.

58. Using effective-interest amortization, how much interest expense will be recognized
in 2010?
A. P195,000 C. P392,124
B. P390,000 D. P392,083

59. Using effective-interest amortization, what will the carrying value of the bonds be on
the December 31, 2010 statement of financial position?
A. P4,903,160 C. P4,906,281
B. P5,000,000 D. P4,902,077

60. Marcus Company has reported a total financial liability of P15,000,000 in its
accounting records as of December 31, 2007 which include the following:

 A P3,000,000 face value perpetual bond that pays 5% interest each

year.
 A P2,000,000 redeemable preference share that will be redeemed by
Marcus at a future date
 A P1,500,000 redeemable preference share redeemable at the option of
the holder
 A P75,000 written call option that allows the holder to purchase a fixed
number of ordinary shares from Marcus Company for a fixed amount.

What is the correct amount of financial liability that should be reported by Marcus
Company in its December 31, 2007 balance sheet?
A. P11,500,000 C. P13,425,000
B. P11,925,000 D. P14,925,000

61. The shareholders’ equity section of the statement of financial position of Mar Inc.
included the following accounts at December 31, 2014:

Shareholders’ Equity
Issued capital:
Ordinary share capital, 100,000 shares at P1 per share P 100,000
Ordinary share premium 850,000
Retained earnings 1,550,000
Total shareholders’ equity P2,500,000

During 2015, several transactions affected the shares of Mar Inc.

 On January 31, Mar Inc. issued 10,000 of its 9% preference shares, P1 par per
share for P55 per share.
 On October 31, 100,000 ordinary shares, P1 par per share, were issued in
exchange for a 10 vehicles. Each vehicle was built to custom specifications so
no cash price was available. Mar Inc. shares were listed at P10 per share.
 On November 1, 100,000 of the ordinary shares and 100,000 preference shares
were sold for 6,000,000. The preference shares had not traded since January
and their market values was uncertain.

Which of the following statements is/are incorrect?

I. The entry on Jan. 31 will include a credit to share premium of P540,000. True
II. Total share premium at December 31, 2015 is P8,000,000. False
III. The entry on Nov. 1 will include a credit to preference share premium of
P900,000. False
IV. Vehicles will be valued at P100,000. False
Page 13 of 16
 A. I only C. II, III and IV only
B. I and II only D. I, II, III and IV
1/31Cash (10,000 x P55) 550,000
Preference shares (10,000 x P1) 10,000
Share premium 540,000

10/31 Vehicles (100,000 x 10) 1,000,000

Ordinary share capital 100,000
Ordinary share premium 900,000

11/1Cash 6,000,000
Ordinary share capital 100,000
Ordinary share premium 900,000
Preference share capital 100,000
Preference share premium 4,900,000

62. On July 1, 2014, Soda Company issued rights to stockholders to subscribe to

additional shares of its ordinary shares. One right was issued for each share owned. A
stockholder could purchase one additional share for 10 rights plus P30 cash. The
rights expired on December 31, 2014. On July 1, 2014, the market price of a share
with the right attached was P40 while the market price of one right alone was P2. All
stock rights were exercised on December 31, 2014. Soda's stockholders' equity on
June 30, 2014 comprised the following:
Ordinary Shares, P25 par value, 40,000 shares issued 1,000,000
and outstanding
Share Premium 600,000
Retained earnings 800,000
What is the contributed capital on December 31, 2014?
a. 2,400,000
b. 1,600,000
c. 1,100,000
d. 1,720,000
Ordinary share capital (1,000,000 1,100,000
+100,000)
When the stock
Share premium (600,000 +20,000) 620,000
rights are exercised,
Contributed capital - 12/31 1,720,000
the issuance of the new
=======
shares is recorded as
follows:
Cash (40,000 / 10 x 30) 120,000
Ordinary share capital (4,000 x 25) 100,000
Share premium 20,000

63. In connection with a stock option plan for the benefit of key employees, Clash
Company intends to distribute treasury shares when the options are exercised. These
shares were bought in 2014 at P42 per share. On January 1, 2015, Clash granted
stock options for 100,000 shares at P38 per shares as additional compensation for
services to be rendered over the next three years. The option is exercisable during a
2-year period beginning January 1, 2018, by grantee still employed by Clash. Market
price of Clash's stock was P47 per share at the grant date. The fair value of the stock
option is P12 on grant date. No stock options were terminated during 2015.

In Clash's 2015 income statement, what amount should be reported as

compensation expense pertaining to the options?
a. 600,000
b. 400,000
c. 300,000
d. 450,000

Page 14 of 16
 Fair value of share options (100,000 x 12) 1,200,000
Compensation for 2015 (1,200,000 / 3)
400,000

PFRS 2 mandates that the fair value method shall be used in measuring the compensation
arising from share options. This means that the compensation is equal to the fair value of
the share options on the date of grant.

The compensation is recognized as expense over the vesting or service period of 3 years.

64. On January 1, 2014, Floppy Company granted stock options to certain key
employees as additional compensation. The options were for 100,000 shares of
Floppy's P2 par value ordinary shares at an option price of P15 per share. Market
price of stock on January 1, 2014, was P20 per share. The fair value of each stock
option on January 1, 2014 is P8. The options were exercisable beginning January 1,
2014 and expire on December 31, 2015. On April 1, 2014, when Floppy’s shares was
trading at P21 per share, all the options were exercised.

What amount of compensation should Floppy report in 2014 in connection with the
options?
a. 800,000
b. 500,000
c. 250,000
d. 400,000

Fair value of share options (100,000 x 8) 800,000

The options vest immediately, the total fair value of the share options shall be recognized
in full as expense.
Since the options are granted on January 1, 2014 and exercisable on January 1, 2014, it
means that the share options vest immediately.

65. On January 1, 2014, Y Company granted Marimar, its president, compensatory

stock options to buy 10,000 shares of Y's P10 par ordinary shares. The options call for
a price of P20 per share and are exercisable for 3 years following the grant date.
Marimar exercised the options on December 31, 2014. The market price of the stock
was P50 on January 1, 2014, and P70 on December 31, 2014.

By what net amount should stockholders' equity increase as a result of the grant
and exercise of the options?
a. 200,000
b. 300,000
c. 500,000
d. 700,000

To record the compensation for 2014:

Salaries (10,000 x 30) 300,000

Share options outstanding 300,000

Observe that the options vest immediately and therefore the total fair value of the share
options is recognized as expense in full in 2014. The effect of the above entry on
shareholder's equity is offsetting.

To record the exercise of the options on December 31, 2014:

Cash (10,000 x 20) 200,000

Share options outstanding 300,000
Ordinary share capital (10,000 x 10) 100,000
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 Share premium 400,000

The effect of the above entry on shareholder equity is (500, 000 – 300, 000) = 200, 000

End of Final Exam

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