Tuesday, January 19, 2016

FINANCIAL ACCOUNTING P-2



FINANCIAL ACCOUNTING P-2

I. THEORIES
1. Which of the following statements best described the terms “liability” ?
a. An excess of equity over current assets
b. Resources to meet financial commitments as they fall due
c. The rental interest in the assets of the entity after deducting all of its liabilities
d. A present obligation of the entity arising from past events

2. In which section of the statement of financial position should employment taxes that are due for settlement in 15 months’ time be presented?
a. current liabilities          b. current assets              c. non current liabilities                 d. non current assets

3.  An entity has a loan due for repayment in six months’ time, but the entity has the option to refinance for repayment two years later. The entity plans to refinance this loan. In which section of the statement of financial position should this loan presented?
a. current liabilities          b. current assets              c. non current liabilities                 d. non current assets

4.  Which of the following would be classified as non current liability?
a. unearned revenue
b. mandatorily redeemable preference share
c. the currently maturing portion of long-term debt
d. accrued salaries payable to management

5. Which of the following is not a current liability?
a. income tax payable
b. one year magazine subscription received in advance
c. unearned interest income related to non interest bearing long term note receivable
d. estimated warranty liability

6.  It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.
a. obligating event           b. past event     c. subsequent event      d. current event

7.  An outflow of resources embodying economic benefits is regarded as “probable “ when?
a. the probability that the event will occur is greater than the probability that the event will not occur
b. the probability that the event will not occur is greater than the probability that the event will occur.
c. the probability that the event will occur is the same as the probability that the event will not occur
d. the probability that the event will occur is 90% likely.

8. Where the provision being measured involves a large population of items, the obligation is estimated by “weighing” all possible outcomes by their associated probabilities. The name for this statistical method of estimation is?
a. expected value            b. present value                               c. current value                 d. extrapolation

9. A legal obligation is an obligation that is derived from all of the following, except?
a. legislation       b. a contract       c. other operation of law              d. an established pattern of past practice





10. For which of the following should a provision be recognized?
a. future operating  losses
b. obligations under  insurance contracts
c. reductions in fair value of financial instruments
d. obligations for plant decommissioning costs

11. It is possible asset that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity.
a. Contingent asset         b. Other asset                   c. Suspense Account                      d. Current asset

12. Which statement is incorrect concerning contingent liability?
a. A contingent liability is not recognized in the financial statements.
b. A contingent liability is disclosed only.
c. If the contingent liability is remote, no disclosure is required.
d. A contingent liability is both probable and measurable.

13. The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which range means that the future event occurring is very slight?
a. Probable                         b. Reasonably possible             c. Certain                           d. Remote

14. An item that is not a contingent liability is
a. Premium offer to customers for labels or box tops
b. Accommodation endorsement on customer note
c. Additional compensation that may be payable on a dispute now being arbitrated
d. Pending lawsuit

15. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and the amount can be reliably measured
d. The amount can be reliably measured

16. Which of the following is the proper accounting treatment of a contingent asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure explaining the nature of the transaction
d. A disclosure only

17. At year-end, an entity was suing a competitor for patent infringement. The award from the probable favorable outcome could be reliably measured. The entity’s financial statements shall report the expected award as
a. Receivable and revenue                          b. Receivable and reduction of patent
c. Receivable and deferred revenue       d. Disclosure only

18. Contingent liabilities will or will not become actual liabilities depending on
a. Whether they are probable and measurable
b. The degree of uncertainty.
c. The present condition suggesting a liability
d. The outcome of a future event

19. Pending litigation would generally be considered
a. Nonmonetary liability                                b. Contingent liability                     c. Estimated liability        d. Current liability

20. Under international accounting standard, the valuation method used for bonds payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance

II. PROBLEMS

1. During 2010, Day Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box contains one coupon which entitles the customer to a baking pan upon remittance of P40. Day pays P50 per pan and P5 for handling and shipping. Day estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons had been processed during 2010. What amount should Day report as a liability for unredeemed coupons on December 31, 2010?
a. 1,000,000        b. 1,500,000        c. 3,000,000         d. 5,000,000

2. Bold Company estimates its annual warranty expense at 2% of annual set sales. The following data are available:
Net Sales                                                                                             4,000,000
Warranty liability
                January 1, 2010                                                                 60,000 credit
                Warranty payments during 2010                               50,000 debit
What is the warranty liability on December 31, 2010?
a. 10,000              b. 70,000              c. 80,000               d. 90,000

3. Chato Company sells electrical goods covered by a one-year warranty for any defects. Of the sales of P70, 000,000 for the year, the entity estimates that 3% will have major defect, 5% will have minor defect and 92% will have no defect.
The cost of repairs would be P5, 000,000 if all the products sold had major defect and P3,000,000 if all had minor defect.
What amount should be recognized as a warranty provision?
a. 8,000,000        b. 5,600,000        c. 300,000            d. 190,000

4. Cobb Department Store sells gift certificates redeemable only when merchandise is purchased. These gift certificates have an expiration date of the two years after issuance date. Upon redemption or expiration, Cobb recognizes the unearned revenue as realized.
Information for the current year is as follows :
Unearned revenue, January 1, 2010                                                        650,000
Gift certificates sold                                                                                        2,250,000
Gift certificates redeemed                                                                          1,950,000
Expired gift certificates                                                                                  100,000
Cost of goods sold                                                                                           60%
On December 31,2010, what amount should be reported as unearned revenue?
a. 510,000            b. 570,000            c. 850,000            d. 950,000

5. Greene Company sells office equipment service contacts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the contracts. Additional information for the year ended December 31, 2010 is as follows:
Unearned service contract revenue at January 1                                               600,000
Cash receipts from service contracts sold                                              980,000
Service contract revenue recognized                                                      860,000
Service contract expense                                                                             520,000
What amount should be reported as unearned service contract revenue on December 31,2010?
a. 460,000            b. 480,000            c. 490,000            d. 720,000

6. Sweet Company sells equipment service contract that covers a two-year period. The sales price of each contract is P600. Sweet’s past experience is that of total pesos spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly durin the second contract year Sweet sold 1,000 contracts evenly throughout 2010.
                In its December 31,2010 statement of financial position, what amount should Sweet reports as deferred service revenue?
a. 540,000            b. 480,000            c. 360,000            d. 300,000

7. On the first day of each month, Ron Mortgage Company receives from Kent Company an escrow deposit of P250,000 in an escrow account. Ron’s  2010 real estate tax is P2,800,000, payable in equal installments on the first day of each calendar quarter. On January 1,2010, the balance in the escrow account was P300,000.  On September 30,2010, what amount should be reported as escrow liability?
a. 1,150,000        b. 450,000            c. 850,000            d. 150,000

8. On July 1,2010 , the Quezon City government issued realty tax assessment  for its fiscal year ended June 30,2011. On September 1, 2010, Fang Company purchased a land in Quezon City. The purchased price was reduced by a credit for accrued realty taxes. Fang does not record the entire year’s real estate tax obligation but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable as appropriate. On November 1,200, Fang paid the first of two equal installments of P600,000 for realty taxes.
                What amount of the payment should Fang record as a debit to real estate taxes payable?
a. 200,000            b. 400,000            c. 500,000            d. 600,000

9. Aubrey Company has a 12-month accounting period  ending  December  31. On April 1,2010, it introduced  a new contractual  bonuses  for the year to  march 31,2011 will amount to P900,000. What amount liability for bonuses should be recorded on December 31,2010?
a. 225,000            b. 900,000            c. 675,000            d. 0

10. On February 5,2011, an employee filed a P2,000,000 lawsuit against Steel Company for damages suffered when one of Steel’s plant exploded on December 29,2010. Steel’s legal counsel expects the entity will probably lose the lawsuit and estimates the loss to be P500,000. The employee has offered to settle the lawsuit out of court for P900,000 but Steel Company will not agree to the settlement.
                In its December 31,2010 statement of financial position, what amount should Steel Company report as liability from lawsuit?
                a. 2,000,000        b. 1,000,000        c. 900,000            d. 500,000

11.  During 2010, Beal Company became involved in a tax dispute with the BIR. On December 31,2010, Beal’s tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was P500,000. After the 2010 financial statement were issued , Beal  received  and accepted a BIR settlement offer of P550,000. What amount of accrued liability would Beal have reported in its December 31,2010 statement of financial position?
                a. 650,000            b. 550,000            c. 500,000            d. 0

12. Concord Company sells motorcycle helmets. In 2010, Concord sold 4,000,000 helmets before discovering a  significant defect in their construction. By December 31,2010, two lawsuits had been filed against Concord. The first lawsuit which Concord has little chance of winning, is expected to be settled out of court for  P1,500,000 in January 2011. Concord ‘s attorneys  think the entity has a 50-50 chance of winning the second lawsuit, which is for P1,000,000. What is the accrued liability on December 31,2010 as a result of the lawsuit?
                a. 1,500,000        b. 1,000,000        c. 2,500,000         d.  0

13.  On November 5,2010, A Cute Company truck was in an accident with an auto driven by  Good. Cute received notice  on January 15,2011 of a lawsuit for P700,000 damages for personal injuries suffered by Good. Cute’s counsel believed it is probable that Good will be awarded  an estimated amount in the range  between P200,000 and P450,000 and no amount is a better estimate of potential liability than any other amount. Cute’s accounting year ends on December 31, and the 2010 financial statements were issued  on March 1,2011. What amount of loss should Cute accrue on December 31,2010?
                a. 450,000            b. 200,000           c. 325,000            d. 0


14. In may 2010, Casco Company filed suits against Wayne Company seeking P1,900,000 damages for patent infringement. A court verdict in November 2010 awarded Caso P1,500,000 in damages, but Wayne’s appeal is not expected to be decided before 2011. Caso’s counsel believed it is probable that Caso will be successful against Wayne for an estimated amount in the range between P800,000 and P1,100,000, with P1M considered the most likely amount. What amount should Caso record as income from the lawsuit for the year ended December 31,2010?
                a. 1,500,000        b. 1,100,000        c. 1,000,000         d. 0

15. During 2010, Micer Company filed against West Company seeking  damages for patent infringement. On December 31,2010, Micer’s legal counsel believed that it was probable that Micer would be successful against West for an estimated amount of P1,500,000. In March 2011, Micer was awarded P1M and received full payment thereof. In Micer’s 2010 financial statements issued February 2011, how should this award be reported?
                a. As a receivable and revenue of P1M
                b. as  a receivable and deferred revenue of P1M
                c. as a disclosure of a contingent asset of P1M
                d. as a disclosure of contingent asset of P1,500,0000

16. Soree Company had the following long term debt:
Sinking fund, maturing in installments                                    2,200,000
Industrial revenue bonds, maturing in installments          1,800,000
Subordinated   bonds, maturing on a single date                               3,000,000
                What is the total amount of serial bonds?
                a. 3M                     b. 4M                    c. 4.8M                 d. 7M

17. Polo Company had the following long term debt:
Bonds maturing in installments secured by machinery                    1M
Bonds maturing on a single date secured by realty                           1.8M
Collateral trust bonds                                                                                     2M
                What is the total amount of Debenture bonds?
                a. 2M                     b. 1M                    c. 1.8M                 d. 0

18. On April 1,2010, Greg Company issued at 99 plus accrued interest, 2000 of its 8%, P1000  face                                                                                                                                                                                                                                                                                                                                    val ue bonds. The bonds are dated January 1,2010 mature on January 1,2020 and pay interest on January 1 and July 1.  Greg paid bond issue cost of P70,000. From the bond issuance, what is the net cash received by Greg Company?
                a. 2,020,000        b. 1,980,000                        c. 1,950,000                  
              d. 1,910,000                                                                                                              

19. On March 1,2010, Candy Company issued at 103 plus accrued  interest 4000 of its 9%, P1000 face value bonds. The bonds are dated January 1,2010 and mature on January 1,2020. Interest is payable semi annually on January 1 and July 1. Candy paid issue cost of P200,000. What is the net cash received from the bond issuance?
                a. 4,320,000        b. 4,180,000                        c. 4,120,000                         d. 3,980,000

20. On November 1,2010, Mason Company issued P8M of its 10-year, 8% term bonds dated October 1,2010. The bonds were sold to yield 10% with total proceeds of P7M plus accrued interest. Interest is paid every april 1 and October 1. What should Mason report for accrued interest payable in its December 31,2010 statement of financial position?
                a. 175,000            b. 160,000                            c. 116,667                            d. 106,667

21. On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of P1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of P400,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Looper should record accrued interest payable of


          a.    P48,000.  
          b.   P44,000.
          c.   P32,000.
          d.   P29,334.


 22. Included in Sauder Corp.'s liability account balances at December 31, 2006, were the following:
7% note payable issued October 1, 2006, maturing September 30, 2007                              P250,000
8% note payable issued April 1, 2006, payable in six equal annual
        installments of P150,000 beginning April 1, 2007                                                                       600,000
Sauder 's December 31, 2006 financial statements were issued on March 31, 2007. On January 15, 2007, the entire P600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2007, Sauder consummated a noncancelable agreement with the lender to refinance the 7%, P250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. On the December 31, 2006 balance sheet, the amount of the notes payable that Sauder should classify as short-term obligations is


          a.   P175,000.
          b.   P125,000.
          c.   P50,000.
          d.   P0.



23. Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:                                                                                          12/31/06                                12/31/07           
Employee advances                                                                             12,000                    18,000
Accrued salaries payable                                                                   65,000                      ?
Salaries expense during the year                                                                                   650,000
Salaries paid during the year (gross)                                                                             625,000
                At December 31, 2007, what amount should Barr report for accrued salaries payable?


a.   P90,000.
b.   P84,000.
c.   P72,000.
d.   P25,000.



24. Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of P480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of P120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:
During 2007                        During 2008                        During 2009
   P100,000                                P160,000                               P70,000
                What amount should be reported as unearned service contract revenues in Dexter's December 31, 2006 balance sheet?


a.   P360,000.
b.   P330,000.
c.   P240,000.
d.   P220,000.





25. Utley Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Utley's past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Utley's liability for stamp redemptions was P7,500,000 at December 31, 2005. Additional information for 2006 is as follows:
Stamp service revenue from stamps sold to licensees                                       P5,000,000
Cost of redemptions                                                                                                           3,400,000
                If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be P2,500,000. What amount should Utley report as a liability for stamp redemptions at December 31, 2006?


a.   P9,100,000.
b.   P6,600,000.
c.   P6,100,000.
d.   P4,100,000


.

26. During 2006, Blass Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows:
                                                                               Actual Warranty
                                    Sales                                     Expenditures
2006                          P   800,000                                P12,000
2007                            1,000,000                                   30,000
                                  P1,800,000                                P42,000
                At December 31, 2007, Blass should report an estimated warranty liability of      


a. P0.
b.P10,000.
c.P30,000.
d.P66,000.



27.    On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of     P1,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31.  The bonds were sold to yield 8%.  Table values are:
Present value of 1 for 8 periods at 6%................................................             .627
Present value of 1 for 8 periods at 8%................................................             .540
Present value of 1 for 16 periods at 3%..............................................             .623
Present value of 1 for 16 periods at 4%..............................................             .534
Present value of annuity for 8 periods at 6%......................................          6.210
Present value of annuity for 8 periods at 8%......................................          5.747
Present value of annuity for 16 periods at 3%....................................        12.561
Present value of annuity for 16 periods at 4%....................................        11.652
The issue price of the bonds is


          a. P883,560.
         b.   P884,820.
         c.   P889,560.
         d.   P999,600.



28. Limeway Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2007 on January 1, 2007. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?

2.5%
3.0%
5.0%
6.0%
Present value of a single sum for 5 periods
.88385
.86261
.78353
.74726
Present value of a single sum for 10 periods
.78120
.74409
.61391
.55839
Present value of an annuity for 5 periods
4.64583
4.57971
4.32948
4.21236
Present value of an annuity for 10 periods
8.75206
8.53020
7.72173
7.36009


a.   P5,000,000
b.   P5,216,494
c.   P5,218,809
    d.P5,217,308



29. Amstop Company issues P20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the total cash received on the issue date?


           a.P19,400,000
         b.P20,450,000
         c.P19,700,000
         d.P19,100,000



30. Houghton Company issues P10,000,000, 6%, 5-year bonds dated January 1, 2007 on January 1, 2007. The bonds pays interest semiannually on June 30 and December 31.  The bonds are issued to yield 5%. What are the proceeds from the bond issue?

2.5%
3.0%
5.0%
6.0%
Present value of a single sum for 5 periods
.88385
.86261
.78353
.74726
Present value of a single sum for 10 periods
.78120
.74409
.61391
.55839
Present value of an annuity for 5 periods
4.64583
4.57971
4.32948
4.21236
Present value of an annuity for 10 periods
8.75206
8.53020
7.72173
7.36009


        a.P10,000,000
                       b.P10,432,988
      c.P10,437,618
                  d.P10,434,616





31. Benton Company issues P10,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the total cash received on the issue date?


              a.P9,700,000
                b.P10,225,000
              c.P9,850,000
                  d.P9,550,000



32. The December 31, 2006, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2015                     P1,000,000
Unamortized premium on bonds payable                                27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1 and December 31 of each year.  Eddy uses straight-line amortization. On March 1, 2007, Eddy retired P400,000 of these bonds at 98 plus accrued interest. What should Eddy record as a gain on retirement of these bonds? Ignore taxes.


a.P18,800.                
b.P10,800.
c.P18,600.
d.P20,000.



33. On January 1, 2001, Gonzalez Corporation issued P4,500,000 of 10% ten-year bonds at 103.  The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).
                On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez repurchased P1,000,000 of the bonds in the open market at 96. Gonzalez has recorded interest and amortization for 2007. Ignoring income taxes and assuming that the gain is material, Gonzalez should report this reacquisition as


a.   a loss of P49,000.
b.   a gain of P49,000.
c.   a loss of P61,000.
d.   a gain of P61,000.



34. The 10% bonds payable of Klein Company had a net carrying amount of P570,000 on December 31, 2006. The bonds, which had a face value of P600,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest payment on July 1, 2007 was made as scheduled. What is the loss that Klein should record on the early retirement of the bonds on July 2, 2007?  Ignore taxes.


a.P12,000.
b.P37,800.
c.P33,600.
d.P42,000.



35. The 12% bonds payable of Keane Co. had a carrying amount of P832,000 on December 31, 2006. The bonds, which had a face value of P800,000, were issued at a premium to yield 10%. Keane uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2007, several years before their maturity, Keane retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is


a.   P0.
b.   P6,400.
c.   P9,920.
d.P32,000.



36. Axlon Company issues P10,000,000 face value of bonds at 96 on January 1, 2006. The bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2009, P6,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2009?


a.   P600,000 loss
b.   P272,000 loss
c.   P360,000 loss
d.   P453,333 loss



37. Goebel Company issues P5,000,000 face value of bonds at 96 on January 1, 2006. The bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2009, P3,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2009?


a.P300,000 loss
b.P136,000 loss
c.P180,000 loss
d.P226,667 loss





38. On July 1, 2007, Pryce Co. issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2007 and mature on April 1, 2017. Interest is payable semiannually on April 1 and October 1. What amount did Pryce receive from the bond issuance?


a.P1,015,000
                  b.P1,000,000
         c.P990,000
        d.P965,00



39. On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of P3,000,000, which mature on January 1, 2017. The bonds were issued for P3,405,000 to yield 8%, resulting in bond premium of P405,000. Gomez uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2007, Gomez's adjusted unamortized bond premium should be


a.P405,000.
b.P377,400.
c.P364,500.
dP304,500.



40. On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of P5,000,000, which mature on July 1, 2015. The bonds were issued for P4,695,000 to yield 10%, resulting in a bond discount of P305,000. Kitel uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2007, Kitel's unamortized bond discount should be


a.P264,050.
b.P255,000.
c.P244,000.
d.P215,000.