I. THEORIES You have 1 minute to answer every question.

Multiple Choice. Choose the best answer.

________ 1. Statement 1: A financial liability is recognized in an entity’s statement of financial position when and only
when such entity becomes a party to the contractual provisions of the liability.

Statement 2: A financial liability is a contractual obligation to exchange financial assets or financial liabilities with
another entity under conditions either potentially favorable or unfavorable to the entity.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 2. Which of the following are financial liabilities?

I. Accounts Payable II. Notes Payable

III. Bonds Payable IV. Loans Payable

V. Income Tax Payable

A. I, II, III, and IV

B. I, II, III, and V

C. I, II, IV, and V

D. All of the above

________ 3. Statement 1: In the case of financial liabilities measured at amortized cost, only transaction costs that are
directly attributable to the issuance of the instrument are included in its initial measurement.

Statement 2: All financial liabilities are subsequently measured at amortized cost.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 4. Statement 1: Another term for accounts payable is non-trade accounts payable.

Statement 2: Trade accounts payable due for less than and more than 12 months from the end of the reporting period
are treated as current and non-current, respectively.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 5. Statement 1: The 'Purchase Discounts Lost' account will be used when the gross method is applied.

Statement 2: When accounts payable are recorded using the net method, there must be a 'Purchase discounts' account
used.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

A. Interest expense is recognized even for non-interest bearing notes.

B. Discount on notes payable should be deducted to arrive at the carrying value of notes payable.

C. Amortizing the discount causes the carrying value of the notes payable to gradually increase over the life of the note.

D. Amortizing the premium causes the carrying value of the notes payable to gradually decrease over the life of the
note.

________ 7. Convertible bonds are separated into:

A. An asset and a liability component

B. An expense and a liability component

C. A liability and an equity component

D. An asset and an equity component

________ 8. Bonds may be issued in-between interest payment dates. The accrued interest for such bonds shall be
credited to:

A. Interest receivable

B. Interest payable

C. Interest income

D. Interest expense

________ 9. Statement 1: If bonds mature on a single date, they are called ___________.

Statement 2: If bonds mature in a series of instalments, they are the _______.

A. Term bonds, Serial bonds

B. Serial bonds, Term bonds

C. Term bonds, Convertible bonds

D. Callable bonds, Convertible bonds

________ 10. Statement 1: If the bond is issued at a premium, the interest expense each period exceeds the interest
accrued, and the carrying value of the bond increases per period.

Statement 2: When a company fails to amortize the discount on an outstanding bond payable, both the carrying value
and the interest expense will be understated.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 11. Which of the following questions is false?

A. Serial bonds mature in installments.

B. There is a premium when the effective rate is lower than the nominal rate.

C. Interest expense is computed using the nominal rate.

D. The premium amortization is equal to the difference of nominal interest and effective interest.
________ 12. Statement 1: Under the residual approach in convertible bonds, the issuer first determines the amount of
the liability component by measuring the fair value of a similar liability without an equity component.

Statement 2: Expenditures incurred related to conversion are recorded as expenses pertaining to shares issued upon
conversion.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 13. Statement 1: When the share warrants are exercised, preference share capital and share premium –
preference are credited.

Statement 2: When the market price without the warrants cannot be distinguished, it shall be computed by discounting
the maturity value and periodic interest at the market rate of interest for a similar debt instrument with the equity
component.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 14. Which among the following statements is/are correct regarding bonds with share warrants?

I. These are the bonds that do not pay interest but instead offer a “deep discount” or huge discount from the face
amount.

II. Upon the issuance of bonds with non-detachable share warrants, bonds payable, and share warrants outstanding are
debited.

III. The issue price is allocated between the bond and the warrants.

IV. The equity component is the residual amount after deducting the fair market value of the bonds from the total issue
price.

V. When bonds are issued with share warrants attached, bondholders are given the right to acquire a specified amount
of common stock of the issuing corporation within the given time.

A. III only B. I, II, III, & V

C. II, III, & IV D. III, IV, & V

________ 15. In an asset swap, the gain on extinguishment of liability is equal to the excess of :

A. Fair value of the asset transferred over its carrying amount.

B. Carrying amount of the liability over the fair value of the asset transferred.

C. Carrying amount of the debt over the carrying amount of the asset transferred.

D. Fair value of asset over the carrying amount of the liability.

________ 16. Equity swap is a form of debt restructuring wherein the ________ issues equity instruments to the
________ in full or partial payment of a liability.

A. payee; payor

B. holder; writer

C. creditor; debtor

D. debtor; creditor
________ 17. Statement 1: Under IFRIC 19, equity instruments shall be solely measured using the fair value of the
financial liability settled.

Statement 2: The difference between the measurement of equity instruments issued and the carrying value of the
financial liability settled is taken to profit or loss.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 18. Statement 1: The terms are substantially different if the discounted present value of the cash flows under
the new terms and discounted using the originaleffective interest rate is more than 10 percent different from the
discounted present value of the remaining cash flows of the original financial liability.

Statement 2: In extinguishment of the original liability, the difference between the carrying amount of the old debt and
the initial measurement basis of the new debt is taken to profit or loss.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 19. Statement 1: For each class of financial liability, the entity shall disclose the information about the extent
and nature of the financial instruments and the accounting policies and methods adopted.

Statement 2: The disclosure of material items of income, expense, and gains and losses that results from financial
liabilities is up to the entity.

A. Statement 1 is TRUE. Statement 2 is FALSE.

B. Statement 1 is FALSE. Statement 2 is TRUE.

C. Both statements are TRUE.

D. Both statements are FALSE.

________ 20. Based on IFRS 7, all information is true regarding the disclosure of the significance of financial instruments
for an entity's financial position except:

I. Financial liabilities at fair value through profit and loss, showing separately those held for trading and those designated
at initial recognition

II. Financial liabilities measured at amortized cost

III. Amount of impairment losses

IV. Information about compound financial instruments with multiple embedded derivatives

V. Breaches of terms of loan agreements

A. II only

B. III only

C. II, and III

D. IV and V
II. PROBLEM SOLVING

PROBLEM 1 (This problem is good for 5 minutes.)

INITIAL RECOGNITION

On December 31, 2022, JAYWON COMPANY reported accounts payable at P6,500,000 prior to making the necessary
year-end adjustments for the following transactions:

 On December 30, 2022, JAYWON COMPANY wrote and recorded checks payments to suppliers amounting to
P1,500,000. These checks were mailed to suppliers only on January 9, 2023.

 JAYWON COMPANY purchased goods for P900,000, terms 2/10, n/30. The goods were received on December 29,
2022. This transaction was only recorded on January 5, 2023, when the supplier sent the invoice. JAYWON accounts for
purchases using the net method.

 On December 21, 2022, goods shipped FOB destination, 3/10, n/30 from SUNKI CORPORATION, a vendor, to JAYWON
were received on January 22, 2023. The goods’ invoice cost is P575,000.

____________ 1. In computing the correct balance of accounts payable on December 31, 2022, at what amount should
the unadjusted balance of accounts payable be credited for the transaction with SUNKI CORPORATION?

____________ 2. What is the adjusted balance of accounts payable on December 31, 2022?

PROBLEM 2 (This problem is good for 10 minutes.)

NOTES PAYABLE

On January 1, 2022, SAIDA CRUMBS INC. purchased equipment for their business. They initially paid 80,000 as down
payment and agreed to pay the balance in four equal installments of 60,000 payable every December 31. The prevailing
market rate for this note was 12%. The following are the available present value:

Present Value of 1 at 12% for 4 periods 0.6355

Present Value of an ordinary annuity of 1 at 12% for periods 3.0373

____________ 3. On January 1, 2022, what is the cost of the machinery purchased?

____________ 4. On December 31, 2022, how much interest expense should be recorded?

____________ 5. On December 31, 2023, how much is the carrying value of the note?

PROBLEM 3 (This problem is good for 15 minutes.)

BONDS PAYABLE

On April 1, 2022, THOR AND CO. issued a 3-year bond payable worth P2,250,000 with the stated interest rate of 7%. For
similar bonds, the effective interest rate is 9%. The bond's interest is paid every March 31 and September 30, with the
first payment due on September 30, 2022. The company uses the effective interest method in amortizing bonds payable.
Furthermore, the company uses the calendar year as its reporting period.

PVF of P1 at 9% for three periods 0.7722

PVAF of P1 at 9% for three periods 2.5313

PVF of P1 at 4.5% for six periods 0.7679

PVAF of P1 at 4.5% for six periods 5.1579

____________ 6. How much is the issue price of the bond on April 1, 2022?

____________ 7. How much interest expense should be reported in the profit or loss for the year ended December 31,
2023?

____________ 8. How much is the increase in the carrying amount of the bonds payable from March 30, 2023 to
September 30, 2023?
PROBLEM 4 (This problem is good for 10 minutes.)

BONDS PAYABLE

BROWNIES CO. issued P8,000,000, 15% bonds on January 1, 2023. Annual principal payments of P1,600,000 and annual
interest payments on the outstanding bonds are made every year end. The bonds has a price that yields 12%. (Round off
the PV factor to 4 decimal places)

____________ 9. How much is the issue price of the bond?

____________ 10. How much interest expense for the year 2025?

PROBLEM 5 (This problem is good for 15 minutes.)

COMPOUND FINANCIAL INSTRUMENTS

On July 1, 2022, COMIC SANS COMPANY issued 5-year 2,000, 12% P1,000 bonds at 110. The holder of each bond is
entitled to convert the bond into 20, P50 par ordinary shares of the company, at anytime up to bond maturity. When the
bonds were issued, the prevailing market rate for similar instruments without the conversion option was 10%. The
bonds pay interest annually on June 30. On June 30, 2024, holders of 500 bonds exercised their conversion privilege
after receiving the annual interest when the fair market value of each share was P80. The remaining bonds were retired
on the maturity date.

____________ 11. How much bond conversion privilege is recognized on July 1, 2022?

____________ 12. How much is the share premium credited when the bonds were exercised on June 30, 2024?

PROBLEM 6 (This problem is good for 10 minutes.)

COMPOUND FINANCIAL INSTRUMENTS

ITAEWON COMPANY issued 5,000, 10% ten-year, P1,000 face value bonds with non-detachable share warrants at 103.
Each 20 bond carries ten non-detachable share warrants, each of which entitles the holder to purchase one share of the
company’s P500 par value ordinary share capital at P550 per share. Other similar instruments without equity
components are being traded at prices that yield 12%. In addition, interest is payable annually and all warrants were
eventually exercised.

____________ 13. How much is the issue price assigned to the warrants?

____________ 14. Upon the exercise of share warrants, how much should be credited to equity?

PROBLEM 7 (This problem is good for 10 minutes.)

TROUBLED DEBT RESTRUCTING

SIMBA CORP. provided the following information with respect to an obligation already matured:

Bank loan payable P 4,260,000

Interest payable 540,000

The company which is in serious financial trouble, has been in negotiations with the bank to clear the loan together with
the accrued interest. Consequently, it used one of its building as full payment to the loan and accrued interest. The
building had a historical cost of P4,900,000 with accumulated depreciation of P456,000. The fair value of the building is
reliably determined at P4,500,000.

____________ 15. What amount should be taken to profit or loss?

____________ 16. Assuming SIMBA CORP. used note receivable with a face amount of P3,980,000 and accrued interest
receivable of P370,000 as a settlement, what amount should be taken to profit or loss?
PROBLEM 8 (This problem is good for 10 minutes.)

TROUBLED DEBT RESTRUCTING

CHICKEN TERIYAKI INC. owes a P5,000,000 note to Pork Katsudon Inc. Unpaid interest on the note was accrued in the
amount of P500,000. Due to financial distress, the entity entered into an agreement with its creditor to issue share
capital in full settlement of the liability. The agreement provides the issue of P50,000 shares with a P50 par value and a
market value of P75. The fair value of the note payable on the date of restructuring is P4,500,000.

____________ 17. CHICKEN TERIYAKI INC. must recognize a gain or loss on debt restructuring of what amount?

____________ 18. Assuming the shares have no fair value, how much share premium will CHICKEN TERIYAKI INC. record
as a result of debt restructuring?

PROBLEM 9 (This problem is good for 15 minutes.)

TROUBLED DEBT RESTRUCTURING

GOLD DUST COMPANY has an overdue note payable to Playback Bank of P1,200,000 and recorded accrued interest of
P108,000 as of December 31, 2021. Playback Bank agreed to the following restructuring agreement on December 31,
2021, wherein the prevailing market rate interest rate for similar debt instruments on this date is 13%.

 Reduce the principal obligation by P200,000

 Waive the P108,000 accrued interest.

 Extend the maturity date to December 31, 2024

 Annual interest of 8% of the new principal is to be paid annually starting on December 31, 2022.

 Round off the PV factor to four decimal places

____________ 19. How much is the initial carrying amount of the restructured notes payable?

____________ 20. How much is the gain on debt restructuring?