LIABILITIES

During the current year, Day Company sold 500,000 boxes of cake mix under a new sales
promotional program.
Each box contained one coupon which entitled the customer to a baking pan upon remittance
of 40.
The entity paid 50 per pan and 5 for handling and shipping and estimated that 80% of the
coupons would be redeemed even though only 300,000 coupons had been processed during
the year.

1. What is the premium expense for the current year?

a. 6,000,000
b. 7,500,000
c. 4,500,000
d. 2,000,000

2. What amount should be reported as liability for unredeemed coupons at year end?
a. 1,000,000
b. 1,500,000
c. 3,000,000
d. 5,000,000

Baker Company sold consumer products that are package in boxes. The entity offered an
unbreakable glass in exchange for two box tops and 50 as a promotion during the current year.
The cost of the glass was 200.
The entity estimated at the end of year that it would be probable that 50% of the box tops will
be redeemed.
The entity sold 100,000 boxes of the product during the current year and 40,000 box tops were
redeemed during the year.

3. What is the premium expense for the current year?

a. 3,740,000
b. 3,000,000
c. 5,000,000
d. 4,000,000

4. What amount should be reported as estimated liability at year end?

a. 3,000,000
b. 1,500,000
 c. 750,000
d. 0

Love Company included one coupon in each package sold. Premium of offered to customers
who send in 10 coupons.
2018 2019
Number of packages sold 500,000 800,000
Number of premiums purchased at 40 each 30,000 60,000
Number of premiums distributed 20,000 50,000
Number of premium to be distributed next period 5,000 3,000

5. What amount should be reported as premium expense for 2018?

a. 1,000,000
b. 1,200,000
c. 600,000
d. 500,000

6. What is the premium liability on December 31, 2018?

a. 400,000
b. 200,000
c. 600,000
d. 300,000

7. What amount should be reported as premium expense in 2019?

a. 2,400,000
b. 2,000,000
c. 2,120,000
d. 1,920,000

8. What is the premium liability on December 31, 2019?

a. 320,000
b. 400,000
c. 120,000
d. 520,000

Bold Company estimated the annual warranty expense at 2% of annual net sales. The net sales
for 2018 amounted to 4,000,000.
On January 1, 2018 the warranty liability was 60,000 and the warranty payments during 2018
totalled 50,000
9. What is the warranty expense for 2018?
a. 70,000
b. 50,000
c. 80,000
d. 60,000

10. What is the warranty liability on December 31, 2018?

a. 10,000
b. 70,000
c. 80,000
d. 90,000

Dunne Company sells equipment service contracts that cover a two year period. The sale price
of each contract is 600.
The past experience is that of the total pesos spent for repairs on service contracts 40% is
incurred evenly during the first contract year and 60% evenly during the second contract year.

11. What is the contract revenue for 2018?

a. 120,000
b. 240,000
c. 300,000
d. 150,000

12. What amount should be reported as deferred contract revenue on December 31, 2018?
a. 540,000
b. 480,000
c. 360,000
d. 300,000

13. What is the contract revenue for 2019?

a. 180,000
b. 360,000
c. 300,000
d. 120,000

14. What is the contract revenue for 2020?

 a. 240,000
b. 360,000
c. 180,000
d. 0

On November 25, 2018 an explosion occurred at a Rex Company plant causing extensive
property damage to area buildings. By March 10, 2019 claims had been asserted against the
entity.
The management and counsel concluded that it is probable that the entity would be responsible
for damages and that 3,500,000 is a reasonable estimate of the liability.
Rex 10,000,000 comprehensive public liability policy has a 500,000 deductible clause. The
financial statements were issued on March 31, 2019.

15. What amount of loss from lawsuit should be reported for 2018?
a. 3,500,000
b. 3,000,000
c. 500,000
d. 0

16. What amount of liability from lawsuit should be reported on December 31, 2018?
a. 3,500,000
b. 3,000,000
c. 500,000
d. 0

On September 1, 2018 Pine Company issued a note payable to National Bank in the amount
1,800,000 bearing interest at 12% and payable in three equal annual principal payment of
600,000. On this date the bank prime rate was 11%.
The first interest and principal payment was made on September 1, 2019.

17. On December 31, 2019 what amount should be reported as accrued interest payable?
a. 44,000
b. 48,000
c. 66,000
d. 72,000

18. What amount should be reported as interest expense for 2019?

a. 144,000
 b. 216,000
c. 192,000
d. 132,000

On July 1, 2018 Justine Company borrowed 1,000,000 on a 10% five year note payable.
On December 31, 2018 the fair value of the note is determined to be 975,000 based on market
and interest factors.
The entity has elected the fair value option for reporting the financial liability.

19. What amount should be reported as interest expense for 2018?

a. 100,000
b. 97,500
c. 50,000
d. 48,750

20. What is the carrying amount of the note payable on December 31, 2018?
a. 1,000,000
b. 975,000
c. 500,000
d. 900,000

21. What is the gain or loss to be recognized in 2018 as a result of the fair value option?
a. 25,000 gain
b. 25,000 loss
c. 12,500 gain
d. 0

On January 1, 2018 Jonathan Company borrowed 500,000 8% interest bearing note due in four
years. The present value of the note on January 1, 2018 was 367,500.
The entity has elected the fair value option for reporting the financial liability. On December 31,
2018 the air value of the note is 408,150.

22. What is the carrying amount of the note payable on December 31, 2018?
a. 500,000
b. 367,500
c. 408,150
d. 460,000
23. What amount should be reported as interest expense for 2018?
a. 40,000
b. 29,400
c. 32,562
d. 20,000

24. What is the net gain from change in fair value to be recognized in 2018?
a. 132,500
b. 40,650
c. 91,850
d. 0

25. At what amount should the discount on note payable be presented on December 31, 2018?
a. 132,500
b. 103,100
c. 100,000
d. 0

Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a 2,500,000 note payable to United Bank.
The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares
quoted at 12 per share. The par value is 10 per share.
The fair value of the note payable on the date of restructuring is 2,200,000.

26. What amount should be recognized as gain from debt extinguishment as a result of the
equity swap?
a. 400,000
b. 100,000
c. 500,000
d. 200,000

27. What amount should be recognized as share premium from the issuance of the shares?
a. 500,000
b. 100,000
c. 400,000
d. 200,000
28. If the shares have no fair value what amount should be recognized as gain on
extinguishment?
a. 200,000
b. 300,000
c. 400,000
d. 500,000

On January 1, 2018 Ezekiel Company received 1,077,200 for 12% bonds with face amount of
1,000,000. The bonds were sold to yield 10%. Interest is payable semi annually every January 1
and July 1.
The entity has elected the fair value option for measuring the financial liability.
On December 31, 2018 the fair value of the bonds is determined to be 1,064,600 due to market
and interest factors.

29. What is the carrying amount of the bonds payable on January 1, 2018?
a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600

30. What is the interest expense for 2018?

a. 120,000
b. 100,000
c. 107,720
d. 129,264

31. What is the gain or loss from change in fair value of the bonds for 2018?
a. 64,600 gain
b. 64,600 loss
c. 12,600 gain
d. 12,600 loss

32. What is the carrying amount of the bonds payable on December 31, 2018?
a. 1,065,600
b. 1,077,200
c. 1,000,000
d. 1,064,920
On January 1, 2018 West Company issued 9% bonds in the face amount of 5,000,000 which
mature on January 1, 2028. The bonds were issued for 4,695,000 to yield 10%.
Interest is payable annually on December 31. Then entity used the interest method of
amortizing bond discount.

33. What is the interest expense for 2018?

a. 450,000
b. 469,500
c. 422,550
d. 500,000

34. On December 31, 2018 what is the carrying amount of the bonds payable?
a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

At the beginning of current year Easy Company sold an equipment with remaining life of 10
years and immediately leased it back for 4 years at the prevailing market rental.

Sales price at fair value 6,000,000

Carrying amount of equipment 4,500,000
Annual rental payable at the end of each year 800,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1
At 10% for four periods 3.17

35. What is the initial lease liability?

a. 2,536,000
b. 3,200,000
c. 3,000,000
d. 0

36. What is the cost of right of use asset?

a. 1,902,000
b. 2,598,000
c. 2,536,000
d. 0
37. What is the gain on right transferred to the buyer lessor?
a. 866,000
b. 634,000
c. 750,000
d. 0

38. What is the annual depreciation of the right of use asset?

a. 475,500
b. 190,200
c. 634,000
d. 253,600

39. What is the net annual rental income of the buyer lessor?
a. 800,000
b. 200,000
c. 600,000
d. 400,000

At the beginning of current year Rachel Company reported the fair value of plan assets at
6,700,000 and projected benefit obligation at 7,600,000. The entity revealed the following
information for the current year:

Current service cost 1,450,000

Past service cost 300,000
Discount rate 10%
Actual return on plan assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000

40. What is the employee benefit expense?

a. 1,840,000
b. 1,540,000
c. 2,510,000
d. 1,750,000

41. What is the remeasurement gain or loss on plan assets?

a. 170,000 gain
 b. 170,000 loss
c. 670,000 gain
d. 670,000 loss

42. What is the fair value of plan assets on December 31?

a. 8,070,000
b. 7,400,000
c. 7,900,000
d. 8,200,000

43. What is the projected benefit obligation on December 31?

a. 8,250,000
b. 9,050,000
c. 9,010,000
d. 9,310,000

Dunn Company reported in the income statement for the current year 900,000 income before
provision for income tax.

Rent received in advance 150,000

Interest income on time deposit 200,000
Depreciation deducted for income tax purpose
In excess of financial depreciation 100,000
Income tax rate 30%

44. What is the current provision for income tax for the current year?
a. 270,000
b. 225,000
c. 210,000
d. 255,000

45. What is the total tax expense?

a. 270,000
b. 330,000
c. 210,000
d. 285,000
Canterbury Company had one temporary difference at the end of 2018 that will reverse and
cause taxable amount of 1,100,000 in 2019, 1,200,000 in 2020 and 1,200,000 in 2021. The
entity had also a deductible temporary difference of 1,500,000.
The pretax accounting income for 2018 is 6,000,000 and the tax rate is 30%. There are no
deferred at the beginning of 2018.

46. What is the current tax expense for 2018?

a. 1,800,000
b. 1,920,000
c. 1,200,000
d. 2,400,000

47. What is the net deferred tax expense for 2018?

a. 1,050,000
b. 1,200,000
c. 600,000
d. 450,000

Chamber Company reported the following differences between the book basis and tax basis of
assets and liabilities on December 31, 2018 which is the end of the first year of operations:

Carrying amount Tax base

Installment accounts receivable 1,000,000 0
Litigation liability 200,000 0

It is expected that the litigation liability will be settled in 2019. The difference in accounts
receivable will result in taxable amounts of 600,000 in 2019 and 400,000 in 2020.
The entity has a taxable income of 7,000,000 in 2018 and is expected to have taxable income in
each of the following two years. The income tax rate is 30%.

48. What is the current tax expense?

a. 2,400,000
b. 2,040,000
c. 2,100,000
d. 2,460,000

49. What is the deferred tax expense?

a. 300,000
 b. 360,000
c. 240,000
d. 60,000
50. What is the total tax expense?
a. 2,460,000
b. 2,400,000
c. 2,340,000
d. 1,860,000