INTERMEDIATE ACCOUNTING 2 FINAL GRADING EXAMINATION

Document Content and Description Below

Current Liabilities 1. Alhambra Company offers three payment plans on its 12-month contracts. Information on the three plans and the number of children enrolled in each plan for September 1, 2005 th ... rough August 31, 2006 contract year follows: Initial payment Monthly fees Number of Plan per child per child children #1 P500 P0 15 #2 200 30 12 #3 50 9 36 Alhambra received all initial payments on September 1, 2005, and P3,240 of monthly fees during the period September 1 through December 31, 2005. In its December 31, 2005 balance sheet, what amount should Alhambra report as deferred revenue? a. 9,900 b. 3,300 c. 6,600 d. 4,380 C = initial payments (500 x 15) + 200 x 12)= 9,900 x 8/12 = 6,600 2. The following are taken from the records of ABC Co. as of year-end. Accounts payable 2,000 SSS contributions payable 6,000 Utilities payable 7,000 Cash dividends payable 4,000 Accrued interest expense 6,000 Property dividends payable 7,000 Advances from customers 1,000 Share dividends payable 3,000 Unearned rent 9,000 Lease liability 35,000 Warranty obligations 5,000 Bonds payable 120,000 Income taxes payable 2,000 Discount on bonds payable (15,000) Preference shares issued 10,000 Security deposit 2,000 Constructive obligation 11,000 Redeemable preferences shares issued 14,000 Obligation to deliver a variable number of own shares worth a fixed amount of cash 10,000 Unearned interest on receivables 3,000 How much is the total financial liabilities to be disclosed in the notes? a. 172,000 b. 185,000 c. 192,000 d. 225,000 Solution: P a g e | 2 Accounts payable 2,000 Utilities payable 7,000 Accrued interest expense 6,000 Obligation to deliver a variable number of own shares worth a fixed amount of cash 10,000 Cash dividends payable 4,000 Finance lease liability 35,000 Bonds payable 120,000 Discount on bonds payable (15,000) Security deposit 2,000 Redeemable preference shares 14,000 Total financial liabilities 185,000 Notes Payable 3. Entity A purchases a TV set on a 6-month installment basis. The installment price is ₱120,000. However, if the TV set is purchased outright in cash, the cash price would have been ₱100,000. The payable will be initially recognized at a. 100,000 b. 120,000 c. Present value of 120,000 discounted at the current market rate using 6 periods d. None of these 4. Entity A purchases goods for ₱250,000 under a special credit period of 1 year. The seller normally sells the goods for ₱220,000 with a credit period of one month or with a ₱5,000 discount for cash basis (i.e., outright payment in cash). The initial measurement of the payable is a. 250,000 b. 220,000 c. 215,000 d. 200,000 Normal purchase price with credit period of one month 220,000 Discount for cash on delivery (5,000) Cash price equivalent of the goods purchased 215,000 5. On January 1, 20x1, ABC Co. acquired transportation equipment in exchange for ₱100,000 cash and ₱1,000,000, noninterest-bearing note payable due in 4 equal annual installments. The first installment is due on January 1, 20x1. The succeeding installment payments are due every December 31. The prevailing rate of interest for this type of note is 12%. How much is the interest income in 20x1? a. 120,000 b. 102,055 c. 72,055 d. 50,702 Future cash flows – annual installments (₱1M ÷ 4) 250,000 Multiply by: PV of an annuity due of ₱1 @12%, n=4 3.401830 Present value of note payable - Jan. 1, 20x1 850,458 Amortization table: (Installment) P a g e | 3 Date Payments Interest expense Amortization Present value Jan. 1, 20x1 850,458 Jan. 1, 20x1 250,000 - 250,000 600,458 Dec. 31, 20x1 250,000 72,055 177,945 422,513 Dec. 31, 20x2 250,000 50,702 199,298 223,214 Dec. 31, 20x3 250,000 26,786 223,214 0 6. On January 1, 20x1, ABC Co. acquired machinery by issuing a 3-year, ₱1,200,000 noninterestbearing note payable due as follows: Date Amount of installment December 31, 20x1 600,000 December 31, 20x2 400,000 December 31, 20x3 200,000 Total 1,200,000 The prevailing rate of interest for this type of note is 10%. How much is the carrying amount of the note on December 31, 20x1? a. 1,026,296 b. 867,312 c. 528,926 d. 489,762 Date Collections PV of ₱1 @ 10%, n= 1 to 3* Present value Dec. 31, 20x1 600,000 0.90909 545,455 Dec. 31, 20x2 400,000 0.82645 330,579 Dec. 31, 20x3 200,000 0.75131 150,263 Totals 1,200,000 1,026,296 * PV of ₱1 @10%: n=1 is 0.90909; n=2 is 0.82645; and n=3 is 0.75131 Amortization table: (Installment) Date Payments Interest expense Amortization Present value Jan. 1, 20x1 1,026,296 Dec. 31, 20x1 600,000 102,630 497,370 528,926 Dec. 31, 20x2 400,000 52,893 347,107 181,818 Dec. 31, 20x3 200,000 18,182 181,818 0 7. On January 1, 20x1, ABC Co. issued a ₱1,200,000 noninterest-bearing note due on December 31, 20x1 in exchange for inventory with a list price of ₱1,100,000 and a cash price of ₱1,000,000. How much is the carrying amount of the note on December 31, 20x1? a. 987,234 b. 1,000,000 c. 1,062,695 d. 1,129,321 First trial: (at 10%) Future cash flows x PV factor at x% = PV of note  1,200,000 X PV of ₱1 @ 10%, n=3 = 1,000,000  (1,200,000 x 0.751315) = 901,578 is not equal to 1,000,000 P a g e | 4 We need a substantially higher amount of present value. Therefore, we need to decrease substantially the interest rate. Let’s try 6%. Second trial: (at 6%) Future cash flows x PV factor at x% = PV of note  1,200,000 X PV factor at 6%, n=3 = 1,000,000  (1,200,000 x 0.839619) = 1,007,543 is not equal to 1,000,000 We need a slightly lower amount of present value. Therefore, we need to increase slightly the interest rate. Let’s try 7%. Third trial: (at 7%) Future cash flows x PV factor at x% = PV of note  1,200,000 X PV factor at 7%, n=3 = 1,000,000  (1,200,000 x 0.816298) = 979,558 is not equal to 1,000,000 In here, we need to perform interpolation. Looking at the values derived above, we can reasonably expect that the effective interest rate is a rate between 6% and 7%. To perform the interpolation, we will use the following formula: x% - 6% 7% - 6% Where: x% again is the effective interest rate. 1,000,000 - 1,007,543 = (7,543) = 0.269 979,558 - 1,007,543 (27,985) 5 The amount computed is added to 6% to derive the effective interest rate. The effective interest rate is 6.2695% (6% + .2695%). Date Interest income Unearned interest Present value Jan. 1, 20x1 200,000 1,000,000 Dec. 31, 20x1 62,695 137,305 1,062,695 Dec. 31, 20x2 66,626 70,679 1,129,321 Dec. 31, 20x3 70,803 (124) 1,200,124 8. On January 1, 20x1, ABC Co. issued a 3-year, ₱1,000,000 noninterest-bearing note payable to XYZ, Inc., a related party. The prevailing interest for similar type of obligation is 12%.The proceeds received from the note is ₱1,000,000, equal to the face amount. How much is the “Day 1” difference? Gain (Loss) a. 288,220 b. (288,220) c. 222,880 d. (222,880) Future cash flow 1,000,000 Multiply by: PV of ₱1, @12%, n=3 0.71178 Present value 711,780 The entry to record the note is as follows: P a g e | 5 Jan. 1, 20x1 Cash Discount on note payable (1M – 711,780) Note payable Unrealized gain – “Day 1” Difference 1,000,000 288,220 1,000,000 288,220 9. On January 1, 20x1, ABC Co. issued a 3-year, 3%, ₱1,000,000 note payable in exchange for a machine. Principal is due on January 1, 20x4 but interest is due annually every January 1. The prevailing interest rate for this type of note is 12%. How much is the carrying amount of the note on December 31, 20x1? a. 783,835 b. 883,664 c. 847,895 d. 919,643 Future cash flows Present value factors @12%, n=3 Present value Principal 1,000,000 0.71178 a 711,780 Annual interest (1M x 3%) 30,000 2.40183 b 72,055 Total 783,835 a (PV of ₱1 @12%, n=3) b (PV of ordinary annuity of ₱1 @12%, n=3 Amortization table: (Installment) Date Payments for interests Interest expense [Show More]

Last updated: 3 years ago

Preview 1 out of 31 pages