Name: ___________________________________________

Year and Section: __________________________________

PART 2. PRACTICE

PROBLEM SOLVING: Supply the answer. Write your answers legibly and strictly no erasures are
allowed.

(Nos. 1 to 2 are based on the following problem)

Problem 1: Apple Company’s accounts payable on December 31, 2020 totaled P750,000 before any necessary
year-end adjustments relating to the following transactions and information:
● On December 27, 2020, Apple wrote and issued checks to creditors in the amount of P180,000. The
checks were dated January 5, 2021 and were recorded in 2021.
● On December 28, 2019, Apple wrote and issued checks dated December 28, 2019 to creditors in the
amount of P190,000. The checks were recorded in 2020.
● On December 29, 2019, Apple wrote checks in the amount of P170,000 and issued these to creditors in
2020. These checks were recorded in 2019.
● Goods shipped on December 29, 2020 from a vendor to Apple under terms F.O.B. shipping point were
recorded when the goods were received on December 31, 2020. The invoice cost was P150,000.
● The accounts payable general ledger balance of P750,000 is net of the following debit balances:
o P50,000 debit balance in one supplier’s account representing deposit made in 2020 on goods to
be delivered in 2021.
o P90,000 debit balance in another supplier’s account representing deposit made in October 2020
on goods which were delivered as agreed upon on December 31, 2020.

Question No. 1: What is the adjusted balance of Accounts payable as of December 31, 2020?
Question No. 2: What is the net adjustment to Purchases for the year ended December 31, 2020?

Problem 2: Busy Company’s accounts payable on December 31, 2021 was P875,000 before considering the
following information:
● Goods shipped on December 20, 2021 under FOB Destination, were lost in transit. The company
recorded the claims receivable from the common carrier and the accounts payable to the supplier in
2021. The invoice costs P120,000.
● On December 28, 2021, Busy was authorized by the vendor to return goods that were billed for
P30,000. The vendor’s credit memo was received on January 3, 2022, but the company recorded the
purchase return in 2021.
● Goods costing P100,000, which was inclusive of freight of P10,000 were purchased from TRY
Trading. The goods were shipped in 2021 but were received in 2022. These were recorded as purchase
on account for the total amount of P100,000 in 2021.
● Goods costing P120,000, net of freight of P15,000, were purchased from DRY Trading. These were
shipped in 2021 and were received in 2022 at the net amount of P120,000. These were recorded in
2022.

Question No. 3: What is the adjusted balance of Accounts Payable as of December 31, 2021?

Problem 3: On September 30, 2020, Chestnut Company purchased an equipment. The terms of the sale called
for Chestnut to pay P4,928,400 on September 30, 2022. Chestnut gave the seller a non-interest bearing note for
this amount. At the date of purchase, the interest rate for this type of loan was 11%. Chestnut recorded this
transaction as a debit to purchases and a credit to note payable at P4,928,400. The company depreciates the
equipment at 10% per annum accordingly.

Question No. 4: What is the understatement (overstatement) in the company’s profit for the year
ended December 31, 2020?

Problem 4: On March 1, 2020, Diamond Company discounted its own P5,000,000 non-interest bearing note
with Bangko Real at 12%. The note is due on February 28, 2021.
 Question No. 5: At what amount should the interest expense be presented in the financial statement
for the year ended December 31, 2020?

(Nos. 6 to 7 are based on the following problem)

Problem 5: On November 1, 2020, the Everlasting Company issued a 10% promissory note with a face value of
P10,000,000 for a piece of land. The principal and interest compounded annually are due on October 31, 2023.

Question No. 6: What is the amount to be shown as non-current liability as of December 31, 2021?
Question No. 7: What is the amount to be shown as interest expense for the year ended December 31,
2022?

(Nos. 8 to 9 are based on the following problem)

Problem 6: On June 1, 2020, Fern Company purchased an equipment by issuing a five-year, non-interest
bearing, P3,500,000 note. The note is payable in annual installments of P700,000. The first installment is due
on May 31, 2021. There was no equivalent cash price for the equipment and the note had no ready market. The
prevailing interest rate for a note of this type is 8%. The present value factors are as follows:

Present value factor of P1 lump-sum using 8% for 5 years is 0.6806

Present value factor of P1 ordinary annuity using 8% for 5 years is 3.9927

Question No. 8: What is the amount to be shown as current liability as of December 31, 2020?
Question No. 9: What is the amount to be shown as non-current liability as of December 31, 2021?

(Nos. 10 to 12 are based on the following problem)

Problem 7: Below is a correctly prepared amortization table of Grace Company relative to the issuance of its
bonds, had these bonds been paid at its maturity date.

Date Nominal Interest Effective Interest Premium Amortized Cost,

P1M x 7.5% Amortized Cost x 6% Amortization End
01.01.20 1,110,401
06.30.20 75,000 66,624 8,376 1,102,025
12.31.20 75,000 66,122 8,878 1,093,147
06.30.21 75,000 65,589 9,411 1,083,736
12.31.21 75,000 65,024 9,976 1,073,760
06.30.22 75,000 64,426 10,574 1,063,186
12.31.22 75,000 63,791 11,209 1,051,977
06.30.23 75,000 63,119 11,881 1,010,096
12.31.23 75,000 62,406 12,594 1,027,502
06.30.24 75,000 61,650 13,350 1,014,152
12.31.24 75,000 60,848 14,152 1,000,000

P400,000 face value bonds were retired on November 30, 2021 for a total of P475,000, inclusive of accrued
interest.

Question No. 10: How much is the gain or (loss) on the extinguishment of the bonds on November 30,
2021?
Question No. 11: How much is the amount of interest expense to be presented in the statement of
comprehensive income for the year ended December 31, 2021?
Question No. 12: How much is the amortized cost of the bonds on December 31, 2022?

(Nos. 13 to 15 are based on the following problem)

Problem 8: Below is a correctly prepared amortization table of High Company relative to the issuance of its
bonds, had these bonds been paid at its maturity date.

Date Nominal Interest Effective Interest Premium Amortized Cost,

P1M x 7.5% Amortized Cost x 6% Amortization End
2
 11.01.20 1,110,401
04.30.21 75,000 66,624 8,376 1,102,025
10.31.21 75,000 66,122 8,878 1,093,147
04.30.22 75,000 65,589 9,411 1,083,736
10.31.22 75,000 65,024 9,976 1,073,760
04.30.23 75,000 64,426 10,574 1,063,186
10.31.23 75,000 63,791 11,209 1,051,977
04.30.24 75,000 63,119 11,881 1,010,096
10.31.24 75,000 62,406 12,594 1,027,502
04.30.25 75,000 61,650 13,350 1,014,152
10.31.25 75,000 60,848 14,152 1,000,000

P700,000 face value bonds were retired on February 28, 2023 for a total of P104 plus accrued interest.

Question No. 13: How much is the gain or (loss) on the extinguishment of the bonds to be recognized
on February 28, 2023??
Question No. 14: How much is the Interest payable to be presented in the statement of financial
position on December 31, 2023?
Question No. 15: How much is the total interest expense for the year ended December 31, 2023?

Problem 9: Joan Company prepared the following amortization table of the 12% P5M bonds it issued on
August 1, 2020. The principal of the bonds is paid series of P1M annually together with any accrued interest on
the outstanding bonds, each July 31 starting July 31, 2021. The bonds were issued for P5,241,834, a price that
yields 10%.

Date Nominal Effective Premium Payment Amortized

interest Interest Amortization Cost
08.01.20 5,241,834
07.31.21 600,000 524,183 75,817 1,000,000 4,166,017
07.31.22 480,000 416,602 63,398 1,000,000 3,102,619
07.31.23 360,000 310,262 49,738 1,000,000 2,052,881
07.31.24 240,000 205,288 34,712 1,000,000 1,018,169
07.31.25 120,000 101,817 18,169 1,000,000 0

Question No. 16: How much is current liability to be presented in the financial statement on
December 31, 2023?

Problem 10: On March 1, 2020, King Company issued P2,000,000 of its 10% non-convertible bonds at 106,
due February 28, 2027. Each P1,000 bond was issued with 40 non-detachable share warrants, each entitles the
holder to purchase two ordinary shares of King, par value P25 for P50 per share. If sold without the warrants,
the bonds would yield 12%. The interest on the bonds is payable annually beginning February 28, 2021. The
present value factors are as follows:

Present Value factor of P1 lump-sum using 12% for 7 periods is 0.4523

Present Value factor of P1 ordinary annuity using 12% for 7 periods is 4.5638

Question No. 17: What is the initial valuation of the equity component on issue date?
(Nos. 18 to 19 are based on the following problem)
Problem 11: Mind Company has an overdue note payable to X Company with a face value of P1,200,000 and
an accrued interest of P120,000. Because of financial difficulty Mind negotiated with X to exchange an
equipment with a carrying amount of P1,150,000. The equipment had a fair value of P1,100,000.

Question No. 18: How much is the gain or (loss) on troubled debt restructuring?

3
 Question No. 19: How much is the gain or (loss) on disposal of the asset?

Problem 12: Oval Company is experiencing financial difficulties and a downward tend in its financial
performance. The firm is unable to service its debt and as a result, missed payment of the annual interest on its
loan from Bank of Quezon City. The principal amount of the loan is P15,000,000, which is already due, with
annual interest of 10% payable annually. Oval management has negotiated a modification of its debt terms with
its creditors. The creditors agree to the following new terms:
● Forgive accrued interest
● Reduce the principal amount of the loan to P12,000,000.
● Extend the payment of principal for 3 years.
● Reduce the interest rate for the remaining three years to 9%.

Oval Company could issue debt with a term of three years at a coupon rate of 12% based on current credit
rating. The present value factors are:

Present value for P1 lump-sum using 10% for 3 periods is 0.7513

Present value of P1 lump-sum using 12% for 3 periods is 0.7118
Present value of P1 ordinary annuity using 10% for 3 periods is 2.4869
Present value of P1 ordinary annuity using 12% for 3 periods is 2.4018

Question No. 20: What is the gain on troubled debt restructuring?

-END OF EXAMINATION-