PREFINAL EXAM – ACCOUNTING 5 SET A DECEMBER 4, 2019

1. On January 1, 2013, Dean Corporation signed a ten-year 5. The amount to be recorded as the cost of an asset under
noncancelable lease for certain machinery. The terms of capital lease is equal to the
the lease called for Dean to make annual payments of a. present value of the minimum lease payments.
P200,000 at the end of each year for ten years with title to b. present value of the minimum lease payments or the
pass to Dean at the end of this period. The machinery has fair value of the asset, whichever is lower.
an estimated useful life of 15 years and no salvage value. c. present value of the minimum lease payments plus
Dean uses the straight-line method of depreciation for the present value of any unguaranteed residual
all of its fixed assets. Dean accordingly accounted for value.
this lease transaction as a capital lease. The lease d. carrying value of the asset on the lessor's books.
payments were determined to have a present value of
P1,342,016 at an effective interest rate of 8%. With 6. On January 1, 2012, Crown Company sold property to
respect to this capitalized lease, Dean should record for Leary Company. There was no established exchange price
2013 for the property, and Leary gave Crown a P3,000,000 zero-
a. lease expense of P200,000. interest-bearing note payable in 5 equal annual
b. interest expense of P89,468 and depreciation installments of P600,000, with the first payment due
expense of P76,136. December 31, 2012. The prevailing rate of interest for a
c. interest expense of P107,361 and depreciation note of this type is 9%. The present value of the note at
expense of P89,468. 9% was P2,163,000 at January 1, 2012. What should be the
d. interest expense of P91,362 and depreciation balance of the Discount on Notes Payable account on the
expense of P134,202. books of Leary at December 31, 2012 after adjusting
entries are made, assuming that the effective-interest
2. Metcalf Company leases a machine from Vollmer Corp. method is used?
under an agreement which meets the criteria to be a a. P0
capital lease for Metcalf. The six-year lease requires b. P642,330
payment of P170,000 at the beginning of each year, c. P669,600
including P25,000 per year for maintenance, insurance, d. P837,000
and taxes. The incremental borrowing rate for the lessee
is 10%; the lessor's implicit rate is 8% and is known by the 7. On December 31, 2010, Nolte Co. is in financial difficulty
lessee. The present value of an annuity due of 1 for six and cannot pay a note due that day. It is a P1,200,000 note
years at 10% is 4.79079. The present value of an annuity with P120,000 accrued interest payable to Piper, Inc. Piper
due of 1 for six years at 8% is 4.99271. Metcalf should agrees to accept from Nolte equipment that has a fair
record the leased asset at value of P580,000, an original cost of P960,000, and
a. P848,760. accumulated depreciation of P460,000. Piper also forgives
b. P814,435. the accrued interest, extends the maturity date to
c. P723,943. December 31, 2013, reduces the face amount of the note
d. P694,665. to P500,000, and reduces the interest rate to 6%, with
interest payable at the end of each year. Nolte should
3. On December 31, 2013, Lang Corporation leased a ship recognize a gain or loss on the transfer of the equipment
from Fort Company for an eight- year period expiring of
December 30, 2021. Equal annual payments of P400,000 a. P0.
are due on December 31 of each year, beginning with b. P80,000 gain.
December 31, 2013. The lease is properly classified as a c. P120,000 gain.
capital lease on Lang 's books. The present value at d. P380,000 loss.
December 31, 2013 of the eight lease payments over the
lease term discounted at 10% is P2,347,370. Assuming all 8. (Refer to no. 7) Nolte should recognize a gain on the
payments are made on time, the amount that should be partial settlement and restructure of the debt of
reported by Lang Corporation as the total obligation under a. P0.
capital leases on its December 31, 2014 balance sheet is b. P30,000.
a. P2,182,108. c. P110,000.
b. P2,000,318. d. P150,000.
c. P1,742,107.
d. P2,400,000. 9. (Refer to no. 7) Nolte should record interest expense for
2013 of
4. Mays Company has a machine with a cost of P600,000 a. P0.
which also is its fair value on the date the machine is b. P30,000.
leased to Park Company. The lease is for 6 years and the c. P60,000.
machine is estimated to have an unguaranteed residual d. P90,000.
value of P60,000. If the lessor's interest rate implicit in the
lease is 12%, the six beginning-of-the-year lease payments 10. When a note payable is issued for property, goods, or
would be services, the present value of the note is measured by
a. P138,541. a. the fair value of the property, goods, or services.
b. P123,698. b. the fair value of the note.
c. P117,270. c. using an imputed interest rate to discount all future
d. P100,000. payments on the note.
d. any of these.
 PREFINAL EXAM – ACCOUNTING 5 SET A DECEMBER 4, 2019
a. no value assigned
11. On January 1, 2012, Ann Price loaned P90,156 to Joe Kiger. b. an appropriation of retained earnings
A zero-interest-bearing note (face amount, P120,000) was c. a separate portion of paid in capital
exchanged solely for cash; no other rights or privileges d. a liability
were exchanged. The note is to be repaid on December
31, 2014. The prevailing rate of interest for a loan of this 17. On April 30, 2019, White Corporation had outstanding
type is 10%. The present value of P120,000 at 10% for 12% P1,000,000 face amount, convertible bonds maturing
three years is P90,156. What amount of interest income on April 30, 2023. Interest is payable on April 30 and
should Ms. Price recognize in 2012? October 31. On April 30, 2019, all these bonds were
a. P9,016. converted into 40,000 shares of P10 par common stock.
b. P12,000. On the date of conversion:
c. P36,000.  Unamortized bond discount was P30,000.
d. P27,048.  Each bond had a market value of P1,080.
 Each share of stock had a market price of P28.
12. On January 1, 2012, Jacobs Company sold property to What amount should White record as a loss on conversion
Dains Company which originally cost Jacobs P950,000. of bonds?
There was no established exchange price for this property. a. P150,000
Danis gave Jacobs a P1,500,000 zero-interest-bearing b. P110,000
note payable in three equal annual installments of c. P30,000
P500,000 with the first payment due December 31, 2012. d. Zero
The note has no ready market. The prevailing rate of
interest for a note of this type is 10%. The present value 18. On May 1, 2019, Hill issued P2,000,000, 20-year, 10%
of a P1,500,000 note payable in three equal annual bonds for P2,120,000. Each P1,000 bond had a detachable
installments of P500,000 at a 10% rate of interest is warrant eligible for the purchase of one share of Hill’s P50
P1,243,500. What is the amount of interest income that par common stock for P60. Immediately after bonds were
should be recognized by Jacobs in 2012, using the issued, Hill’s securities had the following market values:
effective-interest method? 10% bond without warrant P1,040
a. P0. Warrant P20
b. P50,000. Common stock, P50 par P56
c. P124,350. What amount should Hill credit to premium on bonds
d. P150,000. payable?
a. P120,000
13. A lessee with a capital lease containing a bargain purchase b. P80,000
option should depreciate the leased asset over the c. P40,000
a. asset's remaining economic life. d. P0
b. term of the lease.
c. life of the asset or the term of the lease, whichever is 19. If a company chooses the fair value option, a decrease in
shorter. the fair value of the liability is recorded by crediting
d. life of the asset or the term of the lease, whichever is a. Bonds Payable.
longer. b. Gain on Restructuring of Debt.
c. Unrealized Gain/Loss from change in fair value
14. In a lease that is appropriately recorded as a direct- d. None of these.
financing lease by the lessor, unearned income
a. should be amortized over the period of the lease 20. A troubled debt restructuring will generally result in a
using the effective interest method. a. loss by the debtor and a gain by the creditor.
b. should be amortized over the period of the lease b. loss by both the debtor and the creditor.
using the straight-line method. c. gain by both the debtor and the creditor.
c. does not arise. d. gain by the debtor and a loss by the creditor.
d. should be recognized at the lease's expiration.
21. Eddy Co. is indebted to Cole under a P600,000, 12%,
15. Mart issued P5,000,000 face value 12% convertible bonds three-year note dated December 31, 2011. Because of
at 110 on January 1, 2009 maturing on January 1, 2014 and Eddy's financial difficulties developing in 2013, Eddy owed
paying interest semiannually on January 1 and July 1. It is accrued interest of P72,000 on the note at December 31,
estimated that the bonds would sell only at 103 without 2013. Under a troubled debt restructuring, on December
the conversion feature. Each P1,000 bond is convertible 31, 2013, Cole agreed to settle the note and accrued
into 10 ordinary shares with P100 par value. How much is interest for a tract of land having a fair value of P540,000.
the increase in shareholders’ equity arising from the Eddy's acquisition cost of the land is P435,000. Ignoring
issuance of the convertible bonds on January 1, 2009? income taxes, on its 2013 income statement Eddy should
a. P350,000 report as a result of the troubled debt restructuring
b. P500,000 Gain on Disposal Restructuring Gain
c. P150,000 a. P237,000 P0
d. P 0 b. P165,000 P0
c. P105,000 P60,000
16. How should the value of the warrants attached to a debt d. P105,000 P132,000
security be accounted for?
 PREFINAL EXAM – ACCOUNTING 5 SET A DECEMBER 4, 2019
22. On December 31, 2015, Fire Company was experiencing d. manufacturer’s or dealer’s profit from a direct
financial difficulties and entered into a debt restructuring financing lease
agreement with the creditor. The creditor restructured
the obligation as follows: 27. On August 1, 2008, Metro Inc. leased a luxury apartment
 Reduced the principal note payable from P5,000,000 unit to Centro. The parties signed a 1-year lease beginning
to P4,500,000. September 1, 2008 for a P100,000 monthly rent payable
 Forgave P600,000 of accrued interest. on the first day of the month. At the August 1 signing date,
 Extended the maturity date from December 31, 2015 Metro collected P54,000 as a nonrefundable fee for
to December 31, 2003. allowing Centro to sign a 1-year lease (the normal lease
 Reduced the interest from 12% to 10%. Interest was term is 3 years) and P100,000 rent for September. Centro
payable annually on December 31, 2016, 2017 and has made timely payments each month, but prepaid
2018. January’s rent on December 20. In Metro’s 2008 income
Fire should report loss on debt restructuring of: statement, rent revenue should be reported at:
a. P250,000 a. P400,000
b. P850,000 b. P418,000
c. P500,000 c. P454,000
d. P 0 d. P518,000

23. The following information pertains to the transfer of real 28. Glade Company leases computer equipment to customers
estate pursuant to a troubled debt restructuring by Knot under direct financing leases. The equipment has no
Company to Ton Company in full liquidation of Knot’s residual value at the end of the lease and the leases do not
liability to Ton: contain bargain purchase options. Glade wishes to earn
Carrying amount of liability liquidated P150,000 8% interest on a 5-year of equipment with a fair value of
Carrying amount of real estate transferred 100,000 P3,234,000. The present value of an annuity due of 1 at
Fair value of real estate transferred 90,000 8% for 5 years is 4.312. On January 1, 2009, Glade leased
What amount should Knot report as ordinary gain (loss) the equipment to Blaze Company. What is the total
on transfer of real estate? amount of interest revenue that Glade will earn over the
a. (P10,000) life of the lease
b. P 0 a. P1,293,600
c. P50,000 b. P1,394,500
d. P60,000 c. P516,000
d. P750,000
24. (Refer to no. 23.)What amount should Knot report as
pretax extraordinary gain (loss) on restructuring of 29. On January 1, 2009, Hooks Oil Company sold equipment
payables? with a carrying amount of P1,000,000, and a remaining
a. (P10,000) useful life of 10 years, to Maco Drilling for P1,500,000.
b. P0 Hooks immediately leased the equipment back under a 10
c. P50,000 year capital lease with a present value of P1,500,000 and
d. P60,000 will depreciate the equipment using the straight-line
method. Hooks made the first annual lease payment of
25. For which of the following transactions would the use of P244,120 in December 2009. In Hooks’ December 31,
the present value of an annuity due (in advance) concept 2009 balance sheet, the unearned gain on equipment sale
be appropriate in calculating the present value of the should be
asset obtained or liability owed at the date of incurrence? a. P500,000
a. a capital lease is entered into with the initial lease b. P450,000
payment due one month subsequent to the c. 255,880
signing of the lease agreement d. 0
b. a capital lease is entered into with the initial lease
payment due upon the signing of the lease 30. Robin leased a machine from Ready. The lease qualifies
agreement as a capital lease and requires 10 annual payments of
c. a 10-year 8% bond is issued on January 2 with P10,000 beginning immediately. The lease specifies an
interest payable semiannually on July 1 and interest rate of 12% and a purchase option of P10,000 at
January 1 yielding 7% the end of the tenth year, even though the machine’s
d. a 10-year 8% bond is issued on January 2 with estimated value on that date is P20,000. Robin’s
interest payable semiannually on July 1 and incremental borrowing rate is 14%.
January 1 yielding 9% The present value of an annuity due of 1 at:
12% 6.328 14% 5.946
26. The excess of the fair value of leased property at the The present value of 1 at:
inception of the lease over its cost or carrying amount 12% 0.322 14% 0.270
should be classified by the lessor as: What amount should Robin record as lease liability at the
a. unearned income from a sales type lease beginning of the lease term?
b. unearned income from a direct financing lease a. P62,160
c. manufacturer’s or dealer’s profit from a sales b. P64,860
type lease c. P66,500
d. P69,720
PREFINAL EXAM – ACCOUNTING 5 SET A DECEMBER 4, 2019