INTERMEDIATE ACCOUNTING 2

(ACCY 22)
MIDTERM EXAM

INSTRUCTIONS:

1. SEND YOUR ANSWERS in this email ad [email protected]

USE WORD OR EXCEL.. OTHER APPS OR FORM WILL
2. BE SURE YOU WRITE YOUR NAME AND THE SUBJECT WHEN SUBMITTING YOUR ANSWER
3. DO NOT SUBMIT IN JPEG, PDF, PHOTO, SCREEN SHOTS OR SHARE
4. SUBMIT YOUR ANSWER ON OR BEFORE 8:00 PM (EXAM TIME: 6:00 TO 7:30 ; time allowance
for mailing of 30 min )
TAKE NOTE::: THOSE WHO WILL NOT FOLLOW THE ABOVE INSTRUCTION, YOUR TEST PAPER WILL NOT
BE CHECK. Or DEDUCTION OF 20% OR MORE ON YOUR SCORE- DEPENDING ON THE LENGHT OF HOURS
LATE OR THE VIOLATIONS MADE.

NAME: Date: MARCH 16 , 2022

Professor: Marilou Oro-Carumba, CPA,MPA,MBA Score:

MULTIPLE CHOICE: THEORY AND PROBLEMS (2 points each)

1. Depending on the expected settlement date, the liability for accumulating and vesting paid
leaves already earned by employees are presented in the employer’s statement of financial
position as
a. current liability. c. a or b
b. noncurrent liability. d. not presented.

2. PAS 19 does not apply to which of the following?

a. educational assistance given by an employer to the employee’s children
b. an annual subsidy of one sack of rice given by an employer to the employee
c. an additional allowance given to the employee through a competitive bargaining
agreement
d. compensation in the form of shares of stocks

3. Fay Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales.
Sales commissions are computed and paid on a monthly basis (in the month following the
month of sale), and the fixed salaries are treated as advances against commissions. However,
if the fixed salaries for salespersons exceed their sales commissions earned for a month, such
excess is not charged back to them. Pertinent data for the month of March 20X5 for the three
salespersons are as follows:

Sales person Fixed salary Net sales Commission rate

 A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Totals 42,000 1,200,000

What amount should Fay accrue for sales commission payable at March 31, 20X5?
a. 70,000 b. 68,000 c. 28,000 d. 26,000

C
Excess of
Sales Advances (Fixed commission over
person Commission (Net sales x %) salary) advances
A (200K x 4%) = 8,000 10,000 -
B (400K x 6%) = 24,000 14,000 10,000
C (600K x 6%) = 36,000 18,000 18,000
Commission payable 28,000

4. ADHERE TO STICK Co. has the following policy:

− Each employee is entitled to 12 days paid vacation leave each year.
− Unused vacation leaves in a year can be carried over to the immediately following year.
Vacation leaves not taken within two years are forfeited.

The following information was determined at the reporting date:

• Number of employees………………………………….………500
• Average salary per day……………………………………..₱2,000
• Average annual pay increase……………………………….….5%
• Vacation leaves taken during the period…………….5,400 days
• Unused vacation leaves from the previous period………..…..0
• Based on past experience, 90% of unused vacation leave for a year are taken in the
immediately following year.

What is the year-end adjusting entry to accrue a liability for the unused vacation leaves?
4. Answer:
Debit Credit
Salaries expense 1,134,000
Salaries payable 1,134,000

Total vacation leaves entitlement of employees in 20x1 (500 x 12) 6,000

Vacation leaves taken in 20x1 ( 5,400)
Unused vacation leave carried over 600
Multiply by: 90%
Estimated vacation leaves to be taken in 20x2 540
Multiply by: Pay rate in 20x2 (P2,000 x 105%) 2,100
Liability for unused vacation leaves 1,134,000

5. ARTIFACT MAN MADE OBJECT Co.’s retirement plan has the following details:
• Annual contribution to a fund held by a trustee, ₱400,000.
• Upon retirement, an employee shall receive retirement benefit based on whatever
amount is accumulated on the fund.
• Actual contributions to the fund were: ₱400,000 in 20x0; ₱160,000 in 20x1; and ₱900,000
in 20x2. An employee retired in 20x3 and was paid a total of ₱30,000 retirement benefits.
What is the journal entry in 20x2?

5. Answer:
20x1 Retirement benefits expense 400,000
Cash 160,000
Accrued retirement contributions payable 240,000
20x2 Retirement benefits expense 400,000
Accrued retirement contributions payable 240,000
Prepaid retirement contributions 260,000
Cash 900,000

6. To record an asset retirement obligation (ARO), i.e., provision for decommissioning and
restoration costs, the cost
associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.

7. The board of directors of ABC Inc. decided on December 15, 20XX, to wind up international
operations in the Far
East and move them to Australia. The decision was based on a detailed formal plan of
restructuring as required by
PAS 37. This decision was conveyed to all workers and management personnel at the
headquarters in Europe. The
cost of restructuring the operations in the Far East as per this detailed plan was ₱2 million.
How should ABC Inc.
treat this restructuring in its financial statements for the year-end December 31, 20XX?

a. Because ABC Inc. has not announced the restructuring to those affected by the decision
and thus has not raised an expectation that ABC Inc. will actually carry out the
restructuring (and as no constructive obligation has arisen), only disclose the
restructuring decision and the cost of restructuring of ₱2 million in footnotes to the
financial statements.
b. Recognize a provision for restructuring since the board of directors has approved it and it
has been announced in the headquarters of ABC Inc. in Europe.
 c. Mention the decision to restructure and the cost involved in the chairman’s statement in
the annual report since it a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on prudence, wait
until next year and do nothing in this year’s financial statements.

8. In 20x1, LUMINOUS SHINING Co. recalled a product due to a possible defect caused by
malfunctioning factory
equipment. The products recalled will be repaired free of charge. LUMINOUS is uncertain
whether all products
recalled will have the possible defect. However, the following estimate was made by
LUMINOUS’s engineers and
managerial accountants and approved by the board of directors.

Repair cost Probability

80,000,000 5%
60,000,000 20%
40,000,000 35%
20,000,000 40%
100%

How much is the provision to be recognized?

a. 38M c. 48M
b. 50M d. 32M

8. A (80M x 5%) + (60M x 20%) + (40M x 35%) + (20M x 40%) = 38M

9. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract of
sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing
defects that become
apparent within one year from the date of sale. On the basis of experience, it is probable (i.e.,
more likely than not)
that there will be some claims under the warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the
product sold in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for
simplicity that all the 20x2 outflows of economic benefits related to the warranty repairs
and replacements take place on June 30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of

products sold require minor repairs costing 10% of the sale price; and 2% of products
 sold require major repairs or replacement costing 90% of sale price. The entity has no
reason to believe future warranty claims will be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur
on June 30, 20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to
reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to the
probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

a. 424,000 c. 800,000
b. 840,000 d. 752,000

9. A
Minor repairs (40M x 3% x 10%) 120,000
Major repairs (40M x 2% x 90%) 720,000
Total 840,000
Multiply by: Present value factor (given) 0.95238
Total 800,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 848,000
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,000

10. SENTIENT AWARE Co. is engaged in logistics services. During the year, a warehouse was
destroyed by fire. It was
estimated that SENTIENT will probably pay around ₱200M in damages caused to the
goods owned by customers that were contained in the destroyed warehouse. The
contents of the warehouse are insured for ₱80M. SENTIENT’s claim for the insurance has
been approved for payment by the insurance company. How much is the provision to be
recognized?
a. 200M c. 60M
b. 120M d. 0

10. A 200M – without deduction for reimbursement of impairment loss

11. On April 30, 20x2, an explosion occurred at CONVOLUTE TWIST Co.’s plant causing extensive
property damage
to area buildings. CONVOLUTE’s management and counsel concluded that it is likely that
claims will be asserted and that it is probable that CONVOLUTE will be held responsible
for damages. CONVOLUTE’s management believed that ₱5,000,000 would be a
reasonable estimate of its liability. CONVOLUTE’s ₱20,000,000 comprehensive public
liability policy has a ₱1,000,000 deductible clause. CONVOLUTE’s financial statements
 were authorized for issue on March 30, 20x2. How should the event above be reported
in CONVOLUTE’s December 31, 20x1 financial statements?
a. accrue a provision of ₱1M.
b. disclose only ₱1M.
c. accrue and disclose ₱1M.
d. neither accrue nor disclose.

12. In 20x1, JUBILEE REJOICING Co. recognized a provision for a probable loss on a pending
lawsuit amounting to
₱2,000,000. In 20x2, the lawsuit remains unsettled and JUBILEE determined that the
provision on the pending law suit must be increased by ₱800,000. In 20x3, JUBILEE won
the lawsuit. Nothing was paid on the settlement. The effect of the settlement on the 20x3
profit is: increase (decrease)
a. 2,800,000 c. 2,000,000
b. (2,800,000) d. 0

12. A (0 actual settlement – 2,800,000 carrying amount of provision) = 2,800,000 gain on

settlement

13. On January 1, 20x1, DECRY Co. signed a three year, non-cancelable purchase contract, which
allows DECRY Co.
to purchase up to 60,000 units of a microchip annually from BELITTLE Co. at ₱100 per unit
and guarantees a minimum annual purchase of 15,000 units. At year-end, it was found
out that the goods are obsolete. DECRY had 10,000 units of this inventory at December
31, 20x1, and believes these parts can be sold as scrap for ₱20 per unit. How much is the
loss on purchase commitment?
a. 2,400,000 c. 3,200,000
b. 800,000 d. 9,600,000

13. A [15,000 guaranteed annual purchase x 2 years x (₱100 - ₱20)] = 2,400,000

14. RISIBLE FUNNY Co. provides 3-year warranty for the products it sells. RISIBLE estimates that
warranty costs ₱400 per unit sold. As of January 1, 20x1, the liability for warranty has a balance
of ₱800,000 for units sold in 20x0. During the year RISIBLE sold 5,000 units and actual warranty
costs incurred were ₱1,240,000. How much is the warranty expense to be recognized in 20x1?
a. 2,000,000 c. 3,240,000
b. 1,240,000 d. 4,240,000

14. A (5,000 units sold x ₱400) = 2,000,000

15. CANDID FRANK Co. launched a sales promotion in 20x1. For every five bottles returned to
CANDID, customers will receive a T-shirt. The unit cost of T-shirt is ₱400. CANDID estimates that
80% of sales will be
redeemed. Additional information is as follows:
 Units
Sales in 20x1 500,000
Sales in 20x2 900,000
T-shirts distributed in 20x1 60,000
T-shirts distributed in 20x2 147,600

How much is the liability for premiums as of December 31, 20x2?

a. 6,650,000 c. 6,870,000
b. 7,860,000 d. 6,560,000

15. D

Estimated premium liability

- Jan. 1, 20x1
Actual cost of premiums
distributed - 20x1 Premium expense - 20x1
(60,000 x ₱400) 24,000,000 32,000,000 (500,000 x 80% ÷ 5 x ₱400 )

Actual cost of premiums

distributed - 20x2 Premium expense - 20x2
(147,600 x ₱400) 59,040,000 57,600,000 (900,000 x 80% ÷ 5 x ₱400 )
Dec. 31, 20x2 6,560,000

16. Which of the following is the least relevant consideration when evaluating whether to
derecognize a financial liability?

a. Whether the obligation has been discharged.

b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether the obligation has a potential to cause inflows of economic benefits to
the issuer.

d. inflows relate to assets not liabilities

17. When bonds are redeemed by the issuer prior to their maturity date, any material gain or
loss on the redemption, is

a. amortized over the period remaining to maturity and reported as an extraordinary

item in the income statement.
b. amortized over the period remaining to maturity and reported as part of income from
continuing operations in the income statement.
 c. reported in the income statement as an extraordinary item in the period of
redemption.
d. reported in the income statement as part of income from continuing operations in the
period of redemption.

18. On January 1, 20x1, SMUDGE BLUR Co. issued 1,000, ₱4,000, 12%, 3-year bonds for
₱4,198,948. Principal is due on December 31, 20x3 but interests are due annually every year-
end. The effective interest rate is 10%. How much is the unamortized discount or premium on
bonds payable as of December 31, 20x1?

a. 198,948 c. 138,843
b. 135,204 d. 143,134

18. C
Interest Interest
Date payments expense Amortization Present value
Jan. 1, 20x1 4,198,948
Dec. 31, 20x1 480,000 419,894 60,106 4,138,842

4,000,000 face amount – 4,138,842 = 138,842

19. On January 1, 20x1, SLOPPY UNTIDY Co. issued 10%, ₱4,000,000 bonds at face amount.
SLOPPY paid underwriter’s commission of 192,147. The bonds mature on December 31, 20x3.
Interest is due annually. The effective interest on the bond issue is approximately equal to
a. 9.2659% c. 12%
b. 11.3692% d. 13.5%
19. C
Initial measurement: (4,000,000 – 192,147) = 3,807,853
Trial using 12%:
 (4M x PV of ₱1 @ 12%, n=3) + [400,000 x PV of an ordinary annuity of ₱1 @ 12%, n=3] =
3,807,853
 (2,847,120 + 960,733) = 3,807,853 is equal to 3,807,853

❖ The effective interest is 12%.

20. On March 1, 2002, Pyne Furniture Co. issued ₱700,000 of 10 percent bonds to yield 8
percent. Interest is payable semiannually on February 28 and August 31. The bonds mature in
ten years. Pyne Furniture Co. is a calendar-year corporation. How much is the issue price
of the bonds?

a. 792,335 c. 802,336
b. 795,132 d. 809,667
20. B
Solution:
 (700,000 x PV of 1 @4%(a), n=20(b)) + (35,000(c) x PV ordinary annuity @4%, n=20) =
 319,471 + 475,661 = 795,132

(a) 8% ÷ 2 = 4%
(b) 10 yrs. x 2 payments in a year = 20
(c) 700,000x 10% x ½ = 35,000

21. On January 1, 20x1, SPITEFUL MALICIOUS Co. issued 1,000, ₱4,000, 10%, 3-year bonds for
₱3,807,852. Principal is due on December 31, 20x3 but interests are due annually every year-
end. The effective interest rate is 12%. SPITEFUL Co. incorrectly used the straight line method
instead of the effective interest method to amortize the discount. What is the effect of the
error on the carrying amount of the bonds on December 31, 20x1? (over) understated
a. 7,107 c. 6,341
b. (7,107) d. (6,341)
21. B
Erroneous amortization of discount using straight line:
The erroneous straight-line amortization of the discount on bonds payable is computed as
follows:

Face amount of bonds 4,000,000

Cash proceeds (3,807,852)
Discount on bonds payable - Jan. 1, 20x1 192,148
Divide by: Term of bonds (in years) 3
Annual amortization (straight line method) 64,049

Interest expense for 20x1 recognized under straight-line method:

Interest paid (4,000,000 x 10%) 400,000
Amortization of discount (see computation above) 64,049
Interest expense under straight-line method 464,049

Carrying amount of bonds on Dec. 31, 20x1 under straight-line method:

Carrying amount - Jan. 1, 20x1 3,807,852
Amortization of discount (see computation above) 64,049
Carrying amount - Dec. 31, 20x1 3,871,901

Amortization of discount under effective interest method: Amortization table:

Interest
Date Interest payments expense Amortization Present value
Jan. 1, 20x1 3,807,852
Dec. 31, 20x1 400,000 456,942 56,942 3,864,794

Effect on carrying amount of bonds as of Dec. 31, 20x1

 Carrying amounts on Dec. 31, 20x1:
Straight-line 3,871,901
Effective interest rate 3,864,794
Difference - overstatement under straight-line 7,107

The carrying amount of the bonds on December 31, 20x1 under the straight line method is
overstated by ₱7,107.

22. On April 1, 20x1, SQUALID FILTHY Co. issued 12%, ₱4,000,000 bonds dated January 1, 20x1
at 97 including accrued interest. The bonds mature in ten years and pay interest annually every
year-end. How much is the
initial carrying amount of the bonds?
a. 3,760,000 d. 3,812,341
b. 3,880,000 c. 4,000,000
22. A
Solution:
Cash proceeds including accrued interest (4M x 97%) 3,880,000
Accrued interest sold (4M x 12% x 3/12) (120,000)
Carrying amount of the bonds, April 1, 20x1 3,760,000

23. On January 1, 20x1, POTENT POWERFUL Co. issued 12% bonds with face amount of
₱4,000,000 for ₱4,303,264.
The bonds mature in five years and pay annual interest every year-end. The effective interest
rate is 10%. On July 1, 20x3, POTENT called-in the entire bonds and retired them at 102, which is
inclusive of payment for accrued interest. How much is the gain (loss) on the extinguishment of
the bonds?
a. 328,897 c. (118,948)
b. (328,896) d. 118,948
23 A
Interest
Date payments Interest expense Amortization Present value
Jan. 1, 20x1 4,303,264
Dec. 31, 20x1 480,000 430,328 49,672 4,253,592
Dec. 31, 20x2 480,000 425,360 54,640 4,198,948
July 1, 20x3 240,000 209,948 30,052 4,168,896

Carrying amount of bonds retired: (see table above) 4,168,896

Retirement price (Call price):
Retirement price including payment for
accrued interest (4M x 102%) 4,080,000
Accrued interest (4M x 12% x 6/12) (240,000) 3,840,000
Gain on extinguishment of bonds 328,896
24. On January 1, 20x1, TIPSY UNSTEADY Co. issued 10%, ₱12,000,000 bonds for ₱11,601,220.
Principal on the bonds matures in three equal annual installments. Interest is also due annually
at each year-end. The effective interest rate on the bonds is 12%. How much is the carrying
amount of the bonds on December 31, 20x1?

a. 7,844,635 c. 7,683,343
b. 7,793,366 d. 7,543,341
24. B
Interest on
Principal outstanding principal Interest
Date payments balance payments Total payments
Dec. 31, 20x1 4,000,000 12,000,000 x 10% 1,200,000 5,200,000
Dec. 31, 20x2 4,000,000 8,000,000 x 10% 800,000 4,800,000
Dec. 31, 20x3 4,000,000 4,000,000 x 10% 400,000 4,400,000

Date Total payments Interest expense Amortization Present value

Jan. 1, 20x1 11,601,220
Dec. 31, 20x1 5,200,000 1,392,148 3,807,852 7,793,368

25. On December 31, 20x1, CONFLAGRATION LARGE FIRE Co. agreed to the following
modification of its existing liability:
• The principal remained unchanged at ₱20,000,000.
• The repayment of the accrued interest of ₱600,000 was waived.
• The maturity date was extended from December 31, 20x2 to December 31, 20x4.
• The stated rate was reduced from 12% to 10%.

Interest is payable annually at each year-end. The original effective interest rate is 12%.
CONFLAGRATION Co. incurred costs of ₱200,000 which were directly attributable to the
restructuring. The costs were paid to third parties. How much is the gain (loss) on the
extinguishment of the debt?
a. (1,360,732) c. (200,000)
b. 1,360,732 d. 0

25. D
The modification is analyzed as follows:
Old terms New terms
Principal 20,000,000 20,000,000
Accrued interest 600,000 -
Remaining term ('n') 3 years
Nominal rate 12% 10%
Direct costs of modification 200,000

Future cash flows PV factors @12%, n=3 Present value

 Principal 20,000,000 0.711780 14,235,600
Interest 2,000,000 2.401831 4,803,662
Present value of the modified liability 19,039,262

Carrying amt. of old liability (20M + 600K accrued int.) 20,600,000

Present value of modified liability 19,039,262
Difference 1,560,738

Difference 1,560,738
Divide by: Carrying amount of old liability 20,600,000
7.58%

❖ The modification is NOT substantial. The old liability is not extinguished and NO GAIN OR
LOSS on extinguishment is recognized. The direct costs of modification are treated as an
adjustment to the carrying amount of the existing liability.

END