Pamantasan ng Cabuyao

Katapatan Homes Subdivision, Brgy. Banay- Banay, City of Cabuyao, Laguna

Intermediate Accounting 2

PRELIM EXAM_PART II

Name: Score:
Course & Section: Date:

Problem I:

Cut Inc. has produced quality children’s apparel for over 25 years. The company’s fiscal year is
from April 1 to March 31. The following information relates to the obligations of Cut Inc. as of
March 31, 2018:

Bonds Payable: The company issued 7%, P4,000,000 bonds on July 1, 2012 at 98. The bonds
mature on July 1, 2022. Interest is paid semi-annually on July 1 and January 1. Cut Inc. uses the
straight- line method to amortize the bond discount.

Notes Payable: Cut Inc. has signed several long-term notes with financial institutions and
insurance companies. The maturities of these notes are given below. The total unpaid interests
for all these notes amount to P90,000 as of March 31, 2018.

Due Date Amount Due

April 1, 2018 P100,000
July 1, 2018 200,000
October 1, 2018 100,000
January 1, 2019 200,000
April 1, 2019 – March 31, 2020 600,000
April 1, 2020 – March 31, 2021 400,000
April 1, 2021 – March 31, 2022 400,000
April 1, 2022 – March 31, 2023 500,000
April 1, 2023 – March 31, 2024 500,000
TOTAL P3,000,000

Estimated Warranties: Cut Inc. a one-year product warranty on selected items. The estimated
warranty liability on sales made during 2016–2017 fiscal year and still outstanding as of March
31, 2017, amounted to P55,000. The warranty costs on sales made from April 1, 2017, to March
31, 2018, are estimated at P145,000. The actual warranty costs incurred during the current 2017
2018 fiscal year were as follows:
 Warranty on 2016-2017 sales P 55,000
Warranty on 2017-2018 sales 75,000
Total P130,000

Trade payables: Accounts payable for supplies, goods and services purchased on open account
amounted to P325,000 as of March 31, 2018.

Payroll related items: The following outstanding obligations relate to the payroll as of March
31, 2018:

Accrued salaries and wages P145,000

Income taxes withheld from employees 45,000
Other payroll deductions 3,000

Taxes: The following taxes are incurred but not due until the next fiscal year.

Income taxes P250,000

Property taxes 100,000
Value-added taxes 185,000

Other accruals: Other accruals amounted to P50,000 as of March 3,1 2018.

Dividends: On March 15, 2018, the company’s board of directors declared a cash dividend of
P0.40 per share and a 10% share dividend. Both dividends were to be distributed on April 12,
2018, to the ordinary shareholders of record at the close of business on March 31, 2018. Data
regarding the company’s ordinary shares were as follows:

Par value P5 per share

Number of shares issued and outstanding 2,000,000
Number of shares subscribed 500,000
Market value of ordinary shares:
March 15, 2018 P22.00
March 31, 2018 21.50
April 12, 2018 22.50

1. How much is the total long-term liabilities?

2. What is the total current liabilities?
Problem II:

RADO INC. a manufacturer of heavy machinery, grants a 2-year warranty on its products. The
Estimated Liability for Product Warranty account shows the following entries for the year:

Beginning balance P225,000

Provision during the year (quarterly accrual) 200,000
Total P425,000

A review of the company’s policy of accounting for warranties revealed that based on the
company’s past experience, warranty claims averaged 5% on net sales. Moreover, the company
provides for a quarterly accrual of the estimated warranties expenditure based on rough
estimates.

The following additional information is available from the company’s records:

Gross sales P7,250,000

Sales returns and allowances 150,000
Cost of sales 3,678,000

The cost of sales included P415,500 cost of servicing the warranty claims for the year.

What is the correct balance of the estimated liability for product warranty at the end of the year?

Problem III:

Mountain Province Home Depot carries a wide variety of promotion techniques to attract
customers.

Kitchen and home appliances are sold in a one-year warranty for replacement of parts and labor.
The estimated warranty cost, based on past experience, is 5% of sales.

The premium is offered on the home furniture. Customer receive a coupon for each peso spent
on home furniture. Customers may exchange 2,000 coupons and P50 for a rice cooker which the
company purchased at P340 for each rice cooker and estimates that 60% of the coupons given to
customers will be redeemed.

The company’s total sales for 2018 were P115.2M – P86.4M from kitchen and home appliances
and P28.8M from home furniture. Replacement parts and labor for warranty work totaled
P2.624M during 2018. A total of 5,200 rice cookers used in the premium program were
purchased during the year and there were 9,600,000 coupons redeemed in 2018.

The accrual method is used by the company to account for the warranty and premium costs for
financial reporting purposes. The balance in the accounts related to warranties and premiums on
January 1, 2018, were as shown below:

Inventory of Premium items P340,000

Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000

Based on the information above, determine:

1. Promotional expense related to premiums for the current year 2018?

2. Estimated liabilities for premiums as of December 31, 2018?
3. Estimated liabilities for warranties as of December 31, 2018?

Problem IV:

The following is an excerpt of Free Day Inc.’s trial balance as of December 31, 2020:

10% Notes payable - Bank, 5 years P3,000,000

12% Bonds payable, 5 years 5,000,000
9% Bonds payable, 3 years 2,000,000

Additional information:

a. The Notes payable – Bank which was dated April 1, 2016 pays interest annually every
April 1. As of December 31, 2020, Freeday Inc. has the right to refinance the said loan by
issuing Bonds the proceeds shall be used to settle the obligation. On March 1, 2021 the
company issued P4,000,000 Bonds at face value and used one-half of the proceeds to
settle the notes on April 1, 2021. The balance of the maturing obligation was settled out
of working capital. The 2020 financial statement were approved for issuance by the BOD
on April 15, 2021,
b. The 12% bonds payable was issued on January 1, 2019 when the prevailing market rate
for bonds was at 10%. The company recorded the transaction as a debit to cash for the
bond proceeds, credit to the bonds payable account at face value, charging any difference
to interest expense. Interest on the bonds is payable annually every December 31. Interest
payments were recorded to the appropriate interest expense account.
 c. The 9% bonds payable which were issued at P2,948,685, is a serial bonds dated January
1, 2020 and matures at P1,000,000 every December 31, starting 2020. Interest based on
the outstanding balance of the bonds are paid annually every December 31. The
prevailing market rate of interest on the issuance date was at 10%. The issuance was
recorded as a debit to cash for the proceeds, credit to bonds payable at face value with the
difference being charged to interest expense. The first principal and interest collection
was recorded correctly at the end of the year.

Requirements:

1. How much from the 10% Notes payable should be presented as non-current liability as of
December 31, 2020?
2. What is the correct carrying value of the 12% Bonds payable as of December 31, 2020?
3. What is the retroactive adjustment to retained earnings beginning as a result of your audit
of the 12% Bonds payable?
4. What is the correct carrying value of the 9% Serial Bonds Payable as of December 31,
2020?
5. What is the correct interest expense on the 9% Serial Bonds Payable in 2021?