REVIEW 105 DAY 13

Ms. Anna, President, 12%, due in 3 months (For

cash loan given to Ms. Anna)

4,800,000

P1
All notes are trade notes receivable unless otherwise specified. The Michelle note was
paid on December 1 as per notification received from the bank. The Mabelle Co. note
was dishonored on the due date but the legal department has assured management of its
full collectibility.

1. Bocaue Company had the following account balances on December 31, 2005.
Petty cash fund
P50,000
Cash in bank current account
Cash in bank payroll account
Cash on hand
500,000
Cash in bank restricted account for plant additions, expected to
be disbursed in 2006
Treasury bills, due February 15, 2006

10,000,000
2,000,000

4,000,000
3,000,000

The petty cash fund includes unreplenished December 2005 petty cash expense
vouchers of P20,000 and employee IOUs of P10,000. The cash on hand includes a
P100,000 check payable to Bocaue dated January 15, 2006. What should be reported
as cash and cash equivalents on December 31, 2005?
a. P12,420,000
C. P15,420,000
b. P19,420,000
d. P15,450,000

2. On December 1, 2005 Pirena Company assigned on a nonnotification basis accounts

receivable of P10,000,000 to a bank in consideration for a loan of 90% of the receivables less
a 5% service fee on the accounts assigned. Pirena signed a note for the bank loan. On
December 31, 2005, Pirena collected assigned accounts of P6,000,000 less discount of
P400,000. Pirena remitted the collections to the bank in partial payment for the loan. The
bank applied first the collection to the interest and the balance to the principal. The agreed
interest is 1% per month on the loan balance. In its December 31, 2005 balance sheet,
Pirena should report note payable as a current liability at
a. P4,500,000
c. P3,090,000
b. P3,400,000
D. P3,490,000
3. The following pertains to the notes receivable of Amihan Corporation for the calendar year
2005:
Notes Receivable
Date
Particulars
Debit
Credit
Sept. 1
Michelle, 21%, due in 3 months
P320,000
1
Discounted Michelle note
P320,000
Oct. 1
Mabelle Co., 24%, due in 2 months
1,200,000
Nov. 1
Eleanor, 24%, due in 13 months
2,400,000
30
Rigby Co., no interest, due in one year
2,000,000
30
Discounted Rigby Co. note
2,000,000
Dec. 1
Sgt. Pepper, 18%, due in 5 months
3,600,000

At what amount on the current assets section of the balance sheet as of December 31,
2005 will Notes Receivable-trade be carried?
a. P3,600,000
c. P7,200,000
B. P6,000,000
d. P8,000,000
4. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, in
exchange for an P800,000 non-interest bearing note due on April 1, 2007. The note had no
ready market, and there was no established exchange price for the equipment. The
prevailing interest rate for a note of this type at April 1, 2005, was 12%. The carrying value of
the note receivable on December 31, 2005 is
a. P800,000
C. P694,984
b. P620,864
d. P714,112
5. On October 15, 2005, Danaya Company purchased goods costing P4,500,000. The freight
term is FOB Destination. Some of the costs incurred with the sale and delivery of the goods
were:
Packaging for shipment
Shipping
Special handling charges

200,000
200,000
100,000

These goods were received on October 17, 2005. What amount of cost for these goods
should be included in Danayas inventory?
A. P4,500,000
c. P4,700,000
b. P4,900,000
d. P5,000,000
6. The physical count conducted in the warehouse of Imaw Company on December 31, 2005
revealed merchandise with a total cost of P3,600,000 was on hand on that date. However
the following items were excluded from the count:
Goods sold to a customer, which are being held for the customer to call for at the
customers convenience with a cost of P200,000.
A packing case containing a product costing P80,000 was standing in the
shipping room when the physical inventory was taken. It was not included in the
inventory because it was marked hold for shipping instructions. Your investigation
revealed that the customers order was dated December 20, 2005, but that the case
was shipped and the customer billed on January 10, 2006.
Merchandise held by Finishing Company costing P300,000 for further processing
and packaging.

The correct amount of inventory that should be reported in Imaw Companys balance
sheet at December 31, 2005 is
a. P4,180,000
c. P3,880,000
B. P3,980,000
d. P4,100,000
7. The records of Awoos Wholesale and Retail Store report the following data for the month
of January 2005:
Beginning inventory at cost
Purchases at cost
Freight on purchases
Purchase returns at cost
Beginning inventory at sales price
Purchase returns at sales price
Initial mark up on purchases

860,000
6,550,000
150,000
360,000
1,200,000
525,000
4,350,000

Net Additional mark up

Net Mark down
Sales
Sales discounts
Employee discounts
Theft and breakage

Using the average retail inventory method, Awoos cost of sales is

a. P6,390,000
c. P6,080,000
b. P6,150,000
D. P6,336,000
8. Mangatarem Company had the following information relating to its accounts receivable for
the year 2005:
Accounts receivable January 1
P12,000,000
Credit sales
20,000,000
Collection from customers, excluding the recovery of accounts written off
17,000,000
Accounts written off as worthless
300,000
Sales returns
1,000,000
Recovery of accounts written off
100,000
Estimated future sales returns on December 31
400,000
Estimated uncollectible accounts on December 31, per aging
1,000,000
Mangatarem should report the December 31, 2005 accounts receivable, before
allowance for sales returns and uncollectible accounts, at
A. P13,700,000
c. P13,800,000
b. P12,300,000
d. P13,130,000
9. Urdaneta Company accepted from a customer P5,000,000, 120-day, 12% note dated
August 31, 2005. On September 30, 2005, Urdaneta discounted the note at the National
Bank. However, the proceeds were not received until October 1, 2005. In the September 30,
2005 balance sheet, the amount receivable from the bank includes accrued interest revenue
of
a. P200,000
C. P44,000
b. P156,000
d. P
0

10. A physical inventory taken on December 31, 2005 resulted in an ending inventory of
P1,440,000. Banak Company suspects some inventory may have been taken by employees.
To estimate the cost of missing inventory, the following were gathered:
Inventory, Dec. 31, 2004
Purchases during 2005
Cash sales during 2005
Shipment received on December 26, 2005, included in physical inventory,
but not recorded as purchases
425,000
Deposits
were not
750,000made with suppliers, entered as purchases. Goods
received in 2005
9,450,000
Collections
400,000 on accounts receivable, 2005
Accounts
300,000 receivable, January 1, 2005
Accounts
150,000 receivable, December 31, 2005
Gross profit percentage on sales

P1,280,000
5,640,000
1,400,000
40,000
80,000
7,200,000
1,000,000
1,200,000
40%

At December 31, 2005 what is the estimated cost of missing inventory?

a. P200,000
c. P1,000,000
B. P160,000
d. P
0
11. Nakba Company installs replacement siding, windows, and louvered glass doors for
family homes. At December 31, 2005, the balance of raw materials inventory account was
P502,000, and the allowance for inventory writedown was P33,000. The inventory cost and
market data at December 31, 2005, are as follows:
Cost

Replacement
Cost

Sales
Price

Net
Realizable
value

Normal
Profit

89,000
94,000

86,000
92,000

91,500
93,000

87,000
85,000

5,000
7,000

125,000
194,000
502,000

135,000
114,000
427,000

129,000
205,000
518,500

111,000
197,000
480,000

10,000
20,000
32,000

Aluminum siding
Mahogany siding
Louvered glass door
Glass windows
Total

The loss on inventory write down is

a. P 8,000
b. P25,000

c. P11,000

D. P

12. Hagorn Company purchased 10,000 shares of Dinky Company P100 par value common
stock for P1,200,000 to be held as available for sale securities. On March 1, 2005, Hagorn
received a 20% stock dividend. On June 1, 2005, Hagorn sold all the stock dividends that
were received on March 1 at P130 per share. The gain on sale of investment be recorded by
Hagorn is

a. P260,000
b. P 20,000

c. P200,000

D. P 60,000

13. The Alcala Company counted its ending inventory on December 31. None of the
following items were included when the total amount of the companys ending inventory was
computed:

P150,000 in goods located in Alcalas warehouse that are on consignment from

another company.
P200,000 in goods that were sold by Alcala and shipped on December 30 and were
in transit on December 31; the goods were received by the customer on January 2.
Terms were FOB Destination.
P300,000 in goods were purchased by Alcala and shipped on December 30 and
were in transit on December 31; the goods were received by Alcala on January 2.
Terms were FOB shipping point.
P400,000 in goods were sold by Alcala and shipped on December 30 and were in
transit on December 31; the goods were received by the customer on January 2.
Terms were FOB shipping point.

The companys reported inventory (before any corrections) was P2,000,000. What is the
correct amount of the companys inventory on December 31?
a. P2,550,000
C. P2,500,000
b. P1,950,000
d. P2,700,000

a. P300,000
b. P500,000

C. P1,500,000
d. P1,000,000

TOA
1. Directly attributable costs of bringing the asset to working condition for its intended use
include all, except

A. INITIAL OPERATING LOSSES INCURRED PRIOR TO AN ASSET

ACHIEVING PLANNED PERFORMANCE
b. Cost of site preparation
c. Delivery, handling and installation costs
d. Estimated cost of dismantling and removing the asset and restoring the site, to the
extent that it is recognized as a provision
2. A contingent liability is
a. A liability of uncertain timing or amount.
b. A possible obligation depending on whether some uncertain future event occurs.
c. A present obligation but payment is not probable or the amount cannot be measured
reliably.

D. EITHER B OR C.

14. On September 30, 2005, Asingan Company discounted at the bank a customers
P5,000,000 6-month 10% note receivable dated June 30, 2005. The bank discounted the
note at 12%. The proceeds from this discounted note amounted to
A. P5,092,500
c. P4,842,000
b. P5,250,000
d. P5,170,000

3. Which statement is incorrect?

a. Provisions should only be used for the purpose for which they were originally
recognized.
b. Enterprises should not recognize contingent liabilities but should disclose them, unless
the possibility of an outflow of economic resources is remote.
c. Contingent assets should not be recognized but should be disclosed where an inflow of
economic benefits is probable.

15. On January 1, 2004, Agana Company acquired trading securities with the following
market value on December 31, 2004:

D. WHEN THE REALIZATION OF INCOME IS VIRTUALLY CERTAIN,

THEN THE RELATED ASSET IS NOT A CONTINGENT ASSET BUT ITS
RECOGNITION IS INAPPROPRIATE UNLESS RECEIVED.

X
Y
Z
Total

Cost
4,000,000
2,000,000
5,000,000
11,000,000

Market Value
3,700,000
1,800,000
4,500,000
10,000,000

Agana sold Security Z Sept 15, 2005 for P4,800,000, while the remaining securities on
December 31, 2005 had market values of P4,200,000 for Security X and P2,300,000 for
Security Y. The unrealized gain to be recognized Aganas income statement on
December 31, 2005 is

4. Which statement is incorrect regarding classification of leases?

a. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership.
b. All other leases that do not transfer substantially all the risks and rewards incident to
ownership are classified as operating leases.
c. Classification is made at the inception of the lease.

D. WHETHER A LEASE IS A FINANCE LEASE OR AN OPERATING

LEASE DEPENDS ON THE FORM OF THE TRANSACTION.

5. Which statement is incorrect in classifying a lease of land and buildings?

a. In classifying a lease of land and buildings, land and buildings elements would
normally be separately.
b. The minimum lease payments are allocated between the land and buildings elements
in proportion to their relative fair values.
c. The land element is normally classified as an operating lease unless title passes to the
lessee at the end of the lease term.

D. THE BUILDINGS ELEMENT IS NORMALLY CLASSIFIED AS A

FINANCE LEASE UNLESS TITLE WILL NOT PASS TO THE LESSEE
AT THE END OF THE LEASE TERM.
6. The following situations would normally lead to a lease being classified as finance lease,
except
a. The lease transfers ownership of the asset to the lessee by the end of the lease term.

B. THE LESSEE HAS THE OPTION TO PURCHASE THE ASSET AT A

PRICE WHICH IS EXPECTED TO BE EQUAL TO THE FAIR VALUE AT
THE DATE THE OPTION BECOMES EXERCISABLE THAT, AT THE
INCEPTION OF THE LEASE, IT IS REASONABLY CERTAIN THAT THE
OPTION WILL BE EXERCISED.
c. The lease term is for the major part of the economic life of the asset, even if title is not
transferred.
d. At the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset.
7. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the
a. Useful life of the asset
b. Lease term

C. USEFUL LIFE OF THE ASSET IF THERE IS REASONABLE

CERTAINTY THAT THE LESSEE WILL OBTAIN OWNERSHIP BY THE
END OF THE LEASE TERM.
d. Lease term or useful life of the asset, whichever is shorter
8. Examples of costs that are expensed rather than recognized as an element of cost of
property, plant and equipment include all of the following, except

A. COST OF EMPLOYEE BENEFITS ARISING DIRECTLY FROM THE

CONSTRUCTION ON ACQUISITION OF AN ITEM OF PROPERTY,
PLANT AND EQUIPMENT.
b. Cost of opening a new facility
c. Cost of introducing a new product or service, including cost of advertising and
promotion.
d. Cost of relocating or reorganizing part or all of an entitys operations.
9. Which is correct concerning measurement of property, plant and equipment?
I. An entity shall choose either the cost model or the revaluation model as its accounting
policy and shall apply that policy to an entire class of property, plant and equipment.
II. The cost model means that property, plant and equipment are carried at cost less any
accumulated depreciation and any accumulated impairment loss.
II. The revaluation model means that property, plant and equipment are carried at
revalued amount, being the fair value at date of revaluation less any accumulated
depreciation and subsequent accumulated impairment loss.

A. I, II AND III

b. I only

c. II and III only

d.

II only
10. The cost of an item of property, plant and equipment acquired in exchange for a
nonmonetary asset or a combination of monetary and nonmonetary asset is measured at

A. FAIR VALUE OF ASSET GIVEN PLUS CASH PAYMENT

b. Fair value of asset received plus cash payment
c. Book value of asset given plus cash payment
d. Book value of asset received plus cash payment
11. Which statement is incorrect regarding initial measurement of PPE?
a. PPE should be initially recorded at cost, which includes all costs necessary to bring the
asset to working condition for its intended use.
b. If payment for an item of property, plant, and equipment is deferred, interest at a
market rate must be recognized or imputed.
c. If an asset is acquired in exchange for another asset the cost will be measured at the
fair value.

D. IF AN ASSET ACQUIRED IN EXCHANGE FOR ANOTHER ASSET IS

NOT MEASURED AT FAIR VALUE, ITS COST IS MEASURED AT THE
CARRYING AMOUNT OF THE ASSET RECEIVED.
12. If the exchange transaction lacks commercial substance, the acquired item of property,
plant and equipment is measured at

a. Fair value of asset given plus cash payment

b. Fair value of asset received plus cash payment

C. CARRYING AMOUNT OF ASSET GIVEN PLUS CASH PAYMENT

d. Carrying amount of asset received plus cash payment
13. When payment for an item of property, plant and equipment is deferred beyond normal
credit terms, its cost is the

A. CASH PRICE EQUIVALENT

b. Installment price

c. Invoice price
d. List price

14. If an asset is acquired on credit or by installment, the difference between the total
payments and cash price, if any, should be
a. Considered interest expense of the current year
b. Included as part of the asset cost
c. Amortized as interest expense over the life of the asset

D. AMORTIZED AS INTEREST EXPENSE OVER THE CREDIT PERIOD

15. Which is incorrect concerning self-constructed asset?
a. The cost of self-constructed asset is determined using the same principles as for an
acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of selfconstructed asset.

C. THE COST OF ABNORMAL AMOUNTS OF WASTED MATERIAL,

LABOR OR OTHER RESOURCES INCURRED IN THE PRODUCTION
OF A SELF- CONSTRUCTED ASSET IS INCLUDED IN THE COST OF
ASSET.
d. The cost of normal amounts of wasted material, labor or other resources incurred in
the production of a self-constructed asset is included in the cost of the asset.
MAS
1. The following characterize management advisory services except
A. involve decision for the future
B. broader in scope and varied in nature

C. UTILIZE MORE JUNIOR STAFF THAN SENIOR MEMBERS OF THE

FIRM

for additional facilities, budgeted fixed costs for 60,000 units are 25% more than
budgeted fixed costs for P50,000 units. How much is Careras budgeted variable cost
per unit of output?
A. P1.60
C. P3.00
B. P1.67
D. P5.00
3. ABC Company finances all of its seasonal inventory needs from the local bank at an
effective interest cost of 9%. The firms supplier promises to extend trade credit on terms
that will match the 9% bank credit rate. What terms would the supplier have to offer
(approximately)?
a. 2/10, n/60.
b. 2/10, n/100.
C. 2/10, N/90.
d. 3/10,
n/60.
4. A company has accounts payable of $5 million with terms of 2% discount within 15 days,
net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it
can wait until the 30th day when it will receive revenues to cover the payment. If it
borrows funds on the last day of the discount period in order to obtain the discount, its
total cost will be
A. $51,000 less.
B. $75,500 LESS.
C. $100,000 less.
D.
$24,500 more.
5. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day
after each delivery. Thus, the company is considering a 1-year bank loan for $9,800 (98%
of the invoice amount). If the effective annual interest rate on this loan is 12%, what will
be the net dollar savings over the year by borrowing and then taking the discount on the
materials?
A. $3,624
B. $1,176
C. $4,800
D. $1,224
6. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax
purposes will be P100,000 annually for six years. The new machine is expected to
produce cash flow from operations, net of income taxes, of P150,000 a year in each of
the next six years. The accounting (book value) rate of return on the initial investment is
expected to be
A. 8.3%
C. 16.7%
B. 12.0%
D. 25.0%
7. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current
liabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximum
level of new short-term loans it can secure without violating the policy?
A. P400,000
b. P300,000
c.
P266,667
d.
P800,000

D. relate to specific problems where expert help is required

2. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of
budgeted output and P280,000 for 60,000 units of budgeted output. Because of the need

8. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be
expected on the balance sheet of its customer if the firm went to a net cash 30 policy?

A. INCREASED PAYABLES AND INCREASED BANK LOAN.

b. Increased receivables.
c. Decreased receivables.
d. Decrease in cash.
9. The sales director of Lloyd Company suggested that certain credit terms be modified. He
estimates the following effects:
Sales will increase by at least 20%
Accounts receivable turnover will be reduced to 8 times from the present turnover
of 10 times
Bad debts, now at 1% of sales will increase to 1.5%
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the
desired rate of return is 20%. Fixed expenses amount to P150,000.
Should the company allow revision of its credit terms?

A. YES, BECAUSE INCOME WILL INCREASE BY P64,800

B. Yes, because losses will be reduced by P73,800
C. No, because income will be reduced by P13,000
D. No, because losses will be increased by P28,000
10. Which of the following actions would not be consistent with good management?
a. Increased synchronization of cash flows.

B. MINIMIZE THE USE OF FLOAT.

c. Maintaining an average cash balance equal to that required as a compensating
balance or that which minimizes total cost.
d. Use of checks and drafts in disbursing funds.
11. Clara Building Corporation uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job 181, which is subject to a
P10,500-per-week completion penalty. Path A-B-C-F-G-H-I has normal completion time
of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.
The following activities can be crashed:
Activities
Cost to Crash 1 Week
Cost to Crash 2 Weeks
BC
P 8,000
P15,000
DE
10,000
19,600
EF
8,800
19,500
Clara desires to reduce the normal completion time of Job 181 and, at the same time,
report the highest possible income for the year. Clara should crash
A. BC 1 week and EF 1 week
C. EF 2 weeks
B. BC 2 weeks
D. DE 1 WEEK AND EF 1WEEK
12. A company obtaining short-term financing with trade credit will pay a higher percentage
financing cost, everything else being equal, when
A. The discount percentage is lower.
B. The items purchased have a higher price.
C. The items purchased have a lower price.

D. THE SUPPLIER OFFERS A LONGER DISCOUNT PERIOD.

13. It is held that the level of accounts receivable that the firm has or holds reflects both the
volume of a firms sales on account and a firms credit policies. Which one of the
following items is not considered as part of the firms credit policies?
a. The minimum risk group to which credit should be extended.
b. The extent (in terms of money) to which a firm will go to collect an account.
c. The length of time for which credit is extended.

D. THE SIZE OF THE DISCOUNT THAT WILL BE OFFERED.

14. A major advantage of obtaining a package of applications programs from a software
vendor is

A. THE LIKELIHOOD OF REDUCING THE TIME SPAN FROM

PLANNING TO IMPLEMENTATION
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance the programs will be written in a high-level language
15. A change in credit policy has caused an increase in sales, an increase in discounts taken,
a reduction of the investment in accounts receivable, and a reduction in the number of
doubtful accounts. Based on this information, we know that:
a. Net profit has increased.

B. THE AVERAGE COLLECTION PERIOD HAS DECREASED.

c. Gross profit has declined.
d. The size of the discount offered has decreased.

P2
1. Vibe Company purchased the net assets of Atlantic Company in a business combination
accounted for as a purchase. As a result, goodwill was recorded. For tax purposes, this
combination was considered to be a tax-free merger. Included in the assets is a building with
an appraised value of 210,000 on the date of the business combination. This asset had a net
book value of 70,000, based on the use of accelerated depreciation for accounting purposes.
The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of
120,000. Assuming a 36% income tax rate, at what amount should Vibe record this building
on its books after the purchase?
a. 120,000
b. 134,400
c. 140,000

D. 210,000
2. Goodwill represents the excess cost of an acquisition over the

a. sum of the fair values assigned to intangible assets less liabilities assumed.

B. SUM OF THE FAIR VALUES ASSIGNED TO TANGIBLE AND

IDENTIFIABLE INTANGIBLE ASSETS ACQUIRED LESS LIABILITIES
ASSUMED.
c. sum of the fair values assigned to intangibles acquired less liabilities assumed.
d. book value of an acquired company.

200,000
180,000
380,000

Liabilities
Equity
Total

Land
Building
Equipment

100,000
130,000
75,000

What is the 20X5 depreciation expense Balter will record related to purchasing Jersey
Company?

3. Cozzi Company is being purchased and has the following balance sheet as of the
purchase date:
Current assets
Fixed assets
Total

The building has a 10-year remaining useful life and the equipment has a 5-year remaining
useful life. The fair value of the assets on that date were:

90,000
290,000
380,000

a. 8,000
b. 15,000

C. 28,000
d. 30,000

The price paid for Cozzi's net assets is 500,000. The fixed assets have a fair value of
220,000, and the liabilities have a fair value of 110,000. The amount of goodwill to be
recorded in the purchase is ____.

6.
In performing impairment test for goodwill, the company had the following 20X6 and
20X7 information available.

a. 0
b. 150,000
c. 170,000

Fair value of the reporting unit

Net book value (including $50,000 goodwill)

D. 190,000
4.

Separately identified intangible assets are accounted for by amortizing:

a. exclusively by using impairment testing.

20X7
400,000
380,000

Assume that the carry value of the identifiable assets are a reasonable approximation of their
fair values. Based upon this information what are the 20X6 and 20X7 adjustment to goodwill,
if any?
20X620X7

B. BASED UPON A PATTERN THAT REFLECTS THE BENEFITS

CONVEYED BY THE ASSET.
c. over the useful economic life less residual value using only the straight-line method.
d. over a period not to exceed a maximum of 40 years.

a. no adjustment
b. 10,000 increase
c. 10,000 decrease

20,000 decrease
20,000 decrease
20,000 decrease

D. 10,000 DECREASE
5.
Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchase
occurred Jersey Company had the following information related to fixed assets:
Land
Building
Accumulated Depreciation
Equipment
Accumulated Depreciation

20X6
350,000
360,000

$ 80,000
200,000
(100,000)
100,000
(50,000)

NO ADJUSTMENT

7.
Polk issues common stock to acquire all the assets of the Sam Company on January
1, 20X5. There is a contingent share agreement, which states that if the income of the Sam
Division exceeds a certain level during 20X5 and 20X6, additional shares will be issued on
January 1, 20X7. The impact of issuing the additional shares is to

a. increase the price assigned to fixed assets.

11. Consolidated financial statements are designed to provide:

B. HAVE NO EFFECT ON ASSET VALUES, BUT TO REASSIGN THE

AMOUNTS ASSIGNED TO EQUITY ACCOUNTS.
c. reduce retained earnings.
d. record additional goodwill.

a. informative information to all shareholders.

b. the results of operations, cash flow, and the balance sheet in an understandable and
informative manner for creditors.

8. Which of the following income factors should not be factored into an estimation of
goodwill?

C. THE RESULTS OF OPERATIONS, CASH FLOW, AND THE BALANCE

SHEET AS IF THE PARENT AND SUBSIDIARY WERE A SINGLE
ENTITY.

a. sales for the period

b. income tax expense

d. subsidiary information for the subsidiary shareholders.

C. EXTRAORDINARY ITEMS

12.The goal of the consolidation process is for:

d. cost of goods sold

9.
Acquisition costs such as the fees of accountants and lawyers that were necessary to
negotiate and consummate the purchase are
a. recorded as a deferred asset and amortized over a period not to exceed 15 years
b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price

C. EXPENSED IN THE PERIOD OF THE PURCHASE

d. included as part of the price paid for the company purchased
10.
Account
Sales
Cost of Goods Sold
Gross Profit
Selling & Admin. Expenses
Net Income
Dividends paid

Investor
500,000
230,000
270,000
120,000
150,000

Investee
300,000
170,000
130,000
100,000
30,000

50,000

10,000

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net
Income for the Controlling Interest?
a. 164,000

B. 171,000
c. 178,000
d. 180,000

A. ASSET ACQUISITIONS AND 100% STOCK ACQUISITIONS TO RESULT

IN THE SAME BALANCE SHEET.
b. goodwill to appear on the balance sheet of the consolidated entity.
c. the assets of the noncontrolling interest to be predominately displayed on the balance
sheet.
d. the investment in the subsidiary to be properly valued on the consolidated balance sheet.
13. A subsidiary was acquired for cash in a business combination on December 31, 20X1. The
purchase price exceeded the fair value of identifiable net assets. The acquired company
owned equipment with a fair value in excess of the book value as of the date of the
combination. A consolidated balance sheet prepared on December 31, 20X1, would
a. report the excess of the fair value over the book value of the equipment as part of
goodwill.

B. REPORT THE EXCESS OF THE FAIR VALUE OVER THE BOOK VALUE
OF THE EQUIPMENT AS PART OF THE PLANT AND EQUIPMENT
ACCOUNT.
c.

reduce retained earnings for the excess of the fair value of the equipment over its book
value.
d. make no adjustment for the excess of the fair value of the equipment over book value.
Instead, it is an adjustment to expense over the life of the equipment.
14. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000
shares of its 5 par voting common stock. On that date the fair value of those shares totaled
4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants
of 200,000, and stock issuance fees of 100,000. Immediately prior to the purchase, the equity
sections of the two firms appeared as follows:

Common stock
Paid-in capital in excess of par
Retained earnings
Total

Pavin
4,000,000
7,500,000
5,500,000
17,000,000

Sutton
700,000
900,000
500,000
2,100,000

Immediately after the purchase, the consolidated balance sheet should report paid-in capital
in excess of par of
a. 8,900,000
b. 9,100,000

C. 9,200,000
d. 9,300,000
15.Judd Company issued nonvoting preferred stock with a fair value of 1,500,000 in
exchange for all the outstanding common stock of the Bath Corporation. On the date of the
exchange, Bath had tangible net assets with a book value of 900,000 and a fair value of
1,400,000. In addition, Judd issued preferred stock valued at 100,000 to an individual as a
finder's fee for arranging the transaction. As a result of these transactions, Judd should report
an increase in net assets of ____.

The company issued bonds of P3,000,000 at par, giving each P1,000

bond a detachable warrant enabling the holder to purchase two shares
of stock at P40 each for a 1-year period. The bonds would sell at P996
per P1,000 bond without the warrant.
July 1
The company issued rights to stockholders (one right on each share,
exercisable within a 30-day period) permitting holders to acquire one
share at P40 with every 10 rights submitted. All but 9,000 rights were
exercised on July 31, and the additional stock was issued.
Oct. 1
All warrants issued in connection with the bonds on April 1 were
exercised.
Dec. 1
The market price per share dropped to P33 and options came due.
Because the market price was below the option price, no remaining
options were exercised.
Dec. 31
Net income for 2005 was P375,750.
QUESTIONS:

a. 900,000
b. 1,400,000

C. 1,500,000
AP
PROBLEM NO. 3
The stockholders equity section of the Determination Inc. showed the following data on
December 31, 2004: Common stock, P3 par, 450,000 shares authorized, 375,000 shares
issued and outstanding, P1,125,000; Paid-in capital in excess of par, P10,575,000;
Additional paid-in capital from stock options, P225,000; Retained earnings, P720,000. The
stock options were granted to key executives and provided them the right to acquire
45,000 shares of common stock at P35 per share. Each option has a fair value of P5 at
the time the options were granted.
The following transactions occurred during 2005:
Feb. 1
Key executives exercised 6,750 options outstanding at December 31,
2004. The market price per share was P44 at this time.
Apr. 1

Based on the above and the result of your audit, determine the following as of December
31, 2005:
1. Common stock
a. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,050
2. Total additional paid-in capital
a. P12,629,175 b. P11,283,300 c. P12,329,475 d. P12,604,200
3. Retained earnings
a. P870,750 b. P1,095,750 c. P1,287,000 d. P981,225
4. Total stockholders equity
a. P13,545,000 b. P15,000,000 c. P14,676,000 d. P14,973,000
PROBLEM NO. 2
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was
engaged in the audit of the Fortitude Company at the close of the companys first year of
operations on December 31, 2005. The company closed its books prior to the time you
began your year-end fieldwork.
Your audit and review showed the following stockholders equity accounts in the general
ledger:

REQUIRED:
Common Stock
08/30/05 CD P550,000 01/02/05 CR P6,000,000
12/29/05 J 545,000
12/29/05 J
Retained Earnings
P545,000 12/01/05
12/31/05
CR
J
P287,500
4,000,000
12/31/05
12/31/05
J
J
Income Summary
P26,000,000 12/31/05
4,000,000
J P30,000,000
Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the Articles of Incorporation of Fortitude Company:

Authorized capital stock 150,000 shares

Par value per share P100

From the board of directors minutes of meetings, the following resolutions were extracted:

01/02/05 authorized the issuance of 50,000 shares at P120 per share.

08/30/05 authorized the acquisition of 5,000 shares at P110 per share.

12/01/05 authorized the re-issuance of 2,500 treasury shares at P115 per share.

12/29/05 Declared a 10% stock dividend, payable January 31, 2006, to

stockholders on record as of January 15, 2006. The market value of the stock on
December 29, 2005 was P130 per share.

Determine the adjusted balances of

the following as of December 31, 2005.
A

5,995,000

5,545,000

5,000,000

5,475,000

1,012,500

1,000,000

1,155,000

965,000

7. Total retained earnings

3,525,000

3,572,500

3,382,500

3,512,500

8. Treasury stock
250,000

550,000

275,000

9. Total stockholders equity

10,012,500

9,215,000

5. Capital stock

6. APIC

9,737,500

9,262,500

10. During an audit of an entitys shareholders equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans, agreements,
or law. This audit procedure most likely is intended to verify managements assertion
of
a. Existence
c. Valuation
b. Completeness
D. PRESENTATION AND DISCLOSURE
11. If the auditee has a material amount of treasury stock on hand at year-end, the
auditor should

A. COUNT THE CERTIFICATES AT THE SAME TIME OTHER SECURITIES

ARE COUNTED.
b. Count the certificates only if the company had treasury stock transactions during
the year.
c. No count the certificates if treasury stock is a deduction from shareholders equity.
d. Count the certificates only if the company classifies treasury stock with other
assets.
12. In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence
of option holders in the entitys payroll records or stock
ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.

D. TRACE THE AUTHORIZATION FOR THE TRANSACTION TO A VOTE

OF THE BOARD OF DIRECTORS.
13. The auditor would not expect the client to debit retained earnings for which of the
following transactions?

d. False, False
2. A. As a rule, donation between husband and wife during marriage is void
B. Donation can be made to conceived or unborn children
a. TRUE, TRUE
b. True, False
c. False, True
d. False, False

A. A 4-FOR 1 STOCK SPLIT.

b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
d. Correction of error affecting prior year's earnings.
14. Only one of the following four statements, which compare confirmation of accounts
payable with suppliers and confirmation of accounts receivable with debtors is false. The
false statement is that
a. Confirmation of accounts receivable with debtors is a more widely accepted auditing
procedures than is confirmation of accounts payable with suppliers.

B. STATISTICAL SAMPLING TECHNIQUES ARE MORE WIDELY

ACCEPTED IN THE CONFIRMATION OF
ACCOUNTS PAYABLE THAN IN THE CONFIRMATION OF ACCOUNTS
RECEIVABLE.
c. As compared with the confirmation of accounts receivable, the confirmation of
accounts payable will tend to emphasize accounts with zero balances at the
balance sheet date.
d. It is less likely that the confirmation request sent to the supplier will show the
amount owed than that request sent to the debtor will show the amount due.

15. When title to merchandise in transit has passed to the audit client the auditor engaged in
the performance of a purchase cut-off will encounter the greatest difficulty in gaining
assurance with respect to the
a. Quantity B. QUALITY c. Price d. Terms

3. A donation which takes upon the death of the donor

a. Donation mortis causa
b. Partakes of the nature of a testamentary disposition
C. Shall be governed by the law on succession
d. A, B AND C
4. A donation which is intended by the donor to take effect during his lifetime
a. Shall be subject to donors tax using the tax table for donation
B. Shall be in writing if the value exceeds P 5,000
c. DONATION INTER VIVOS
d. A, B and C
5. A. gift is perfected from the moment the donor effects the delivery either actual or
constructively of the property donated.
B. Donors tax is a property tax imposed on the property transferred by way of gift
inter-vivos

a. True, True

b. True, False

c. False, True

D.

FALSE,

FALSE
BLT
1. A. For the purpose of donors tax, second degree cousins are strangers to each
other.
B. Encumbrance of the property donated, if assumed by the donor is deductible for
the donors tax purposes.

A. True, True
b. TRUE, FALSE
c.

False, True

6. This requires a special power of attorney except

a. To accept or repudiate an inheritance
b. To effect novation
C. To enter into compromise
d. TO LEASE REAL PROPERTY FOR ONE

YEAR

7. It is a contract wherein a person binds himself to render some service in

representation or on behalf of another, with the consent or authority of the latter
a. AGENCY
b. Contract of service
c. Contract of piece of work

d. Partnership
8. If an agent enters into a contract in the name of his principal, exceeding the scope of
his authority, the contract is
A. Voidable
b. UNENFORCEABLE
c. Rescissible
d. Void
9. Which of the following is the correct?
a. A contract of agency must be in writing to be a valid agreement
B. A sale of personal property made by an agent without authority from the owner is
void
c. A SALE OF A PIECE OF LAND MADE BY AN AGENT WITH

ORAL AUTHORITY FROM THE OWNER IS VOID

d. An unemancipated minor cannot be appointed as an agent
10. In which of the following acts may a person not appoint an agent?
a. To represent the principal in a wedding ceremony where the principal is a
principal sponsor
B. To vote for the principal during the meetings of stockholders where the principal
is a stockholder
c. TO REPRESENT THE PRINCIPAL IN A BAPTISMAL CEREMONY

WHERE THE PRINCIPAL IS THE FATHER OF THE CHILD TO BE

BAPTIZED
d. To attend a meeting of the board of directors of a corporation where the principal
is a director

11. Which escape from taxation does not result in loss of revenue to the
government?
a. Tax evasion
b. Tax avoidance
C. Tax exemption
d. SHIFTING

12. The following fringe benefits are not taxable, except:

a. Fringe benefits which are authorized and exempted from tax under
special laws.

B. Contributions of the employer for the benefit of the employee to

retirement, insurance and hospitalization benefits.
c. MEMBERSHIP FEES, DUES AND OTHER

EXPENSES
BORNE BY THE EMPLOYER IN SOCIAL OR ATHLETIC CLUBS
OR OTHER SIMILAR ORGANIZATIONS.
d. Benefits given to rank and file employees, whether granted under a
collective bargaining agreement or not.

13. The final tax on capital gains from sale of real property, classified as
capital asset is:
a. 20% based on the gross selling price or current fair market value
whichever is higher.
B. 7.5% based on the gross profit.
c. 6% BASED ON THE GROSS SELLING PRICE OR ZONAL

VALUE, WHICHEVER IS HIGHER.

d. 6% of the purchase price or the assessed value whichever is higher.

14. Sale, barter, exchange or other disposition of shares of stocks which

are traded in the local stock exchange is subject to:
A. capital gains tax of 5% and 10% of capital gain
b. PERCENTAGE TAX OF OF 1% OF SELLING PRICE
c. 10% VAT
d. none of the above

15. Domeng bought a parcel of residential land for P 1,000,000 sometime

in 1980. He sold the same to Norbie for P 10,000,000 on October 15,
2000. The transaction is subject to 6% capital gains tax.
a. TRUE
b. False, if Domeng is engaged in the real estate business.
c. False, it is subject to VAT if the sale is in the regular course of trade or
business.
d. b and c are correct.