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INTERMEDIATE ACCOUNTING PART 2

1ST SEMESTER 2020-2021
MIDTERM EXAMINATION

NAME: _______________________________ PERMIT / O.R __________________________

SCHEDULE: TTH 12:00 – 3:00 TEACHER: _____________________________

MULTIPLE CHOICE
1. D When the effective interest method is used, the periodic amortization would
a. Increase the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium
c. Increase if the bonds were issued at a premium
d. Increase if the bonds were issued at either a discount or a premium

2. D Under the effective interest method of amortization, the interest expense is equal to
a. The stated rate of interest multiplied by the face amount of the bonds.
b. The market rate of interest multiplied by the face amount of the bonds.
c. The stated rate of interest multiplied by the beginning carrying amount of the
bonds.
d. The market rate of interest multiplied by the beginning carrying amount of the
bonds.

3. A When interest expense for the current year is more than interest paid, the bonds
were issued at
a. Discount
b. A premium
c. Face amount
d. No discount or premium

4. B When bonds are sold at discount and the effective interest method is used, at each
subsequent interest payment date, the cash paid is
a. More than the effective interest
b. Less than the effective interest
c. Equal to the effective interest
d. More than the bonds had been sold at a premium.

5. D When bonds are sold at a premium and the effective interest method is used, at each
interest payment date, the interest expense
a. Remain constant
b. Is equal to the change in carrying amount
c. Increases
d. Decreases
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Intermediate Accounting Part 2 Midterm Exam

6. C An entity shall initially measure equity instruments issued to extinguish a financial
liability at
a. Carrying amount of the liability extinguished.
b. Fair value of the liability extinguished.
c. Fair value of the equity instruments issued.
d. Par value of the equity instruments issued.

7. B For a debt restructuring involving substantial modifications of terms, it is appropriate

for a debtor to recognize gain when the carrying amount of the debt
a. Is less than the present value of the future cash payments specified by new terms.
b. Exceeds the present value of the future cash payments specified by new terms.
c. Exceed the total future cash payments specified by new terms.
d. Is less than the total future cash payments specified by new terms.

8. In a debt restructuring that is considered an asset swap, the gain on extinguishment is

equal to
a. Excess of the carrying amount of debt over the carrying amount of the asset.
b. Excess of the fair value of the asset over its carrying amount.
c. Excess of the carrying amount of the debt over the fair value of the asset.
d. Excess of the fair value of the asset over the carrying amount of the debt.

9. If both the fair value of the equity instruments issued and the fair value of the financial
liability extinguished cannot be measured reliably, the equity instruments issued shall
be measured at
a. Value assigned by the Board of Directors
b. Carrying amount of the equity instruments issued
c. Fair value of the equity instruments issued.
d. Carrying amount of the liability extinguished.

10. The gain or loss from extinguishment of a financial liability by issuing equity
instruments is presented as
a. Component of other comprehensive income
b. Other income or other expense
c. Separate line item in the income statement
d. Component of finance cost

11. How should an entity calculate the net proceeds to be received from bond issuance
a. Discount the bonds at the stated rate of interest
b. Discount the bonds at the market rate
c. Discount the bonds at the market rate of interest and deduct bond issuance cost.
d. Discount the bonds at the stated rate of interest and deduct bond issuance cost.
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Intermediate Accounting Part 2 Midterm Exam

12. An entity neglected to amortize the premium on bonds payable. What is the effect of
the failure to record premium amortization on interest expense and bond carrying
amount, respectively?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated

13. When bonds are retired prior to maturity with proceeds from a new bond issue, any
gain or loss from the early extinguishment should be
a. Recognized in income from continuing operations.
b. Recognized in retained earnings
c. Amortized over the remaining original life of the retired bond issue.
d. Amortized over the life of the new bond issue.

14. If bonds are issued between interest dates, the entry of the issuer could include a
a. Debit to interest payable
b. Credit to interest receivable
c. Credit to interest expense or interest payable
d. Credit to unearned interest

15. Included in Be Grateful Company liability account balances at December 31, 2018 were the
following:
20% note payable issued in October 1, 2017
maturing September 30, 2020 2, 500, 000
18% Notes payable April 1, 2018
maturing April 1, 2019 4, 000, 000

Be Grateful Company’s December 31, 2018 financial statements were issued on March 1, 2019.
On January 15, 2019, the entire P4, 000, 000 balance of 18% note was refinanced by issuance of
a long-term obligation payable in a lump-sum. In addition, on March 10, 2019. Be Grateful
Company consummated a non-cancellable agreement with the lender refinance the 20%, P2,
500, 000 note on a long-term basis, on readily determinable terms that have not yet been
implemented. Both parties are financially capable of honoring the agreement’s provisions. On
December 31, 2018, balance sheet, the amount of the notes payable that Be Grateful should
classify as current liability?
a. P-0- b. P6, 500, 000 c. P2, 500, 000 d. P4, 000, 000
Question no. 16 to 17
On January 1, 2018, Gymnastic Company issued 9% bonds in the face amount of P5, 000, 000 which
mature on January 1, 2028. The bonds were issued for P4, 695, 000 to yield 10%. Interest is payable
annually on December 31. The entity used the interest method of amortizing bond discount?
16. What is the interest expense for 2018?
a. P450, 000 b. P469, 500 c. P422, 550 d. P500, 000
17. On December 31, 2018, what is the carrying amount of the bonds payable?
a. P5, 000, 000 b. P4, 704, 750 c. P4, 714, 500 d. P4, 695, 000

Intermediate Accounting Part 2 Midterm Exam

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Question no. 18 to 20
RESILIENCE Company had outstanding 7%, 10-year bond payable with face amount of P5, 000, 000.
The bond was originally sold to yield 6% annual interest. The entity used the effective interest method to
amortize bond premium. On January 1, 2020, the carrying amount of the bond payable was P5, 250,
000.
18. What amount of unamortized premium on bond payable should be reported on December 31,
2020?
a. P52, 500 b. P172, 500 c. P215, 000 d. P225, 000
19. What is the carrying amount of the bond payable on December 31, 2020?
a. P5, 000, 000 b. P5, 215, 000 c. P5, 250, 000 d. P4, 785, 000

20. At the beginning of the current year, HEART Company issued 10-year bonds with a face amount
of P5, 000, 000 and stated interest of 8% payable annually at every year-end. The bonds were
priced to yield 10%.
PV of 1 for ten periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods at 10% 6.145
What is the issue price of the bonds?
a. P4, 385, 500 b. P1, 927, 500 c. P5, 000, 000 d. P5, 614, 500

21. VIRTUAL Company provided the following information in relation to the issuance of bonds at
the beginning of the current year:
Face amount P5, 000, 000
Term Ten years
Stated interest rate 6%
Interest payment date Annually December 31
Yield 9%

At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of an ordinary annuity of
1 for 10 periods 7.360 6.418
What is the issue price of the bonds payable?
a. P4, 035, 400 b. P4, 318, 000 c. P5, 000, 000 d. P2,110, 000

22. On January 1, 2020, BSA Company issued 10% bonds in the face amount of P1, 000, 000 that
mature on December 31, 2027. The bonds were issued for P886, 000 to yield 12% resulting in
bond discount of P114, 000. The entity used the effective interest method of amortizing bond
discount. Interest is payable on June 30 and December 31. For the year ended December 31,
2020, what amount should be reported as bond interest expense?
a. P50, 000 b. P53, 160 c. P100, 000 d. P106, 510

23. On July 1, 2020, PFIZER VACCINE Company issued 4, 000 bonds of 8%, P1, 000 face amount for
P3, 504, 000. The bonds were issued to yield 10%. The bonds are dated July 1, 2020 and mature
on July 1, 2030. Interest is payable semi-annually on January 1 and July 1. Using the effective
interest method, what amount of the bond discount should be amortized for the six-months
ended December 31, 2020?
a. P19, 840 b. P15, 200 c. P30, 400 d. P24, 800
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24. HOPE Company entered into a troubled debt restructuring agreement with PNB. The bank
agreed to accept land with a carrying amount of P800, 000 and a fair value of P1, 000, 000 in
exchange for a note payable with a carrying amount of P1, 500, 000. Under IFRS, what amount
should be reported as a gain on extinguishment of debt?
a. P-0- b. P300, 000 c. P500, 000 d. P700, 000

25. During 2020, BSA Company experienced financial difficulties and is likely to default on a P5,
000, 000, 15% three-year note dated January 1, 2018 payable to Union Bank. On December 31,
2020, the bank agreed to settle the note and unpaid interest of P750, 000 for 2020 for P4, 100,
000 cash payable on January 31, 2021. What amount should be reported as gain from
extinguishment of debt in 2020?
a. P1, 650, 000 b. P900, 000 c. P750, 000 d. P-0-

Question no. 26 to 28
Pacquiao Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditor to relieve its financial stress. Pacquiao has a P2, 500, 000 note payable to Money
Bank. The bank accepted an equity interest in Pacquiao Company in the form of P200, 000
ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the
note payable on the date of restructuring is P2, 200, 000.

26. What amount should be recognized as a gain from debt extinguishment as a result of the
equity swap?
a. P100, 000 b. P200, 000 c. P400, 000 d. P500, 000
27. What amount should be recognized as share premium from the issuance of the shares?
a. P100, 000 b. P200, 000 c. P400, 000 d. P500, 000
28. If the shares have no fair value, what amount should be recognized as gain on extinguishment?
a. P500, 000 b. P400, 000 c. P300, 000 d. P200, 000

Question 29 to 30
ABC Company had an overdue 8% note payable to Security Bank at P8, 000, 000 and accrued interest of
P640, 000. As a result of a restructuring agreement on January 1, 2020, Security Bank agreed to the
following provisions:
 The principal obligation is reduced to P7, 000, 000.
 The accrued interest of P640, 000 is forgiven.
 The date of maturity is extended to December 31, 2023.
 Annual interest of 10% is to be paid for 4 years every December 31.
The present value of 1 at 8% for 4 periods is 0.735 and the present value of an ordinary annuity of 1 at
8% for 4 periods is 3.31
29. What amount should be reported as gain on extinguishment debt for 2020?
a. P538, 000 b. P1, 000, 000 c. P1, 178, 000 d. P1, 640, 000
30. What amount should be reported as interest expense for 2020?
a. P640, 000 b. P700, 000 c. P596, 960 d. P746, 200
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Question no. 31 to 33
Facemask Company transferred real estate to Face Shield Company pursuant to a debt restructuring in
full liquidation of Facemask Company’s liability to Face Shield Company:
Carrying amount of liability liquidated P 1, 500, 000
Carrying amount of real estate transferred 1, 000, 000
Fair value of real estate transferred 900, 000
31. Under IFRS, what amount should be reported as gain on extinguishment of liability?
a. P100, 000 b. P600, 000 c. P900, 000 d. P500, 000
32. Under USA GAAP, what amount should be reported as gain or loss on restructuring?
a. P500, 000 gain c. P100, 000 loss
b. P600, 000 d. -0-
33. Under USA GAAP, what amount should be reported as gain or loss on transfer of real estate?
a. P100, 000 gain c. P500, 000 gain
b. P600, 000 gain d. P100, 000 loss

34. During the current year, GLOBE Company incurred the following costs in connection with the
issuance of bonds:
Promotion cost 400, 000
Printing and engraving 300, 000
Legal fees 1, 600, 000
Fees paid to independent accountants for registration 200, 000
Commissions paid to underwriter 3, 000, 000
What amount should be recorded as bond issue costs to be amortized over the term of the
bonds?
a. P5, 100, 000 b. P5, 500, 000 c. P3, 000, 000 d. P2, 100, 000

35. On December 31, 2020, NOVO Hotel Company reported bonds payable of P7, 360, 000 and
accrued interest payable of P200, 000. The bonds are retired on December 31, 2020 for P8,
160, 000 excluding accrued interest. What amount should be reported as gain or loss on
extinguishment of bonds payable?
a. P800, 000 gain c. P800, 000 loss
b. P600, 000 loss d. P600, 000 gain

“End of Exam”
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 COLLEGE OF BUSINESS
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INTERMEDIATE ACCOUNTING PART 2

1st Semester 2020-2021
MIDTERM EXAM

NAME: ______________________________ DATE: ____________

CLASS SCHEDULE: ___________________ PERMIT # _________

OFFICIAL ANSWER SHEET

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3. 23.
4. 24.
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9. 29.
10. 30.
11. 31.
12. 32.
13. 33.
14. 34.
15. 35.
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