Intermediate Accounting II

Second Semester – AY 2024-2025

LIABILITIES DRILL

1. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to
be fair unless
S1. no interest rate is stated.
S2. the stated interest rate is unreasonable.
A. S1 and S2 are correct C. Only S1 is correct
B. S1 and S2 are incorrect D. Only S2 is correct

2. Evaluate the following statements:

S1. Preference dividends in arrears are not a liability until declared by the Board of Directors, but should
be disclosed in the notes to the financial statements.
S2. Companies should recognize the expense and related liability for compensated absences in the
year earned by employees.
A. S1 and S2 are correct C. Only S1 is correct
B. S1 and S2 are incorrect D. Only S2 is correct

3. Evaluate the following statements:

S1. All long-term debt maturing within the next year must be classified as a current liability on the
statement of financial position.
S2. A short-term obligation can be excluded from current liabilities if the company intends to refinance
it on a long-term basis.
A. S1 and S2 are correct C. Only S1 is correct
B. S1 and S2 are incorrect D. Only S2 is correct

4. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation
is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay
the bank P80,000 each year for 10 years to repay the loan. Which of the following relationships can you
expect to apply to the situation?
a. The balance of mortgage payable at a given statement of financial position date will be reported as a
non-current liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of
the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.

5. Evaluate the following statements:

S1. A company can exclude a short-term obligation from current liabilities if it intends to refinance the
obligation and has an unconditional right to defer settlement of the obligation for at least 12 months
following the due date.
S2. Constructive obligations, in which the company has created a valid expectation on the part of other
parties that it will discharge certain responsibilities, are disclosed in the notes to the financial
statements but not recorded.
A. S1 and S2 are correct C. Only S1 is correct
B. S1 and S2 are incorrect D. Only S2 is correct

6. Discount on Notes Payable is charged to interest expense

A. equally over the life of the note. C. using the effective interest method
B. only in the year the note is issued. D. only in the year the note matures

7. Norton Corp. does not elect the fair value option for recording its financial liabilities. The discount resulting
from the determination of a note payable’s present value should be reported on its balance sheet as a(n)
A. Addition to the face amount of the note. C. Deferred credit separate from the note
B. Deferred charge separate from the note. D. Direct reduction from the face amount of the note
8. On September 1, 2025, Two Company issued a note payable to National Bank in the amount of P1,800,000,
bearing interest at 12% and payable in three equal annual instalments. The first interest and principal
payment was made on September 2026. On December 31, 2026, determine the interest expense?

9. From the immediately preceding data, compute the total liability at the end of 2026.

10. ABC Company bought a new machine on January 1, 2024 and agreed to pay in equal annual instalment of
P600,000 at the end of each of the next five years. The prevailing rate of interest is 12%. The reporting period
is every December 31. Compute the 2025 Interest expense

11. From the immediately preceding data, determine the 2026 book value of the note liability

12. On January 1, 2026, ABC Company borrowed P500,000, 8% noninterest-bearing note due in 4 years. The
present value of the note on January 1, 2026 was 367,500. ABC Company elects the fair value of the note
is P408,150. At the end of 2026, determine the amount should be presented in the financial statements as
gain/ loss on note payable? Label your answer.

13. On March 1, 2022, KKK Company borrowed P1,000,000 and signed a 2-year note bearing interest at 12%
per annum compounded annually. Interest is payable in full at maturity on February 28, 2024. Adjustment at
the end of 2023 would include a debit to

14. On January 1, 2025, Water Snake Company borrowed P500,000, 8% noninterest-bearing note due in 4 years.
The present value of the note on January 1, 2025 was 367,500. Water Snake Company elects the fair value
of the note is P408,150. At the end of 2025, determine the amount of the following that should be presented
in the financial statements for Note payable and Gain/ loss on note payable are

15. On January 1, 2025, Attractive Company signed a P1,000,000 noninterest-bearing note due in 3 years at a
discount rate of 10%. Attractive Company elects to use the fair value option for reporting its financial liabilities.
On December 31, 2025, Attractive credit rating and risk factors indicated that the rate of interest applicable to
its borrowings was 9%. Adjustment at the end of 2025 includes
A. Debit note payable P21,000
B. Credit note payable P 91,000
C. Credit gain on note payable P 91,000
D. Debit loss on note payable P21,000
E. None of the above

16. On January 1, 2025, Jantzen Company sold land to Dansko Company. There was no established market price
for the land. Dansko gave Jantzen a P2,400,000 Zero-interest-bearing note payable in three equal annual
installments of P800,000 with the first payment due December 31, 2025. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%. The present value of a P2,400,000 note payable in
three equal annual installments of P800,000 at a 10% rate of interest is P1,989,600. The note will be reported
on Dansko’s 2025 statement of financial position at a carrying value of
a. P1,989,600 b. P2,126,400 c. P2,188,560 d. P2,400,000

17. On January 1, 2025, Li Company purchased equipment from Keiko Distributors. There was no established
market price for the equipment which has a 10-year life and no salvage value Li gave Keiko a P200,000 zero-
interest-bearing note payable in 5 equal annual installments of P40,000, with the first payment due December
31, 2025. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was
P144,200. Assuming that Li uses the straight-line method of depreciation, what amounts will be reported on
the company’s 2025 income statement for interest expense and depreciation expense for the note and
equipment?
a. P0; P20,000 c. P12,978; P14,420
b. P18,000; P20,000 d. P14,420; P28,840

18. On January 1, 2025, Ann Price loaned P45,078 to Joe Kiger. A zero-interest-bearing note (face amount,
P60,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be
repaid on December 31, 2027. The prevailing rate of interest for a loan of this type is 10%. The present value
of P60,000 at 10% for three years is P45,078. What amount of interest income should Ms. Price recognize in
2025?
 a. P4,508. b. P6,000. c. P18,000. d. P13,524.

19. On January 1, 2025, Jacobs Company sold property to Dains Company which originally cost Jacobs
P760,000. There was no established exchange price for this property. Dains gave Jacobs a P1,200,000 zero-
interest-bearing note payable in three equal annual installments of P400,000 with the first payment due
December 31, 2025. The note has no ready market. The prevailing rate of interest for a note of this type is
10%. The present value of a P1,200,000 note payable in three equal annual installments of P400,000 at a
10% rate of interest is P994,800. What is the amount of interest income that should be recognized by Jacobs
in 2025, using the effective-interest method?
a. P0. b. P40,000. c. P99,480. d. P120,000.

20. On January 1, 2025, Crown Company sold property to Leary Company. There was no established exchange
price for the property, and Leary gave Crown a P2,000,000 zero-interest-bearing note payable in 5 equal
annual installments of P400,000, with the first payment due December 31, 2025. The prevailing rate of interest
for a note of this type is 9%. The present value of the note at 9% was P1,442,000 at January 1, 2025. What
should be the balance of the Notes Payable account on the books of Leary at December 31, 2025 after
adjusting entries are made, assuming that the effective-interest method is used?
a. P2,000,000 b. P1,171,780 c. P1,553,600 d. P1,442,000

EXERCISES

On April 1, 2024, ABC issues a 3-year, 10% promissory note amounting to P1,500,000 for an equipment. The
prevailing rate of interest for similar note is 11%. The asset received can’t be measured reliably. ABC reports
every December 31. Consider the following independent assumptions:

Assumption 1
If the principal obligation will be paid as follows: P750,000 on March 31, 2025; P500,000 on March 31, 2026;
and P250,000 on March 31, 2027; plus, annual interest based on the outstanding obligation, determine the
following:
a. Interest expense for the year ended 2025.
b. Carrying value of the notes payable on December 31, 2024, current
c. Carrying value of the notes payable on December 31, 2025, noncurrent

Assumption 2
If the principal obligation will be paid P250,000 every September 30 and March 31, together with the semiannual
interest based on the outstanding obligation, determine the following:
a. Carrying value of the notes payable on December 31, 2024, current
b. Interest expense for the year ended 2025.
c. Total current liability related to the note on December 31, 2025