Republic Central Colleges

Angeles City

📝Activity in E3- Liabilities

Name________
Score

Multiple choice problem. Show your solution in good form. 3 points each correct
answers. (18 x 3= 54 + 1 if not late on submission= 55)

1. The Plan Company was organized late in 2021 and began operations on January 1,
2022. Plan Company is engaged in conducting market research studies on behalf of
manufacturers. Prior to the start of operations, the following costs were incurred:

Attorney’s fees in connection with organization of Plant P 400,000

Improvements to lease offices prior to occupancy 700,000
Meetings of incorporation, filing fees and other organization expense 500,000

What is the amount of organization costs amortized for 2022

a. P 900,000 c. P 500,000
b. 400,000 d. 1,600,000

Attorney’s fees 400,000

Other organization expense 500,000
P900,000

2. The net assets of Flor Company excluding goodwill totaled P 2,400,000 and earnings for
the last five years totaled P 2,670,000. Included in the latter figure are gain on sale of
equipment-P 225,000; typhoon loss of-P 120,000 and sales commissions of P 45,000. In
developing a sales price for the business a 14% return on the net worth is considered
normal for the industry, and the annual excess earnings are to be capitalized at 20% in
arriving at goodwill.
 Flor should recognized goodwill of-
a. P 885,000 c. P 930,000
b. 990,000 d. 1,050,000

Earnings 2,670,000
Gain on sale of equipment 225,000
Typhoon loss 120,000
Total P2,565,000
Divide by 5 years
Total 513,000
Net asset of goodwill (2.4M x 114%) 336,000
Excess annual earnings 117,000
Divide capitalization rate 20%
Total goodwill P885,000

3. On February 1, 2022, a franchise was purchased from the Franchisor Company for P
1,440,000. The contract which runs for 20 years provides that 5% of revenue from the
franchise must be paid to Franchisor. Revenue from the franchise from 2022 was P
7,500,000.

Compute the unamortized cost of the franchise at December 31. 2022:

a. P 999,000 c. P 1,440,000
b. 1,350,250 d. 1,374,000

Franchise cost 1,440,000

Less: Amortization [(1,440,000/ 20yrs) x 11/12] 66,000
Total P1,374,000

4. Mini Software Company is an established computer software company. In 2021, the firm
incurred the following costs in the processes of designing, developing and producing a
new software program using the JAVA technology to access the Internet: Designing and
planning-P 1,000,000; Cod development-P 1,500,000; testing-P 500,000; and Production
of product master-P 2,500,000.

Mini will begin marketing the software in 2022 that will earn P 2,400,000 revenue for
2022 over the 4 year life of the product. Mini incurred P 1,000,000 in costs to produce
the software program for sale in 2022. The costs of designing and planning, code
development and testing were all incurred before the technological feasibility of the
product was established. At the end of 2022, Mini was offered P 4,000,000 for the rights
to distribute the software.
 How much of the Research and Development would be expensed in 2021 and 2022
respectively?
2021 2022 2021 2022
a. P 2,500,000 P 1,000,000 c. P 3,000,000 P 1,625,000
b. 3,000,000 1,000,000 d. 5,500,000 1,625,000

Solution:
Design & planning 1,000,000
Code development 1,500,000
Testing 500,000
Total cost P3,000,000

Software cost 1,000,000

Production of proud master (2.5M/4yrs) 625,000
Total cost P1,625,000

5. During 2022, Dolly Company sold 600,000 boxes of cake mix under a new sales
promotional program. Each box contains one coupon, which entitles the customer to a
baking pan upon remittance of P 40. Dolly Company pays P 60 per pan and P 10 for
handling and shipping.

Dolly Company estimates that 70% of the coupons will be redeemed, even though only
200,000 coupons had been processed during 2022

What amount should Dolly Company report as a liability for unredeemed coupons on
December 31, 2022?
a. P 4,400,000 c. P 4,000,000
b. 6,600,000 d. 2,200,000

Solution:

Est. Coupons redeemed (600k x 70%) 420,000

Less: processed coupons 200,000
Total 220,000
Remittance cost cost (40 – 60 + 10) 30
Total P6,600,000

6. Sandy Company sells color television sets with a two year repair warranty. The sales
price for each set is P 15,000. The average repair cost per set is P 800. Research has
shown that 20% of all sets sold are repaired in the first year and 40% in the second year.
The number of sets sold were as follows:
 300 in 2021, 500 in 2022. Total payments for repairs associated with the warranties were
P 40,000 in 2022, P 150,000 in 2022 respectively.

Determine the estimated warranty liability on December 31, 2022 if the company is using
an accrual approach?
a.P 0 c. P 240,000
b. 190,000 d. 194,000

Solution:

Warranty expense 2021 (300 x 60% = 180 X P800) P 144,000

Warranty expense 2022 (500 x 60% = 300 x P800) 240,000
Less: total payments for warranties (40k + 150k) 190,000
Total warranty liability P194,000

7. Mel Department Store sells gift certificates redeemable only when merchandise is
purchased. These gift certificates have an expiration date of two years after issuance
date. Upon redemption or expiration, Mel recognizes the unearned revenue as realized.
Information for 2022 is as follows:
Gift certificates payable, Jan 1 P 260,000
Gift certificates sold 900,000
Gift certificates redeemed 780,000
Expired gift certificates 40,000
Cost of goods sold 60%

How much is the total unearned revenue on December 31, 2022?

a.P 204,000 c. P 340,000
b. 380,000 d. 0

Total unearned revenue (260k + 900k – 780k – 40k) P340,000

8. Eastern Company has several contingent liabilities on Dec. 31, 2022. The auditor
obtained the following brief description of each liability.
In May 2022, Eastern Company became involved in litigation. In December 2022, the
court assessed a judgment for P 1,600,000 against Eastern Company. The entity is
appealing the amount of the judgment. Its attorneys believe it is probable that they can
reduce the assessment on appeal by 50%. The appeal is expected to take at least a
year.
 In July 2022, Pasig City brought action against Eastern Company for polluting the Pasig
River with its waste products. It is probable that Pasig City will be successful but the
amount of damages Eastern Company might have to pay should not exceed
P 1,500,000.
Eastern Company has signed as guarantor for a P 1,000,000 loan by First Bank to
Northern Company, a principal supplier to Eastern Company. At this time, there is a only
a remote likelihood that Eastern Company will have to make payment on behalf of
Northern Company

What should Eastern Company report as liability in its December 31, 2022 statement
of Financial position?
a.P 1,500,000
b.P 2,300,000
c.P 3,100,000
d. P 3,300,000

Solution:
Assessment fee (1.6M x 50%) P800,000
Waste product cost 1,500,000
Total liability P2,300,00

9. The following information about Oscar Company is available on December 31, 2022:
Accounts payable, P 250,000
Advances from customers, P 100,000
Advances from officers, P 400,000
Advances to officers, P 500,000
Bonds payable, due Dec. 31, 2014, P 800,000
Cash balance at PNB, P 3,000,000
Cash overdraft at PNB, P 150,000
Contract entered into for the construction of machinery. P 4,000,000
Customer’s with credit balance, P 100,000
Deferred tax liability, P 70,000
Estimated damages as a result of unsatisfactory performance on a contract P 800,000
Estimated damages payable by reason of breach of contract, P 400,000
Estimated expenses of meeting warranties on merchandise previously sold, P 300,000
Income tax liability, P 80,000
Mortgage payable, P 900,000
Stock dividend payable, P 1,500,000

Compute the total current liabilities on December 31, 2022-

 a.P 2,180,000 c. P 3,380,000
b. 2,980,000 d. 2,580,000

Solution:
(250,0000 + 100,000 + 150,000 + 100,000 + 800,000 + 400,000 + 300,000 + 80,000)
P2,180,000

10. Malcom Corp. had outstanding P 6,000,000 of 11% bonds ( interest payable July 31 and
January 31) due in 10 years. On July 1, it issued P 9,000,000 of 10%, 15 year bonds
(interest payable July 1 and January 1) at 97. A portion of the proceeds was used to call
the 11% bonds at 103 on August 1. Unamortized bond discount and issue cost
applicable to the 11% bonds were P 240,000 and P 60,000, respectively.

How much is the loss on redemption of 11% bonds?

c.P 180,000 c. P 480,000
d. 420,000 d. 120,000

Solution:
Redemption price (6M x 103%) 6,180,000
FV of bonds 6,000,000
Less: Discount on bonds (240k + 60k) 300,000 5,700,000
Total loss P480,000

11. On November 1, 2022, Mary Company issued P 4,000,000 of its 10 year, 8% term bonds
dated October 1, 2020. The bonds were sold to yield 10% with total proceeds of
P 3,500,000 plus accrued interest. Interest is paid every April 1 and October 1.

What should Mary Company report as interest payable in its December 31, 2022
statement of financial position?
a.P 87,000 c. P 80,000
b. 53,333 d. 100,000

Interest payable (4M x 8% x 3/12) P80,000

12. June 1, 2022, Java Company issued P 6,000,000 of 10% face value bonds to yield 12%.
Interest is payable annually on June 1 of each year. The bonds mature in 5 years. The
entity follows the calendar year. (Compute present value into 2-digit decimal number)

Compute interest expense for December 31, 2022

a.P 390,600 c. P 350,0000
 b. 309,400 d. 325,500

Interest expense (5,580,000 x 12% x 7/12) P390,600

Bonds issued (6M x 0.57) P3,420,000

Annual interest (6M x 10% x 3.60) 2,160,000
Total P5,580,000

13. On March 1, 2022, Phantom Company issued P 7,000,000 face value 10% bonds to yield
8%. Interest is payable semiannually on March 1 and September 1, the bonds mature in
10 years. The entity follows the calendar year. (Compute present value into 3-digit
decimal number)

How much is the interest expense to reported for December 31, 2022-
a.P 529,045 c. P 476,910
b. 634,598 d. 529,900

Total interest expense (7,951,300 x 8% x 10/12) P530,086

Bond issued (7M x 0.463) P3,241,000

Nominal interest (7M x 5% x 6.710) 2,348,500
Total 5,589,500

Bond issued (7M x 0.4564) 3,194,800

Nominal interest (7M x 10% x 13.590) 4,756,500
7,951,300

Total interest expense (7,951,300 x 8% x 10/12) P530,086

14. On January 1, 2022, Molly Company issued its 10 percent bonds payable in the face
amount of P 4,500,000. The bonds mature in January , 2032. The bonds were issued for
P 3,987,000 to yield 12%, resulting in a bond discount of P 513,000. The entity used the
effective interest method of amortizing bond discount. Interest is payable semiannually
on January 1 and July 1.

For six months ended June 30, 2022, what amount should be reported as bond interest
expense?
a.P 255,780 c. P 239,220
b. 250,650 d. 225,000

Total interest expense (3,987,000 x 12% x 6/12) P239,220

15. On January 1, 2022 Lawrence Company had decided to raise additional capital by
issuing P 5,000,000 face value 5-year bonds with interest rate of 12% payable annually
on December 31. To help the sale of the bonds, share warrants are issued- one warrant
for each P 1,000 bond sold. The warrant entitles the holder to purchase five shares at P
100 per share. The par value of the share is P 50.

It is reliably determined that the value of the warrants is P 30 each at the time of the
issuance of the bonds. The bonds are sold for P 5,100,000 with warrants but would have
sold only at P 4,657,000 without the warrants with 14% effective yield.

What amount should the entity record on January 1, 2022 as discount or premium on the
issuance of the bonds?
a.P 100,000 premium c. P 343,000 discount
b. 443,000 discount d. 293,000 discount

Cash 5,100,000
Discount on bonds 343,000
Bonds payable 5,000,000
Warrant share 443,000

Bonds sold P5,100,000

Warrants 4,657,000
Total P443,000

16. On December 31, 2022, Cholo Company had outstanding 12%, P 5,000,000 face amount
convertible bonds maturing on December 31, 2029. Interest is payable on June 30 and
December 31,. Each P 1,000 bond is convertible into 50 shares of Cholo Company with
P 10 par value. On December 31, 2022, the unamortized balance in the premium on
bonds payable account was P 300,000. No equity component was recognized from the
original issuance of the convertible bonds. On December 31, 2022, 2,000 bonds were
converted when the share had a market price of P 24. Cholo Company incurred P
20,000 in connection with the conversion.

What is the share premium arising from the bond conversion?

a.P 1,120,000 c. P 1,100,000
b. 1,380,000 d. 1,400,000

Solution:
No answer
For nos. 17 and 18
On December 31, 2022, Mellow Company entered into a debt restructuring agreement
with Johnny Company which was experiencing financial difficulties. Mellow Company
restructured a P 1,000,000 note receivable as follows:
Reduced the principal obligation to P 700,000
Forgave P 120,000 of accrued interest
Extended maturity date from December 31, 2022 to December 31, 2024
Reduced the interest rate from 12% to 8%. Interest payable annually on December 31,
2022 and 2024
Based on the foregoing and the result of your audit, compute the following: (round off
present value factors to four decimal places).

Principal obligation (700k x 0.79719) P558,004

Nominal interest (700k x 8% x 1.69005) 94,645
Total 652,676

17. How much should Johnny Company recognize the gain on extinguishment of debt?
a.P 0 c. P 420,000
b. 467,324 d. 412,173

(1,000,000 + 120,000 – 652,676) P467,324

Principal obligation (700k x 0.79719) P558,033

Nominal interest (700k x 8% x 1.69005) 94,643
Total P652,676

18. Total interest to recognized in 2023

a. P 84,000 c. P 78,321
b. 84,939 d. 134,400

Interest expense (652,676 x 12%) P78,321

END