MULTIPLE CHOICE – THEORY 1. D 2. D 3. B 4. C 5. A 6. C 7. B 8. A 9. C 10. A Problem 1 Jade Corporation A. Transaction Entries April 1 Truck 4,000,000 Cash 1,000,000 Notes Payable 3,000,000 May 1 Cash 800,000 Discount on Notes Payable 120,000
Notes Payable 920,000
Aug. 1 Retained Earnings 300,000
Dividends Payable 300,000
Sept. 10 Dividends Payable 300,000
Cash 300,000
Dec. 15 Purchases 147,000
Accounts Payable 147,000
B. Adjusting Entries
Dec. 31 Interest Expense 270,000
Interest Payable 270,000
3,000,000 x 12% x 9/12 = 270,000
31 Interest Expense 80,000
Discount on Notes Payable 80,000 120,000 x 8/12
31 Discounts Lost 3,000
Problem 2 Sierra Corporation
Current Liabilities
Accounts Payable P 650,000
Notes Payable – trade 120,000
Notes Payable – Bank 300,000
10% Mortgage Note Payable (with notes to FS) 600,000 Bonds Payable 2,000,000
Interest Payable 250,000
Wages and Salaries Payable 15,000 Total Current Liabilities P3,935,000 Non-Current Liabilities
Refinanced Note Payable, due in 2015 (with note to FS) P 500,000 12% Mortgage Notes Payable, due in 2023 1,500,000 Total Current Liabilities P2,000,000 Total Non-Current Liabilities P5,935,000 Notes to FS
• The 10% Mortgage Note Payable was issued October 1, 2009, with a term of 10years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2012, the entity is already three months behind in paying its required interest payment. Hence, the note is reclassified as a current liability. • P500,000 Note Payable, was originally due on January 2, 2011. On December 30, 2012, The entity negotiated a written agreement with the First Bank to replace this note with a 2-year P500,000 note, which was issued on January 2, 2013.
Problem 3 (Charity, Inc.) Premium Expense (2,000,000 x 30%)/10 x P5 = P300,000 Inventory of Premiums ( 36,000 – 28,000) x P5 = P 40,000 Estimated Premium Claims Outstanding
Expected distribution
(2,000,0000 x 30%)/10 60,000 Actual distribution (28,000) Still to be distributed 32,000 Cost of each premium x P5 Premium Claims Outstanding P160,000
Audit Adjustment:
Inventory of Premiums 40,000
Premium Expense ( 300,000 – 180,000) 120,000
Estimated Premium Claims Outstanding 160,000
Problem 4 (Evergreen)
Audit Adjustments:
Loss on Damages 1,200,000
Provision for Construction Damages 1,200,000
Loss on Pending Lawsuit 1,800,000
Provision for Damonage on Pending Lawsuit 1,800,000
Loss on Product Defects 1,500,000
Provision for Cost of Product Withdrawal 1,500,000 (1,800,000 + 1,200,000) / 2
Warranty Expense 800,000
Provision for Warranties 800,000
P1,000,000 x 30% = P300,000 5,000,000 x 10% = 500,000 0 x 60% 0 Total P800,000 Problem 5 SM Department Store
Correct balance of Unearned Revenue for Gift Certificates Outstanding P300,000 – P15,000 – P200,000 = P85,000
Adjusting entry
Unearned Revenue for Gift Certificates Outstanding 215,000
Sales 200,000
Problem 6
National Finance Company
Date Effective Interest (7%) Nominal Interest (6%) Discount Amortization Amortized cost, end Jan. 2, 2009 P4,470,303 July 1, 2009 P 312,921 300,000 12,921 4,483,224 Jan. 1, 2010 313,826 300,000 13,826 4,497,050 July 1, 2010 314,794 300,000 14,794 4,511,844 Jan. 1, 2011 315,829 300,000 15,829 4,527,673 July 1, 2011 316,937 300,000 16,937 4,544,610 Jan. 1, 2012 318,123 300,000 18,123 4,562,733 July 1, 2012 319,391 300,000 19,391 4,582,124 Jan. 1, 2013 320,749 300,000 20,749 4,602,873
1. Bonds Payable per client P5,000,000 Bonds Payable redeemed 1,000,000* Bonds Payable, per audit P4,000,000 *Cash payments = Redemption price + Accrued interest 1,110,000 = 1.08Face + ( Face x 12% x 3/12)
1,110,000 = 1.08Face + (.03Face) Face = 1,110,000/1.10
Face of bonds redeemed = P1,000,000
2. Carrying value of P4M bonds on December 31, 2012 P4,602,873 x 4M/5M = P3,682,298 Face value of bonds still outstanding 4,000,000 Bond Discount, per audit P 317,702 3. Bond Interest Expense for the year 2012
January 1 to June 30 P319,391 July 1 to October 1 P 320,749 x 3/6 160,375 October 1 to December 31
P320,749 x 4M/5M x 3/6 128,300 Interest Expense for 2012 P608,066 4. Carrying value of P1M bonds on July 1, 2012
P4,582,124 x 1M/5M P 916,425 Discount amortized, July 1 to October 1
P20,749 x 1M/5M x 3/6 2,075 Carrying value of bonds redeemed P918,500 Retirement price P1,000,000 x 108% 1,080,000 Loss on bond retirement P161,500 5. Balance of Interest Payable on December 31, 2012
Audit Adjusting Entry
Bonds Payable 1,000,000
Interest Expense 8,065
Loss on Bond Redemption 161,500
Retained Earnings 392,430
Bonds Payable Redeemed 1,110,000
Bond Discount 211,995
Interest Payable 240,000
Charge to Retained Earnings
Interest Paid before 2012 P1,500,000
Correct interest expense in periods prior to 2010 1,892,430 Effect of prior period errors P 392,430
Problem 7 (Lucky Corporation) Correct Cost of Land
Down payment P2,000,000
PV of 4 future payments = P2,633,875 x 3.037351 8,000,000
Cost of land P10,000,000
Correct Interest Expense for 2012 P8,000,000 x 12% x 6/12 P 480,000 Audit Adjusting entries
Land 8,000,000
Discount on Notes Payable 2,535,500
Notes Payable (2,633,875 x 4) 10,535,500
Interest Expense 480,000
Discount on Notes Payable 480,000
Accrued Liabilities – Land Purchase 1,316,937.50
Land 1,316,937.50
Problem 8
(Burnham Smelting Company)
Capitalized cost of the leased asset
290,000 x 6.75903 P1,960,119
Audit Adjustments
Leased Equipment 1,960,119
Finance Lease Liability 290,000 Taxes and Insurance Expense (20,000 x 9/12) 15,000
Prepaid Taxes and Insurance 5,000
Prepaid Rent 310,000
Depreciation Expense – Leased Equipment 147,009
Accumulated Depreciation – Leased Equipment 147,009 1,960,119/10 x 9/12 = 147,009
Interest Expense (1,960,119 – 290,000) x 10% x 9/12 125,259
Interest Payable 125,259
Problem 9 Timex Company
(a) 1. Interest payable = P5,000,000 x 8% x 6/12 P 200,000 2. Income Tax Expense:
Current P6,000,000 x 30% P1,800,000 Deferred:
Increase in deferred tax liability
P1,500,000 x 30% 450,000 Total income tax expense P2,250,000 3. Deferred Tax Liability = P4,500,000 x 30% P1,350,000 (b) Current Liabilities:
Accounts Payable P 350,000
Dividends Payable 500,000
Current Portion of Finance Lease Liability 620,920 Interest Payable on Bonds 200,000 Income Tax Payable 6,000,000 x 30% 1,800,000
Total Current Liabilities P3,470,920
(c) Non-current Liabilities:
Non-current Portion of Finance Lease Liability P3,169,880 Bonds Payable, net of discount of P348,002 4,651,998
Deferred Tax Liability 1,350,000
Total Non-current Liabilities P9,171,878
MULTIPLE CHOICE 1. D 2. D 3. A 4. C 5. A 6. D
7. B 8. D 9. C 10. B 11. B 12. C 13. C 14. B 15. B 16. D 17. D 18. B 19. B 20. B 1. D 550,000 + 4,700,000 + 5,000,000 + 4,000,000 = 14,250,000
Total issue price P5,500,000
Issue price attributable to the debt
P5,000,000 x 0.6209 = P3,104,500
400,000 x 3.7908= 1,516,320 4,620,820 Issue price attributable to the conversion privilege P 879,180 2. D Issue price attributable to the debt P4,620,820
Date Effective Interest (10%) Nominal Interest (8%) Discount Amortization Amortized cost, end Jan. 2, 2010 P4,620,820 Dec. 31, 2010 P462,082 P400,000 P 62,082 4,682,902 Dec. 31, 2011 468,290 400,000 68,290 4,751,192 Dec. 31, 2012 475,119 400,000 75,119 4,826,311
3. A Carrying value of the bonds on December 31, 2010 P4,682,902
4. C Interest expense for 2011 = P 468,290
5. A Conversion of P2,000,000 on January 1, 2010
Bonds Payable 2,000,000
Paid in Capital from Bond Conversion Privilege (879,180 x 2/5) 351,672
Discount on Bonds Payable (248,808 x 2/5) 99,523 Ordinary Share Capital (P2,000,000/P1,000 x 8 x 100) 1,600,000
Share Premium 652,149
6. D Retirement price P2,000,000 x 105% P2,100,000
Carrying value of P2,000,000 bonds 4,751,192 x 2/5 1,900,477
Loss in profit or loss P 199,523
7 B Interest expense for 2012 if P2,000,000 bonds were retired
Items 8 through 11
8. D Annual rate = 70,000/500,000 = 14%
9. C Carrying value on January 1, 2012 = 555,738 + 1,562 = 557,300 Effective interest, January 1 to June 30 = 35,000 – 1,562 = 33,438 Effective semiannual rate = 33,438 / 557,300 = 6%
Effective annual rate = 6% x 2 = 12%
10. B Premium amortization – July 1 to Dec. 31, 2012
Nominal P35,000
Effective = 6% x 555,738 33,344
Amortization P 1,656
Premium amortization – January 1 to Dec. 31 1,562 Total amortization for 2012 P 3,218 11. B Interest expense for 2012 = 33,438 + 33,344 = P66,782
12. C 1,500,000 x 12% = P180,000
2,500,000 x 12% x 6/12 = 150,000
Total Interest Expense recorded P330,000
13. C 1,500,000 x 12% x 10/12 = P150,000 2,500,000 x 12% x 6/12 = 150,000 1,000,000 x 12% x 8/12 = 80,000 Total P380,000 14. B Face P1,000,000 Interest payable 1,000,000 x 12% x 8/12 = 80,000 Total P1,080,000 Items 15 through 20
15. B Accounts payable, per client P5,000,000 Debit balance in suppliers’ account 200,000
Shipments from cruise 300,000
Goods held on consignment ( 90,000) Accounts payable, per audit P5,410,000
17. D Total proceeds P1,100,000 Accrued interest 1,000,000 x 11% x 6/12 ( 55,000) Retirement price P1,045,000 Carrying value As of 12/31/09 2,101,506 x ½ P1,050,753 Amortization 30,864 x 1M/2M x 6/12 ( 7,716) 1,043,037 Loss P 1,963 18. B P4,000,000 x .75131 = P3,005,240
Date Interest Expense Carrying Value
9/30/10 P 3,005,240 9/30/11 300,524 3,305,764 9/30/12 330,576 3,636,340 9/30/13 363,660 4,000,000 Carrying value as of 9/30/12 P3,636,340 Amortization 363,660 x 3/12 90,915 Carrying value 12/31/2012 P3,727,255 19. B P240,000 20. B 5,000,000 (10%) + 2,000,000 (25%) = P1,000,000 21 – 25
Interest Date Interest Paid Effective Interest Amortization Premium Amortized Cost, End
March 31, 2010 P10,772,144 Sept. 30, 2010 600,000 538,607 61,393 10,710,751 March 31, 2011 600,000 535,538 64,462 10,646,289 Sept. 30, 2011 600,000 532,314 67,686 10,578,603 March 31, 2012 600,000 528,930 71,070 10,507,533 Sept. 30, 2012 600,000 525,377 74,623 10,432,910 March 31, 2013 600,000 521,646 78,354 10,354,556 21. D P10,000,000 – P3,000,000 = P7,000,000 22. D Carrying value of remaining bonds, 9/30/2012
P10,432,910 x 7/10 P7,303,037
Amortization of premium 9/30 to 12/31/2012
P78,354 x 7M/10M x 3/6 ( 27,424)
Carrying value of remaining bonds 12/31/2012 P7,275,613
Face value or remaining bonds 7,000,000
Premium on bonds payable, 12/31/12 P 275,613
24. B January 1 to March 31 P528,930 x 3/6 P264,465
April 1 to September 30 525,377
October 1 to Dec. 31 521,646 x 7/10 x 3/6 182,576
Total interest expense for 2012 P972,418
25. A Carrying value of bonds retired:
As of Sept. 30, 2012 P10,432,910 x 3/10 P3,129,873 Retirement price P3,000,000 x 102% 3,060,000
