PROBLEM 1:

BOOMERANG INC., is a manufacturer and retailer of household furniture. Your audit of the
company’s financial statements for the year ended December 31, 2012, discloses the following
debt obligations of the company at the end of its reporting period. Boomerang’s financial
statements are authorized for issuance on march 6, 2013.

a. A P150,000 short – term obligation due on March 1, 2012. Its maturity could be extended
to March 1, 2015, provided Boomerang agrees to provide additional collateral. On February
12, 2013, an agreement is reached to extend the loan’s maturity to March 1, 2015.
b. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2013.
The company issued 75,000 ordinary shares for P36 per share on January 25, 2013. The
proceeds from the issuance, plus P900,000 cash, were used to fully settle the debt on
February 5, 2013.
c. A long – term obligation of P2,500,000 on December 1, 2012. On November 10, 2012,
Boomerang breaches a covenant on its debt obligation and the loan becomes payable on
demand. An agreement is reached to provide a waiver of the breach on December 11,
2012.
d. A long – term obligation of P4,000,000. The loan is maturing over 4 years in the amount of
P1,000,000 per year. The loan is dated September 1, 2012, and the first maturity date is
September 1, 2012, and the first maturity date is September 1, 2013.
e. A debt obligation of P1,000,000 maturing on December 31, 2015. The debt is callable on
demand by the lender at any time.

1. What amount of current liabilities should be reported on the December 31, 2012, statement
of financial position?
A. P8,250,000 C. P4,750,000
B. P5,570,000 D. P3,750,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2012
statement of financial position?
A. P5,500,000 C. P6,500,000
B. P1,000,000 D. P7,500,000

PROBLEM 2:
The data are from the records of MANOR INC. on December 31, 2012:

Accounts payable P 680,000

Cash balance, ABC Bank 1,240,000
Cash overdraft with XYZ Bank 80,000
Customer’s accounts with credit balances 25,000
Dividends in arrears on preference shares 400,000
Employees’ income tax payable 100,000
Estimated warranty payable 50,000
Estimated premium claims outstanding 90,000
Income tax payable 400,000
Notes payable (issued in 2012 maturing in 20 semi – annual
installments beginning on April 1, 2013) 4,000,000
Salaries payable 400,000

The amount to be shown as total current liabilities on Manor statement of financial position at
December 31, 2012, is
A. P2,225,000 C. P2,625,000
B. P2,025,000 D. P2,145,000

PROBLEM 3:
SAI CORP. records its purchases at gross amounts but wishes to change to recording purchases
net of purchase discounts. Discounts on purchases recorded from January 1, 2012 to December
31, 2012, totaled P80,000. Of this amount, P8,000 is still available in the accounts payable
balance. The balance in Sai’s accounts as of and for the year ended December 31, 012, before
conversion are:

Purchases P 4,000,000
Purchase Discounts 32,000
Accounts payable 1,200,000

1. The amount of purchase discounts lost to be recognized is

 A. P8,000 C. P32,000
B. P0 D. P40,000
2. The accounts payable balance should be reduced by
A. P8,000 C. P32,000
B. P80,000 D. P40,000
3. The purchases account should be reduced by
A. P32,000 C. P40,000
B. P80,000 D. P8,000
4. The entry to record the conversion is
A. Accounts payable 80,000
Purchases 80,000
B. Purchase discounts lost 32,000
Purchases 32,000
C. Purchase discounts lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
D. Purchase discounts lost 32,000
Account payable 8,000
Purchases 40,000

PROBLEM 4:
ANGLIN CORPORATION must determine the December 31, 2012, year-end accruals for
advertising and rent expenses. A P50,000 advertising bill was received January 10, 2013,
comprising costs of P37,500 for advertisements in December 2012 issues, and P12,500 for
advertisements in January 2013 issues of the newspaper.

A short lease, effective December 16, 2011, calls for fixed rent of P120,000 per month, payable
one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net
sales over P6,000,000 per calendar year is payable on January 31 of the following year. Net
sales for 2012 were P7,500,000.

What is the total accrued liabilities that should be reported by Anglin Corporation in its
statement of financial position as at December 31, 2012?
A. P185,000 C. P97,500
B. P172,500 D. P110,000

PROBLEM 5:
Ana Rosa, president of the APOKA COMPANY, has a bonus arrangement with the company
under which she receives 10% of the net income (after deducting taxes and bonuses) each
year. For the current year, the net income before deducting either the provision for income
taxes or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax rate is
30%.

1. Determine the amount of Ana Rosa’s bonus.

2. Compute the appropriate provision for income tax for the year.
3. Prepare the entry to record the bonus (which will be paid in the following year.)

PROBLEM 6:
POKWANG COMPANY sold 700,000 boxes if “Puto mix” under a new sales promotional program.
Each box contains one coupon, which if submitted with P40, entities the customer to a kitchen
knife. Pokwang pays P60 per knife and P5 for handling and shipping. Pokwang estimates that
70% of the coupons will be redeemed even though only 250,000 coupons had been processed
during 2012.

How much should Pokwang report as liability for unredeemed coupons at December 31, 2012?
A. P6,000,000 C. P15,600,000
B. P9,600,000 D. P12,250,000

PROBLEM 7:
In packages of its products, PLACID, INC. includes coupons that may be presented at retail
stores to obtain discounts on other Placid products. Retailers are reimbursed for the face
amount of coupons redeemed plus 10% of that amount for handling costs. Placid honors
requests for coupon redemption by retailers up to 3 months after the consumer expiration
date. Placid estimates that 60% of all coupons issued will ultimately be redeemed. Information
relating to coupons issued by Placid during 2012 is as follows:

Consumer expiration date December 31.

2012
Total payments to retailers as of December 31, 2012 P 165,000
Liability for unredeemed coupons as of December 31, P 99,000
2012

What is the total face amount of coupons issued by Placid, Inc. in 2012?
A. P440,000 C. P600,000
B. P400,000 D. P264,000

PROBLEM 8:
OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged
a deposit for each container delivered and receives a refund for each container returned within
two years after the year of delivery. Omega accounts for the containers not returned within the
time limit as being sold at the deposit amount. Information for 2012 is as follows:

Containers held by customer at

December 31, 2011, from deliveries in:
2010 85,000
2011 240,00 325,000
0
Containers delivered in 2012 430,000
Containers returned in 2012 form
delivers in: 2010 57,500
2011 140,000
2012 157,000 354,500

1. How much revenue from container sales should be recognized for 2012?
A. P127,500 C. P27,500
B. P267,500 D. P85,000
2. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2012?
A. P373,000 C. P267,500
B. P400,500 D. P30,000

PROBLEM 9:
Described below are certain transactions of ASHLEE COMPANY:
February The company purchased goods from Happy Corp. for P150,000
2 subject to cash discount terms of 2/10, n/30. The company
records purchases and accounts payable at net amounts after
cash discounts. The invoice was paid on February 25.

April 1 The company purchased a truck for P120,000 from Broom Motors
Corp., paying P12,000 in cash and signing a one-year, 12% note
for the balance of the purchase price.

May 1 The company borrowed P240,000 from Manila Bank by signing a

P276,000 noninterest-bearing note due one year from May 1.

August 1 The company’s board of directors declared a P900,000 cash

dividend that was payable on September 10 to shareholders of
record on August 31.

1. Prepare all the journal entries necessary to record the transactions described above.
2. Assume that Ashby Company’s financial year ends on December 31, and that no adjusting
entries relative to the transactions above have been recorded. Prepare any adjusting
journal entries concerning interest that are necessary to present fair financial statements at
December 31.
PROBLEM 10:
Presented below are two independent situations. Answer the questions at the end of each
situation.

Situation 1
EGWENE CO., a machinery dealer, sells a machine for P22,200 under a 1-year warranty
contract that requires the company to replace all defective parts and to provide the necessary
repair labor at no cost to the customers. With sales being made evenly throughout the year,
Egwene sells for cash 600 machines in 2012 (half of the warranty expense is incurred in 2012,
half in 2013). On the basis of past expenses, the 1-year warranty costs are estimated to be
P510 parts and P660 labor. Assume that in 2012, these warranty costs are incurred exactly as
estimated.

1. What amount of warranty expense would be charged against 2012 revenue?

A. P702,000 C. P153,000
B. P351,000 D. P396,000
2. What amount of warranty liability would appear on the December 31, 2012 statement of
financial position?
A. P0 C. P702,000
B. P153,000 D.P351,000

Situation 2
RAND INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract for
P810 that requires the company to provide periodic maintenance services and to replace
defective parts. During 2012, Rand sold 300 washing machines and 270 warranty contracts for
cash. The company estimates that the warranty costs are P180 for parts and P360 for labor.

Assume sales occurred on December 31, 2012. Rand’s policy is to recognize income from the
warranties on a straight-line basis. In 2013, Rand incurred actual costs relative to 2012
warranty sales of P18,000 for parts and P36,000 for labor.

1. What liability relative to these transactions would appear on the December 31, 2012,
statement of financial position and how would it be classified?
Current Non-current
A. P 145,000 P72,900
B. P 72,900 P72,900
C. P 72,900 P145,800
D. P0 P218,700

2. What amount of warranty expense would be shown on the income statement for the year
ended December 31, 2013?
A. P18,000 C. P36,000
B. P0 D. P54,000
3. What liability relative to the 2012 warranties would appear on the December 31, 2013,
statement of financial position and how would it be classified?
Current Non-
current
A. P145,000 P72,900
B. P72,900 P72,900
C. P72,900 P145,800
D. P145,800 P0

PROBLEM 11
OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipments, recorded music, and sheet music. To promote the sale of its products, Olson uses
two promotion techniques – premium and warranties.

Premiums:
The premium is offered on the recorded and sheet music. Customers receive a coupon for each
P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and
P200 for a CD player. Olson pays P340 for each CD player and estimates that 60% of the
coupons given to customers will be redeemed. A total of 6,500 CD players used in the
premium were purchased during the year and there were 1,200,000 coupons redeemed in
2012.

Warranties:
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2%
of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2012.

Olson uses accrual method to account for the warranty and premium costs for financial
reporting purposes. Olson’s sales for 2012 totaled P72,000 – P54,000,000 from musical
instruments and sound reproduction equipment and P18,000,000 from recorded music and
sheet music. The balances in the accounts related to warranties and premium on January 1,
2012, were as shown below:

Inventory of premium CD players P 399,500

Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

Based on the preceding information, determine the amounts that will be shown on the 2012
financial statements for the following:
1. Warranty expense
A. P1,640,000 C. P800,000
B. P1,080,000 D. P360,000
2. Estimated liability from warranties
A. P1,920,000 C. P240,000
B. P1,080,000 D. P800,000
3. Premium expense
A. P1,836,000 C. P756,000
B. P840,000 D. P2,189,500
4. Inventory of premium CD players
A. P399,500 C. P2,210,000
B. P569,500 D. P739,500
5. Estimated premium claims outstanding
A. P364,000 C. P756,000
B. P840,000 D. P672,000

PROBLEM 12:
On December 31, 2012, BAKI COMPANY acquired a piece of equipment from Seller Company by
issuing a P1,200,000 note, payable in full on December 31, 2016. Baki’s credit rating permits it
to borrow funds from its several lines of credit at 10%. The equipment is expected to have a 5-
year life and a P150,000, salvage value. The present value of 1 at 10% for 4 periods is
0.68301.

1. What is the equipment’s book value on December 31, 2014?

A. P551,767 C. P491,767
B. P630,000 D. P341,767
2. What is the carrying value of the note at December 31, 2014?
A. P1,090,903 C. P1,200,000
B. P991,730 D. P819,612

PROBLEM 13:
ORCHID COMPANY purchased machinery on December 31, 2012, paying P80,000 down and
agreeing to pay the balance in four equal installments of P60,000 payable each December 31.
Implicit in the purchase price is an assumed interest of 12%.

The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552
Present value of an annuity of 1 at 12% 3.03735

1. What is the cost of the machine purchased on December 31, 2012?

A. P233,083 C. P262,241
B. P320,000 D. P290,842
2. How much interest should be reported in Orchid’s income statement for the year ended
December 31, 2013?
A. P38,131 C. P17,293
 B. P21,869 D. P42,707
3. What is the carrying value of the note at December 31, 2014?
A. P120,000 C. P99,310
B. P144,110 D. P101,403

PROBLEM 14:
On October 1, 2012, ALTHOR CORP. issued a P500,000, 12-month, 12% not to ABC Company in
payment of account. On the same date, the company borrowed P1,000,000 form the Asian
Bank by signing a 12-month, non-interest-bearing, P1,120,000 note.

1. Prepare adjusting journal entries at December 31, 2012.

2. What is the total/net liability to be reported in the December 31, 2012, statement of
financial position for:
a. The interest-bearing note?
b. The noninterest-bearing note?

PROBLEM 15:
Described below are certain transactions of TUNIC COMPANY.
 On April 1, the corporation bought a truck for P400,000 from General Motors Company,
paying P40,000 in cash and signing a one-year, 12% note for the balance of the
purchase price.
 On may 1, the corporation borrowed P800,000 from Prudent Bank by signing a P920,000
noninterest-bearing note due one-year from May 1.

Prepare any adjusting journal entries to present fair financial statements at December 31.

PROBLEM 16:
In conjunction with your firm’s examination of the financial statements of BATA, INC. as of
December 31, 2012, you obtained the information from the company’s voucher register sown
in the work paper below.

Ite Entry Voucher

m Date Referen Description Amou Account Charged
No. ce nt
1 12.18.1 12-200 Supplies, shipped FOB destination,
2 12/15/12; received 12/17/12 P Supplies on hand
15,000
2 12.18.1 12-203 Auto insurance, 12.15.12 – 12/15/13 22,000 Prepaid insurance
2
3 12.21.1 12-209 Repairs services; received 12/20/12 19,000 Repairs &
2 maintenance
4 12.26.1 12-212 Merchandise, shipped FOB shipping point,
2 12/20/12; received 12/24/12 123,00 Inventory
0
5 12.21.1 12-210 Payroll, 12/7/12 – 12/21/12
2 (12 working days) 69,000 Salaries and wages
6 12.21.1 12-234 Subscription to industry magazine for 2013 5,000 Dues & subscriptions
2 expense
7 12.28.1 12-236 Utilities for December 2012 24,000 Utilities expense
2
8 12.28.1 12-241 Merchandise, shipped FOB destination,
2 12,24,12; received 1/2/13 111,50 Inventory
0
9 12.28.1 12-242 Merchandise, shipped FOB destination;
2 12/24/12; received 1/2/13 84,000 Inventory
10 1.2.13 1-1 Legal services; received 12/28/12 46,000 Legal and
professional
fees expense
11 1.2.13 1-2 Medical services for employees for 25,000 Medical expenses
December 2012
12 1.5.13 1-3 Merchandise, shipped FOB shipping point,
12/29/12; received 1/4/13 55,000 Inventory
13 1.10.13 1-4 Payroll, 12/21/12 – 1/5/13 (12 working
days in total, 4 working days in
 January 2013) 72,000 Salaries and wages
14 1.10.13 1-6 Merchandise, shipped FOB shipping point,
1/2/13; received 1/6/13 64,000 Inventory
15 1.12.13 1-8 Merchandise, shipped FOB destination, 38,000
1/3/13; received 1/10/13 Inventory
16 1.13.13 1-9 Maintenance services; received 1/9/13 9,000 Repairs and
maintenance
17 1.14.13 1-10 Interest on bank loan, 10/10/12 – 1/10/13 30,000 Interest expense
18 1.15.13 1-11 Manufacturing equipment; installed 254,00 Machinery &
12/29/12 0 equipment
19 1.15.13 1-12 Dividend declared, 12/15/13 160,00 Dividends payable
0

Accrued liabilities as of December 31, 2012, were as follows:

Accrued payroll P48,000
Accrued interest payable 26,666
Dividends payable 160,000

The accrued payroll and accrued interest payable were reversed effective January 1, 2013.

Required:
Review the data given above and prepare journal entries to adjust the accounts on December
31, 2012. Assume that the company follows FOB terms for recording inventory purchases.

PROBLEM 17:
You are engaged to audit the December 31, 2012, financial statements of LIZA COMPANY, a
manufacturer of household appliances. Your audit disclosed the following situations.

a. In June 2012, the company began producing and selling a new line of dishwasher. By the
end of the year, it had sold 120,000 to various dealers for P15,000 each. The product
was sold under a 1-year warranty, and the company estimates warranty costs to be
P750 per dishwasher. Liza had paid out P30 million in warranty expenses as of
December 31, 2012, which also the amount shown as warranty expense in its income
statement for the current year.
b. In response to your letter of audit inquiry, Liza’s lawyer informed you that the company
is involved in a lawsuit for violation environmental laws regulating hazardous waste.
Although the litigation is pending, Liza’s lawyer is certain that Liza will most probably
have to pay cleanup costs and fines of P5,500,000. Liza neither accrued nor disclosed
this loss in the financial statements.
c. Liza is the defendant in a patent infringement suit by Mona Bang over Liza’s use of a
hydraulic compressor in several of its manufactured appliances. Liza’s lawyer informed
you that if the suit goes against your audit client, the loss may be as much as P10
million. However, the lawyer believes that the loss of this suit is only possible. Liza did
not in any way disclose this pending litigation in its financial statements.

1. What amount of warranty expense should be shown on Liza’s income statement for the
year ended December 31, 2012?
A. P30,000,000 C. P60,000,000
B. P0 D. P90,000,000
2. What amount of warranty liability should be shown on Liza’s statement of financial position
as of December 31, 2012?
A. P60,000,000 C. P30,000,000
B. P90,000,000 D. P0
3. What amount of lawsuit liability should be reported as a provision on Liza’s December 31,
2012, statement of financial position?
A. P10,000,000 C. P15,500,000
B. P5,500,000 D. P0

PROBLEM 18:
On November 1, 2012, 69 passengers on CANYON AIRLINES Flight No. 143 were injured upon
landing when the plane skidded off the runway. Personal injury suits for damages totaling
P10,000,000 were filed on January 12, 2013, against the airline by 21 injured passengers. The
airline carries no insurance. Legal counsel has studied each suit and advised Canon that it can
reasonably expect to pay 70% of the damages claimed. The financial statements for the year
ended December 31, 2012, were authorized for issue on February 12, 2013. During the past
decade, the company has experienced at least one accident per year and incurred average
damages of P4,100,000.

1. Prepare the journal entry that should be made as of December 31, 2012, to recognized the
loss.
2. What liability due to risk of loss from lack of insurance coverage should Canyon Airlines
record or disclose? (Ignore the November 1, 2012, accident.)

PROBLEM 19:
BAGKUS COMPANY has the following three loans payable scheduled to be repaid in February of
next year. The company’s accounting year ends on December 31.
a. The company intends to repay Loan 1 for P100,000 when it comes due in February. In
the following October, the company intends to get a new loan for P80,000 from the
same bank.
b. The company intends to refinance Loan 2 for P150,000 when it comes due in February.
The refinancing agreement, for P180,000, will be signed in April, after the financial
statements for this year have been authorized for issue.
c. The company intends to refinance Loan 3 for P200,000 before it comes due in February.
The actual refinancing for P175,000, took place in January, before the financial
statements for this year have been authorized for issue.

1. As of December 31 of this year, the total current liabilities to be reported in the company’s
statement of financial position should be
A. P100,000 C. P450,000
B. P250,000 D. P125,000
2. As of December 31 of this year, the total noncurrent liabilities to be reported in the
company’s statement of financial position should be
A. P25,000 C. P175,000
B. P0 D. P350,000

PROBLEM 20:
The following are based on the financial statements of CAMEL COMPANY.

Current assets P 750,000

Short-term loan payable 600,000
Total liabilities 3,000,000
Current ratio 1.5
Debt-to-equity-ratio 1.5

Camel Company has arranged with its bank to refinance its short-term loan when it becomes
due in 3 months. The new loan will have a term of 5 years.

1. Compute the following:

A. Total current liabilities
B. Total shareholders’ equity
C. Total noncurrent liabilities
2. As the auditor of camel Company, how would you verify the validity of the short-term loan
refinancing?

PROBLEM 21:
CAREY CO. owes P1,998,000 to Loan Shark Corp. the debt is a 10-year 11% note. Because
Carey Co. is in financial trouble, Loan Shark Corp. agrees to accept land and cancel the entire
debt. The land has a book value of P800,000 and affair market value of P1,200,000.

What entry should be made by Carey Co. for the debt restructure?

PROBLEM 22:
NAKARU CORPORATION is having financial difficulty and therefore has asked Naawa Bank to
restructure its P3 million note outstanding. The present note has 3 years remaining and pays a
current rate of interest of 12%. The note was issued as its face value.

Presented below are two independent situations. Prepare the journal entry that Nakaru would
make for each of the following types of debt restructuring.
 a. Naawa Bank agrees to accept land in exchange for relinquishing its claim on this note.
The land has a book value of P2,000,000 and a fair value of P2,500,000
b. Naawa Bank agrees to reduce the principal balance due to P2,000,000 and interest rate
to 10%.

The following present value factors are abstracted from the present value tables.
12% 10%
Present value of 1 for 3 periods 0.71178 0.75132
Present value of an ordinary annuity of 1 for 3 periods 2.40183 2.48685

PROBLEM 23:
At December 31, 2012, KISS COMPANY’s liabilities include the following:
 P10 million of 10% notes are due on March 31, 2017. The following agreement contains
a covenant that requires Kiss to maintain current assets at least equal to 200% of its
current liabilities. As of December 31, 2012, Kiss has breached this loan covenant. On
February 10, 2013, before Kiss’s financial statements are authorized for issue, Kiss
obtained a period of grace form Mayumi Bank until January 31, 2014, having convinced
the bank that the company’s normal 3 to 1 ratio of current assets to current liabilities
will be reestablished during 2013.
 P15 million of noncancelable 12% bonds were issued at face value on September 30,
1991. The bonds mature on august 31, 2013. Kiss expects to have sufficient cash
available to redeem the bonds at maturity.
 P20 million of 10% bonds were issued at face value on June 30, 1993. The bonds mature
on June 30, 2022, but bondholders have the option to call (demand payment on) the
bonds on June 30, 2013. However, the call option is not expected to be exercised, given
prevailing market conditions.

What potion of Kiss Company’s debt should be reported as a noncurrent liability?

A. P10 million C. P20 million
B. P30 million D. P0

PROBLEM 24:
Your audit client, SUPA COMPANY, is involved in the situations described below. Supa’s
accounting year ends on December 31, 2012, and its financial statements are authorized for
issue on March 20, 2013.
a. Supa is involved in a lawsuit resulting from a dispute with a customer. In January 28,
2013, judgment was rendered against Supa in the amount of P20 million. Supa plans to
appeal the judgment and is unable to predict its outcome though management believes
that it will not have a material adverse effect on the company.
b. On April 25, 2013, the Bureau of Internal Revenue is in the process of examining Supa’s
tax returns for 2010 and 2011, but has not proposed a deficiency assessment.
Management feels an assessment is reasonably possible, and if an assessment is made,
an unfavorable settlement of up to P5 million is reasonably possible.
c. On January 5, 2013, inventory purchased FOB shipping point from a foreign country was
detained at that country’s border because of political unrest. The shipment is valued at
P1 million. Supa,s lawyers have stated that it is probable that Supa will be able to obtain
the shipment.
d. On November 1, 2012, a lawsuit was filed by a disgruntled customer who discovered a
safety hazard in one of Supa’s best-selling products. Supa’s lawyers feel it is probable
that the company will be liable for P500,000.
e. On December 5, 2012, Supa initiated a lawsuit seeking P1 million in damages from a
patent infringement.

Determine the appropriate means of reporting each situation. Prepare any necessary journal
entries on December 31, 2012:

PROBLEM 25:
LARIO COMPANY issued 10-year bonds on January 1, 2012. The company’s year-end is
December 31, and financial statements are prepared annually. The amortization and interest
schedule below reflects the bond issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE
Interes Interest Amount Carrying
 Date t paid expense Unamortiz Value
ed
01.01.1 --- --- P28,253 P471,747
2
12.31.1 P P 56,610 26,643 473,357
2 55,000
12.31.1 55,000 56,803 24,840 475,160
3
12.31.1 55,000 57,019 22,821 477,179
4
12.31.1 55,000 57,261 20,560 479,440
5
12.31.1 55,000 57,533 18,027 481,973
6
12.31.1 55,000 57,837 15,190 484,810
7
12.31.1 55,000 58,177 12,013 487,987
8
12.31.1 55,000 58,558 8,455 491,545
9
12.31.2 55,000 58,985 4,470 495,530
0
12.31.2 55,000 59,470* --- 500,000
1
* Adjustment due to rounding

1. The bonds were issued at

A. A premium C. Face value
B. A discount D. Par value
2. What amortization method is used in the amortization schedule presented?
A. Straight-line method C. Effective interest method
B. Bonds outstanding method D. Declining balance method
3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2012?
A. 11% C. 10%
B. 12% D. 6%
4. What is the effective interest rate of the bonds issued on January 1, 2012?
A. 11% C. 10%
B. 12% D. 6%
5. On the basis of the schedule presented, what is the journal entry to record the issuance of
the bonds on January 1, 2012?
A. Cash 500,000
Bonds payable 500,000
B. Cash 471,747
Interest expense 28,253
Bonds payable 500,000
C. Cash 500,000
Premium on bonds payable 28,253
Bonds payable 471,747
D. Cash 471,747
Discount on bonds payable 28,253
Bonds payable 500,000

PROBLEM 26:
ELEANOR CORP. has been producing quality disposable diapers for more than two decades.
The company’s fiscal year runs from April 1 to March 31. The following information relates to
the obligations of Eleanor as of March 31, 2012.

Bonds Payable
Eleanor issued P10,000,000 of 10% bonds on July 1, 2010. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2020.
Interest is paid semiannually on July 1 and January 1. Eleanor uses the effective interest rate
method to amortize bond premium or discount.
The following present value factors are taken from the present value tables:
Present value of 1 at 12% for 10 periods 0.32917
Present value of 1 at 6% for 20 periods 0.31180
Present value of an annuity of 1 at 12% for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6% for 20 11.46992
periods

Notes Payable
Eleanor has signed several long-term notes with financial institutions. The maturities of these
notes are given in the schedule below. The total unpaid interest for all these notes amounts to
P600,000 on March 31, 2012.

Due Date Amount Due

Aril 1, 2012 P 400,000
July 1, 2012 600,000
October 1, 2012 300,000
January 1, 2013 300,000
April 1, 2013 − March 31, 2014 1,200,000
April 1, 2014 − March 31, 2015 1,000,000
April 1, 2015 − March 31, 2016 1,400,000
April 1, 2016 − March 31, 2017 800,000
April 1, 2017 − March 31, 2018 1,000,000
P7,000,000

Estimated Warranties
Eleanor has a one-year product warranty on some selected items in its product line. The
estimated warranty liability on sales made during the 2010 – 2011 fiscal year and still
outstanding as of March 31, 2011 amounted to P180,000. The warranty costs on sales made
from April 1, 2011, through March 31, 2012, are estimated at P520,000. The actual warranty
costs incurred during the current 2011 – 2012 fiscal year are as follows:

Warranty claims honored on 2010 – 2011 sales P 180,000

Warranty claims honored on 2011 – 2012 sales 178,000
Total warranty claims honored P 358,000

Other Information
a. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2012.

b. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000
Withholding waxes payable 94,000
Other payroll deductions 10,000
Total P 404,000

c. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2012.

d. DIVIDENDS
On March 15, 2012, Eleanor’s board of directors declared a cash dividend of P0.20 per
ordinary share and a 10% share dividend. Both dividends were to be distributed on April
12, 2012, to the shareholders of record at the close of business on March 31, 2012. Data
regarding Eleanor ordinary share capital are as follows:

Par value P 5.00 per

share
Number of shares issued and outstanding 6,000,000
shares

Market values of ordinary shares:

March 15, 2012 P22.00 per
share
March 31, 2012 21.50 per share
April 12, 2012 22.50 per share
1. How much was received by Eleanor from the sale of the bonds on July 1, 2010?
A. P8,852,960 C. P10,500,000
B. P10,000,000 D. P10,647,040
2. What is the current portion of Eleanor’s notes payable at March 31, 2012?
A. P2,800,000 C. P1,300,000
B. P1,600,000 D. P3,800,000
3. The balance of the estimated warranties payable at March 31, 2012, is
A. P342,000 C. P520,000
B. P18,000 D. P180,000
4. On March 31, 2012, Eleanor’s statement of financial position would report total current
liabilities of
A. P5,286,000 C. P5,336,000
B. P4,386,000 D. P5,642,000
5. On March 31, 2012, Eleanor’s statement of financial position would report total noncurrent
liabilities of
A. P14,389,350 C. P14,370,783
B. P14,352,217 D. P14,252,960

PROBLEM 27:
The following data were obtained from the initial audit of HANSTEEN COMPANY:

15%, 10-year, Bonds Payable, dated January 1, 2011

Debit Credit Balance
Cash proceeds from issue on January 1, 2011 of 1,000,
P1,000 bonds. The market rate of interest on the date P1,172,0 P1,172,0
of issue was 12%. 44 44

Bond Interest Expense

Cash paid, 1.2.12 P75,00 P 75,000
Cash paid, 7.1.12 0 150,000
Accrual, 12.31.12 75,000 225,000
75,000
Accrued Interest on Bonds
Balance, 1.1.12 P 75,000 P 75,000
Accrual, 12.31.12 75,000 150,000

Treasury Bonds
Redemption price and interest to date on 200 bonds
permanently retired on December 31, 2012 P265,0 P265,000
00

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2012
A. P831,110 C. P1,151,583
B. P800,000 D. P91,266
2. Loss on bond redemption
A. P4,683 C. P15,000
B. P19,683 D. P34,683
3. Accrued interest on bonds at December 31, 2012
A. P75,000 C. P60,000
B. P135,000 D. P52,500
4. Bond interest expense for the year ended December 31, 2012
A. P150,000 C. P69,745
B. P139,174 D. P160,826

PROBLEM 28:
The long – term debt section of ELMO COMPANY’s statement of financial position as of
December 31, 2011, included 9% bonds payable of P400,000, less unamortized discount of
P32,000. Further examination revealed that these bonds were issued to yield 10%. The
amortization of the bonds discount was recorded using the effective interest method. Interest
was paid on January 1, and July 1 of each year. On July 1, 2012, Elmo retired the bonds at 105
before maturity.

What is the amount of loss to be recognized on the retirement of bonds?

 A. P52,400 C. P51,600
B. P20,000 D. P0

PROBLEM 29:
MALOMBE CORP. had outstanding P6,000,000 of 11% bonds (interest payable July 31 and
January 31) due in 10 years. On July 1, it issued P9,000,000 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 P240,000 and P60,000, respectively.

Required:
Prepare journal entries to record the following:
a. Sale of the new issue
b. Retirement of the old issue

PROBLEM 30:
On January 1, 2012, DIAS COMPANY issued a 3-year, 4,000 convertible bonds at face value of
P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%.
Each bond is convertible, at the holder’s option, into 200 P2 par value ordinary shares at any
time up to maturity. On the date of issuance, the prevailing market interest rate for similar
debt without the conversion privilege was 9%. On the same date, the market price of one
ordinary share was P3. The bonds were converted on December 31, 2013.

The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for 3 periods 2.67301 2.53130
Present value of an annuity due of 1 for 3 periods 2.83339 2.75911

1. The liability component of the convertible debt is

A. P4,000,000 C. P1,600,000
B. P3,696,232 D. P3,730,242
2. The equity component of the convertible debt is
A. P303,768 C. P1,600,000
B. P1,973,621 D. P2,400,000
3. The interest expense to be reported on Dias Company’s income statement for the year
ended December 31, 2013, is
A. P101,000 C. P240,000
B. P110,107 D. P341,000
4. The entry to record the bond conversion on December 31, 2013, should include a credit to
share premium – issuance of
A. P2,289,893 C. P2,593,661
B. P2,400,000 D. P0

PROBLEM 31:
EYASI, INC. began operating on January 1, 2012. At the end of the first year of operations,
Eyasi reported P7,500,000 income before income taxes on its income statement but only
P700,000 taxable income on its tax return. Analysis of the P6,800,000 difference revealed that
P6,200,000 was a permanent difference and P600,000 was a temporary difference related to a
current asset. At the end of 2013, the accumulated temporary tax liability difference related to
future years is P1,100,000. The enacted tax rate is 30% for 2012 and 2013.

1. The journal entry to adjust the deferred tax liability at the end of 2013 should include a
A. Debit to Deferred tax liability of P150,000
B. Credit to Deferred tax liability of P150,000
C. Debit to Deferred tax asset of P150,000
D. Credit to Deferred tax liability of P330,000
2. Assume that at the end of 2013, the accumulated temporary tax liability difference related
to future years is P550,000. What journal entry should be made to adjust the deferred tax
liability at the end of 2013?
A. Income Tax expense 165,000
Deferred tax liability 165,000
B. Deferred tax asset 15,000
Income tax benefit 15,000
C. Deferred tax liability 15,000
 Income tax expense 15,000
D. Deferred tax liability 15,000
Deferred tax asset 15,000

PROBLEM 32:
At December 31, 2011, GALILEE CORPORATION had a temporary difference (related to
depreciation) and reported a related deferred tax liability of P60,000 on its statement of
financial position. At December 31, 2012, Galilee has four temporary differences. An analysis
of these reveals the following:

Temporary Difference Future Taxable (Deductible)

Amounts

2013 2013 Later

Year
a. Use of straight-line depreciation for
accounting purposes and accelerated
depreciation for tax purposes P160,00 P220,000 P760,000
0
b. Rent collected in advance; recognized when
earned for accounting purposes and when
received for tax purposes (380,000 --
)
c. Various expenses accrued when incurred for
accounting purposes; recognized for tax
purposes when paid (90,000) -- --

d. Recognition of gain on installment sales

during the period of sale of accounting
purposes and during the period of collection 276,0 210,000 --
for tax purposes 00
(P34,00 P430,000 P760,000
0)

Assume that the company has income taxes of P435,000 due per the tax return for 2012. The
installment receivable collectible in 2014 is classified as noncurrent. The enacted tax rate is
30% for all periods.

1. What amount of deferred tax asset should be shown on Galilee’s statement of financial
position at December 31, 2012?
A. P114,000 C. P141,000
B. P514,800 D. P27,000
2. What amount of deferred tax liability should be shown on Galilee’s statement of financial
position at December 31, 2012?
A. P342,000 C. P141,000
B. P456,000 D. P487,800
3. How much is Galilee’s pretax accounting income for 2012?
A. P1,563,900 C. P1,450,000
B. P2,406,000 D. P2,606,000
4. How much is Galilee’s net income for 2012?
A. P1,971,000 C. P2,406,000
B. P1,684,200 D. P1,450,000

PROBLEM 33:
The following data pertain to the CARROLL COMPANY.
a. At December 31, 2012, the company has a P900,000 liability reported for estimated
litigation claims. This P900,000 balance represents amounts that have been charged to
income but are not tax deductible until they are paid. The company expects to pay the
claims and thus have tax-deductible amounts in the future in the following manner:

Year Payments
2015 P150,000
2016 690,000
 2017 60,000
P900,000

b. The company uses different depreciation methods for financial reporting and tax
purposes. Consequently, at December 31, 22012, the company has a cumulative
temporary difference due to depreciable property of P2,400,000. This P2,400,000
cumulative temporary difference is to result in taxable amounts in future years in the
following manner:

Year Payments
2013 P480,000
2014 480,000
2015 480,000
2016 480,000
2017 480,000
P 2,400,000

c. The income tax rate is 30%.

d. Taxable income for 2012 is P2,400,000. The company expects to report taxable income
for the nest five years.
e. No temporary differences existed at the end of 2011.

1. The deferred tax liability to be reported in Carroll’s statement of financial position at

December 31, 2012, is
A. P720,000 C. P450,000
B. P480,000 D. P270,000
2. The deferred tax asset to be reported in Carroll’s statement of financial position at
December 31, 2012, is
A. P270,000 C. P450,000
B. P150,000 D. P720,000
3. The amount of current income tax payable to be reported in Carroll’s statement of financial
position at December 31, 2012, is
A. P630,000 C. P540,000
B. P546,000 D. P720,000
4. Carroll’s pretax accounting income for 2012 is
A. P3,900,000 C. P2,874,000
B. P900,000 D. P2,400,000
5. Carroll’s net income for 2012 is
A. P2,730,000 C. P1,230,000
B. P3,630,000 D. P4,350,000

PROBLEM 34:
KAMPESCA, INC., in its first year of operations, has the following differences between the
carrying value and tax base of its assets and liabilities at the end of 2012:
Carrying Value Tax
Base
Equipment (net) P800,000 P680,00
0
Estimated warranty liability 400,000 0

Kampesca estimates that the warranty liability will be settled in 2013.

The difference in equipment (net) will result in taxable amounts as shown below:
Year Amount
s
2013 P40,000
2014 60,000
2015 20,000

The company has taxable income of P1,040,000 for 2012. He income tax rate is 30%.

1. What amount of deferred tax liability should be reported in Kampesca’s statement of

financial position at December 31, 2012?
A. P36,000 C. P24,000
B. P30,000 D. P84,000
2. What amount of deferred tax asset should be reported in Kampesca’s statement of financial
position at December 31, 2012?
A. P156,000 C. P120,000
B. P0 D. P84,000
3. What is the amount of income tax payable (current) to be reported in Kampesca’s
statement of financial position at December 31, 2012?
A. P228,000 C. P312,000
B. P396,000 D. P156,000
4. What is the total income tax expense for 2012?
A. P228,000 C. P192,000
B. P396,000 D. P348,000

PROBLEM 35:
On December 31, 2011, LEMAN CO. signs a 10-year noncancelable lease agreement to lease a
storage building from Storage Company. The following information pertains to this lease
agreement:
a. The agreement requires rental payments of P720,000 beginning on December 31, 2011.
b. The fair value of the building on December 31, 2011, is P4,400,000
c. The building has an estimated economic life of 12 years, with an unguaranteed residual
value of P100,000. Leman depreciates similar buildings on the straight-line method.
d. The lease is nonrenewable. At the termination of the lease, the building reverts to the
lessor.
e. The lessor’s implicit rate, known to Leman Co., is 12% per year.
f. The yearly rental payment includes P24,705 of executory costs related to taxes on the
property.

The following present value factors are for 10 periods at 12% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 5.65022
1
Present value of 1 0.32197

1. What amount should be capitalized as the cost of the leased storage buildings?
A. P4,556,340 C. P4,432,197
B. P4,400,000 D. P0
2. What amount should be included in the current liabilities section of Leman’s statement
position at December 31, 2012?
A. P720,000 C. P695,295
B. P414,477 D. P280,818
3. What amount should be included in the noncurrent liabilities section of Leman’s statement
of financial position at December 31, 2012?
A. P3,453,975 C. P5,562,360
B. P3,173,157 D. P0
4. What is the total lease-related expenses to be reported in Leman’s income statement for
the year ended December 31, 2012?
A. P909,270 C. P1,160,000
B. P879,182 D. P464,705

PROBLEM 36:
JUMBO COMPANY enters into a lease agreement with Lessor Co. on July 1, 2012, to lease a
machine to be used in its manufacturing operations.

The following data pertain to this agreement:

a. The term of the noncancelable lease is 3 years, with no renewal option and no residual
value at the end of the lease term. Payments of P212,024 are due on July 1 of each year,
beginning July 1, 2012.
b. The fair value of the machine on July 1, 2012, is P620,000. The machine has a remaining
economic life of 5 years, with no salvage value. The machine reverts to the lessor upon
the termination of the lease.
c. Jumbo Company elects to depreciate the machine on the straight-line method.
d. Jumbo Company’s incremental borrowing rate is 10% per year, and it has no knowledge
of the implicit rate computed by the lessor.
e. The present value factor of an ordinary annuity of 1 for 3 periods at 10% per year is
2.48685. the present value factor of an annuity due of 1 for 3 periods at 10% is 2.73554.
How much lease liability should be recognized by Jumbo at the beginning of the lease
contract?
A. P0 C. P580,000
B. P527,272 D. P636,072