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PRACTICAL ACCOUNTING 1 – REVIEW

NOTES PAYABLE & DEBT RESTRUCTURING

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. Jeffrey Company is indebted to Apex under a P5,000,000, 12% three-year note date December 31,
2016. Because of Jeffrey’s financial difficulties developing in 2018, Jeffrey owed accrued interest of
P600,000 on the note at December 31, 2018. Under a debt restructuring on December 31, 2018,
Apex agreed to settle the note and accrued interest for a tract of land having a fair value of P4,500,
000. Jeffrey’s acquisition cost of the land is P3,600,000. Ignoring income tax, in its 2018 income
statement,
What amount of gain on extinguishment should Jeffrey report as component of income from
continuing operations?
a. 2,000,000 b. 1,400,000 c. 1,100,000 d. 900,000

2. The following information pertains to the transfer of real estate pursuant to a debt restructuring by
Kaila Company to Mene Company in full liquidation of Kaila’s liability to Mene:
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 1,200,000
What amount of pretax gain should Kaila report as component of income from continuing operations
?
a. 300,000 b. 500,000 c. 200,000 d. 0

3. Kaila Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditors to relieve ifs financial stress. Kaila has a P2,500,000 note payable to United Bank. The
bank is considering acceptance of an equity interest in Kaila Company in the form of 200,000
shares of common stock valued at P12 per share. The par value of the common is P10 per share.

How much additional paid in capital should be recognized from the debt restructuring?
a. 500,000 b. 100,000 c. 400,000 d 0

4. Due to extreme financial difficulties, Kaila Company has negotiated a restructuring of its 10% P5,
000,000 note payable due on December 31, 2017. the unpaid interest on the note on such date is
P500,000. the creditor has agreed to reduce the face value to P4,000,000, forgive the unpaid
interest, reduce the interest rate to 8% and extend the due date three years from December 31,
2017. the present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary
annuity of 1 at 10% for three periods is 2.49.
Kaila Company should report gain on extinguishment of debt in its 2017 income statement at
a. 1,703,200 b. 1,203,200 c. 2,000,000 d. 540,000

5. Giselle Company has an overdue 8% note payable to First Bank at P8,000,000 and accrued
interest of P640,000. As a result of a restructuring agreement on January 1, 2017, First 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, 2020
 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.

What is the gain on extinguishment to be recognized for the year 2017?

a. 1,000,000 b. 1,178,000 c. 1,640,000 d. 538,000

6. Due to adverse economic circumstances and poor management, Giselle Highlands Company has
negotiated a restructuring of its 9% P6,000,000 note payable to Second Bank due on January 1,
2017. There is no accrued interest on the note.
The bank has reduced the principal obligation from P6,000,000 to P5,000,000 and extend the
maturity to 3 years or on December 31, 2017. However, the new interest rate is 13% payable
annually every December 31. The present value of 1 at 9% for three periods is .77 and the present
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value of an ordinary annuity of 1 at 9% for three periods is 2.53.

What is the gain on extinguishment to be recognized for 2017?

a. 1,000,000 b. 350,000 c. 505,500 d. 0

7. During 2017 Joseph Company experienced financial difficulties and is likely to default on a P5,000,
000, 15% three-year note date January 1, 2013, payable to Summit Bank. On December 31, 2017,
the bank agreed to settle the note and unpaid interest of P750,000 for P4,100,000 cash payable on
January 31, 2018.

What amount should Joseph report as gain from debt extinguishment in its 2017 income statement?
a. 1,650,000 b. 900,000 c. 750,000 d. 0

8. On December 31, 2015, Melvin Company acquired a piece of equipment from Mary Company by
issuing a P1,200,000 note, payable in full on December 31, 2019. Melvin’s credit rating permits it to
borrow funds from several lines of credit at 10%. The equipment is expected to have a 5-year life
and a P150,000 salvage value. The present value of 1 at 10% for 4 periods is 0.68301.

1. What is the equipment’s book value on December 31, 2017?

a. P551,767 c. P491,767
b. P630,000 d. P341,767

2. What is the carrying value of the note at December 31, 2017?

a. P1,090,903 c. P1,200,000
b. P991,730 d. P819,612

9. Kris Company purchased machinery on December 31, 2017, paying P80,000 down and agreeing to
pay the balance in four equal installments of P60,000 payable each December 31. Implicit in the
purchase price is an assumed interest of 12%.
The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552
Present value of an ordinary annuity of 1 at 12%
for 4 periods 3.03735

1. What is the cost of the machinery purchased on December 31, 2017?

a. P233,083 c. P262,241
b. P320,000 d. P290,842

2. How much interest expense should be reported on Kris’s income statement for the year
ended December 31, 2018?
a. P38,131 c. P17,293
b. P21,869 d. P42,707

3. What is the carrying value of the note at December 31, 2019?

a. P120,000 c. P99,310
b. P144,110 d. P101,403

10. On December 31, 2019, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
600,000 note with 60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte
a building that has a fair value of 590,000, an original cost of 530,000, and accumulated
depreciation of 130,000.

Nolte should recognize a gain on the settlement of the debt of

a. 0. b. 10,000. c. 60,000. d. 260,
000.

11. Colt, Inc. is indebted to Kent under an 800,000, 10%, four-year note dated December 31, year 1.
Annual interest of 80,000 was paid on December 31, year 2 and year 3. During year 4, Colt
experienced financial difficulties and is likely to default unless concessions are made. On December
31, year 4, Kent agreed to restructure the debt as follows:
Interest of 80,000 for year 4, due December 31, year 4, was made payable December 31, year 5.
Interest for year 5 was waived.
The principal amount was reduced to 700,000.
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How much should Colt report as a gain in its income statement for the year ended December 31,
year 4?
a. 0 b. 100,000 c. 60,000 d. 120,000

12. On December 31, year 1, Marsh Company entered into a debt restructuring agreement with Saxe
Company, which was experiencing financial difficulties. Marsh restructured a 100,000 notes
receivable as follows:

Reduced the principal obligation to 70,000.

Forgave 12,000 of accrued interest.
Extend the maturity date from December 31, year 1 to December 31, year 3.
Reduced the interest rate from 12% to 8%.
Interest is payable annually on December 31, year 2 and year 3.

Present value factors:

Single sum, two years @ 8% .85734 Single sum, two years @ 12% .79719 Ordinary annuity, two
years @ 8% 1.78326 Ordinary annuity, two years @ 12% 1.69006 In accordance with the
agreement, Saxe made payments to Marsh on December 31, year 2 and year 3. Marsh does not
elect the fair value option for reporting the modification of debt.

How much interest income should Marsh report for the year ended December 31, year 3?
a. 0 b. 5,600 c. 8,100 d. 11,200
EMPLOYEE BENEFITS

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. JP Company provided the following information for the current year:

Projected benefit obligation, January 1 5,600,000
Fair value of plan assets, January 1 5,000,000
Current service cost 1,110,000
Actual return on plan assets 450,000
Actuarial gain during the year 150,000
Employer contribution 425,000
Benefits paid to retirees 390,000
Settlement rate 10%
What is the total defined benefit cost?
a. 1,120,000 b. 1,100,000 c. 1,170,000 d. 1,070,000
2. JP Company provided the following information pertaining to the defined benefit plan for the current
year:
Current service cost 1,600,000
Actual return on plan assets 350,000
Interest income on plan assets 400,000
Past service cost during the year 50,000
Annual interest on pension liability 500,000
What is the total defined benefit cost?
a. 2,150,000 b. 1,700,000 c. 1,800,000 d. 1,750,000
3. Shawn Company provided the following information for the current year:
Current service cost 520,000
Actual return on plan assets 810,000
Interest expense on PBO 590,000
Interest income on plan assets 350,000
Loss on plan settlement 240,000
Past service cost during the year 360,000
Contribution to the plan 1,500,000
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Q1. What is the employee benefit expense for the current year?
a. 1,710,000 b. 1,470,000 c. 1,350,000 d. 1,360,000
Q2. What is the remeasurement gain or loss?
a. 460,000 loss b. 460,000 gain c. 220,000 loss d. 220,000 gain
Q3. What is the total defined benefit cost?
a. 1,820,000 b. 900,000 c. 740,000 d. 960,000
Q4. What is the prepaid or accrued benefit cost for the year?
a. 600,000 accrued b. 600,000 prepaid c. 140,000 accrued d. 140,000 prepaid
4. On January 1, 2020, Shawn Company reported the fair value of plan assets at P6,700,000 and
projected benefit obligation at P7,600,000. The entity revealed the following 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

Q1. What is the employee benefit expense?

a. 1,840,000 b. 1,540,000 c. 2,510,000 d. 1,750,000
Q2. 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
Q3. 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
Q4. 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
5. On January 1, 2020, Steven Company reported fair value of plan assets at P6,500,000 and projected
benefit obligation at P7,500,000. During the current year, the entity determined that the current
service cost was P1,200,000 and the discount rate is 10%. The actual return on plan assets was P800,
000 during the year. Other information during the year related to the defined benefit plan is as
follows:
Contribution to the plan 1,200,000
Benefits paid to retires 1,500,000
Decrease in projected benefit obligation due
to change in actuarial assumptions 200,000

Q1. What is the employee benefit expense?

a. 1,300,000 b. 1,950,000 c. 1,200,000 d. 1,100,000
Q2. What is the total remeasurement gain?
a. 350,000 b. 150,000 c. 200,000 d. 800,000
Q3. What is the fair value of plan assets on December 31?
a. 7,000,000 b. 8,500,000 c. 8,350,000 d. 7,550,000
Q4. What is the projected benefit obligation on December 31?
a. 7,750,000 b. 8,700,000 c. 9,250,000 d. 7,950,000
6. On January 1, 2020, Steven Company reported the fair value of plan assets at P6,000,000 and
projected benefit obligation at P8,000,000. During the year, the entity made a lump sum payment to
certain plan participants in exchange for their rights to receive specified postemployment benefits.
The lump sum payment was P800,000 and the present value of the defined benefit obligation settled
was P1,000,000. In addition, the following data are gathered during the current year:
Current service cost 900,000
Actual return on plan assets 800,000
Contribution to the plan 700,000
Discount rate 12%

Q1. What is the employee benefit expense?

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a. 1,140,000 b. 1,860,000 c. 900,000 d. 940,000

Q2. What is the fair value of plan assets on December 31?
a. 7,500,000 b. 6,700,000 c. 6,000,000 d. 5,900,000
Q3. What is the projected benefit obligation on December 31?
a. 8,900,000 b. 8,860,000 c. 9,680,000 d. 9,060,000
Q4. What is the accrued benefit cost on December 31?
a. 2,160,000 b. 2,000,000 c. 3,160,000 d. 2,240,000
7. Ana Company provided the following information on January 1, 2020 prior to the adoption of PAS
19R:
Fair value of plan assets 4,750,000
Unamortized past service cost 1,250,000
Projected benefit obligation 5,500,000
Unrecognized actuarial gain 850,000
The transactions for the current year are as follows:
Current service cost 925,000
Discount rate 6%
Actual return on plan assets 485,000
Contribution to the plan 1,350,000
Benefits paid to retirees 925,000
Increase in projected benefit obligation due to
change in actuarial assumptions 150,000

Q1. What is the employee benefit expense?

a. 1,255,000 b. 1,540,000 c. 970,000 d.925,000
Q2. What is the net remeasurement gain?
a. 200,000 b. 150,000 c. 350,000 d. 50,000
Q3. What is the prepaid/accrued benefit cost on December 31?
a. 480,000 prepaid b. 480,000 accrued c. 320,000 prepaid d. 320,000 accrued

8. Ana Company provided the following information during 2020:

January 1 December 31
Fair value of plan assets 6,000,000 7,900,000
Projected benefit obligation 5,000,000 5,900,000
Prepaid/accrued benefit cost- surplus 1,000,000 2,000,000
Asset ceiling 700,000 1,200,000
Effect of asset ceiling 300,000 800,000
During the current year, the following data are gathered:
Current service cost 700,000
Past service cost 200,000
Actual return on plan assets 900,000
Decrease in projected benefit obligation due
change in actuarial assumptions 500,000
Discount rate 10%

Q1. What is the employee benefit expense?

a. 830,000 b. 900,000 c. 800,000 d. 870,000
Q2. What is the net remeasurement gain?
a. 330,000 b. 800,000 c. 300,000 d. 500,000

9. On January 1, 2020, Kris Company had a projected benefit obligation of P10,000,000 and a pension
fund with a fair value of P9,200,000. The entity provided the following information during the
current year:
Current service cost 1,200,000
Actual return on pension fund 250,000
Benefits paid to retirees 1,100,000
Contribution to pension fund 1,050,000
Discount rate 9%
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Expected return on pension fund 10%

Q1. What is the pension expense for the current year?

a. 1,272,000 b. 2,100,000 c. 1,850,000 d. 1,050,000
Q2. What is the fair value of pension fund on December 31?
a. 9,400,000 b. 9,450,000 c. 8,350,000 d. 9,150,000
Q3. What is the projected benefit obligation on December 31?
a. 11,000,000 b. 12,100,000 c. 11,200,000 d. 10,100,000
Q4. What is the remeasurement gain or loss on December 31?
a. 578,000 gain b. 578,000 loss c. 250,000 gain d. 250,000 loss
Q5. What is the pension asset or liability on December 31?
a. 1,600,000 liability b. 1,600,000 asset c. 800,000 liability d. 800,000 asset
10. Kelly Company provided the following information related to a defined benefit plan for the year
ended December 3, 2020:
Current service cost 30,000
Benefits paid 31,000
Contribution to the fund 21,000

Fair value of plan assets:

January 1 2,100,000
December 31 2,400,000

Projected benefit obligation

January 1 2,200,000
December 31 2,500,000

Past service cost the current year 115,000

On January 1, 2020, the discount rate and expected rate of return are 5% and 7% respectively. On
January 1, 2019, the discount rate and expected rate of return are 6% and 8% respectively.

Q1. What amount should be recognized as employee benefit expense for the current year?
a. 150,000 b. 145,000 c. 115,000 d. 140,000
Q2. What is the actual return on plan assets?
a. 310,000 b. 147,000 c. 163,000 d. 341,000
Q3. What is the actuarial loss arising from the increase I projected benefit obligation?
a. 191,000 b. 300,000 c. 185,000 d. 76,000
Q4. What is the net measurement gain or loss on December 31, 2020?
a. 281,000 gain b. 281,000 loss c. 129,000 gain d. 129,000 loss
Q5. What amount should be reported as prepaid or accrued benefit cost on December 31, 2020
a. 150,000 accrued b. 150,000 prepaid c. 100,000 accrued d. 100,000 prepaid
11. Kelly Company provided the following information for 2020:
January 1 December 31
Fair value of plan assets 2,600,000 3,000,000
Projected benefit obligation 2,000,000 2,100,000
Prepaid/accrued benefit cost-surplus 600,000 900,000
Asset ceiling 200,000 300,000
Effect of asset ceiling 400,000 600,000
Current service cost 100,000
Contribution to the plan 350,000
Benefits paid 150,000
Discount rate 10%

Q1. What is the actual return on plan assets for the current year?
a. 200,000 b. 350,000 c. 150,000 d. 260,000
Q2. What is the actuarial gain due to decrease in PBO?
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a. 50,000 b. 40,000 c. 30,000 d. 0

Q3. What is the employee benefit expense for 2020?
a. 200,000 b. 100,000 c. 80,000 d. 40,000
Q4. What is the net remeasurement loss in 2020?
a. 110,000 b. 220,000 c. 270,000 d. 170,000

12. Kimberly Company provided the following information pertaining to the pension plan for the current
year:
Projected benefit obligation on January 1 7,200,000
Assumed discount rate 10%
Service cost 1,800,000
Pension benefits paid 1,500,000

If no change in actuarial estimate occurred in the current year, what is the projected obligation on
December 31?
a. 6,420,000 b. 7,500,000 c. 7,920,000 d. 8,220,000
13. Kimberly Company provided the following plan information for the current year:
January 1 Projected benefit obligation 3,500,000
Accumulated benefit obligation 2,800,000
During the year Pension benefits paid to retired
employees 250,000
December 31 Projected benefit obligation 4,200,000
Accumulated benefit obligation 3,100,000
Discount or settlement rate 10%
There is no change in actuarial assumptions during the year. What is the current service cost for the
current year?
a. 600,000 b. 950,000 c. 250,000 d. 270,000

14.Ivan Company provided the following information:

January1 December 31
Fair value of plan assets 3,500,000 3,900,000
Market related value of plan assets 2,800,000 2,900,000
Contribution to the plan 280,000
Benefits paid to retirees 250,000

What is the actual return on plan assets for the current year?
a. 400,000 b. 370,000 c. 430,000 d. 100,000
15. Anna Company amended the pension plan at the beginning of the current year.
Before amendment After amendment
Accumulated benefit obligation 950,000 1,425,000
Projected benefit obligation 1,300,000 1,900,000

What is the total amount of past service cost as a result of the amendment?
a. 950,000 b. 600,000 c. 475,000 d. 125,000
16. On January 1, 2020, Ivan Company established a noncontributory defined benefit plan covering all
employees and contributed P1,000,000 to the plan . On December 31,2020, the entity determined
that the current service cost and interest expense on the benefit obligation totaled P620,000. The
discount rate was 10%. There was no remeasurement gain or loss during the year. What amount
should be reported on December 31,2020 as prepaid pension cost?
a. 280,000 b. 380,000 c. 480,000 d. 620,000
17. On January 1, 2020, Ivan Company adopted a defined benefit plan. The current service cost of P750,
000 was fully funded at the end of 2020. Past service cost was funded by a contribution of P300,000
in 2020. Past service cost was P120,000 for 2020. What is the prepaid pension cost on December 31,
2020?
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a. 180,000 b. 300,000 c. 420,000 d. 540,000

18. Cleo Company had the following balances relating to the defined benefit plan on December 31,
2020:
Fair value of plan assets 37,000,000
Projected benefit obligation 33,000,000
Asset ceiling 2,500,000

What is the prepaid benefit cost on December 31, 2020?

a. 4,000,000 b. 1,500,000 c. 2,500,000 d. 0
What is the effect on asset ceiling?

a. 4,000,000 b. 1,500,000 c. 2,500,000 d. 0

19. On December 31, 2020, Cleo Company provided the following information:
Fair value of plan assets 3,450,000
Accumulated benefit obligation 4,300,000
Projected benefit obligation 5,700,000

What is the accrued liability on December 31, 2020?

a. 5,700,000
b 2,250,000
c. 1,400,000
d. 850,000
20. Cleo Company provided the following information pertaining to the defined benefit pension plan for
the current year:
Prepaid pension cost, January 1 20,000
Current service cost 190,000
Interest expense on PBO 380,000
Interest income and actual return on plan assets 400,000
Past service cost during the year 500,000
Employer contribution 400,000

What is the accrued pension cost at year-end?

a. 250,000 b. 290,000 c. 270,000 d. 400,000