Region X & CARAGA Cup Theory of Accounts Source: ReSA Easy Category 1. The main difference between cash and accrual accounting is a. Cash accounting attempts to measure economic income; accrual accounting attempts to measure accounting income b. Accrual accounting recognizes revenue in the period of sale; cash accounting recognizes revenue in the period of collection c. Accrual accounting is not based on generally accepted accounting principles d. Cash accounting always leads to more reliable financial information about an entity’s financial position Which of the following statements about the income statement and balance sheet is true? a. The income statement tells the firm’s position at one point in time; the balance sheet represents the events occurring between two points in time b. Transactions that change the net worth of shareholders appear on the balance sheet c. The income statement shows the assets and liabilities of a firm d. The balance sheet shows the net worth of shareholders at one point in time If financial information that is presented in a statement of financial position or statement of comprehensive income is misstated, and it influences the economic decisions of users, that information is described as a. Reliable b. Material c. Prudent d. Faithful When a company ships product to a customer based on FOB destination, a. The seller will pay the shipping charges and title will not be exchanged until goods are received by the customer b. The buyer will pay the shipping charges and title is exchanged at point of shipment c. The seller will pay the shipping and title is exchanged at point of shipment d. The buyer will pay the shipping and title is exchanged when the goods are received by the customer The CPA's role in performing audits is important to our society because a. Auditors provide direct financial advice to potential investors b. Auditors have the primary responsibility for the information contained in financial statements c. Auditors issue reports on the accuracy of each financial transaction d. An audit of financial statements helps investors and others to know that they can rely on the information presented in the financial statements When a company decides to switch from the double-declining balance depreciation method to the straight-line depreciation method, this change should be handled as a a. Change in accounting principle b. Change in accounting estimate c. Prior period adjustment d. Correction of an error If an item of income is not material, then the manner of presenting that information, or whether or not it is disclosed a. will have an impact on the economic decisions of users b. should not affect the economic decisions of users c. should not be included in the determination of profit or loss for the period d. will be included directly in retained earnings For accounting purposes, cash includes a. Notes receivable from employees b. Supplies c. Balances on deposit in banks d. A note received from a customer in settlement of an overdue account receivable Which is the correct order of the steps in the accounting cycle during the accounting period? a. Transaction analysis, journal entries, trial balance b. Transaction analysis, posting to the ledger, journal entries c. Transaction analysis, posting to the ledger, adjusting the accounts d. Transaction analysis, journal entries, posting to the ledger The nature of generally accepted accounting principles (GAAP) is important to large corporations because a. a change in GAAP will not likely affect the selling price of the company's stock b. a change in GAAP will not likely affect the amount of bonuses paid to managers and employees c. a change in GAAP will not likely affect a corporation's competitive position d. change in GAAP will likely affect a company's financial statements 2. 3. 4. 5. 6. 7. 8. 9. 10. Average Category 1. When goods are sold on credit, revenue usually should be recognized at the date of a. receipt of the sales order b. passage of title from the seller to the buyer c. receipt of the goods by the buyer d. manufacture of the goods 2. The accounting equation must remain in balance a. Throughout each step in the accounting cycle b. Only when journal entries are recorded c. Only at the time the trial balance is prepared 1 d. 3. Only when formal financial statements are prepared Presenting consolidated financial statements this year when statements of individual companies were presented last year is a. A correction of an error b. An accounting change that should be reported prospectively c. An accounting change that should be reported by restating the financial statements of all prior periods presented d. not an accounting change Under the installment method, revenue is recognized when the customer a. orders the merchandise b. receives the merchandise c. receives the bill d. makes a cash payment Under the percentage-of-completion method, revenue is recognized a. when construction begins on the project b. when the project is complete c. throughout the project, based upon the amount of work completed each year d. throughout the project, based upon the amount of cash received from the customer Which of the following post-balance-sheet events would generally require disclosure, but no adjustment of the financial statements? a. Retirement of the company president b. Settlement of litigation when the event that gave rise to the litigation occurred prior to the balance sheet date c. Employee strikes d. Issue of a large amount of capital stock 4. 5. 6. 7. When a depositor receives a bank statement indicating a "NSF check", the depositor should a. b. c. d. credit the cash account for the amount of the check record the amount as an expense of the current period credit a special receivable for the amount of the check debit sales revenue 8. Which of the following is an argument against using historical cost in accounting? a. Fair values are more relevant b. Historical costs are based on an exchange transaction c. Historical costs are reliable d. Fair values are subjective Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between a. Relevance and reliability. b. Reliability and periodicity c. Timeliness and materiality d. Understandability and timeliness 10. Unrelated parties include all of the following, except a. Two entities that have a common director b. Providers of finance in the course of their normal dealings with an entity by virtue only of those dealings c. Entities for which the investments are accounted for by the equity method d. A single customer or supplier with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence Difficult Category 1. Under PAS 37, the appropriate accounting treatment for future operating losses is to a. Determine a reasonable estimate of the cost and provide for the future liability b. Determine the cost and charge it directly against retained earnings c. Not recognize such items in the financial statements d. Measure on the basis of estimated future cash flows The difference between the accounting process and the accounting cycle is a. The accounting process results in the preparation of financial statements, whereas the accounting cycle is concerned with recording business transactions b. The accounting cycle represents the steps taken to accomplish the accounting process c. The accounting process represents the steps taken to accomplish the accounting cycle d. merely semantic, because both concepts refer to the same thing A company acquires a subsidiary exclusively with a view of selling it. The subsidiary meets the criteria to be classified as held for sale. At the balance sheet date, the subsidiary has not yet been sold. How will the subsidiary be valued in the balance sheet at the date of the first financial statements after acquisition? a. At cost b. At fair value less costs to sell c. Cost or fair value less cost to sell, whichever is lower d. Cost or fair value less cost to sell, whichever is higher A reversing entry should never be made for an adjusting entry that a. accrues unrecorded revenue b. adjusts expired costs from an asset account to an expense account c. accrues unrecorded expenses d. adjusts unexpired costs from an expense account to an asset account Which is not an item of income statement presented under ‘nature of expense’ method? a. Decrease in inventory 9. 2. 3. 4. 5. 2 6. b. Supplies expense c. Net purchases d. Cost of sales The accounting for cash discounts and trade discounts are a. The same b. Not the same c. Always recorded net d. Tied to the timing of cash collections on the account Unreplenished petty cash vouchers at balance sheet date will require adjustments to avoid a. Overstatement of both asset and expense b. Understatement of both asset and expense c. Understatement of asset and overstatement of expense d. Overstatement of asset and understatement of expense Which of the following describes the proper treatment of a loss, which is material, unusual in nature, and infrequent in occurrence? a. Report as part of continuing operations b. Report as part of discontinued operations c. Report as an extraordinary item d. Report as a prior period item To comply with the matching principle, the cost of labor services of an employee who participates in the manufacturing of a product normally should be charged to the income statement in the period in which the a. Work is performed b. Employee is paid c. Product is completed d. Product is sold A change from FIFO to weighted average method of accounting for inventory is considered as a a. Change in accounting estimate that is accounted for prospectively b. Change in accounting policy that is accounted for retrospectively c. Change in accounting policy that is accounted for prospectively d. Correction of prior period error 7. 8. 9. 10. Clincher Category 1. Credit terms of 2/10, n/30 indicate that a a. Two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month to of sale b. Two percent discount for early payment is available within ten days of the date of sale c. Ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice d. Two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date The primary difference between revenues and gains is a. Gains are increases in net assets from peripheral activities while revenues are increases from ongoing activities b. c. d. 3. generally accepted accounting principles makes no distinction between them since they both increase income Revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities Both revenues and gains cause a decrease in net assets from ongoing and peripheral transactions respectively 2. If you wanted to know what accounting rules a company follows related to its inventory, where would you look? a. The statement of financial position b. The statement of comprehensive income c. The statement of changes in equity d. The notes to the financial statements A deficiency in cash control that may conceal cash shortage by way of manipulating accounts receivable from customers. a. Window dressing b. Lapping c. Kiting d. Defalcation Which of the following is not a required supplemental disclosure for the balance sheet? a. Contingencies b. Financial forecasts c. Accounting policies d. Contractual situations Which of the following is an example of revenue or expense recognized in the current period's income statement? a. Cash received from a client before the lawyer represents them in court b. Inventory purchased by a retail store c. Wage costs owed to employees who worked during the period. d. Cash collected from an accounts receivable Which of the following is considered cash? a. Certificates of deposit (CDs) b. Money market checking accounts c. Money market savings certificates d. Postdated checks 4. 5. 6. 7. 3 8. 9. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a. As offsets to capital b. By means of footnotes only c. As assets but separately from other receivables d. As trade notes and accounts receivable if they otherwise qualify as current assets Changes in the fair value of biological assets should be recognized a. In profit or loss b. In other comprehensive income c. In the statement of cash flows d. In the statement of changes in equity Why would a company sell receivables to another company? a. To improve the quality of its credit granting process b. To limit its legal liability c. To accelerate access to amounts collected d. To comply with customer agreements 10. Practical Accounting Problems 1 Source: ReSA Easy Category 1. For ReSA Company, the following information is available: Cost of goods sold P90,000 Dividend revenue 4,000 Income tax expense 9,000 Operating expenses 35,000 Sales 150,000 In ReSA’s multiple-step income statement, gross profit a. should not be reported. c. should be reported at P60,000. b. should be reported at P20,000. d. should be reported at P64,000. 2. Lee Company reported the following information for 2010: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities For 2010, Lee would report comprehensive income of a. P117,000. b. P115,000. P500,000 350,000 55,000 20,000 2,000 c. P97,000 d. P20,000. P60,000 10,000 2,000 1,000 40,000 3. For the year ended December 31, 2010, NFJPIA Inc. reported the following: Net income Preferred dividends declared Common dividend declared Unrealized holding loss, net of tax Retained earnings, beginning balance 80,000 Common stock Accumulated Other Comprehensive Income,Beginning Balance 5,000 What would NFJPIA report as the ending balance of Retained Earnings? a. P139,000 c. P128,000 b. P133,000 d. P127,000 4. Nierras, Inc. factors P2,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Nierras estimates the fair value of the recourse liability at P75,000. What would be recorded as a gain (loss) on the transfer of receivables? a. Loss of P 75,000 c. Loss of P175,000 b. loss of P100,000 d. Loss of P375,000 5. If a petty cash fund is established in the amount of P250, and contains P150 in cash and P95 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, P75. c. Cash, P95; Cash Over and Short, P5 b. Petty Cash, P100. d. Cash, P100. 6. If the month-end bank statement shows a balance of P36,000, outstanding checks are P12,000, a deposit of P4,000 was in transit at month end, and a check for P500 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. P27,500. c. P20,500. b. P28,500. d. P43,500. 7. In preparing its bank reconciliation for the month of April 2010, Lumanglas, Inc. has available the following information. Balance per bank statement, 4/30/10 NSF check returned with 4/30/10 bank statement Deposits in transit, 4/30/10 Outstanding checks, 4/30/10 P39,140 450 5,000 5,200 4 Bank service charges for April What should be the correct balance of cash at April 30, 2010? a. P39,370 c. P38,490 b. P38,940 d. P38,470 20 8. Below is the information relative to an exchange of assets by Stanton Company. The exchange lacks commercial substance. Book Value P75,000 P50,000 Old Equipment Fair Value P85,000 P45,000 Cash Paid P15,000 P 7,000 Case I Case II Which of the following would be correct for Stanton to record in Case II? Record Equipment at: a. P57,000 b. P50,000 c. P52,000 d. P50,000 Record a gain of (loss) of: P5,000 P2,000 P(5,000) P(2,000) 9. Vicente Co. had the following account balances: Sales Cost of goods sold Salary expense Depreciation expense Dividend revenue Utilities expense Rental revenue Interest expense Sales returns Advertising expense P120,000 60,000 10,000 20,000 4,000 8,000 20,000 12,000 11,000 13,000 What would Vicente report as total expenses in a single-step income statement? a. P127,000 c. P123,000 b. P134,000 d. P63,000 10. An inventory loss from market decline of P1,600,000 occurred in May 2011, after its March 31, 2011 quarterly report was issued. None of this loss was recovered by the end of the year. How should this loss be reflected in the company's quarterly income statements? 3/31/11 -0-0-0P400,000 Three Months Ended 6/30/11 9/30/11 -0-0P 533,333 P533,333 P1,600,000 -0P 400,000 P400,000 12/31/11 P1,600,000 P 533,333 -0P 400,000 a. b. c. d. Average Category 1. On January 1, 2008, Neal Corporation acquired equipment at a cost of $540,000. Neal adopted the sum-of-the-years’-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2011, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2011 would be a. P28,125. c. P 67,500. b. P45,000. d. P108,000. 2. Bell Inc. took a physical inventory at the end of the year and determined that P650,000 of goods were on hand. In addition, Bell, Inc. determined that P50,000 of goods that were in transit that were shipped f.o.b. shipping were actually received two days after the inventory count and that the company had P75,000 of goods out on consignment. What amount should Bell report as inventory at the end of the year? a. P650,000. c. P725,000. b. P700,000. d. P775,000 The following information was available from the inventory records of Reganit Company for January: Units Unit Cost Total Cost Balance at January 1 3,000 P9.77 P29,310 Purchases: January 6 2,000 10.30 20,600 January 26 2,700 10.71 28,917 Sales: January 7 (2,500) January 31 Balance at January 31 1,200 (4,000) 3. Assuming that Reganit does not maintain perpetual inventory records, what should be the inventory at January 31, using the weighted-average inventory method, rounded to the nearest peso? a. P12,606. c. P12,312. b. P12,284. d. P12,432. 4. On May 1, 2010, Goodman Company began construction of a building. Expenditures of P120,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2010. For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2010 were 5 a. b. 5. P100,000. P120,000. c. P480,000. d. P600,000. Calvez Company purchased P400,000 of 10% bonds of Scott Co. on January 1, 2011, paying P376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of P23,900 provides an effective yield of 11%. Calvez Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2011, Calvez Company should report interest revenue from the Scott Co. bonds of: a. P42,392. c. P41,368. b. P41,409. d. P40,000. 6. On its December 31, 2010 balance sheet, De guzman Company appropriately reported a P10,000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no change during 2011 in the composition of De guzman’s portfolio of marketable equity securities held as available-for-sale securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/11 X P125,000 P160,000 Y 100,000 95,000 Z 175,000 125,000 P400,000 P380,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2011 is a. P30,000. c. P10,000. b. P20,000. d. 0. 7. The balance in Moon Co.'s accounts payable account at December 31, 2010 was P700,000 before any necessary year-end adjustments relating to the following: • • • Goods were in transit to Moon from a vendor on December 31, 2010. The invoice cost was P40,000. The goods were shipped f.o.b. shipping point on December 29, 2010 and were received on January 4, 2011. Goods shipped f.o.b. destination on December 21, 2010 from a vendor to Moon were received on January 6, 2011. The invoice cost was P25,000. On December 27, 2010, Moon wrote and recorded checks to creditors totaling P30,000 that were mailed on January 10, 2011. In Moon's December 31, 2010 balance sheet, the accounts payable should be a. P730,000. c. P765,000. b. P740,000. d. P770,000. 8. Rich Company had the following bank reconciliation at March 31, 2008: Balance per bank statement, March 31, 2008 P 46,500 Add: Deposit in transit Less: Outstanding checks Balance per book, March 31, 2008 10,300 P 56,800 12,600 P 44,200 Data per bank statement for the month of April, 2008 follow: Deposits Disbursements P 58,400 49,700 All reconciliation items at March 31, 2008 cleared through the bank in April. Outstanding checks at April 30, 2008 totaled P7,500. What is the amount of cash disbursements per book in April? a. P44,600 c. P54,800 b. P49,700 d. P57,200 9. Company Q is a supplier of industrial products, in 2009, the company purchased a plot of land on the outskirts of a major city. The land was originally acquired at a cost of P15,000,000. The area has mainly low-cost public housing and very limited public transport facilities. The national government has plans to develop the area as an industrial park in five years time and land is expected to greatly appreciate in value if the government proceeds with the plan. Company Q’s management has not decided what to do with the property. On December 31, 2010, the property has a current fair value of P15,400,000. How should the company classify the property in its December 31, 2010 statement of financial position? a. as land at its historical cost of P15,000,000 b. as land at its current fair value of P15,400,000 c. as investment property at its current fair value of P15,400,000 d. as inventory at the lower of cost of P15,000,000 or current fair value of P15,400,000. 10.In January, 2006, Findley Corporation purchased a patent for a new consumer product for P720,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2011 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2011, assuming amortization is recorded at the end of each year? a. P480,000. c. P72,000. b. P360,000. d. P48,000. Difficult Category 1. During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its primary supplier. Jeremiah agreed to purchase P2.5 million of raw materials during the next fiscal year under this contract. At the end of the current fiscal year, the raw material to be purchased under this contract had a market value of P2.3 million. What is the journal entry at the end of the current fiscal year? a. Debit Unrealized Loss for P200,000 and credit Estimated Liability on Purchase Commitment for P200,000. b. Debit Estimated liability on Purchase Commitment for P200,000 and credit Unrealized Gain for P200,000. c. Debit Unrealized Loss for P2,300,000 and credit Estimated Liability on Purchase Commitment for P2,300,000. 6 d. No journal entry is required. 2. Hardin Company received P40,000 in cash and a used computer with a fair value of P120,000 from Page Corporation for Hardin Company's existing computer having a fair value of P160,000 and an undepreciated cost of P150,000 recorded on its books. The transaction has no commercial substance. How much gain should Hardin recognize on this exchange, and at what amount should the acquired computer be recorded, respectively? a. 0 and P110,000 c. P10,000 and P120,000 b.P769 and P110,769 d. P40,000 and P150,000 3. Creep Company purchased 100 beef cattle at an auction for P800,000 on July 1, 2010. Transportation costs were P8,000. Creep Company would have to incur the same transportation costs if it had sold its cattle in the auction. In addition there would be a 2% auctioneer’s fee on the market price of the cattle payable by the seller. Creep Company also incurred P4,000 veterinary expenses. On December 31, 2010, the fair value of the cattle in the most relevant market increases to P880,000. On May 2, 2011, Creep Company sold 18 cattle at auction for P160,000 and incurred transportation charges of P1,200. On June 15, 2011, the fair value of the remaining cattle was P662,560 but on the same day, 42 cattle were slaughtered with total cost of P33,600. The fair value of the carcasses on that day was P386,400 and the estimated transportation cost to sell the carcasses is P3,360. No other selling costs are expected. On June 30, 2011, the fair value of the remaining 40 cattle was P358,400. The estimated transportation cost is P3,200. What amount should the biological asset be initially recognized on July 1, 2010? a. P776,000 c. P792,000 b. P784,000 d. P800,000 4. On January 2, 2007, Phone Company purchased 10,000 shares (10%) of the outstanding ordinary shares of Pal, Inc. for P25 per share. The purchase was appropriately recorded as a long-term investment and accounted for under the fair value method. The market price of the share was P24 per share on December 31, 2009. During 2010, Pal experienced severe financial difficulties and Phone disposed of its entire investment in Pal share for P10 per share on November 9, 2010. Phone’s effective income tax rate was 32% for 2010. In its 2010 income statement, how much should Phone report as loss from disposal of the long-term investment? a. P84,000 c. P140,000 b. P90,000 d. P150,000 On September 1, 2010, Tender Company purchased 30% of the outstanding ordinary shares of Care Corporation for P3,000,000 when the book value of net assets of Care Corporation was P9,000,000. The fair values of the assets are equal to their carrying values except for a land which was undervalued by P1,000,000. Care reported net earnings throughout the year in the amount of P2,400,000 and paid total dividends of P1,000,000. What is the maximum amount of income Tender Company could include in its 2010 income statement as “equity in Care’s earnings”? a. P207,500 c. P237,500 b. P235,000 d. P240,000 6. Company S owns, hotel resort, which includes a casino, housed in a separate building that is part of the premises of the entire hotel resort. Its patrons would be largely limited to tourists and non-resident visitors only. The owner operates the hotel and other facilities on the hotel resort, with the exception of the casino, which can be sold or leased out under a finance lease. The casino will be leased to an independent operator. Company S has no further involvement in the casino. The casino operator will not be prepared to operate it without the existence of the hotel and other facilities. On December 31, 2010, the following are relevant information for the purpose of measuring the above assets: Hotel Casino Other facilities P200,000,000 50,000,000 150,000,000 5. What amount of investment property should Company S report in its December 31, 2010 statement of financial condition? a.P 50,000,000 c. P250,000,000 b.P150,000,000 d. P400,000,000 6. On December 31, 2008, North Co. is in financial difficulty and cannot pay a note due that day. It is a P600,000 note with P60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from North equipment that has a fair value of P290,000, an original cost of P480,000, and accumulated depreciation of P230,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2011, reduces the face amount of the note to P250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. North should recognize a gain on the partial settlement and restructure of the debt of a. P0. c. P55,000. b. P15,000. d. P75,000. 7. Fuller Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Fuller. The grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Fuller receives it. During 2010 Fuller issued two separate series of coupons as follows: Issued On 1/1/10 7/1/10 Total Value P375,000 540,000 Consumer Expiration Date 6/30/10 12/31/10 Amount Disbursed as of 12/31/10 P177,000 225,000 The only journal entries to date recorded debits to coupon expense and credits to cash of P536,000. The December 31, 2010 balance sheet should include a liability for unredeemed coupons of a. P0. c. P93,000. b. P45,000. d. P270,000. 8. Marcus Company plans to dispose of a group of its assets as held for sale. The assets form a disposal group, and are measured as follows: 7 Goodwill P 3,000,000 Property, plant & Equipment ( revalued amount) 9,200,000 8,000,000 Property, plant & Equipment (historical amount) 11,200,000 11,200,000 Inventory 4,800,000 4,400,000 Investment in available for sale 3,600,000 3,000,000 Total P32,000,000 P29,800,000 Marcus Company estimates that fair value less costs to sell of the disposal group amounts to P26,000,000. Immediately before classification as held for sale, what amount of loss should the company recognize? a. None c. P2,200,000 b. P2,000,000 d. P3,800,000 9. On December 31, 2010, Irey Co. has $2,000,000 of short-term notes payable due on February 14, 2011. On January 10, 2011, Irey arranged a line of credit with County Bank which allows Irey to borrow up to P1,500,000 at one percent above the prime rate for three years. On February 2, 2011, Irey borrowed P1,200,000 from County Bank and used P500,000 additional cash to liquidate P1,700,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2010 balance sheet which is issued on March 5, 2011 is a. P0. c. P500,000. b. P300,000. d. P800,000. Clincher Category 1. At the close of its first year of operations, December 31, 2010, Del Mundo Company had accounts receivable of P540,000, after deducting the related allowance for doubtful accounts. During 2010, the company had charges to bad debt expense of P90,000 and wrote off, as uncollectible, accounts receivable of P40,000. What should the company report on its balance sheet at December 31, 2010, as accounts receivable before the allowance for doubtful accounts? a. P670,000 c. P490,000 b. P590,000 d. P440,000 2. On January 2, 2011, Betancor Company sold equipment with a carrying amount of P480,000 in exchange for a P600,000 non-interest-bearing note due January 2, 2014. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2011 was 10%. The present value of 1 at 10% for three periods is 0.7513. What is the carrying value of the note receivable as of December 31, 2011 statement of financial position? a. P450,780 c. P545,444 b. P495,858 d. P600,000 ECC Inc. uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were P65,500 (P99,000), purchases during the current year at cost (retail) were P568,000 (P865,600), freight-in on these purchases totaled P26,500, sales during the current year totaled P811,000, and net markups were P69,000. What is the ending inventory value at cost? a. P222,600. c. P142,241. b. P174,366. d. P152,308. On January 1, 2011, Bell Company purchased 4,000 of P1,000 face value, 10% bonds of Pepper Company for P4,270,600. The bonds will mature on January 1, 2012 pay interest semi-annually on January 1 and July 1. Bonds effective interest rate is 8%. In its December 31, 2011 profit or loss, how much should Bell Company report as interest income on the bonds? a. P160,000 c. P170,824 b. P169,657 d. P340,481 Carrying Amount Before Classification as Held for Sale P 3,000,000 Remeasured Amount Immediately Before Classification as Held for Sale 3. 4. 5. Balcony Corporation acquires a coal mine at a cost of P500,000. Intangible development costs total P120,000. After extraction has occurred, Balcony must restore the property (estimated fair value of the obligation is P60,000), after which it can be sold for P170,000. Balcony estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the first year, which of the following would be included in the journal entry to record depletion? a. Debit to Accumulated Depletion for P91,800 b. Debit to Inventory for P91,800 c. Credit to Inventory for P90,000 d. Credit to Accumulated Depletion for P153,000 6. During 2010, Miles Corporation disposed of Pine Division, a major component of its business. Miles realized a gain of P1,200,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were P1,400,000 in 2010. How should these facts be reported in Miles income statement for 2010? Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations P1,400,000 loss P1,200,000 gain 200,000 loss 0 0 200,000 loss 1,200,000 gain 1,400,000 loss a. b. c. d. 8 7. On January 1, 2008, Bok Corporation acquired machinery at a cost of P250,000. Bok adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2011, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2011 would be a. P12,800. b. P18,286. c. P25,000. d. P35,714. 8. Rodriguez Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is P150,000. The total selling price is P350,000, and estimated costs of disposal are P5,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet? a. P145,000. c. P345,000 b. P150,000. d. P350,000. 9. On December 1, Miser Corporation exchanged 2,000 shares of its P25 par value common stock held in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by Miser at a cost of P40 per share, and on the exchange date the common shares of Miser had a fair market value of P50 per share. Miser received P6,000 for selling scrap when an existing building on the property was removed from the site. Based on these facts, the land should be capitalized at a. P74,000. c. P94,000. b. P80,000. d. P100,000. 10. Storm Corporation purchased a new machine on October 31, 2010. A P1,200 down payment was made and three monthly installments of P3,600 each are to be made beginning on November 30, 2010. The cash price would have been P11,600. Storm paid no installation charges under the monthly payment plan but a P200 installation charge would have been incurred with a cash purchase. The amount to be capitalized as the cost of the machine on October 31, 2010 would be a. P12,200. c. P11,800. b. P12,000. d. P11,600. Practical Accounting Problems 2 Source: ReSA, CTDI, CRC-ACE, & NRC Easy Category 1. Lake Construction Company uses the percentage-of-completion method for long-term construction contracts. The company has a project with a contract price of P7,000 on which P600 of gross profit has been recognized in prior years. Information for the current year is as follows: Total cost incurred through current year Estimated costs remaining at end of current year What is the loss that Lake should recognize in the current year? A. P600 C. P1,400 B. P800 D. No loss should be recognized. 2. Emmanuel Company transferred 5,500 units to Finished Goods Inventory during September. On September 1, the company had 300 units on hand (40 percent complete as to both material and conversion costs). On September 30, the company had 800 units (10 percent complete as to material and 20 percent complete as to conversion costs). The number of units started in process during September was: A. 5,200 C. 6,000 B. 5,500 D. 6,300 On December 12, 2008, UniOil sold merchandise to Thai Company. 3,000 Baht is due on February 10, 2009. On the same date Uni Oil paid P4,000 cash to acquire a 60-day put option for 3,000 Baht. 12/12/08 12/31/08 2/10/09 Spot rate (market price) P14 P15 P12 Strike price (exercise price) P14 P14 P14 Fair value of put option P4,000 P5,000 P5,500 How much is the net foreign exchange gain or loss on February 10, 2009? (Assume the option was not exercised on that date) A. P9,000 loss B. P8,500 loss C. P8,000 loss D. P10,000 loss 4. BBB Computer Store started its operation in January 1, 2008. During the year, it had cash sales of P1,375,000 and installment sales of P 3,300,000. BBB imposes a mark up on cost of 25% for cash sales and 50% for installment sales. During 2008, installment receivable balance amounted to P1,320,000. How much is the realized gross profit for 2008? A. P660,000 5. B. P990,000 C. P935,000 D. P1,100,000 P5,000 2,800 3. On September 18, 2008, Ocean Deep Co. acquired all the Titanic Inc.’s P2,000,000 identifiable assets and P500,000 liabilities. Book values of the Titanic’s assets and liabilities equal to their fair values except for the overvalued Plant & equipment. As a consideration, Ocean Deep issued its own shares of stock with a market value of P1,600,000. The merger resulted into P700,000 goodwill. Assuming Ocean Deep had P5,000,000 total assets prior the combination, how much is the combined total assets? A. P6,400,000 B. P6,600,000 C. P7,100,000 D. P7,000,000 KLM Company has the following information for September: Units started BWIP (65% incomplete) Normal spoilage Abnormal spoilage EWIP (30% incomplete) 100,000 20,000 3,500 5,000 14,500 Units Units Units Units Units 6. 9 Transferred out Beginning Work in Process Costs: Material Conversion All materials are added at the start of the production process. KLM Company inspects goods at 75 percent completion as to conversion. Assume that the costs per EUP for material and conversion are P2.50 and P3.75, respectively. Using FIFO, what is the total cost assigned to the transferred-out units (rounded to the nearest peso)? A. P573,594 B. P573,954 C. P555,000 D. P548,594 7. 97,000 P15,000 10,000 Units Sherilyn Manufacturing Company produce a product called Sexy. The following information pertain to this product. Required hours per unit Number of employees Estimated weekly wage per employee Employee benefits (related to wages) Weekly hour per employee 2 hours 25 P480 25% 30 hours Employee benefits treated as direct manufacturing labor cost. What is the standard direct labor cost per unit? a. P20 b. P40 c. P24 d. P16 8. Year-Round Golf sells franchises for indoor golf driving ranges and putting greens. For each franchise, the company charges a non-refundable initial franchise fee of P400,000. The franchise agreement requires a down payment of P100,000, with balance covered by the issuance of a P300,000, 10% note, payable by the franchisee at the end of 5 years. Interest does not begin to accrue until the franchise opens, and first interest payment is required 12 months after the franchise opens. The company only sells to qualified buyers so the collectibility of the note is always reasonably assured. The services required for the initial franchise fee are completed 6 months after the agreement is signed. How much franchise revenue earned must be recognized upon signing of the agreement by Year-Round? a. P400,000 b. P100,000 c. P286,276 d. P0 The ST Company sells a franchise that requires an initial franchise fee of P500,000. A P100,000 down payment is required with the balance payable in 4 equal monthly installments of P100,000. All material services have been substantially performed by ST Company, the refund period has expired, and the collectibility of the note is reasonably assured. The interest rate for this type of loan will be 12%. The franchise revenue earned during the period must be: a. P100,000 b. P500,000 c. P490,000 d. P403,735 9. 10. Shangri-La Restaurant sells a franchise that require an initial franchise fee of P700,000. A down payment of P200,000 cash is required, with the balance covered by the issuance of P500,000, 10% note payable by the franchisee in five equal annual installments. The franchisor accounts for this initial franchise fee depending on the surrounding circumstances related to the franchise agreement. The franchisor has not substantially performed all material services, the refund period has expired and the collectibility of the note is reasonably assured. The franchise revenue amounted to: A. P 0 C. P500,000 B. P200,000 D. P700,000 Average Category 1. Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is unable to reliably predict bad debts. During 2010, Coaster sold equipment costing P2,400,000 for P3,600,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2010 were made on schedule. Round answers to two places. Assuming that Coaster uses the installment method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2010? A. P1,680,000 C. P560,000 B. P1,120,000 D. P369,600 2. In the RST partnership, Ron's capital is P80,000, Stella's is P75,000, and Tiffany's is P50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following questions is independent of the others. Refer to the above information. Tiffany is paid P60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal: A. Tiffany, Capital will be credited for P60,000. B. Ron, Capital will be debited for P5,000. C. Stella, Capital will be debited for P4,000. D. Cash will be debited for P60,000. 3. The Brooke Corporation has two branches, Branch P and Branch Q. The home office shipped P80,000 in merchandise to Branch P and prepaid the freight charges of P500. A short time thereafter, Branch P was instructed to ship this merchandise to Branch Q at a prepaid freight cost of P700. Freight charges for this merchandise normally cost P800 when shipped from the home office directly to Branch Q. Compute the excess freight on transfers of merchandise: A. P700 C. P500 B. P800 D. P400 4. EFG Company has developed standard overhead costs based on a capacity of 180,000 machine hours as follows: Standard costs per unit: Variable portion Fixed portion 2 hours @ P3 = 2 hours @ P5 = P 6 10 10 P 16 During September, 85,000 units were scheduled for production, but only 80,000 units were actually produced. The following data relate to September: Actual machine hours used were 165,000. Actual overhead incurred totaled P1,378,000 (P518,000 variable plus P860,000 fixed). All inventories are carried at standard cost. The variable overhead efficiency variance for September was; The fixed overhead spending variance for September was A. P15,000 U ; P40,000 F C. P38,000 U ; P40,000 F B. P38,000 F ; P60,000 F D. P23,000 U ; P100,000 U 5. On January 1, 2008 M Co. acquired 70% of the outstanding common stock of N Co. for P322,500 cash. The book value of N’s net assets at controlling interest is P183,750. N’s only over or undervalued assets is machinery that has a book value of P39,000 and a current value of P33,000. The machinery has a remaining useful life of four years. How much is the minority interest to be reported in the consolidated balance sheet on January 1, 2008? A. P53,325 B. P77,400 C. P76,425 D. P76,950 The Buo Company processes apples into pies, spread and dressing. During the second quarter of 2008, the joint cost of processing the apples were P750,000. There was no beginning inventories for the quarter. Production and sales value information for the quarter were as follows: Assume the use of the estimated net realizable value method. Product Items/ Sales Value at Separable Final Selling Units unit Split-off point Costs Price on hand Pies 20,000 P14/unit P20/unit P35/unit 7,000 Spread 50,000 P12/unit P10/unit P28/unit 24,000 Dressing 25,000 P 9/unit P 8/unit P20/unit 10,000 Determine the TOTAL amount of cost of goods sold A. P1,601,500 B. P1,160,500 C. P788,500 D. P1,061,500 6. 7. Agency SS issued a purchase order for the acquisition of office equipment costing P225,000. The equipment was received with the charge invoice and was paid by check after withholding tax of 10%. Agency SS remitted the tax withheld to BIR thru a government depository bank. What is the entry of Agency SS to record the payment? A. Accounts Payable Due to BIR Cash-National Treasury-MDS B. Office Equipment Cash-National Treasury-MDS C. Accounts Payable Due to BIR Cash-Disbursing officer D. Office Equipment Cash-National Treasury-MDS 8. 225,000 22,500 202,500 225,000 225,000 225,000 22,500 202,500 202,500 202,500 AA and BB formed a partnership in 2008 and made the following investments and withdrawals during the year: AA Investment Withdrawal P252,000 P108,000 81,000 BB Investments P162,000 54,000 Withdrawal January1 P216,000 June 1 August 1 27,000 December 1 The partnership’s profits and loss agreement provides for a monthly salary of P45,000 for each partner. AA is to receive a bonus of 25% on net income after salaries and bonus. The partners are also to receive interest of 5% on average capital balances. Any remainder are to be allocated based on their ending capital balances. Assuming the income summary has a credit balance of P1,440,000. Determine which of the following is incorrect in the partnership operation. A. AA is to receive a bonus of P72,000 B. BB will receive P7,875 interest on average capital balance C. BB has a share of 40% in the P273,375 remainder or balance D. AA, Capital account will increase by P783,900 9. The Home Office in Makati shipped merchandise costing P40,000 to Manila branch and paid for the freight charges of P300. The home office bills the branch at 125% of cost. Manila branch was subsequently instructed to transfer one-half of the merchandise to Quezon City branch wherein Quezon City branch paid for P100 freight. If the shipment was made directly from Makati to Quezon City, the freight cost would have been P200. By how much will Manila Branch charge the Home Office account? A. P25,150 B. P25,300 C. P25,650 D. P25,250 10. The JPB partnership reported net income of P160,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows: J P 50,000 10% 60% P P 60,000 5% 30% B P 30,000 10% 10% Salaries Bonus on net income Remainder (if positive) 11 Remainder (if negative) 30% 40% 30% How should partnership net income for 2008 be allocated to J, P, and B? J P B A. P96,000 P48,000 P16,000 B. P58,000 P64,000 P38,000 C. P60,000 P60,000 P40,000 D. P66,000 P68,000 P46,000 A. Option A B. Option B C. Option C D. Option D Difficult Category 1. Selected balances from the Cebu Company’s Branch A and B are as follows: Branch A Inventory, Jan. 1, 2009 P21,000 Imprest Branch Fund 2,000 Inventory, Dec. 31, 2009 19,000 A/Receivable, Jan. 1, 2009 55,000 Merchandise from Home Office 61,000 A/Receivable, Dec. 31, 2009 70,000 Cash Collections 85,000 Sales 100,000 Cash Expenses… 21,000 Branch B P19,000 1,500 12,000 43,500 47,000 53,500 70,000 80,000 14,300 All sales, collections, and expenses are handled at the branch. All cash received from sales and collections are sent directly to the Home Office. Expenses are paid by the branch from the imprest fund and immediately reimbursed by the Home Office and credited to the Home Office account. All expenses paid by the branch are recorded in the books of the branch. Compute the balance of the Home Office account on January 1, 2009. Branch A Books P78,000 75,000 64,000 78,000 Branch B Books P67,000 64,000 78,000 64,000 A. B. C. D. 2.On January 1, 2010, Orton Co. sold a used machine to King, Inc. for P350,000. On this date, the machine had a depreciated cost of P245,000. King paid P50,000 cash on January 1, 2010 and signed a P300,000 note bearing interest at 10%. The note was payable in three annual installments of P100,000 beginning January 1, 2011. Orton appropriately accounted for the sale under the installment method. King made a timely payment of the first installment on January 1, 2011 of P130,000, which included interest of P30,000 to date of payment. At December 31, 2011, Orton has deferred gross profit of: A. P70,000. C. P60,000 B. P66,000. D. P51,000 3. Partners Dennis and Lilly have decided to liquidate their business. The following information is available: Cash Inventory Total P100,000 200,000 ________ P300,000 Accounts payable Dennis, capital Lily, capital Total P100,000 120,000 80,000 P300,000 Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for P60,000, and P60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for P45,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month. Using a safe payments schedule, how much cash will be distributed to Lilly at the end of the second month? A. P27,000 C. P18,000 B. P36,000 D. P 0 4. Wynne Inc. charges an initial franchise fee of P920,000, with P200,000 paid when the agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is P545,872. The franchisee has the option to purchase P120,000 of equipment for P96,000. Wynne has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is A. P200,000 C. P745,872 B. P721,872 D. P920,000 Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2008 Lake began operations and sold jet skis with a total price of P900,000 5. 12 that cost Lake P450,000. Lake collected P300,000 in 2008, P300,000 in 2009, and P300,000 in 2010 associated with those sales. In 2009 Lake sold jet skis with a total price of P1,500,000 that cost Lake P900,000. Lake collected P500,000 in 2009, P400,000 in 2010, and P400,000 in 2011 associated with those sales. In 2011 Lake also repossessed P200,000 of jet skis that were sold in 2009. Those jet skis had a fair value of P75,000 at the time they were repossessed. In its December 31, 2009, balance sheet, Lake would report: A. Deferred gross profit of P700,000 B. Deferred gross profit of P1,050,000. C. Installment receivables (net of deferred gross profit) of P750,000. D. Installment receivables (net of deferred gross profit) of P900,000. 6. Included in the accounting records of the home office and the only branch, respectively, of Socrates Company were the following ledger accounts for June, 2009: Investment in Plato Branch Credit Date 2009 May 31 June 6 20 26 30 Home Office Credit Date 2009 May 31 June 8 18 27 30 Explanation Balance Receipt of merchandise Payment of cash Acquisition of office equipment Payment of cash Debit 30,500 11,500 14,500 22,000 51,000 cr 81,500 cr 70,000 cr 55,500 cr 33,500 cr Balance Explanation Balance Shipment of merchandise Receipt of cash Collection of branch trade account receivable Shipment of merchandise Debit 30,500 11,500 9,000 24,000 51,000 dr 81,500 dr 70,000 dr 61,000 dr 85,000 dr Balance The reconciled amount of the reciprocal account is: A. P48,500 C. P63,000 B. P57,500 D. P70,500 7. Summary adjusted trial balances for the home office and branch of Tanker Corporation at December 31, 2009 are as follows: Home Office Debits Other assets Inventories Jan.1, 2009 Branch Purchases Shipments from home office Expenses Dividends Total debits Credits Other liabilities Capital stock Retained earnings Home office Unrealized profit in branch inventory Sales Shipments to branch Branch profit Total credits Determine the combined net income of the home office and the branch: A. P202,500 C. P247,500 B. P200,000 D. P370,000 8. BNC sells a new car for P560,000. Cash down payment of P100,000 was received together with an old car with a trade-in value of P80,000. Cost of the new car sold is P322,800. It is estimated that the reconditioning of the old car will cost P40,000 and may be sold at P140,000 which includes a 30% gross profit. BNC was able to collect 50% of the balance and the customer defaulted. The car was repossessed and can still be sold at 90% of the uncollected balance after reconditioning cost of 20%. How much is the gain or loss from repossession? a. P22,800 gain b. P27,280 gain c. P31,015 gain d. P28,860 gain Arlene Chemical Company manufactures two industrial chemical products in a joint process. In May, 10,000 gallons of input costing P60,000 were processed at a cost of P150,000. The joint process resulted in 8,000 pounds of Resoline and 2,000 pounds of Krypto. Resoline sells at P25 per pound and Krypto sells for P50 per pound. Management generally processes each of these chemicals further in separable processes to produce more refined chemical products. Resoline is processed separately at a cost of P5 per pound. The resulting product, Reoslite, sells for P35 per pound. Krypto is processed separately at a cost of P15 per pound. The resulting product, Kryptite, sells for P95 per pound. The joint cost share of product Kryptite using the net realizable value method must be: a. P126,000 b. P84,000 c. P140,000 d. P70,000 P 530,000 50,000 200,000 500,000 120,000 100,000 P1,500,000 P 90,000 500,000 100,000 -10,000 537,500 200,000 ____62,500 P1,500,000 Branch P165,000 45,000 240,000 50,000 ________ P500,000 P 25,000 175,000 300,000 ________ P500,000 9. 13 10. Rodelia, MeAn, and Tracy share profits and losses from their partnership in the ratio of 20 percent, 35 percent, and 45 percent, respectively. Capital and loan balances related to each partner are as follows: Loan to Partner Rodelia MeAn Tracy Loan to Partnership From Partnership from Partner Capital P100,000 P500,000 P70,000 200,000 280,000 250,000 In addition to the loan to MeAn, assets of the partnership include cash of P110,000, inventory of P360,000, receivables of P260,000, and plant and equipment of P710,000. Partnership liabilities to nonpartners amount to P180,000. If Rodelia receives already P450,000, how much Tracy receives at this point? a. P180,000 Clincher Category 1. Mike and Roger formed a partnership on January 2, 2006, and agreed to share profits 90% and 10%, respectively. Mike contributed P25,000 and Roger contributed his expertise. There were no withdrawals during the year except for the P1,000 monthly salary for Roger as full- time manager. It was further agreed that 5% interest be given based on the beginning capital and Roger is to receive 20% bonus calculated on income before deducting salaries, interests, and bonus. b. P112,500 c. P1,012,500 d. P200,000 The 2006 income statement showed revenues of P96,450 and expenses of P49,700, including partners’ salaries, interest and bonus. How much is the bonus? a. P9,350 b. P15,000 c. P12,000 d. P9,037.50 2. Jock and Lock, partners to a firm, share profits equally and each has a capital balance of P900,000. Mock is to be admitted as a new partner by a cash investment of P1,200,000 for a 1/3 interest in both the firm’s assets and profits. Mock will be credited in full for the amount he invested. The new capital of the firm will be: a. P2,400,000 b. P3,600,000 c. P4,200,000 d. P3,000,000 Don, Hon, and Jon, who share profits in the ratio of 4:1:5, respectively, have the following capital balances, respectively: P50,000; P50,000; and P150,000. On this date the partnership has liabilities of P40,000. The partners decided to liquidate. If Jon gets P87,500 upon final liquidation, the realization loss is: a. P115,000 b. P140,000 c. P142,500 d. P125,000 3. 4. On December 31, the branch account on the home office books of the Sexy Company shows a balance of P16,800. The following are some of the transactions between the home office and the branch: 1. Merchandise billed at P1,230 was shipped by the home office to the branch on December 28. The merchandise is in transit and has not been recognized on the books of the branch. 2. The branch collected a home office accounts receivable of P5,000 but failed to notify the home office of this collection. 3. The home office was charged P1,280 when the branch returned merchandise to the home office on December 31. The merchandise is in transit. 4. The home office recorded incorrectly the branch net income for November at P2,250. The branch reported net income of P2,520. The corrected balance of the reciprocal accounts as of December 31 was: a. P20,790 b. P10,770 c. P13,330 5. The condensed balance sheets of Adult, Inc. and Sibling Co. are shown below: Assets Liabilities Capital stock (par P100) Retained earnings Adult P3,125,000 1,625,000 1,250,000 250,000 Sibling P875,000 250,000 500,000 125,000 d. P19,560 The fair market value of Adult and Sibling’s assets were P3,500,000 and P950,000, respectively. Their liabilities are fairly valued. Adult buys all of the issued and outstanding shares of Sibling at P180 per share. In the consolidated balance sheet, the total assets are a. P4,275,000 b. P4,450,000 c. P3,750,000 d.P3,375,000 6. On January 1, 2005, Royal Corporation purchased 80% of Servant Corporation’s P10 par common stock for P975,000. On this date, the carrying amount of Servant’s net assets was P1,000,000. The fair values of Servant’s identifiable assets and liabilities were the same as their carrying amount except for plant assets (net), which were P100,000 in excess of the carrying amount. The plant assets have a remaining useful life of 5 years from January 1, 2005. For the year ended December 31, 2005, Servant had net income of P190,000 and paid cash dividends totaling P125,000. Goodwill was found to be impaired by P25,000. In the December 31, 2005, consolidated balance sheet, goodwill should be reported at a. P90,250 b. P95,000 c. P70,000 d. P175,000 7. National Federation Company provides the following information for 2006: Opening work in process inventory Closing raw materials inventory Opening raw materials inventory Raw materials available for use Indirect materials Direct labor Factory overhead (inclusive of indirect materials) Cost of goods manufactured P150,000 60,000 70,000 410,000 10,000 300,000 337,500 975,000 How much is National’s ending work in process inventory? a. P302,500 b. P212,500 c. P162,500 d. P152,500 14 8. The following selected information pertains to Total Company: Direct materials P625,000 Indirect materials 125,000 Direct labor 750,000 Indirect labor 112,500 Factory overhead (not including indirect materials and indirect labor) 375,000 How much is the conversion costs? a. P1,375,000 b. P1,362,500 c. P2,500,000 d. P2,737,500 St. Louis Hospital received an unrestricted bequest of P150,000 in 2004. This bequest should be recorded as a. Memo entry only. b. Other operating revenue of P150,000. c. Non- operating revenue of P150,000. d. A direct credit of P150,000 to the fund balance. 9. 10. The statement affair for Vzell Corporation shows that approximately P0.78 on the peso probably will be paid to unsecured creditors without priority. The corporation owes Boy Company P23,000 on a promissory note, plus accrued interest of P940. Inventories with a current fair value of P19,200 collateralize the note payable. Compute the amount that Boy should receive from Vzell assuming that the actual payments to unsecured creditors without priority consist of 78% of total claims. Round all amounts to the nearest peso. a. P19,200 b. P22,897 c. P33,987 d. P52,200 Auditing Theory Source: ReSA and CRC-ACE Easy Category 1. S1 Information risk refers to the risk that the auditor may express an unqualified opinion on the financial statements when in fact the financial statements are materially misstated. S2 The biases and motives of the information provider may be a cause of information risk. S3 The assumption underlying an audit of financial statements is that they will be used by different groups for similar purposes. a. False, false, true c. False, true, false b. False, true, true d. True, false, false Material errors which occur in the accounting process may not be detected by the auditor in his examination of the firm is quite a big risk. In order to minimize this risk, the auditor relies on: a. Compliance tests. c. Substantive tests. b. Internal controls. d. Statistical risk analysis. During the performance of risk assessment procedures, Leslie, CPA, noted a change in accounting principle has been effected by the client. In this case, Leslie should plan to evaluate the change to satisfy herself that: a. The newly adopted principle is a generally accepted accounting principle. b. The method of accounting for the effects of the change is in conformity with generally accepted accounting principles. c. Management’s justification for the change is reasonable. d. All of the answers. 2. 3. 4. Assertions are representations of management that are embodied in financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation? a. Notes payables in the balance sheet include all such obligations of the entity. b. Trade accounts receivables in the balance sheet are stated at net realizable value. c. Property is recorded at historical cost. d. Property cost is systematically allocated to appropriate accounting period. Reports on agreed-upon procedures are restricted to the parties that have agreed to the procedures to be performed, because: a. Independence is required when such engagements are performed. b. The identity of fraudsters must be protected from further damage by exposure to the public. c. Other parties who are unaware of the reasons for the procedures may misinterpret the results. d. Users of audited financial statements must form their own conclusions. Which of the following is the best criterion for evaluating a staff auditor’s work performance? a. Quantity of deficiency findings. b. Fulfillment of requirements set forth in the audit. c. Working papers appearance. d. Ability to get along with clients. Under the Glossary of Terms, the term “assess”, by convention, is used only in relation to: a. Risk c. Audit engagements b. Materiality d. Audit procedures Which of the following would most likely cause a CPA not to accept a new audit engagement? a. a high level of client business risk. b. being approached by the client just before the fiscal year end. c. concluding that there was a high inherent risk of management fraud. d. lack of adequate knowledge of the client’s business. 5. 6. 7. 8. 15 9. When an auditor is assessing the auditability of a small business client, the auditor should focus upon: a. the integrity of management and the adequacy of the client’s internal control systems. b. whether the auditor has adequate resources to accomplish the audit. c. the amount of risk the audit represents and the audit fee which can be collected. d. whether the client’s accounting personnel are well trained and professionally qualified. 10. According to the IRR, how many representatives of the Quality Review Committee will be representatives of the accredited national professional organization of CPAs? a. Five members. c. Six members. b. Four members. d. Seven members. Average Category 1. When performing analytical tests, a CPA is least likely to compare the current year’s balances or ratios to expectations derived from: a. informed judgment c. industry data b. budgetary data d. unaudited data The term incoming auditor refers to: I. The auditor of the financial statements of the current period, where either the financial statements of the prior period have been audited by another auditor (i.e., successor auditor) II. The auditor of the financial statements of the current period, where the audit is an initial audit engagement. a. I only c. Both I and II b. II only d. Neither I nor II Which of the following statements is incorrect? a. A component is a division, branch, subsidiary, joint venture, associated company or other entity whose financial information is included in financial statements audited by the principal auditor. b. An error is an unintentional fraud in the financial statements, while fraud is an intentional error by one or more individuals, among management, employees, or third parties, which results in a misrepresentation of financial statements. c. An expert is a person or a firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing. d. One procedure an auditor considers using is inquiry, which consists of seeking information of knowledgeable persons inside or outside the entity. PSQC No. 1 requires complaints and allegations against the firm to be dealt with appropriately. Complaints and allegations may come from: A B C • Firm personnel Yes No Yes • Clients Yes Yes No • Other third parties No Yes No 2. 3. 4. D Yes Yes Yes 5. A CPA must earn at least 60 credit units for three years, with a minimum of 15 credit units earned per year. Excess credit units, if any, shall not be carried over to the next three-year period except: a. Credit units earned for authoring an article of national significance. b. Credit units earned for serving as professorial chair. c. Credit units earned for an invention of significance to the profession. d. Credit units earned for doctoral or masteral degrees. S1 The auditor cannot assume that an instance of fraud is an isolated S2 If the auditor believes that a misstatement is or may be the result of financial statements, the auditor evaluates the implications, especially those dealing with the organizational position of the individual(s) involved. a. True, false b. False, true occurrence. fraud, but the effect of the misstatement is not material to the 6. c. d. True, true False, false 7. Sinner, CPA, is planning the audit of Thinner Printers, Inc. Thinner verbally asserts to Sinner that all the expenses for the year have been recorded in the accounts. Thinner’s representation in this regard: a. Is sufficient evidence for Sinner to conclude that the completeness assertion is supported for the expenses. b. Should be disregarded because it is not in writing. c. Is not considered a sufficient basis for Saint to conclude that all expenses have been recorded. d. Can enable Sinner to minimize his work on the assessment of control risk for the completeness of expenses. 8. According to PSA 315, an example of the matters that the auditor may consider to obtain an understanding of the nature of the entity is conduct of operations. Conduct of operations include the following, except: a. Stages and methods of production b. Business segments c. Alliances, joint ventures, and outsourcing activities d. Details of declining or expanding operations 16 9. The following are examples of the type of information that may come to the auditor’s attention which might indicate that noncompliance with laws or regulations has occurred. One of them is not. Identify the exception: a. Media comment. b. Industry is regulated by various government agencies. c. Unusual payments in cash, purchases in the form of cashier’s checks payable to bearer or transfers to numbered bank accounts. d. Payments without proper exchange control documentation. 10. The following statements relate to the Philippine Institute of Certified Public Accountants (PICPA). Which one is incorrect? a. The national directors shall be apportioned according to sectors in the three geographic sectors based on the ratio of latest available number of members in good standing from those areas. b. There shall only be fifteen national directors, unless there is a valid reason to have additional representation. c. A director can only represent a sector in a region if he/she has been a member in good standing in such sector in the region for at least two years at the time of his/her nomination. d. It shall have a full-time career Executive Director who shall implement the policies promulgated by the PICPA Board of Directors and shall have direct supervision over the PICPA Secretariat. Difficult Category 1. Conrad, CPA, is conducting the 2009 audit of Manlolo Co., which specializes in the manufacture of cellphone components. These cellphones have Internet and email capabilities and feature superior mobile technology. In the performance of the audit, the following, except one, would be considered by Conrad as fraud risk factors. Select the exception: a. Management does not engage in committing to analysts, creditors and other third parties to achieving what appears to be unduly aggressive or clearly unrealistic forecasts. b. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity. c. A significant portion of management’s compensation is represented by bonuses, stock options, or other incentives, the value of which is contingent upon the entity achieving unduly aggressive targets for operating results, financial position, or cash flow. d. Adverse consequences on significant pending transactions (such as a business combination or contract award) if poor financial results are reported. Which statement is incorrect? a. A review involves the application of audit skills and techniques and the gathering of evidence. b. A review comprises inquiry, confirmation, and analytical procedures which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party. c. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise. d. No assurance is expressed in a compilation engagement, but users of compiled information still derive some benefit, because the service has been performed with due professional skill and care. How long will be the terms of the chairman, the vice-chairman (indicate length of term as vice-chair) and the members of the Professional Regulatory Board of Accountancy? Chairman Vice-Chairman Members a. 3 years 3 years 3 years b. 1 year 1 year 3 years c. 3 years 1 year 1 year d. 3 years 1 year 3 years 2. 3. 4. Are the following risks greater in CIS than in manual systems? Erroneous data conversion Erroneous source document preparation Repetition of errors Concentration of data 5. A Yes Yes No Yes B Yes Yes No No C Yes Yes Yes Yes D Yes No Yes Yes An auditor who has not been able to obtain sufficient appropriate evidence with respect to several material balances on a client’s opening balance sheet is most likely to issue which of the following opinions? a. An adverse opinion b. A disclaimer of opinion c. An unqualified opinion with an emphasis of matter paragraph d. A qualified opinion due to departure from financial reporting standards. PPP Inc. sells all of its products through its website. The company sells specialty tea, mostly imported from China. Most of its customers are in North America, and the rest are in Europe. The company’s website is attractive and receives hundreds of hits every day, including some from Russia, Africa, and South America. PPP has instituted a firewall to protect its website. Which of the following is false concerning firewalls in a situation similar to PPP’s? a. They can monitor the data traffic both into and out of the organization’s network. b. They can block certain kinds of data. c. They can block all traffic from particular locations. d. They are an effective alternative for other security measures such as digital certificates. Which of the following statements is true? a. Increasing control risk will increase detection risk. b. Detection risk is inversely related to the amount of evidence required. c. Increasing inherent risk will increase detection risk. d. Inherent risk and control risk are inversely related to audit risk. An audit firm has a policy that all audits will be conducted such that the risk that they will fail to express an appropriate opinion when the financial statements are materially misstated will be no greater than 4%. If the risk of a material misstatement occurring in the first place is assessed at 0.5, and 6. 7. 8. 17 the risk that the internal controls will fail to prevent/detect a material misstatement is assessed at 0.2, how should the firm ensure that their policy is followed? a. Adjust audit risk to 0.4 c. Adjust inherent risk to 0.4 b. Adjust detection risk to 0.4 d Adjust control risk to 0.4 9. For all audits of financial statements conducted in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent As a risk assessment procedure in the planning phase As a substantive test procedure In the overall review of the financial statements A Yes Yes Yes B Yes No Yes C Yes No No D No Yes Yes 10. Under PSA 210, the auditor should not agree to a client’s request to change the engagement to one which provides a lower level of assurance where there is no reasonable justification for doing so. Which of the following would not be considered a reasonable basis for requesting a change in the engagement? I. A change in the circumstances that affects the entity’s requirements and the need for the service. II. A misunderstanding as to the nature of an audit or related service. III. A restriction on the scope of the engagement, whether imposed by the client or caused by circumstances. a. I only b. II only. c. III only. d. I and III only Clincher Category 1. S1 A typical objective of an operational audit is for the auditor to determine whether the financial statements fairly present the entity’s financial position, results of operations and cash flows. S2 In performing compliance audits, a CPA issues a report on the degree of compliance with the criteria used for the engagement (for example, laws, rules or regulations which have been set by the auditor). S3 Independent auditors are expected by management to be experts who actively participate in management decision-making. a. False, false, true c. False, true, false b. True, false, false d. False, false, false 2. Those matters that arise from the audit of financial statements and, in the opinion of the auditor, are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process. a. Fraud risk factors b. Audit matters of governance interest c. Risk of material misstatement d. Material weaknesses in internal controls A preliminary or entrance conference with the auditee is a useful step in avoiding misunderstandings. Which of the following items is usually not covered in a preliminary conference? a. Special problems known to be relevant to the audit. b. Extent to which the independent auditor will need assistance and cooperation from the organization’s personnel. c. Condition of accounting records and other data sources which may affect the scope of the audit and difficulty of completion. d. Audit program to be followed. Parties are considered to be related if: a. If a breach of covenants has occurred, and if on or before balance sheet date, one party has obtained a grace period of at least twelve months after balance sheet date during which said party can rectify the breach, and the other party has agreed not to demand payment for the term of the grace period. b. One party has the ability to control the other party and exercise significant influence over the other party in making financial and operating decisions. c. If one party discounts a note receivable to another party and the discounting is without recourse. d. If a transaction is processed in an unusual manner due to errors in the accounting and internal control system. 3. 4. 5. Which of the following statements is incorrect? a. An engagement quality control review ordinarily involves discussion with the engagement partner, a review of the financial statements or other subject matter information and the report, and, in particular, consideration of whether the report is appropriate. b. The extent of the review depends on the complexity of the engagement and the risk that the report might not be appropriate in the circumstances. c. The review reduces the responsibilities of the engagement partner. d. An engagement quality control review may be conducted before the end of the engagement. The main difference between inspection of audit engagements and engagement quality control reviews is the: a. Firm that performs such procedures b. Members of the audit team that performed the inspected engagement c. Timing of performance of such procedures d. All of the answers. An auditor has withdrawn from an audit engagement of a publicly-held company after finding irregularities which may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence to the a. Securities and Exchange Commission. b. Client’s legal counsel. c. Stock exchanges where the company’s stock is traded. 6. 7. 18 d. 8. Board of Directors. The following statements relate to Republic Act No. 9298. Which statement is correct? a. The Board of Accountancy has the authority to remove, after due process, any member of the Professional Regulation Commission for negligence, incompetence or any other just cause. b. The functions of the Board of Accountancy include the preparation of the contents of the CPA licensure examination and the rating of examination papers. c. After two years, subject to certain conditions, the Board of Accountancy must order the reinstatement of a CPA whose certificate of registration has been revoked. d. Insanity is a ground for issuing a certificate of registration to a successful CPA candidate. In planning an audit, the auditor should consider the presence of fraud risk factors relating to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. In which of the following situations would the auditor most likely presume that a high risk of defalcation exists? a. ABC Company is a multinational company that does business in various countries in the Asia-Pacific rim. b. DEF Company does business with related parties. c. GHI Company has a cashier who also handles accounting and authorization functions. d. MNO Company is in an industry where the rate of change is very slow. 9. 10. Tomahawk Corp. orally engaged Indian & Co., CPAs, to audit its financial statements. Tomahawk’s management informed Indian that it suspected that the accounts receivable were materially overstated. Although the financial statements that Indian audited did, in fact, include a materially overstated accounts receivable balance, Indian issued a standard unqualified report. If Tomahawk sues Indian for negligence in failing to discover the overstatement, Indian’s best defense would be that: a. Indian had signed no engagement letter. b. Indian performed the audit in accordance with PSAs. c. Indian was not in privity of contract with Tomahawk. d. Indian did not perform the audit recklessly or with an intent to deceive. 19 Auditing Problems Source: NRC, ReSA and CRC-ACE Easy Category 1. The standard bank cash confirmation form requests all of the following except Maturity date of a direct liability The principal amount paid on a direct liability Description of collateral for a direct liability The interest rate of a direct liability The auditor’s count of the client’s cash should be coordinated to coincide with the a Study of the system of internal controls with respect to cash b Close of business on the balance sheet date c Count of marketable securities d Count of inventories When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if a Subsequent collections are to reviewed b Internal control over receivables is good c Negative confirmations are to be used d There is a simultaneously examination of cash and accounts receivable 2. 3. 4. The audit working paper often include a client prepared, aged trial balance of accounts receivables as of the balance sheet date. This aging is best used by the auditor to a Evaluate internal control over credit sales b Test the accuracy of recorded charge sales c Verify the validity of the recorded receivables d Estimate credit losses. 5. Which of the following is a standard internal accounting control for cash disbursements? a Checks should be signed by the controller and at least one other employee of the company b Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliation c Checks and supporting documents should be marked “Paid” immediately after the check is returned with the bank statement d Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation. You completed your filed work for 2008 on April 10, 2009. Before issuance of your audit report on April 25, 2009, you were advised that on April 15, 2009 a large receivable from a customer who is facing bankruptcy was written off as uncollectible. What should you do about this fact? a. disclose the loss in the 2008 statements b. adjust the 2008 financial statements c. date your report April 10, 2009 d. take up the loss in the 2009 statements In establishing the existence and ownership of a long-term investment in the form of publicly traded shares, an auditor should inspect the securities or a. Correspond with the investee company to verify the number of shares owned. b. Inspect the audited financial statements of the investee company. c. Confirm the number of shares owned that are held by an independent custodian. d. Determine that the investment is carried at the lower of cost or market. When an entity has few property and equipment transactions during the year, the continuing auditor usually carriers out a. A complete review of the related internal controls and performs tests of the controls of which the entity relies. b. A complete review of the related internal controls and performs analytical review tests to verify current-year additions to property and equipment. c. A preliminary review of the related internal controls and performs a thorough examination of the balances at the beginning of the year d. A preliminary review of the related internal controls and performs extensive tests of current-year property and equipment transactions. The auditor’s count of the client’s cash should be coordinated to coincide with the a Study of the system of internal controls with respect to cash b Close of business on the balance sheet date c Count of marketable securities d Count of inventories 6. 7. 8. 9. 10. A form of receivable confirmation where the respondent is asked to reply to the auditor only in the event of disagreement with the information provided in the request. a. Positive external confirmation c. Blank confirmation b. Negative external confirmation d. Standard confirmation 20 Average Category 1. The records of Percy Company report the following data for April. Inventory 4/01/05 Purchases Purchases Returns Purchase Discounts Sales (Gross) Sales Returns Employee Discounts Freight-in Freight-out Loss from Breakage Markups Markup Cancellations Markdowns Markdown Cancellations What is the cost of sales to be reported using the average retail method? a. P366,786 b. P360,597 c. P361,015 2. Cost Retail P 36,100 346,400 9,000 7,000 P 50,000 600,000 20,000 605,000 20,000 5,000 23,500 50,000 2,500 38,000 18,000 28,500 8,500 d. P355,705 Dell Company sells its products in reusable, expensive containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Dell accounts for the containers not returned within the time limit as being retired by sale at the deposit amount. Information for 1993 is as follows: Containers held by customers at December 31, 1992 from deliveries in 1991 1992 P 50,000 145,00 P195,000 260,000 Containers delivered in 1993 Containers returned in 1993 from deliveries in: 1991 1992 1993 30,000 85,000 95,000 210,000 What amount should Dell report as a liability for returnable containers at December 31, 1993? a. P165,000 b. P215,000 c. P225,000 d. P245,000 3. Lucero Company pays a general manager’s bonus based on 10% of Lucero’s income after deducting the bonus but before deducting income taxes. For the year ended December 31, 1993, Lucero’s income was P110,000 before deducting the bonus and income taxes. Lucero estimated its income tax expense at P40,000 for 1993. How much bonus should Lucero pay the general for 1993? a. P0 b. P 7,000 c. P10,000 d. P11,000 Audrey Company incurred the following costs during 2009: Quality control during commercial production, including routine testing of products Laboratory researched aimed at discovery of new knowledge Engineering follow-through in an early phase of commercial production Adaptation of existing capability to a particular requirement or customer’s need as part of continuing commercial activity Trouble shooting in connection with breakdowns during commercial production Searching for applications of new research finding P 460,000 540,000 120,000 110,000 230,000 150,000 4. Compute the amount that will be classified and expensed as research and development. a. P 690,000 b. P 540,000 c. P 1,150,000 d. P 1,610,000 5. Your audit of the debt securities held for trading purposes of DAP CORP. disclosed the following entries during the fiscal year ended June 30, 2009: Date Nov 01 Jan 01 Mar 31 The nominal rate for this bond is a. 18% b. 9% Particulars Acquired 10 shares of P10,000 Face value bonds at 102 plus accrued interest Interest received Proceeds from sale of P30,000 par value bonds including accrued interest. c. 8.33% d. 16.67% Debit P108,000 P9,000 31,000 Credit 21 6. On October 1, 1993, Mann Company purchased 500 of the P1,000 face value, 8% bonds of Woman, Incorporated, for P540,000, which includes accrued interest of P10,00. The bonds, which mature on January 1, 2000, pay interest semiannually on January 1 and July 1. Assuming that Mann uses the straight-line method of amortization and that the bonds are appropriately recorded as long-term investment, the bonds should be shown on Mann’s December 31, 1993 balance sheet at a. P528,400 b. P528,800 c. P530,000 d. P540,000 In January 1991, Cameron Corporation established a sinking fund in connection with its issue of bonds due in 2001. A bank was appointed as independent trustee of the fund. At December 31, 1993, the trustee held P364,000 cash in the sinking fund account, representing P300,000 in annual deposits to the fund, and P64,000 of interest earned on those deposits. How should the sinking fund be reported in Cameron’s balance sheet at December 31, 1993? a. No part of the sinking fund should appear in Cameron’s balance sheet. b. P64,000 should appear as a current asset. c. P364,000 should appear as a current asset. d. P364,000 should appear as a noncurrent asset. The balance in Reed Company’s accounts payable account at December 31, 1992 was P1,225,000 before the following information was considered: Goods shipped FOB destination on December 21, 1992 from a vendor to Reed were lost in transit. The invoice cost of P45,000 was not recorded by Reed. On December 28,1992, Reed notified the vendor of the lost shipment. Goods were in transit from a vendor to Reed on December 31, 1992. The invoice cost was P60,000, and the goods were shipped FOB shipping point on December 28,1992. Reed received the goods on January 6, 1993. What amount should Reed report as accounts payable in its 1992 balance sheet? a. P1,330,000 b. P1,285,000 c. P1,270,000 d. P1,225,000 December 31, 7. 8. 9. The Ackley Company exchanged 100 shares of Burke Company common stock, which Ackley was holding as an investment, for a piece of equipment from the Flynn Company. The Burke Company common stock, which had been purchased by Ackley for P30 per share, had a quoted market value of P34 per share at the date of exchange. The piece of equipment had a recorded amount on Flynn’s books of P3,100. What journal entry should Ackley have made to record this exchange? Debit a. Equipment Investment in Burke Co. common stock b. Equipment Investment in Burke Co. common stock Other income c. Equipment Other expense Investment in Burke Co. common stock d. Equipment Investment in Burke Co. common stock Other income 300 300 400 300 100 3,100 100 3,000 3,400 3,000 400 Credit 10. Marshall Company prepared an aging of its accounts receivable at December 31, 1993 and determined that the net realizable value of the receivable at that date is P50,000. Additional information is available as follows: Accounts receivable at December 31, 1992 Accounts receivable at December 31, 1993 Allowance for doubtful accounts at December 31, 1992 - - credit balance Accounts written off as uncollectible during 1993 P48,000 54,000 6,000 5,000 Marshall’s bad debt expense for the year ended December 31, 1993 was a. P3,000 b. P4,000 c. P5,000 d. P7,000 Difficult Category 1. Hermiogne Granger Company (HGC) issued 200,000 shares of common stock, 30,000 shares of 8% P100 par cumulative, convertible preferred stock, and P1,500,000 of 10% convertible bonds on December 31, 2008. The preferred stock is convertible into 60,000 shares of common stock. The bonds were issued to yield 12% and has a carrying value of P1,392,000 on December 31, 2008. Each P1,000 face value bond is convertible into 20 common shares In 2009, HGC reported net income before taxes of P1,800,000. Tax rate for the year is 32%. The basic earnings per share for 2009 is a. P4.92 b.P6.12 c. P7.80 d.P9.00 22 2. On January 6, 2010, you were asked to prepare the financial statements of Jughead Company for the period ending December 31, 2009. Jughead Company in its investment portfolio reported an Investment in debt securities - AFS of P1,783,713. Further examination revealed the following: The debt security was issued by Archie Andrews Incorporated on January 1, 2006, having a face amount of P2,000,000, term of 6-years and carries a 9% interest rate. The debt security was acquired by Jughead Company on January 1, 2007 for P1,783,713 Jughead Company reported interest income of 180,000 in its 2007 and 2008 income statement which corresponds to the actual amount received by the Jughead Company. The prevailing rates at December 31, 2007 - 2009 were 10.7%, 10.25% and 11.40% respectively On January 3, 2010, 40% of the bonds were sold for P800,000 c. 214,046 d. 228,000 The correct amount of interest income in 2007 is a. 160,534 b. 203,343 3. On December 31, 2008, FERNANDO Company, a financing institution lent P3,000,000 to TEODORO Corp. due 2 years after. The loan is supported by an 8% note receivable. Interest on the loan are collectible at the end of each year. Fernando was able to collect interest as it became due at the end of 2009. During 2010, however, due to Teodoro Corporation’s business deterioration and due to political instability and faltering global economy, the company was not able to collect amounts due at the end 2010. After reviewing all available evidence at December 31, 2010, Outer Company determined that it was probable that Inner would pay back only P2,400,000 collectible as follows: December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014 P1,000,000 700,000 500,000 200,000 As of December 31, 2010, the prevailing rate of interest for all debt instruments is 14%. What is the correct carrying value of the loans receivable as of December 31, 2012? a. 1,235,503 c. 634,343 b. 700,000 d. 185,091 4. PANGILINAN Corp. reported the following amounts in the shareholders’ equity section of its December 31, 2008, balance sheet: Preference shares, P10 par (100,000 shares authorized, 40,000 shares issued) Ordinary shares, P5 par (50,000 shares authorized, 20,000 shares issued) Share premium Accumulated profits P 400,000 100,000 192,000 1,200,000 The following transactions occurred during 2008: a. Paid the annual 2008 P1 per share dividend on preference shares and P0.50 per share dividend on Ordinary shares. These dividends had been declared on December 31, 2007. b. Purchased 4,000 shares of its own outstanding ordinary shares for P80,000. c. Reissued 1,400 treasury shares for equipment with a fair value at P50,000. d. Issued 10,000 shares of preference shares at P15 per share. e. Declared a 10% stock dividend on the outstanding ordinary shares when the stock is selling for P12 per share. f. Issued the share dividend. g. Declared the annual 2008 P1 dividend on preference shares and the P0.50 per share dividend on ordinary shares. These dividends are payable in 2009. h. i. Appropriated accumulated profits for BOD-approved planned plant expansion, P600,000. Registered a net income for 2008 at P940,000. Determine the adjusted balance of the accumulated profits-unappropriated. a. P2,059,000 c. P1,471,730 b. P1,407,550 d. P1,459,550 5. Philip Company’s bookkeeper is not familiar with accrual accounting concepts. He determined net income for 2009 to be P79,800. In your audit of the company you determine the following: 1) Accrued, but unpaid, wages at the end of 2009 amounted to P4,575 and have not been recorded. 2) Insurance premiums paid in 2009 totaled P18,000, only one-third of which relate to coverage of 2009. The other two-third relates to coverage in future years. (The complete amount was expensed when paid.) 3) Accounts receivable of P50,000, which have been properly recorded, are expected to result in losses from uncollectibility of P3,000. (No specific accounts have been written of as of the end of the year. 4) Cash of P11,500, received in late 2009, was recorded as revenue, although the work to be performed under the related contract will take place in 2008. The adjusted net income of Philip Company in 2009 is: a. P72,725 b. P 75,725 c. P 78,725 d. P 81,725 On December 31, 2009, PICHAY Co. signs a 10-year noncancellable lease agreement to lease a storage building from Puno Corp. The following information pertains to this lease agreement: a. b. c. d. e. f. The agreement requires equal rental payments of P720,000 beginning on December 31, 2009. The fair value of the building on December 31, 2009, is P4,400,000. The building has an estimated economic life of 12 years. Pichay depreciates similar buildings on the straight-line method. The lease in nonrenewable. At the termination of the lease, the building reverts to the lessor. Pichay’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Pichay. The yearly rental payment includes P24,705 of executor costs related to taxes on the property. 6. 23 What amount should be included in the noncurrent liabilities section of Pichay’s Statement of Financial Position as of December 31, 2011? a. 3,453,975 c. 2,858,640 b. 3,173,157 d. 0 7. In the course of your examination of the December 31, 2008, financial statements of ESTRADA Inc., you discovered certain errors that had occurred during 2007 and 2008. No errors were corrected during 2007. The errors are summarized below: a. b. c. d. e. f. Beginning merchandise inventory in 2007 was understated by P259,200. Merchandise costing P72,000 was sold for P120,000 to James Corp. on December 28, 2007, but t he sale was recorded in 2008. The merchandise was shipped FOB shipping point and was included in ending inventory. ESTRADA uses the periodic inventory system. A two-year fire insurance policy was purchased on May 1, 2007, for P172,800. The whole amount was charged to Prepaid Insurance. No adjusting entry was prepared in 2007 and 2008. A one-year note receivable of P288,000 was held by ESTRADA Inc. beginning October 1, 2007. Payment of the 10% note and accrued interest was received upon maturity. No adjusting entry was made on December 31, 2007. Equipment with a 10 year useful life was purchased on January 1, 2007, for P1,176,000. No depreciation expense was recorded during 2007 or 2008. Assume that the equipment has no residual value and that ESTRADA Inc. uses the straight-line method for recording depreciation. The company reported a P1,500,000 net income in 2007 and a P1,750,000 net income in 2008. By how much is the December 31, 2008 retained earnings be overstated/understated by? a. 379,200 c. 293,200 b. 331,200 d. 203,800 8. Energen Company operates a wholesale oil products company. Energen believes that an employee and a customer are conspiring to steal gasoline. The employee records sales to this customer for less than the amount actually placed in the customer’s tank truck. In order to confirm or refuse these suspicions. Energen has collected the following data for the past 10 working days. Item Inventory, September 1 Purchases Goods available for sale Quantity (gallons) 220,000 1,560,000 1,780,000 Cost per unit (gal.) P 1.45 1.45 Total Cost P 319,000 2,262,000 P2,581,000 Energen had sales of P2,512,000 during this 10-day period. All sales were made at P1.60 per gallon. A physical inventory indicates that there are 192,000 gallons of gasoline in inventory at the close of business on September 10. How much inventory should be present at the end of the 10-day period (in gallons)? a. 210,000 b. 200,000 c. 192,000 9. d. 220,000 Lovely Company’s December 31 year-end financial statements contained the following errors: (Overstated )/Understated 2008 2009 Depreciation expense (P 20,000) P 18,000 Ending Inventory 180,000 ( 75,000 ) Rent of P30,000 was collected in advance in 2008 covering the years 2008, 2009 and 2010. The company credited the whole amount to rental income. An insurance premium of P25,000 was paid in advance in 2008 covering the insurance premium of the company’s fixed assets for five years commencing in 2008. The company charged the whole amount to expense in 2008. The net effect of the errors on the 2008 net income: a. P 200,000 under c. P 200,000 over b. P 160,000 under d. P 160,000 over 10. You were engaged to audit the accounts of MACY Company. The following disbursements were made in relation to the construction of its building which started January 1, 2009 and was completed December 31, 2009. January 1, March 31 June 1 August 1 December 31 10,000,000 5,000,000 6,000,000 3,000,000 1,000,000 The client is not sure as to how it should treat the interest related to the above construction. Assuming the building is a qualifying asset, interest related to the construction should be: a. capitalized as part of the cost of the building only b. charged to expense c. either a or b d. neither a nor b Clincher Category 1. The negative confirmation requests may be used in all of the following conditions except a. A large number of small balances is involved. b. A substantial number of errors are not expected. c. The assessed level of inherent and control risk is high. 24 d. the acceptable level of detection risk is high. ii. Which of the following internal control procedures most likely would deter lapping of collections from customers? a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries b. Authorization of writeoffs of uncollectible accounts by a supervisor independent of credit approval. c. Segregation of duties between receiving cash and posting the accounts receivable ledger. d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries. On January 1, Macy obtained a loan for P20,000,000 at an interest rate of 10% specifically to finance the construction of its building. Prior to disbursements, the proceeds were temporarily invested and earned interest income of P100,000. Determine the amount of interest that should be included as part of the cost of the building. a. P 2,000,000 b. P1,990,000 c. P 1,900,000 d. P 100,000 The following information is available for Cooke Company for 1993: Net sales Freight-in Purchases discounts Ending inventory P1,800,000 45,000 25,000 120,000 iii. iv. The gross margin is 40% of net sale. What is the cost of goods available for sale? a. P 840,000 b. P 960,000 c. P1,200,000 d. P1,220,000 v. Orr Company had the following bank reconciliation at March 31, 1993: Balance per bank statement, 3/31/93 P46,500 Add:Deposit in transit 10,300 56,800 Less: Outstanding checks Balance per books, 3/31/93 12,600 P44,200 ======= Data per bank statement for the month of April 1993 follow: Deposits P58,400 Disbursements 49,700 All reconciliation items at March 31, 1993, cleared through the bank in April. Outstanding checks at April 30, 1993 totaled P7,500. What is the amount of cash disbursement per books in April? a. P44,600 b. P49,700 c. P54,800 d. P57,200 vi. On January 1, 2007, Lebron Company purchased rights to a mine. The total purchase price was P60,000,000, of which P20,000,000 was allocated to the land. Estimated mineral deposits made through a geological survey were 5,000,000 tons. Lebron expects to extract and sell 100,000 tons per month. Simultaneous with the purchase of the mine, delivery equipment was acquired at a total cost of P25,000,000 with no residual value at the end of its estimated 10 year useful life. Because of the rugged terrain and heavy duty work to e conducted, the delivery equipment will be of no use when all the mineral deposits are extracted. How much is the depreciation of the equipment for 2007? A. 2,500,000 C. 5,000,000 B. 3,000,000 D. 6,000,000 vii. Bailey Corporation issues 5,000 of its 10%, P1,000 face value bonds on January 1, 2007 at 110. Interest on the bonds is paid annually at December 31 and matures on December 31, 2011. Out-of-pocket costs incurred by bailey for underwriting fees and printing of the bond certificates totaled P350,000. The present value factors of 1 at 9% and 8% are .65 and .68, respectively, and the present value factors of an ordinary annuity of 1 for 5 periods at 9% & 8% are 3.89 & 3.99, respectively. Assuming Bailey uses the effective interest method of amortization, what is the interest expense for 2007? A. 412,000 C. 475,345 B. 470,000 D. 500,000 viii. Kristel Company was organized on June 30, 2004. After 2 ½ years of profitable operations, its shareholder’s section was as follows: Contributed Capital: Ordinary Shares, P30 par, 600,000 shares authorized, 200,000 shares issued & outstanding Share Premium Accumulated Profits Total Shareholder’s Equity During 2007, the following transactions affected shareholder’s equity: P6,000,000 6,000,000 4,500,000 P16,500,000 25 Jan.31 April 1 April 30 June 1 Aug.31 Dec. 31 Reacquired 10,000 of ordinary shares at P32 Declared a 25% share dividends Declared an P8 cash dividend Issued the share dividends and paid the cash dividend Sold all treasury shares at P40 per share Net income for the year, P1,000,000 What is the total shareholder’s equity on December 31, 2007? A. 14,255,000 C. 15,680,000 B. 14,635,000 D. 16,060,000 ix. The shareholder’s equity of Wilson Company on December 31, 2007 consists of the following: Preferrence shares, 12% cumulative & participating up to 16%, P100 par, 25,000 shares issued Ordinary shares, P50 par, 100,000 shares issued Share premium – preference shares Share premium – ordinary shares Accumulated profits P2,500,000 5,000,000 500,000 1,000,000 2,100,000 The preference dividends are in arrears for 2006 and 1007. The preference shares have a call price and liquidation value of P120, and P110, respectively. What is the book value per share of the ordinary shares on December 31, 2007? A. 73.50 C. 75.50 B. 74.00 D. 76.50 x. On January 1, 2007, Lory Company acquired a building for P5,000,000. The company made a down-payment of P500,000 and signed a non-interest bearing for the balance, payable in 3 equal annual installments every December 31 of each year. Assume the prevailing interest rate for a note of this type is 12%. The present value of an ordinary annuity of 1 for 3 periods is 2.0418.How much is the interest expense to be reported for the year 2007? A. 540,000 C. 367,524 B. 600,000 D. 245,016 Business Law & Taxation Source: ReSA and CRC-ACE Easy Category 1. S reluctantly and against his good sense and judgment entered into a contract of sale of TV set with B for a price of P 20,000.00. The contract is: a) Rescissible c) Unenforceable b) Voidable d) Valid 2. Statement I: The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Statement II: Estate taxation is governed by the statute in force at the time the return is filed. a. Both I and II are correct b. Both I and II are incorrect c. d. Only I is correct Only II is correct 3. Which of the following contracts of sale need not in writing? a) sale of 100 kilos of rice at 20 pesos per kilo when there is partial delivery b) sale where by its term cannot be performed within a year from making thereof c) sale of land d) sale at public auction 4. Which of the following statements is incorrect? A claim against an insolvent person, which is not collectible in full: a. is included in the gross estate. b. is not included in the taxable net estate. c. needs no preliminary filing of a case against the insolvent. d. must be notarized if arising out of a debt instrument of the insolvent. 5. A sold and delivered a diamond ring to B. It was agreed that B will fix the price within 15 days. On the 15 th day B text A and stated the price at P 20,000.00. Is the sale perfected? a) No because at the time of the sale the price was not fixed b) Yes because the price was already known c) Yes because the price stated and fixed by the buyer was accepted by the seller. d) No because the price was left to the discretion of one of the parties only. 26 6. What is the tax base of the tax on winnings of a person who wins in horse races? a. Actual amount paid for every winning ticket b. Actual amount paid for every winning ticket after deducting the cost of the ticket c. Prizes d. Gross receipts 7. B purchased the Honda S 2000 car of S for P1.3M and to show his eagerness, B handed to S the amount of P 40,000.00 and it is called: a) purchase money c) option money b) earnest money d) consideration 8. Once optionally registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the: a. first day of the month following the registration. b. first day of the month following the close of the first quarter after registration. c. tenth day of the month following the registration. d. twenty-fifth day following the close of the quarter. 9. A borrowed the car of B for one week. Just a day after it was borrowed, B agreed to sell the car to A and the latter paid the price of the car. How was the car delivered? a) traditio longa manu b) traditio brevio manu c) traditio constitotum possesorium d) actual delivery 10. Which of the following transactions by certain cooperatives duly registered and in good standing with the Cooperative Development Authority (CDA) shall not be exempt from VAT? a. Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare parts thereof, to be used by them b. Gross receipts from lending activities by credit or multi-purpose cooperatives c. Sales by non-agricultural, non-electric and non-credit cooperatives d. None of the choices Average Category 1. Donor’s tax shall be levied, assessed, collected and paid upon the transfer of property by any person, resident or non-resident, as a gift. Second statement: For purposes of donor’s tax, a “stranger” is a person who is not a relative by consanguinity in the collateral line within the fifth degree of relationship. e. True, True c. True, False f. False, False d. False, True Aida delivered to Beth 10,000 pieces of Cebu-fabricated shellcraft jewelry for the purpose of selling them at P1.00 each. Out of the proceeds of the expected sale, Beth is to receive a 10% commission. After 3 days, however, Beth sold all of the items at P1.50 each to Celeste, but on 60-day credit. Aida compels Beth to pay A. Beth cannot be compelled to pay at all. B. Beth must pay P10,000 immediately. C. Beth must pay P10,000 after collecting from Celeste. D. Beth must pay P5,000 immediately and P10,000 after 60-days. "do ut facias" means: a. I give and you give b. I give and you do c. I do and you give d. I do and you do First statement: 2. 3. 4. Which of the following statements is incorrect? a. A separate return shall be filed by each donor for each gift or donation made on different dates during the year reflecting therein any previous net gifts made in the same calendar year. b. Only one return shall be filed for several gift or donations by a donor to the different donees on the same date. c. When a donor’s tax return was filed and it was found out by the BIR to have errors which gave rise to a deficiency donor’s tax, the donor cannot be required to pay the deficiency tax because he does not possess or own the property anymore. d. The Government is not legally bound by the agreement between the donor and the donee that the latter shall pay the donor’s tax instead of the former. Case No. 1. Sonny sold his ward’s house worth P600,000 for only P500,000, the contract is rescissible Case No.2. Sonny, 17 years old, sold his house worth P1M for only P700,000, the contract is rescissible because he suffered a lesion by more than one-fourth of the value of the said house. a. Both statements are false. c. First false, second true. b. Both statements are true. d. First true, second false. 5. 6. 27 Over But Not Over P 100,000 The Tax Shall be Exempt 0 2,000 14,000 44,000 Plus Of the Excess Over P100,000 200,000 500,000 1,000,000 P 100,000 200,000 500,000 1,000,000 200,000 500,000 1,000,000 3,000,000 2% 4% 6% 8% 1st statement: In all cases, void donations are not subject to donor’s tax. 2nd statement: Every donation between the spouses during the marriage shall be void. 7. Both statements are true 8. Both statements are false 9. First statement is true while second statement is false 10. First statement is false while second statement is true 7. The redhibitory action based on the faults or defects of animals must be brought within a. 30 days from delivery to the vendee b. 40 days from delivery to the vendee c. 45 days from delivery to the vendee d. 6 months from delivery to the vendee 8. Without actual exportation, the following shall be considered constructively exported for purposes of VAT, except? a. Sales to bonded manufacturing warehouses of export-oriented Manufacturers b. Sales to export processing zones c. Sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board of Investment (BOI) in consultation with the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) d. Sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products and must have been paid for in foreign currency only. 9. The following except one are non-negotiable instruments: A. Certificate of stock C. Certificate of Deposit B. Postal money orders D. Letter of credit 10. A domestic carrier by land is engaged in the transport of passengers. It is not VAT-registered but its annual gross receipts exceed P1,500,000. To what business taxes is it liable? a. 12% value-added tax; c. 3% tax on VAT-exempt persons; b. 3% common carrier’s tax; d. Not subject to business tax. Difficult Category 1. Nancy and Cory are partners. On March 5, 2004 when the total obligation of the partnership was P450,000, Lory was admitted as a new partner. At the time of Lory's admission, the partnership was indebted to Beth for P50,000 and Niño for P400,000. After March 5, 2004, the partnership borrowed from Lora P200,000 and P40,000 from Laarni. On December 6, 2004, the partnership became insolvent leaving an obligation totaling P690,000 and partnership assets amounting in P300,000. The creditors are going after the separate properties of the partners to satisfy their remaining claims. How are the creditors' claims satisfied? ANSWER 1: Beth and Niño can go after the separate properties of Nancy and Cory. ANSWER 2: Lora and Laarni can go after the separate properties of Nancy, Cory and Lory. Which of the following is correct? A. Both answers are wrong. B. Both answers are correct. C. Answer #1 is wrong, but answer #2 is correct. D. Answer #1 is correct, but answer #2 is wrong. 2. Holder H altered the amount of a negotiable note from P10,000 to P100,000 then negotiated the note to I. As a result: A. If I is a holder in due course, he can require the maker to pay P100,000 B. If I is not a holder in due course, he can require the maker to pay the sum of P100,000 C. I cannot require the maker to pay because of the forgery whether or not he is a holder in due course D. I is entitled to P10,000 if he is a holder in due course Sylvia is the owner of various real estate properties in Baguio. These properties are for lease and yield rental income to Sylvia. Every year, she pays value-added tax to the BIR. The city government of Baguio enacts an ordinance imposing on her a lessor tax in accordance with the schedule of amounts related to her gross rental income from the same real properties. First question: Does the local ordinance, constitute, in effect, double taxation? 3. 28 Answer: Yes, there is double taxation because there are two kinds of taxes levied on the same person for the same occupation or business. Dagupan City enacts an ordinance which imposes an occupation tax upon owners of prawn farms. The validity of the ordinance is being challenged on the ground that it constitutes double taxation because the prawn farm is already subject to land tax. Second question: Is the ordinance valid? Answer: Yes, because there are two different taxes involved, a tax on occupation and a tax on the land. Hence, there is no double taxation. a. Answer to 1st question is wrong, answer to 2nd question is correct. b. Answers to both questions are correct. c. Answers to both questions are wrong. d. Answer to 1st question is correct, answer to 2nd question is wrong. 4. Haydee died on November 20, 2009. Some of the properties she left are the following Market value Assets Mode of Date of acquisition Date acquired Death of Haydee acquisition Land Donation 07/03/2005 P500,000 P350,000 Car Purchase 10/02/2008 800,000 980,000 Other information: • The gross estate of the decedent amounts to P3,000,000. • The land was mortgaged for P50,000 which was deducted in prior estate and Haydee paid the same before she died. • The allowable deductions total P125,000, which includes medical expenses of P30,000. It excludes bequest to a charitable institution in the amount of P50,000. The vanishing deduction is: a. P56,500 b. P57,100 c. P57,500 d. P58,100 5. On January 2, 2006, Tycoon leased his land to Powers. The term of the contract, which qualifies as an operating lease, was fifteen (15) years, and the rental fee was P360,000 a year. The contract provided that Powers, the lessee, would pay two years rent in advance and one year deposit totaling P1,080,000 upon signing the contract. The one year deposit would be forfeited in favor of the lessee in case of contract violation that would lead to termination. The annual real estate tax of P50,000 would also be shouldered by the lessee. The lessee would also construct a building which at the end of the term of the contract would be owned by Tycoon, the lessor. The building construction was completed on January 2, 2009 at a cost of P6,000,000. The building had a useful life of 25 years. How much was the total rent income of the lessor in the year 2006? a. P770,000 b. 720,000 c. P410,000 d. P360,000 The following 2009 data of a married resident employee occupying managerial position who has four (4) qualified dependent children are made available: Salary (net of P150,000 withholding tax, P20,000 SSS contribution and P25,000 Pag-ibig contribution) Rice subsidy (P1,500 x 12) Monetized unused vacation leave credits (20 days) Actual medical benefits Christmas gift Laundry allowance (P1,500 x 12) Manager of the year award, gold watch valued at P840,000 18,000 50,000 15,000 10,000 18,000 60,000 6. 7. How much is the total tax-exempt de minimis benefits? a. Zero b. P65,600 c. P146,000 d. P171,000 Gomez, Burgos and Zamora (GOMBURZA), is a general professional partnership engaged in assurance and management consultancy. Aside from its assurance and management consultancy, it is also engaged in the sale of agricultural products harvested from its farm in Sagada. The profit and loss ratio of partners Gomez, Burgos and Zamora is 4:4:2, respectively. The following data are available for the year 2009: Gross professional fee from assurance and management consultancy Gross sales, agricultural products Cost of services on assurance and management consultancy Cost of sales, agricultural products Operating expenses, assurance and management consultancy Operating expenses, sales of agricultural products How much is the tax due and payable for the year? a. P736,000 b. P747,500 c. P690,000 d. None, not subject to tax P5,000,000 3,000,000 1,000,000 500,000 300,000 200,000 8. Kenkoy Corp. is a VAT-registered taxpayer. The following data pertain to its first quarter ended March 31, 2009. Purchases were all from value-added suppliers. Output taxes, January P 330,000 Input taxes, January 600,000 Output taxes, February 870,000 Input taxes, February 360,000 Sales, total invoice price, March 8,960,000 Purchases, total invoice cost, March 3,248,000 The value-added tax payable for March 2009 is: a. P141,000 b. P342,000 c. P510,000 d. P612,000 The following data are for Manels Company for the first quarter of 2009: Sales up to March 15, total invoice value Purchases up to March 15, net of input taxes P336,000 200,000 9. 29 Additional information: On March 16, 2009, Manels Company retired from its business and the inventory valued at P190,000 net of input taxes was taken and transferred to Ystilo Company. There is a deferred input taxes from the last quarter last year of P3,500. How much is the total value added taxes due and payable by Manels Company in its operations in the first quarter of 2009 and its retirement from business? a. P8,500 b. P12,000 c. P34,800 d. P31,300 10. In 2009, Tycoon made the following gifts: • On June 1, 2009, P150,000 to Enfant, his son, on account of his marriage celebrated on May 1, 2006. • On July 10, 2009, a parcel of land worth P180,000 to his father, subject to the condition that the father would assume the mortgage indebtedness of Tycoon in the amount of P40,000. • On September 30, 2009, P150,000 dowry to his daughter Jolina, on account of her scheduled marriage on October 25, 2009, and another wedding gift worth P20,000 on November 23, 2009. How much is the total net gifts? a. P500,000 b. P450,000 c. P430,000 d. P460,00 Clincher Category 1. Which of the following shall not be allowed presumptive input tax? a. Persons or firms engaged in the processing of sardines, mackerel and milk b. Persons or firms engaged in the processing of canned fruits and vegetables c. Persons or firms manufacturing refined sugar, cooking oil and packed noodle-based instant meals d. None of the choices 2. Pelaez, a citizen of the Philippines and resident of Iloilo City, died testate on May 10, 2009. Among his gross estate are properties inherited from his deceased father who died on April 4, 2006. What percentage of deduction will be used in computing the amount of vanishing deduction? a. 80% of the value taken as basis for vanishing deduction. b. 100% of the value taken as basis for vanishing deduction. c. 60% of the value taken as basis for vanishing deduction. d. 40% of the value taken as basis for vanishing deduction. 3. Robin P. imported a car from the USA for his personal use. Total landed cost is P250,000 (about $5,952) including customs duties of P50,000. VAT payable using 12% rate is: a. P 30,000. c. P10,000. b. P 25,000. d. none. 4. An example of an aleatory contract is A. Sale B. Loan C. Insurance D. Partnership 5. If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words “VAT-exempt sale”, the transaction shall: a. still be exempt from value-added tax. b. become taxable and the issuer shall be liable to pay VAT thereon. c. be effectively subject to zero percent. d. be considered erroneous transaction and must be disregarded. 6. Shares of stock held as investment listed and sold through the local stock exchange shall be subject to: a. ½ of 1% percentage tax based on gross selling price or gross value in money. b. 12% VAT based on gross income. c. capital gains tax of 5% on first P100,000 capital gain; 10% on excess of P100,000. d. 4%; 2%; 1% percentage tax based on gross selling price or gross value in money. An alien employee of an offshore banking unit has the following income for the current year: Salary received from the offshore banking unit (OBU) Honoraria and allowances received from the OBU Interest income from a domestic bank on his peso deposits Capital gain from sale of shares in a domestic corporation How much is the tax from his gross income in the Philippines? a. P2,272,500 b. P2,250,000 8. c. P1,500,000 d. None of the choices P 10,000,000 5,000,000 50,000 100,000 7. On January 15, 2009, Amerah gave a piece of land to her brother-in-law who is getting married on February 14, 2009. The assessed value and zonal value of the land were P750,000 and P1,000,000, respectively. The land had an unpaid mortgage of P200,000 which was not assumed by the donee, and an unpaid realty tax of P10,000 which was assumed by the donee. The brother-in-law agreed to pay the donor’s tax on the donation. How much is the donor’s tax due? a. P297,000 b. P237,000 c. P162,000 d. P222,000 When does a buyer of a thing acquire real right to the fruits of the things bought? A. From the time the fruits are delivered. B. From the time the obligation to deliver the thing bought arises. C. From the time the sale is perfected. D. From the time the thing bought is delivered. 9. 10. Petra transferred to Pedro a parcel of land for the price of P200,000; P130,000 to be paid in cash and for the difference, he will convey his car worth P70,000. What kind of contract is this? a. Lease contract c. Obligation to sell 30 b. Contract of sale d. Barter Management Services Source: ReSA and CRC-ACE Easy Category 1. Which of the following is not needed for determining the break-even point? a. Selling price b. Variable cost per unit c. Fixed cost d. Sales volume A highly automated plant would generally have a. More variable than fixed costs b. More fixed than variable costs c. All fixed costs d. All variable costs A cost driver a. causes fixed costs to rise because of production changes b. has a direct cause-effect relationship to a cost c. can predict the cost behavior of variable costs, but not fixed costs d. is an overhead cost that causes distribution costs to change in distinct increments with changes in production volume Variable costs are expenditures that vary a. Due to seasonal market factors b. Randomly c. With inventory d. When output changes Holding everything else constant, reducing the sales price per unit implies: a. A lower break-even point b. An increase in the slope of the total revenue line c. No effect on the break-even point d. A higher break-even point 2. 3. 4. 5. 6. Which one of the following changes will cause demand curve for gasoline to shift to the left? a. The price of cars increases b. The price of cars decreases c. The price of gasoline increases d. The supply of gasoline decreases 7. When a scarce resource (e.g., limited hours or space) exists in an organization, the criterion that should be used to determine production is a. Selling price per unit b. Contribution margin per unit c. Total variable costs of production d. Contribution margin per unit of scarce resource 8. A fundamental purpose of a database management system is to a. Store all data for an organization in multiple files b. Reduce data redundancy c. Use physical data organization concepts instead of logical data d. Change the manner in which application programs access individual data elements 9. Which of the following statements is not an assumption of the operating break-even model? a. Constant selling price per unit b. Decreasing variable cost per unit c. All costs can be classified as fixed or variable d. A single product (or constant mix products) is being produced and sold 10. In the context of a feasibility study, technical feasibility refers to whether a. A proposed system is attainable, given the existing technology b. The systems manager can coordinate and control the activities of the systems department c. An adequate computer site exists for the proposed system d. The proposed system will produce economic benefits exceeding its costs Average Category 1. A company makes a single product that it sells for P16 per unit. Fixed costs are P76,800 per month and the product has a contribution margin ratio of 40%. If the company's actual sales are P224,000, its margin of safety is: a P32,000 b P96,000 c P128,000 d P192,000 Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell P100 million of P3.25 cumulative preferred stock to the public at a price of P25 per share. Flotation costs are P1.00 per share. Ohio Valley has a marginal income tax rate of 40%. a. 13.0% b. 7.8% c. 8.12% d. 13.54% 2. 31 3. Ardor Company's net income last year was P500,000. The company has 150,000 shares of common stock and 30,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of P1.00 per share on the common stock and P0.70 per share on the preferred stock. The earnings per share of common stock is closest to: a. P3.33 b. P3.19 c. P2.33 d. P3.47 Ezzell Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments. Information for January is presented here. Overhead costs incurred Service provided to: Maintenance Dept. Utilities Dept. Producing Dept. A Producing Dept. B Maintenance P18,700 20% 40% 40% Utilities P9,000 10% 30% 60% 4. Refer to Ezzell Corporation. The amount of Utilities Department costs distributed to Dept. B for January should be (rounded to the nearest peso) a. P3,600. b. P4,500. c. P5,400. d. P6,000. 5. In the two following constraint equations, X and Y represent two products (in units) produced by the Fantastic Goods Corporation. Constraint 1: 3X + 5Y < 4,200 Constraint 2: 5X + 2Y > 3,000 Refer to Fantastic Goods Corporation. What is the maximum number of units of Product X that can be produced? a. 4,200 b. 3,000 c. 600 d. 1,400 The Motor Division of Engaging Engine Corporation uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of P100. The Carburetor Division of Engaging Engine Corporation manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at P106 per unit. Its cost structure (on 15,000 units) is: Variable production costs Variable selling costs All fixed costs P70 10 10 6. Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. What is the maximum of the transfer price range for a transfer between the two divisions? a. P106 b. P100 c. P90 d. P70 7. Stephens Metals Company has a revolving credit agreement with its bank permitting it to borrow up to P25 million at an annual interest rate of 12%. Stephens is required to maintain a 10% compensating balance on any funds borrowed under this agreement and to pay a 0.5% commitment fee on the unused portion of the credit line. The company maintains a P500,000 balance at the bank that can be used to meet the compensating balance requirement. Determine the annual financing cost of borrowing P20 million under this revolving credit agreement. a. 13.3% b. 13.5% c. 13.1% d. 12.0% 8. Consider the following linear programming problem and assume that nonnegativity constraints apply to the independent variables: Max CM = P14X + P23Y Subject to Constraint 1: 4X + 5Y < 3,200 Constraint 2: 2X + 6Y < 2,400 Which of the following are feasible solutions to the linear programming problem? a. X = 600, Y = 240 b. X = 800, Y = 640 c. X = 0, Y = 400 9. d. X = 1,200, Y = 0 Perry Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year ended December 31: Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Net loss P1,000,000 (800,000) P 200,000 P100,000 250,000 (350,000) P (150,000) Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Perry’s income would a. increase by P150,000. c. decrease by P155,000. b. decrease by P 75,000. d. decrease by P215,000. 10. West Company produces a part that has the following costs per unit: Direct material Direct labor Variable overhead Fixed overhead Total P8 3 1 5 P17 Zest Corporation can provide the part to West for P19 per unit. West Company has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if West no longer produces the part, it can rent that portion of the plant facilities for P60,000 per year. West Company currently produces 10,000 parts per year. Which alternative is preferable and by what margin? a. Make-P20,000 c. Buy-P10,000 b. Make-P50,000 d. Buy-P40,000 32 Difficult Category 1. The margin of safety in the Flaherty Company is P24,000. If the company's sales are P120,000 and its variable expenses are P80,000, its fixed expenses must be: a. P8,000 b. P32,000 c. P24,000 d. P16,000 2. Holt Company's variable expenses are 70% of sales. At a P300,000 sales level, the degree of operating leverage is 10. If sales increase by P60,000, the degree of operating leverage will be: a.12 b.10 c. 6 d. 4 3. The following data are available for the Phelps Company for a recent month: Product A Product B Product C Total Sales P150,000 P130,000 P90,000 P370,000 Variable expenses 91,000 104,000 27,000 222,000 Contribution margin P 59,000 P 26,000 P63,000 148,000 Fixed expenses 55,000 Net operating income P 93,000 The break-even sales for the month for the company are: a P91,667 b P203,000 c P148,000 d P137,500 4. Hermosilla Corporation is a single product firm with the following selling price and cost structure for next year: Selling price per unit Contribution margin ratio 40% Total fixed expenses for the year P218,700 P 1.80 How many units will Hermosilla have to sell next year in order to break-even? a 121,500 b 202,500 c 303,750 5. Mobile Machine Works had the following data regarding monthly power costs: Month Jun Jul Aug Sept. Machine hours 300 600 400 200 Power cost P680 720 695 640 d 546,750 6. Assume that management expects 500 machine hours in October. Using the high-low method, calculate October’s power cost using machine hours as the basis for prediction. a. P700 c. P710 b. P705 d. P1,320 Pinpin Trainers provides a personalized training program that is popular with many companies. The number of programs offered over the last five months, and the costs of offering these programs are as follows: Jan Feb Mar April May Programs Offered 55 45 60 50 75 Costs Incurred P15,400 14,050 18,000 14,700 19,000 Using the high-low method, compute the variable cost per program and the total fixed cost per month. a. P160and P6,620 c. P105 and P6,025 b. P165 and P6,625 d. P170and P6,670 7. Determine the (after-tax) percentage cost of a P50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company. Assume that the company has a 40% marginal tax rate. This long-term debt issue will yield 12% to the insurance company. a. 4.8% b. 7.2% c. 12.0% d. none of the above 8. The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). a. 14.1% b. 7.6% c. 6.5% d. none of the above 9. The following financial information is available on Rawls Manufacturing Company: Current per share market price P 48.00 Current (t = 0) per share dividend P 3.50 Expected long-term growth rate 5.0% Rawls can issue new common stock to net the company P44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%). a. 12.3% b. 13.4% c. 13.0% d. 12.7% 10. Calvez has annual sales of P724 million from its 600 retail stores. 33 Calvez can reduce its mail float by 2 days through the use of wire transfers. The annual cost of the wire transfers is expected to be P105,610. If Calvez's cost of short-term funds is 9.75 percent, should the change to wire transfers be made? Assume 365 days per year. a. No, loss of P247,340 b. Yes, savings of P281,185 Clincher Category 1. c. Yes, savings of P474,582 d. No, loss of P105,610 Illinois Division of the Boston Company has the following statistics for its most recent operations: Assets available for use (Market Value) Assets available for use (Book Value) Illinois Division's return on investment Illinois Division's residual income Return on investment (entire Boston Company) P3,600,000 P2,000,000 25% 200,000 20% Refer to Boston Company. Compute EVA assuming the cost of capital is 10% and the tax rate is 40%. a. P 90,000 b. P 150,000 c. P0 d. P (60,000) 2. 3. Calculate the annual financing cost of foregoing the cash discount if the credit terms are 1/10, net 40. a. 6.0 percent b. 9.2 percent c. 12.3 percent d. None of the above Runners Ink, Inc. had sales last year of P700,000 and 35 percent of its sales are for cash, with the remainder buying on terms of net 30 days. If the receivables conversion period is actually 38 days, what is Runners Ink's accounts receivable? a. P72,877 b. P25,507 c. P47,370 d. none of the above Gamble Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50, and Product Y has a contribution margin of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Gamble Company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of a. P250,000. b. P240,000. c. P210,000. d. P200,000. In 2009, HUNTS Corporation manufactured 70,000 units of product A, a new product. Only 65,000 units were sold during the year. Manufacturing cost per unit was P 20.00 variable and P 50.00 fixed. What would be the effect on income if absorption costing is used instead of variable costing? a. Income is P 250,000 lower b. Income is P 250,000 higher c. Income is P 100,000 lower d. Income is P 100,000 higher A debit balance in the material usage variance indicates that the a. Actual quantity used is higher than standard quantity allowed b. Actual quantity used is lower than standard quantity allowed c. Actual quantity purchased is higher than standard quantity d. Actual quantity purchased is lower than standard quantity 4. 5. 6. 7. Last year, PURE Company had an income of P 92,000 using absorption costing and an income of P 98,600 using variable costing. The fixed manufacturing overhead cost was P 54,000 and production was 18,000 units, then sales in units last year were: a. 24,600 b. 20,200 c. 15,800 d. 15,000 8. Simple regression analysis provides the means to evaluate a line of regression which is fitted to a plot of data and represents a. The way costs change in respect to the independent variable b. The way costs change in respect to the dependent variable c. The variability of expense of pesos of operation 9. BONUS Co. uses 10,000 units of a part in its production process. The costs to make a part are: direct material, P 12; direct labor, P 25; variable overhead, P 13; and applied fixed overhead, P 30. BONUS Co. has received a quote of P 55 from a potential supplier for this part. If BONUS Co. buys the part, 70% of the applied fixed overhead would continue. BONUS Co. would be better off by a. P 50,000 to manufacture the part b. P 160,000 to manufacture the part c. P 40,000 to buy the part d. P 150,000 to buy the part 10.If a company desires to increase its safety margin, it should: a. Increase fixed costs b. Decrease the contribution margin c. Decrease selling prices, assuming the price change will have no effect on demand d. Stimulate sales volume 34