Page 1 Acctg 22 - Set A

Prelim Exam
PAGADIAN CAPITOL COLLEGE, INC.
Acctg 22 - Set A
Prelim Exam

NAME:
Date:

Instruction: On the answer sheet provided, fully shade the circle of the letter of your answer using
black ballpen.
STRICTLY NO FORM OF ANY ERASURES AND UNNECESSARY WRITINGS.
SET Erasure/unnecessary writing is equivalent to '1 POINT DEDUCTION'
B A
50 1. b. If the entity has executed an agreement to refinance the note before the end of reporting period.

51 2. d. None of the above

52. 3. b. I or III

Note
The classification of financial liabilities is limited only to FVPL and amortized cost. FVOCI classification is not
applicable for financial liabilities.

53 4. a. 122,400 loss

54 5. b. 1,445,000

55 6. c. P300,000

56 7. a. Interest expense - Overstated ; Bond carrying amount - Overstated

57 8. a. False, true, false

58 9. b. 410,156

59 10. a. 180,469

60 11. d. 65,625

61 12. b. 328,125

1 13. a. Carrying amount of bonds - Increase ; Net income - Decrease

2 14. b. Fair value minus directly attributable transaction costs

Note
Financial liability not designated at fair
value through profit loss (A.K.A. at
amortized cost) is initially measured at fair
value minus directly attributable
transaction costs.

3 15. d. represents accepted practice and should be used whenever the warranty is an integral and
inseparable part of the sale.

4 16. c. 5,345,200
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Prelim Exam

5 17. d. Expensed when incurred.

6 18. c. 1,158,926

7 19. b. 115,892

8 20. c. 350,000

9 21. a. 6,000,000

10 22. b. The obligation to provide goods that customers have ordered and paid for during the current year

11 23. d. 2,160,000

12 24. c. 720,000

13 25. b. 2,700,000

14 26. b. 900,000

15 27. a. False, true

16 28. d. 4,750,000

17 29. b. 4,000,000

18 30. c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer
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Prelim Exam
19 31. b. 1,530,000

20 32. d. 0

21 33. c. False, true

22 34. c. 250,000
Solution; (100,000 + 400,000)/2 = 250,000

23 35. b. 629,000

24 36. d. 500,000

Explanation: The lawsuit damages must be accrued as a loss contingency because an unfavorable outcome is
probable and the amount of the loss is reasonably estimable. When a range of possible loss exists, the best
estimate within the range is accrued. When no amount within the range is a better estimate than any other
amount, the dollar amount at the low end of the range is accrued (in this case, $500,000) and the dollar
amount of the high end of the range is disclosed.

25 37. a. 800,000

Solution: 500,000 + 300,000 = 800,000

26 38. b. 3,832,700

27 39. d. If the amount of payment can be estimated, a liability should be recognized, if the amount of
expected payment cannot be estimated, only a note disclosure would be required.

28 40. c. 2,400,000
Explanation: Amount recognized should be the best estimate of the expenditure required to settle the present
obligation. Best estimate represents the amount that a company would pay to settle obligation at the
statement of financial position date.With regards to unfiled suits and unasserted claims and assessments, a
 Page 4 Acctg 22 - Set A
Prelim Exam
company must determine:

29 41. b. 750,000
Solution: 500,000 + / 2 750,000

30 42. c. 4,700,000

31 43. b. 2,900,000

32 44. b. 6,046,000

33 45. b. It must be payable in cash.

34 46. a. 2 and 3

35 47. d. 0 2,500,000

36 48. d. Financial liabilities that provide financing but are not due for settlement within twelve
months after the reporting period
37 49. c. 965,392

38 50. d. 969,882
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39 51. a. 965,392

40 52. a. 630,000

41 53. c. The entity has the discretion to refinance as long-term.

42 54. c. P2,090,000

43 55. d. 1,250,000

44 56. d. The premium on bonds payable decreases when amortization entries are made until the balance
reaches zero at maturity date
45 57. a. 251,293

46 58. c. 72,102 gain

47 59. a. 945,000

48 60. b. True, true

49 61. b. 5,450,000
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Prelim Exam

PAGADIAN CAPITOL COLLEGE, INC.

Acctg 22 - Set A
Midterm Exam

NAME:
Date:

Instruction: On the answer sheet provided, fully shade the circle of the letter of your answer using black ballpen ONLY.
STRICTLY NO FORM OF ANY ERASURES AND UNNECESSARY WRITINGS.
Erasure/unnecessary writing is equivalent to '1 POINT DEDUCTION'
Using of erasable pen will result to 20point deduction
Anyone caught talking will result to 30 point deduction for both. Raise your questions to your instructor/proctor ONLY.
SET
A B
1. 55. b. Deferred tax liability expected to reverse within 6 months

2. 56 a. Accrued

3. 57 c. Midpoint

4. 58 c. 2,900,290

Note
PV of principal (P1,000,000 x 2.4018) P2,401,800
PV of nominal interest:
Year 1 (P3,000,000 x 10% x 0.8929) 267,870
Year 2 (P2,000,000 x 10% x 0.7972) 159,440
Year 3 (P1,000,000 x 10% x 0.7118) 71,180
Issue price and initial measurement of bonds P2,900,290

5. 59 a. 1,948,325

Note
Issue price and initial measurement of bonds P2,900,290
Nominal interest (P3,000,000 x 10%) (300,000)
Effective interest (P2,900,290 x 12%) 348,035
Principal repayment (1,000,000)
Amortized cost 12/31/2018 P1,948,325

6. 60 b. II only

Note
If the initial measurement of a note payable is higher than its face amount, the loan was issued at a premium.
The nominal rate is HIGHER than the effective rate.

7. 61 b. 379,680
Note
Interest expense 2015 (P3,796,800 x 10%) = P379,680
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Prelim Exam
8. 62 d. 1,703,200
Note
Carrying amount of liability (P5,000,000 + P500,000) P5,500,000
PV of modified obligation [(P4,000,000 x 0.75) + (P4,000,000 x 8% x 2.49)] 3,796,800
Gain on extinguishment P1,703,200

9. 63 c. is initially treated as unearned rent by a lessor

10. 64 d. 630,000

Note
From 2014 sales:
2nd half (P250,000 x 60%) P150,000
From 2015 sales:
1st half (P300,000 x 60%) 180,000
2nd half (P300,000 x 100%) 300,000
Total unearned revenue P630,000

11. 65 b. 3,465,000

Note
Accounts payable 192,500
Unsecured note payable, 8%, due July 1, 2024 1,400,000
Accrued expenses 122,500
Senior bonds payable, 7%, due March 31, 2024 1,750,000
Total current liabilities 3,465,000

**Contingent Liability shall not be recognized in the FS but disclosed only

12. 66 b. Decrease; Decrease

13 67 c. 3,600,000
Note
Initial lease liability (1,000,000 x 3.60) = 3,600,000

14 68 a. 6,720,000
Note
Fair value P20,000,000
Sale price 18,000,000
Excess fair value - prepayment of rental P2,000,000

Initial lease liability P3,600,000

Excess fair value - prepayment of rental 2,000,000
Total lease liability P5,600,000

Cost of right of use asset (5,600,000 / 20,000,000 x 24,000,000) P6,720,000

15 69 b. 400,000
Note
Annual rent income P1,000,000
Depreciation of buyer-lessor (18,000,000 / 30 years) (600,000)
Net annual rent income P400,000

16 70 a. 2,880,000
Note
Fair value of building P20,000,000
Carrying amount 24,000,000
Total loss P(4,000,000)

Fair value of building P20,000,000

Right retained equal to total lease liability -5,600,000
Right transferred to buyer-lessor P14,400,000
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Prelim Exam
Loss on right transferred (14,400,000 / 20,000,000 x 4,000,000) P2,880,000

17. 1 a. 1 only

18. 2 b. For bonds measured at amortized cost, if the initial measurement of bonds is higher than its face value,
the difference is treated as a premium and amortized using the effective interest method. As a result of
amortization, the interest expense recorded is LOWER than the interest accrued or paid

19. 3 b. Direct origination costs - Ignore ; Origination fee - Deduct

20. 4 a. 1,980,216

Note
PV of principal (P700,000 x 2.4018) P1,681,260
PV of nominal interest
Year 1 (P2,100,000 x 10% x 0.7118) 149,478
Year 2 (P1,400,000 x 10% x 0.7118) 99,652
Year 3 (P700,00 x 10% x 0.7118) 49,826
Initial measurement P1,980,216

21. 5 d. 2,030,203

Note
PV of principal (P700,000 x 2.4018) P1,681,260
PV of nominal interest
Year 1 (P2,100,000 x 10% x 0.8928) 187,448
Year 2 (P1,400,000 x 10% x 0.7972) 111,608
Year 3 (P700,00 x 10% x 0.7118) 49,826
Initial measurement P2,030,142

22. 6 b. 1,999,158

Note
PV of principal (P2,100,000 x 0.7118) P1,494,780
PV of nominal interest (P2,100,000 x 10% x 2.4018) 504,378
Initial measurement P1,999,158

23. 7 a. Excess of the carrying amount of the debt over the carrying amount of the asset

Note
Gain on extinguishments under asset swap is computed as the difference between carrying amount of the
debt over the carrying amount of the asset

24. 8 d. None from the statements

25. 9 c. 1,575,500

Note
Asset Swap:
Carrying amount of liability [P2,300,000 + (P2,300,000 x 12% x 6/12)] P2,438,000
Carrying amount of asset 1,500,000
Gain on extinguishment P938,000

Equity Swap:
Carrying amount of liability [P1,500,000 + (P1,500,000 x 10% x 3/12)] P1,537,500
Initial measurement of equity instruments issued (100,000 shares x P9) 900,000
Gain on extinguishment P637,500

Total gain on extinguishment (P938,000 + P637,500) P1,575,500

26. 10 a. 200,000
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Note
Excess of fair value of shares over par value [(P9 – P7) x 100,000 shares] = P200,000

27. 11 a. In relation to low-value lease, the value of an underlying asset is based on the value of the asset when new
regardless of the age of the asset

28. 12 b. 1,750,000

50k x 70% 35k

x 50
1,750k
29. 13 c. 250,000

1,750k
(1,500k)
250k

30. 14 b. Lease payment less the portion allocable to interest

31. 15 a. The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease term

Note
In a sales type lease, a lessor recognizes a dealer's profit or gross profit at lease inception and interest
revenue over the lease term. On the other hand a lessor recognizes only and interest revenue over the lease
term under a direct finance lease.

32. 16 a. 3,510,000

Note
Present value of annual rental (1,000,000 x 3.17) P3,170,000
Present value of residual value guarantee (500,000 x .68) 340,000
Initial lease liability P3,510,000

33. 17 a. 4,200,000

Note
Initial lease liability or present value of lease payments P3,510,000
Payment to lessor to obtain the lease 300,000
Cost of dismantling and restoring the asset 390,000
Total cost of right of use asset P4,200,000

The annual executory cost is not part of the cost of right of use asset but expensed immediately.

34. 18 d. 2,861,000

Note
Annual rental P1,000,000
Applicable to interest (10% x 3,510,000) (351,000)
Applicable to principal P649,000

Lease liability-January 1 P3,510,000

Principal payment (649,000)
Lease liability - December 31 P2,861,000

35. 19 b. 925,000

Note
Cost of right of use asset P4,200,000
Residual value guarantee -500,000
Depreciable amount P3,700,000
Depreciation (3,700,000 / 4 years) P925,000

36. 20 d. l, Il and Ill

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37. 21 a. 251,293

Note
Issue price P2,867,149
Accrued interest (P3,000,000 x 10% x 3/12) 75,000
Initial measurement P2,792,149
Interest expense 2018 (P2,792,139 x 12% x 9/12) P251,293

38. 22 b. 72,102 gain

Note
Initial measurement P2,792,149
Nominal interest (P3,000,000 x 10% x 9/12) (225,000)
Effective interest (P2,792,139 x 12% x 9/12) 251,293
Amortized cost 12/31/2018 P2,818,442
Nominal interest (P3,000,000 x 10% x 9/12) (225,000)
Effective interest (P2,818,442 x 12% x 9/12) 253,660
Amortized cost 09/30/2019 2,847,102

Net retirement price [P3,000,000 – (P3,000,000 x 10% x 9/12)] P2,775,000

Amortized cost 09/30/2019 2,847,102
Gain on retirement 72,102

39. 23 a. The land is an operating lease and the building is a finance lease

40. 24 d. Charged to cost of sales in the first period of the lease term

41. 25 b. 2,040,000
Note
Sale price P20,000,000
Fair vaiue 18,000,000
Excess sale price - financing component P2,000,000

Present value of rentals P5,400,000

Present value related to financing component (2,000,000)
Present value related to lease liability P3,400,000

Cost of right of use asset (3,400,000 /18,000,000 x 10,800,000) = P2,040,000

Any excess sale price over fair value shall be accounted for as financing provided by the buyer-lessor to seller-lessee.

42. 26 c. 5,400,000
Note
Initial lease liability (1,500,000 x 3.60) = 5,400,000

43. 27 d. 5,840,000
Note
Fair value P18,000,000
Carrying amount (10,800,000)
Total gain on sale P7,200,000

Fair value P18,000,000

Right retained by seller-lessee equal to lease liability (3,400,000)
Right transferred to buyer-lessor P14,600,000

Gain to be recognized (14,600,000 /18,000,000 x 7,200,000) = P5,840,000

44. 28 a. 944,444

Note
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Present value Fraction Allocation
Rental income P3,400,000 34/54 P944,444
Financial asset 2,000,000 20/54 555,556
Total present value P5,400,000 P1,500,000

45. 29 b. 900,000

Note
Depreciation of building of buyer-lessor (18,000,000/20 years) = P900,000

46. 30 a. 1, 2 and 4

47. 31 c. The present value of the principal amount due at the end of the life of the bond plus the present value of
the interest payments made during the life of the bond
Note
The issuance price A.K.A. the proceeds from issuing bonds, is computed generally as the The present value
of the principal amount due at the end of the life of the bond plus the present value of the interest payments
made during the life of the bond

48. 32 c. 2,000,000

25k x 80 = 2,000k

49. 33 a. 1,300,000
2000k - 700k = 1300k

50. 34 b. 1 and 4

51. 35 b. S2 only
Note

The computation of cost of right of use asset by the seller-lessee is affected if the sale price is above or below fair value.|
The following adjustments shall be made to measure the sale proceeds at fair value if the sales price is not equal
to the fair value of the asset or if the lease payments are not at market rates:

Any below-market terms shall be accounted for as a prepayment of lease payments.

​Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-lessee.

52. 36 b. II and III

Note
Collateral trust bonds are bonds secured by investments in stocks and bonds.

53 37 c. 13,535

Note
Present value of lease liability on January 1, 2021 as a result of modification (150,000 x 2.5771) P386,565
Remaining lease liability (497,374 - 124,344) 373,030
Increase in lease liability P13,535

54 38 d. 10,620 gain

Note
Decrease in floor space (5,000-3,750) 1,250
Decrease in scope of the lease (1,250 / 5,000) 0
Cost of right use asset P758,160
Accumulated depreciation - December 31, 2020 (758,160 / 5x2) (303,264)
Carrying amount-December 31, 2020 P454,896

Decrease in lease liability (497,374 x 25%) P124,344

Decrease in carrying amount of right of use asset (454,896x25%) (113,724)
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Termination gain P10,620

55 39 b. 497,374

Note
Present value of lease liability - January 1, 2019 (200,000 x 3.7908) = 758,160

Date Payment 10% Interest Principal Lease Liability

January 1, 2019 758,160
December 31, 2019 200,000 75,816 124,184 633,976
December 31, 2020 200,000 63398 136,602 497,374

56. 40 d. Neither I nor II

Note
If the cash proceeds from issuing the bonds is less than its face amount, the bonds were sold at a discount by
which the effective interest rate is higher than the nominal rate.

57. 41 c. True, false

Note
If the gain or loss on extinguishment of the old liability is less than 10% of the carrying amount of the old liability,
there is no substantial modification of terms. In this case, the gain or loss is NOT recognized.

58. 42 b. 205,260

Note

(1,600,000 – 1,394,741) = 205,259

59. 43 c. 1,394,740

Note
(400,000 x PV annuity due @10%, n=4) = 1,394,741

60. 44 a. 194,740
Note
(1,394,741 – 1,200,000 = 194,741

61. 45 c. 114,740

Note
(194,741 – 80,000 initial direct costs) = 114,741

62. 46 b. 1,600,000

Note
(400,000 x 4 years) = 1,600,000

63. 47 b. False, false, true

64. 48 c. Interest expense - Understated ; Bond carrying amount - Understated

Note
Failure to amortize bond discount understates the amount of interest expense to be reported in the income
statement. It also understates the carrying amount of bonds payable to be reported in the balance sheet.

65. 49 d. Face value minus origination fees charged

Note
Initial measurement of loans payable is computed as face value minus origination fees charged. Direct origination
costs are ignored.
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66. 50 c. 1,285,200

(70% x 2,000k)x 70% = 980,000

(70% x 1,000k)x 30% = 210,000
1,190,000
x 1.08
1,285,200

67. 51 b. 1,147,555

1,285,200
0.8929
1,147,555

68. 52 b. S2 only

69. 53 b. 925,000
Note
12% Notes Payable (P1,500,000 x 25%) P375,000
8% Loans Payable 500,000

Accrued interest expense:

12% Notes Payable (P1,500,000 x 12% x 2/12) 30,000
8% Loans Payable (P500,000 x 8% x 6/12) 20,000 50,000
Total current liabilities P925,000

70. 54 a. 1,250,000

Note
Beginning balance 750,000
Sales during the year 2,500,000
Redemptions (P250,000 + P1,750,000) (2,000,000)
Ending balance 1,250,000
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