CLINCHER QUESTION No.1 The following T-account summarizes the transactions affecting the accounts receivable of FLASH Company for 2014: Beginning balance after deducting credit balances of P9,000 106,000 Charge 1,250,000 Charge to goods out on consignment Shareholders’ subscriptions Accounts written-off but recovered Cash paid to customer for Jan. 1 credit 5,000 Deposit on 50,000 Claim against common carrier for shipping Accounts Receivable Collections from customers, including P Overpayment of P10,000 P1,240,000 Write sales offs 7,000 25,000 Merchandise returns 5,500 60,000 Allowance to customers for shipping damages 3,000 5,000 Collections on carrier claims 2,000 Collection on subscription Balance 45,000 contract damages 5,000 IOUs 1,000 Cash 50,000 Advances 10,000 from employees advance to to affiliate supplier Audit notes: a. It was ascertained that half of the adjusted outstanding accounts receivable-trade balance are still currently collectible. The term of sale is 5/30, n/60. Based on past experience, a 25% of customers whose accounts are still current normally pay within the discount period. b. 30% of the adjusted accounts receivable-trade is 60 days past due and is expected to be only 90% collectible. c. 20% of the adjusted accounts receivable-trade balance is more than 120 days past due and is expected to be 50% collectible. Determine the amortized cost of the accounts receivable – trade. Answer: P107,537 CLINCHER QUESTION No. 2 As part of a preliminary survey of the purchasing function, an auditor read the department's policies and procedures manual. The auditor concluded that the manual described the processing steps well and contained an appropriate internal control design. The next engagement objective was to determine the operating effectiveness of internal controls. Which procedure would be most appropriate in meeting this objective? which indicates the need for a test of controls. financial management.a) b) c) d) Prepare a flowchart. 2014 from a borrower that is due on December 31. The borrower paid the interest that was due on December 31. which indicates the need for a test of controls. (b). 2015 that interest accrued in 2015 and the interest for 2016 will be paid on maturity date. Capital budgeting Answer: C The correct answer is (c) because internal control is a function of the controller’s office. CLINCHER QUESTION No. 3 (Easy) Which of the following is not a function of financial management? A. Perform a test of controls. and risk management. Tests of controls. and (d) are incorrect because the functions of financial management include: financing. Prepare a system narrative. the auditor may sample large transactions and review whether manager approval was obtained and whether the proposed transaction meets all the criteria that the manager was supposed to verify. The audit objective is whether the controls are in place and effective. Internal control D. System narratives are most appropriate for studying internal control design. 2018. 4 Bankrupt Bank has a 5-year loan receivable with face value of Php2. For instance. As a test of controls. Flowcharts are most appropriate for studying internal control design. Interest on the loan is payable at 10% every December 31. 2014 but informed Bankrupt on December 31. b) Incorrect.000.000 dated January 1. a policy may require that all large transactions be approved by a manager. The audit objective is whether the controls are in place and effective. Answers (a). corporate governance. c) Correct. also known as compliance tests. Financing B. budgeting. d) Incorrect. capital. help an auditor determine whether controls are being followed and are effective. Risk-management C. Substantive tests are tests to determine whether an objective has been achieved and do not necessarily test internal controls. Solution: C a) Incorrect. CLINCHER QUESTION No. The borrower will also probably miss the last two years for interest payments because of . Perform a substantive test. To give effect to and administer the supervisory and police powers conferred to it by National Internal Revenue Code (NIRC) and other tax laws .000 + 200.000.000-4. 6 Which of the following is not part of the powers of the Commissioner of Internal Revenue (CIR)? a.000)=14.500 600 5.000.000 x 60% Loss P6.000 +(200. 2014.500) CLINCHER QUESTION No. On January 1.000.financial difficulty.802.60 0 CLINCHER QUESTION No. What is the loan impairment loss to be recognized on December 31. The merchandise was originally sold with a gross profit rate of 40%. the borrower will also probably be expected to pay the loan and accrued interest in 2015 and 2016 on December 31. When no further collection could be made. The merchandise had a fair market value of P6. 2015? (Round off the present value factor to three decimal places)? ANSWER: Php397.751 Impairment loss Php2.500 (Average) FMV after reconditioning cost Less: Reconditioning cost FMV before reconditioning cost Less: Unrecovered cost (18.900 8. respectively: Answer: P2.600 Carrying amount (2.000) Present value of remaining cash flows [2.000 x 2)] x 0. After that.500 loss. 2018. To interpret tax laws and decide on tax cases b. P6. Sharon Company had an installment account receivable from Rowena with a balance of P18.500 after the company spent for P600 for reconditioning of the merchandise. the merchandise sold to Rowena was repossessed. During 2014. P4. Determine the gain or loss on repossession and Cost of Repossessed Merchandise to be presented in the Income Statement. 5 Sharon Company uses the installment sales method in accounting for its installment sales.000 was collected from Rowena. 000 1.200.400 Php397.400 (P2. and take testimony of persons (Sec. To make assessments and prescribe additional requirements for tax administration and enforcement ANSWER: B The CIR has the power to interpret tax laws and decide on tax cases (Sec.c. To obtain information. and to summon. and take testimony of persons d. 4). 6). and to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. examine. examine. and to summon. to obtain information. 5). . for what taxable year will a corporation become liable for MCIT? SEC Registration May 29. At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. all of the following conditions are met.CLINCHER QUESTION No. 2010 a. The effectiveness of the hedge can be reliably measured IV. c. b. the hedged item or transaction. For purposes of MCIT. 2010 Start of commercial operations October 14. II. and only if. . II. 2009 BIR Registration June 19. a) At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. the taxable year in which the business commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue. The hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated. That documentation shall include identification of the hedging instrument. III and IV Paragraph 88 of IAS 39 Financial Instruments: Recognition and Measurement A hedging relationship qualifies for hedge accounting under paragraphs 89–102 if. 7 Based on the information as follows. 2012 2013 2014 2015 Answer: C. CLINCHER QUESTION No. Answer: I. the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. III. 8 Which of the following statements would the hedging relationship qualify for hedge accounting? I. The hedge is expected to be highly effective. d. MCIT is imposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. d) Direct the individual to a desired answer. 000 50. CLINCHER QUESTION No. that is. 000 140. The interrogator should avoid leading questions. 000 90. b) Incorrect. d) Incorrect.621 3. 9 Questions used to interrogate individuals suspected of fraud should: a) Adhere to a predetermined order. c) Move from the general to the specific. For cash flow hedges. questions that suggest an answer. The interviewee's answer may suggest a follow-up question that should be asked before asking the next planned question.b) The hedge is expected to be highly effective (see Appendix A paragraphs AG105–AG113A) in achieving offsetting changes in fair value or cash flows attributable to the hedged risk. Solution: C a) Incorrect.791 30% 5 years . 10 (Average) Assume that Stripler Industries is considering investing in a project with the following characteristics: Initial investment Additional investment in working capital Cash flows before income taxes for years 1 to 5 Yearly tax depreciation Terminal value of investment Cost of capital Present value of P1 received after 5 years discounted at 10% Present value of an ordinary annuity of P1 for 5 years at 10% Marginal tax rate Investment life P500 . General information should be obtained first before details are sought. This may be confusing for the respondent. 000 10% 0. c) Correct. b) Cover more than one subject or topic. CLINCHER QUESTION No. consistently with the originally documented risk management strategy for that particular hedging relationship.000 10. a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss. Interest of 9 percent was to be paid to partners on the basis of their average capital balances excluding net income. Durkee P40. These capital withdrawals in total were equal to salaries for the year. deferred tax asset to be recognized on the balance sheet for the year will be: ANSWER: Php-0PAS 12. the tax credit from paying MCIT during the year may not be utilized and therefore should be recognized as zero. The after-tax cash flows are calculated by deducting tax expense from the before-tax cash flows.000) × 30%]. income taxes for year 2 are equal to P15. Since the Company expects to still be liable to MCIT for the next periods. Since depreciation is deductible for tax purposes it provides a tax shield. Each withdrew P5. Therefore. Answer (c) is incorrect because this solution fails to consider the deductibility of depreciation.Assume that all cash flows come at the end of the year. . The RCIT rate is 30% while MCIT rate is 2%.000 – P15. It is the first time that JPIA will be paying MCIT after operating for 7 years. Income Taxes provides that deferred tax assets shall be recognized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. 2014.000.000 – P90.000 is the before-tax cash flows. and after-tax cash flows are P125. and November 1. but before the salaries and interest.000.000). If JPIA expects that the Company will still be liable to MCIT for the next periods. Crenshaw and Durkee formed a partnership on January 1.000 Answer (b) is correct.000. CLINCHER QUESTION No. Crenshaw invested P60.000 on each of the following dates during 2014: March 1.000 (P140. July 1. 11 The JPIA Co. CLINCHER QUESTION No. Answer (a) is incorrect because P140.000 with the minimum corporate income tax (MCIT) computed at Php100. 12 1. Additionally Crenshaw was to get a 20 percent bonus based on partnership net income after the bonus. operations resulted to regular corporate income tax (RCIT) amounting to Php25.000 [(P140. What is the amount of the after-tax cash flows in year 2? Answer: Php125. 841. e. 13 Which of the following is subject to fringe benefits tax? a.00 45.20 (100.00 22. d.841.0 0 4.00 0.000 35.00 16.000.00 22. Compensation of rank and file employees Compensation of supervisory and managerial employees Fringe benefit of rank and file employees Fringe benefit of supervisory and managerial employees C and D ANSWER: D BASIS: Compensation of both rank and file and supervisory and managerial employees are subject to WTW.925.000.233. 00 M+ M+ M+ M+ MR/12 = 32.667.20 (NI-B) .500 .00 16.0 P15.667 CLINCHER QUESTION No.50 (Average) Salaries C D Total P15.000 50.5 0 Interest (9% x Average) Bonus * Balance (equally) Average Capital C: 60.000 x x x x (Use Calculator) 2 = M+ 4 = M+ 4 = M+ 2 = M+ MR/12 = 52.000.233.500 D: 40.00 P100.5 0 0 7.000.650. b. If partnership net income was P100.000-B) 20.667. c.683.0 P30.50 P40.50 P59. Fringe benefits of rank and file employees are also subject to WTW.000 55.725.000 x x x x 2 4 4 2 *Bonus = = = B= = = = = 0 2. Section 33 of the Tax Code: .000 30. how much will be allocated to Crenshaw? Answer:P59.766.000 45.Any remaining profit (or loss) was to be allocated equally among the partners.000 25.000.20B 16.000-. Changes in Accounting Estimates and Errors states that Prior period errors are omissions from. 1998. reliable information that: a) was available when financial statements for those periods were authorised for issue. and b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. 15 Effective January 2015. CLINCHER QUESTION No. business or profession of the employer. P 5. thirty-three percent (33%) effective January 1. Errors committed and discovered in prior periods Errors committed and discovered in the current period Errors committed and discovered in current and prior periods Errors committed in prior periods but are discovered only in the current period Answer: D Paragraph 5 of IAS 8 Accounting Policies. 1999. and thirty-two percent (32%) effective January 1. — A final tax of thirty-four percent (34%) effective January 1. provided that it does not exceed P___________ per employee per taxable year. whether an individual or a corporation (unless the fringe benefit is required by the nature of. or misuse of. C . 14 Which of the following correctly describes prior period errors? A . B . benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and productivity incentive schemes combined are tax exempt. or when the fringe benefit is for the convenience or advantage of the employer). is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer. the entity's financial statements for one or more prior periods arising from a failure to use.000 . a. 2000 and thereafter. and misstatements in. or necessary to the trade.” CLINCHER QUESTION No.“Imposition of Tax. D . 000+9.000 for direct materials.000+7.b. Four joint products were recovered during May 2015 as follows: Ham Bacon Salami Sausag e 1.000 d.71 1.000 kilos Costs incurred up to the split-off point were: P20.” CLINCHER QUESTION No.000 15.000 P2.000 for direct labor.710 (Average) Total cost (20. P 10. 16 Chris Products uses a process cost system and sells a variety of ready-tocook meat products. P15.000 kilos 500 kilos 5.500 P2.000 ANSWER: B BASIS: Revenue Regulations (RR) 1-2015 “Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (Php 10.000 kilos 9. P 82. P 30.000+15. and P7. how much joint cost would product Ham absorb? Answer: P2.000) Divided by total output (1.000) Cost per unit Ham Joint cost – Ham CLINCHER QUESTION No.000 for factory overhead applied.000+500+5. Using the physical output method. 17 P42.000 c.710 .00) per employee per taxable year.000. Although management indicated that the corrections should be completed within six months. 18 (Average) Assume that demand for a particular product changed as shown below from D1 to D2. d) Discuss the findings with the audit committee and ask the committee to determine the appropriate follow-up action. b) Monitor the status of corrective action and schedule a follow-up engagement when appropriate. A follow-up engagement should be scheduled when changes to the claims processing system have been sufficiently completed to allow for testing of adequacy and effectiveness. the vice president of the claims department informed the auditors that attempts to recover the duplicate payments would be initiated immediately and that the claims processing system would be enhanced within six months to correct the problems. The internal audit activity should monitor the status of the corrective action. d) Incorrect. During the exit conference. the internal audit activity should not wait until the next regularly scheduled audit to assess the status of corrective action. the scope and timing of a follow-up engagement should be determined by the chief audit executive based on available information. b) Correct. . the chief audit executive should: a) Adjust the scope of the next regularly scheduled audit of the claims department to assess controls within the claims processing system.An audit of an organization’s claims department determined that a large number of duplicate payments had been issued due to problems in the claims processing system. As a result. Because the finding is significant. CLINCHER QUESTION No. c) Incorrect. Solution: B a) Incorrect. c) Schedule a follow-up engagement within six months to assess the status of corrective action. the internal audit activity should monitor the status of corrective action and schedule a follow-up engagement when it is appropriate. this may not be the case. Based on this response. Although the findings should be discussed with the audit committee because of their significance. A change in consumer tastes D.000.00 .000. 2014.000. CLINCHER QUESTION No.000 Bonds payable Future taxable amount Multiply by tax rate Deferred tax liability Financi al 3.000.000 for the equity component. 2014 if the tax rate is 32%? ANSWER: Php320.0 00 Tax base 4. Answer (a) is incorrect because this would result in movement along the existing demand curve. Answer (d) is incorrect because a decrease in price of a substitute would result in a shift of the curve to the left.000.000. that matures in five years. A decrease in the price of the product B.000 32% Php320. giving a total amount of the bond of Php4.000 for the liability component and Php1. Titan has calculated that the liability and the equity components of the bond are Php3. An increase in supply of the product C.0 00 Temporary difference Php1. 000 1.000. The interest rate of the bond is 6% and local tax legislation allows a tax deduction for the interest paid in cash. Answer (b) is incorrect because a change in supply would not affect the demand function. A decrease in the price of a substitute for the product Answer: C The correct answer is (c) because a shift demand could result from a change in consumer tastes. 19 Titan Company issued a convertible bond on January 1. The bond can be converted into ordinary shares at any time.000.Which of the following could cause the change shown in the graph? A. What is the deferred tax liability arising on the bond as at the year ending December 31. 0 .