1. There is substantial modification of terms of an old financial liability if the gain or 8.

8. Maturity value concession involves a reduction of interest rate, forgiveness of

loss on extinguishment is unpaid interest or moratorium oninterest. 
a. At least 10% of the carrying amount of the new liability a. True
b. At least 10% of the carrying amount of the old liability b. False

2. Under a debt restructuring involving substantial modification of terms, the future 9. Under USA GAAP, the gain or loss on debt restructuring is the difference
cash flows under the new terms shall be discounted using between the carrying amount of the old liability and the present value of the new
a. Market rate of interest restructured liability. 
b. Original effective interest rate a. True
b. False
3. Seal Company is experiencing financial difficulty and is negotiating debt
restructuring with its creditor to relieve its financial stress.  Seal has a 10. When the gain on extinguishment of liability is less than 10% of the carrying
2,000,000 note payable to United Bank.  The bank is considering acceptance of an amount of the old financial liability, theamount should be recognized. 
equity interest in Seal Company in the form of 200,000 ordinary a. True
shares fairly valued at 9.6 per share.  The par value is 8 per share.  How much b. False
share premium should be recognized from the debt restructuring?
Ans: 320,000 11. An asset swap is the issuance of share capital by the debtor to the creditor in full
or partial payment of an obligation. 
4. During 2019, Shyrill company experienced financial difficulties and is likely to a. True
default on a 9,000,000, 15% three year note dated Jan. 1, 2017, Payable to Canque b. False
Bank. On Dec. 31, 2019, the bank agreed to settle the note and unpaid interest of
1,350,000 for 2019 for 7,380,000 cash payable on Jan. 31, 2020. The amount that 12. The accounting issue on extinguishment of a financial liability by issuing equity
Shyrill company report as gain from extinguishment of debt in its 2019 income instruments is now well settled under IFRIC 19. 
statement is ________ a. True
Ans: 2,970,000 b. False

5. USA GAAP shall be followed in accounting for debt restructuring conceived as 13. On October 1, 2019, an entity borrowed cash and signed a three year interest
modification of terms.  bearing note on which both principal and interest are payable on Oct. 1,2022. On
a. True Dec. 31, 2021 accrued interest payable should
b. False a. Be reported as noncurrent liability
b. Be reported as part of noncurrent note payable
6. Under PFRS 9, asset swap is recorded as if two transactions have taken place; sale c. Be reported as current liability
of the asset and extinguishment of liability.  d. Not be reported as liability
a. True
b. False 14. The discount resulting from the determination of the present value of a note
payable should be reported as
7. The difference between the carrying amount of the liability and the fair value of a. Deferred charge
the asset is gain or loss from restructuring. b. Addition to the face of the note
a. True c. Direct deduction from the face amount of the note
b. False d. Deferred credit
15. When a note payable is exchanged for property, the stated interest rate is
presumed to be fair when
a. The face amount of the note is materially different from the cash sale price
for similar property 23. On January 1, 2019,Joanna Company borrowed 1,000,000 8% noninterest bearing
b. The stated interest rate is unreasonable note due in four years.  The present value of the note on the date of issuance was
c. No interest rate is stated 367,500.  The entity elected irrevocable the fair value option in measuring the
d. The stated interest rate is equal to the market rate note payable.  On December 31, 2019, the fair value of the note is 408,150.
What is the carrying amount of the note payable on December 31, 2019?
16. On January 1, 2019, Mabelle Company acquired a tract of land for 10,500,000. The Ans: 408,150
entity paid a 2,500,000 down payment and signed a non-interest bearing note for
the balance which is due on January 1, 2022. There was no established exchange 24. What amount should be reported as interest expense for 2019?
price for the land and the note had no ready market.  The prevailing interest rate Ans: 80, 000
for this type of note was 12%.  The present value of 1 at 12% for 3 periods is .
7118. 25. What amount of gain from change in fair value of the note payable should be
What is the cost of the land? reported for 2019?
Ans: 8,194,400 Ans: 40,650

17. What is the amount of interest expense for the year 2019? 26. At what amount should the discount on note payable be presented on December 31,
Ans: 683,328 2019?  
Ans: 0
18. What is the carrying amount of the notes payable on Dec. 31, 2019?
Ans: 6,377,728 27. Amortizing the discount on note payable gradually decreases the carrying amount
of the liability over the life of the note. 
19. What is the initial carrying amount of the notes payable? a. True
Ans: 5,694,400 b. False

20. Assume that on January 1, 2011, an entity acquired an equipment with a cash price 28. The cost of asset acquired upon the issuance of a noninterest bearing note is equal
of 400,000 for 550,000, 150,000 down and the balance payable in 4 equal annual to the cash equivalent price, if readily available. 
instalments.  What is the amount to be debited as cost of the Equipment? a. True
Ans: 400,000 b. False

21. On March 2, 2018, Firefly company borrowed 800,000 and signed a 2-year note 29. The cost of the asset acquired by an issuance of a noninterest bearing note does
bearing interest at 12% per annum compounded annually.  Interest is payable in full not include transaction the down payment made on the date of.
at maturity on Feb. 28,2020. a. True
What is the amount of interest expense for Dec. 2019? b. False
Ans: 105,600
30. The difference between the cash equivalent price of 540,000 for an equipment
22. What is the amount of interest expense for Dec. 2018? acquired at 600,000 noninterest bearing note is a loss on acquisition of the asset. 
Ans: 80,000 a. True
b. False
 c. recorded as reduction in the lease receivable
31. When a company’s own note is discounted at the bank, the difference between the d. recorded as reduction of depreciation
face value of the note and the cash proceeds from the bank is amortized as 39. Rent received in advance by the lessor in an operating lease should be recognized
interest expense over the period of the note.  as revenue
a. True a. in the period specified by the lease
b. False b. at the lease inception
c. at the lease expiration
32. When an entity issued a note solely in exchange for cash, the present value of the d. when received
note at issuance is equal to its face value.  
a. True 40. The classification of a lease is normally carried at
b. False a. when the entity deems it necessary
b. after a cooling off period of once a year
33. If the present value of a note issued in exchanged for a property is less than the c. at the end of the lease term
face amount, the difference should be included in the cost of the asset. d. at the inception of the lease
a. True
b. False 41. When should a lessor recognize in income a nonrefundable lease bonus paid by a
lessee?
34. Discount on note payable may be debited when an entity discounts its own note a. at the lease expiration
with the bank. b. at the inception of the lease
a. True c. over the lease term
b. False d. when received

35. The discount on note payable is a deduction from the face amount of note 42. Which is correct regarding lease capitalization criteria?
payable.  a. the lease transfers ownership to the lessor.
a. True b. the lease payments are 90% of fair value of asset.
b. False c. the lease contains a purchase option.
d. the lease term is equal to at least 75% of the economic life of the underlying
36. The discount on note payable represents interest charges applicable to past asset.
periods.
a. True 43. On Oct. 1, 2017, Dean company leased office space at a monthly rental of 600,000
b. False for 10 years expiring Sept. 30, 2027. As an inducement for Dean to enter into the
lease, the lessor permitted Dean to occupy the premises rent free from Oct. 1 to
37. The fair value option of recording note payable, amortizes discount at every end Dec. 31, 2017. For the year ended Dec. 31, 2017, Dean should record rent expense
of the year.  amounting to __________
a. True Ans: 1, 755,000
b. False
Computation: 600,000*12= 72,000,000 – (600,000*3) =
38. In an operating lease recorded by the lessor, the equal monthly rental payments 70,200,000/10=7,020,000*3/12=1,755,000
should be
a. recorded as a rental income
b. allocated between reduction in lease receivable and interest expense
 costs under the terms of the lease of 83,200 in 2019. After the lease with Raven
44. Ramzel Company leased a new machine to Marlon Company on Jan. 1, 2017. The expires, Huggies will lease the equipment to another entity for two years.
lease expires on Jan. 1, 2022. The annual rental is 900,000. Additionally, on Jan. 1, What is the pretax income derived by Huggies for 2019?
2017, Marlon paid 500,000 to Ramzel as a lease bonus and 250,000 as a security Ans: 384, 800
deposit to be refunded upon expiration of the lease. In Ramzel’s 2017 income
statement, the amount of rental revenue should be _________ Computation:  936,000-83,200-468,000=384,800
Ans: 1, 000, 000
48. The balance of the deferred initial direct cost shall be presented as an addition to
Computation: 900,000 + (500,000/5) = 1000,000 the carrying amount of machinery.
a. True
45. Rod Company purchased a tractor on Jan 1,2017 at a cost of P1,600,000 for the b. False
purpose of leasing it.  The tractor is estimated to have a useful life of 5 years
with residual value of P100,000.  Depreciation is on a straight line basis.  On April Identification
1,2017, Rod entered into a lease contract for the lease of the tractor for a term
____________ 1.  It is defined as an agreement whereby the lessor conveys to the
of two years up to March 31,2019.  The lease fee is P50,000 monthly and the
lessee in return for a payment or series of payments the right to use an asset for an
lessee paid P600,000, the lease fee for one year. Rod paid P120,000 commission
agreed period of time.  LEASE    
associated with negotiating the lease, P15,000 minor repairs, and P10,000
transportation of the tractor to the lessee during 2017.  Rod Company should ____________ 2. and ___________ 3.  What are the two types of leases? 
report net rent revenue for the year 2017 at _________ OPERATING AND FINANCE LEASE
Ans: 80, 000
____________ 4.  It is the type of lease whereby periodic rental is simply recognized
Computation: 600,000 *9/12=450,000-(120,000/2*9/12)-15,000-10,000=380,000- as rent expense on the part of the lessee and also called the rental approach. 
300,000=80,000 OPERATING LEASE

____________ 5.  It is an amount paid by the lessee to the lessor in addition to

46. Roche Company, lessor, leases its equipment under an operating lease. The lease periodic rental and amortized as rent expense over the lease term.  LEASE BONUS
term is for 5 years and the lease payments are made in advance on January 1 of
each year as shown in the following schedule: January 1, 2017 800,000 January 1, ____________ 6.  It is often incurred by the lessor and includes amounts such as
2018 800,000 January 1, 2019 1,120,000 January 1, 2020 1,360,000 January 1, commissions, legal fees and internal costs that are incremental and directly
2021 1,520,000 On December 31, 2018, what amount should be reported as rent attributable to negotiating and arranging the lease. INITIAL DIRECT COST
receivable?
____________ 7.  It is refundable upon the lease expiration and accounted for as a
Ans: 640, 000
liability by the lessor. SECURITY DEPOSIT
Computation: 800,000+800,000+1,120,000+1,360,000+1520, 000=5,600,000/5 ____________ 8.  These refers to ownership costs and expenses usually born by the
=1,120,000*2=2,240,000-800,000-800,000=640,000 lessor such as depreciation of leased property, real property taxes, insurance and
maintenance.  OWNERSHIP COSTS
47. On May 1, 2019, Huggies Company leased equipment to Raven Company which
expires on May 1, 2020.  Raven could have bought the equipment from Huggies for ____________ 9.  What PAS covers the accounting for operating lease?   PAS 17
4,160,000 instead of leasing it. Huggies accounting records showed a carrying
____________ 10.  The balance of the deferred initial direct cost shall be presented
amount for the equipment on May 1, 2019 for 3,640,000.  Huggies depreciation on
as an addition to the carrying amount of machinery.  (True or False)  True
the equipment in 2019 was 468,000. During 2019, Raven paid 936,000 in rentals to
Huggies for the 8-month period.  Huggies incurred maintenance and other related