Name: _____________________________________

Rate: ________
Part 1: THEORY
1. Which of the following statements is incorrect concerning appropriations of retained earnings?
a. Appropriations do not reduce total retained earnings
b. The only proper way to eliminate an appropriation of retained earnings after it has served its purpose is to
revert to the unappropriated retained earnings.
c. An appropriation of retained earnings does not mean that assets are segregated for a specific purpose.
d. When treasury shares are purchased, retained earnings must be appropriated equal to the par or stated
value of treasury shares.
2. The major difference between convertible debt and share warrants is that upon exercise of the warrants
a. the shares are held by the company for a defined period of time before they are issued to the warrant holder
b. the holder has to pay a certain amount of cash to obtain the shares
c. the shares involved are restricted and can only be sold by the recipient after a set period of time
d. no share premium can be a part of the transaction
3. In which portion of the statement of financial position should employment taxes that are due for settlement in 15 months
time be presented?
a. Current liabilities
c. Noncurrent liabilities
b. Current assets
d. Noncurrent assets
e.
4. All of the following are characteristics of sale of warranty, except
a. Warranty liability
c. Unearned warranty revenue
b. Warranty expense
d. Warranty revenue
e.
5. On October 31, 2014, Star Ltd issued bonds with the principal amount of $16 million at the stated rate of 8% per annum.
The cash proceeds raised from the bond was $14.5 million. Stars effective rate on the bonds is:
a. More than the stated discount rate of 8%.
c. Equal to the stated discount rate of 8%.
b. Less than the stated discount rate of 8%.
d. Unrelated to the stated discount rate of 8%.
e.
6. If there is an acceleration of vesting, any payment made to the employees on the cancellation or settlement of the grant shall
be
a. Accounted for as repurchase of equity interest
b. Recognized in retained earnings
c. Recognized as component of other comprehensive income
d. Accounted for as repurchase of equity interest and excess payment over the fair value of share options
shall be recognized as expense.
f.
7. An entity shall measure initially a financial liability not designated at fair value through profit or loss at
a. Fair value
c. Fair value minus directly attributable transaction costs
b. Fair value plus directly attributable transaction costs
d. Face amount
e.
8. A long-term debt which is due to be settled within twelve months after the reporting period is classified as current when
a.
I. An agreement to refinance or to reschedule payments on a long term basis is completed on or before the
end of the reporting period and before the financial statements is authorized for issue.
b.
II. The entity has the discretion to refinance or roll over the obligation for at least twelve months after the
reporting period under an existing loan facility.
c. I only
e. Both I and II
d. II only
f. Neither I nor II
g.
9. Some borrowing agreements incorporate covenants which have the effect that the liability becomes payable on demand if
certain conditions related to the covenants are breached. In such case, the liability is classified as
a.
I. Current, even if the lender has agreed, after the reporting period and before the financial statements are
authorized for issue, not to demand payment as a consequence of the breach.
b.
II. Noncurrent, when the lender has agreed on or before the end of the reporting period to provide a period of
grace ending at least twelve months after that date.
c. I only
e. Either I and II
d. II only
f. Neither I nor II
g.
10. Which of the following is in substance a capitalization of retained earnings?
a. Cash dividend
c. Property dividend
b. Share dividend
d. Liquidating dividend
e.
11. Among short term obligations of Prime Minister Corporation as of December 31, 2014, the balance sheet date, are notes
payable totaling P500, 000 with the Bank of the Philippine Islands. These are 90 day notes renewable for another 90 day
period. These notes should be classified on the balance sheet of the company as
a. Current liability
c. Noncurrent liabilities
b. Deferred credit
d. Intermediate debt
e.
12. Of the four situations presented below, the one that will most likely lead to the classification of a finance lease is:

a. The lease term is one third of the economic useful life of the asset.
b. The present value of minimum lease payments is fifty percent of the fair value of the asset.
c. The purchase option allows the lessee to buy the asset at half the estimated residual value of the asset at
the end of the lease term.
d. The renewal option to extend a four-year lease term to the end of the useful life of the asset of eight years is at
market rates.
e.
13. Which of the following is incorrect in relation to cash flow presentation of leases?
a. cash payments attributable to the lease liability shall be presented as operating activities
b. cash payments attributable to the interest shall be presented as operating activities
c. lease payments on short term lease is presented as operating activities
d. lease payments on low value item lease is presented as operating activities
e.
14. How would the declaration and subsequent issuance of a small stock dividend share capital and share premium,
respectively, when the fair value of the shares exceeds the par value of the shares?
a. No effect, No effect
c. Increase, No effect
b. No effect, Increase
d. Increase, Increase
e.
15. Which of the following temporary difference will lead to a deferred tax asset?
a. Tax, penalty, surcharge
b. Dividend received on stock investment
c. Rent received in advance, taxable when payment is received.
d. Excess of tax depreciation over accounting depreciation.
e.
16. An entity operates a defined benefit plan and changes it to a defined contribution plan. The net pension liability after the
amendment decreased compared to the net pension liability before the amendment. How should the entity account for the
change?
a. The entity recognizes the gain
b. The entity does not recognize a gain
c. The entity recognizes a gain to be amortized over the remaining service period of the employees.
d. The entity recognizes the gain as component of other comprehensive income.
e.
17. A taxable temporary difference is expected to lead to the payment of _______________.
a. Less tax in the future and gives rise to a deferred tax asset.
b. More tax in the future and gives rise to a deferred tax asset.
c. Less tax in the future and gives rise to a deferred tax liability.
d. More tax in the future and gives rise to a deferred tax liability.
e.
18. Which of the following statements is/are true concerning the recognition and measurement of a defined contribution plan?
I.
Any excess contribution shall be recognized as prepaid expense but only to the extent that the prepayment will
lead to a reduction in future payments or a cash refund.
II.
Any unpaid contributions at the end of the period shall not be recognized as accrued liability.
III.
An entity shall not disclose the amount recognized as expense for a defined contribution plan.
a. I only
c. III only
b. II only
d. Only statements I and II are true
e.
19. If share based payment transaction provides that the employees have the right to choose the settlement whether in cash or
shares, the entity is deemed to have issued
a. A compound financial instrument
c. A liability instrument
b. An equity instrument
d. Either an equity instrument or a liability instrument
e.
20. The total amount of liability associated with the bond issue would
a. increase each year as a result of the amortization of the discount.
b. decrease each year as a result of the amortization of the discount.
c. remain the same each year.
d. always be equal to the face value of the bond payable.
e.
f. Part 2: THEORY
21. Home Company reported the following amounts in the stockholders equity section of its balance sheet dated December 31,
2014:
a. Preference share capital, P150 par value
3, 000, 000
b. Ordinary share capital, P37.50 par value
3, 750, 000
c. Share premium reserve
6, 000, 000
d. Retained earnings
4, 500, 000
e. Treasury shares, 5,000 ordinary shares
250, 000
f.

On January 2, 2015, Home sold 20, 000 additional shares of ordinary share for P90 per share. Late in 2015, it
was learned that because of mathematical error, an overstatement of depreciation expense by P375, 000 had
occurred in 2014. Home reported net income of P825, 000 for 2015. Home declared cash dividends of
P150,000 on preference share and P450, 000 on the ordinary share during 2015. All the treasury shares were re

 issued for P35 per share on December 31, 2015. What should be the retained earnings balance on December
31, 2015?
a. 5, 100, 000
c. 4, 905, 000
b. 5, 025, 000
d. 4, 275, 000
g.
22. Alamo Ltd. had P300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of P30
million and an increase in deferred tax liabilities of P60 million. The company is subject to a tax rate of 40%. The total
income tax expense for the year was:
a. P390 million
b. P210 million

c. P150 million
d. P180 million

e.
23. Ayala Company provided the following information with respect to defined benefit plan for the current year:
a. Defined benefit obligation
b.
Beginning
3, 000, 000
c.
Ending
3, 500, 000
d. Contribution to the plan
600, 000
e. Benefits paid to retirees
500, 000
f. Settlement discount rate
10%
g. How much is the current service cost?
h. 700, 000
i. 600, 000

j. 500, 000
k. 300, 000

l.
24. On June 30, 2015, Phamel Companys shares had fair value of P65 per share and its equity accounts are as follows:
a. Ordinary Share Capital, P50 par value
P3, 000, 000
b. Share Premium ordinary
600, 000
c. Retained Earnings
4, 200, 000
d. If a 100% stock dividend were declared and distributed, shareholders equity will
e.
f.

Increase by P6, 000, 000

Increase by P3, 250, 000

g. Increase by P3, 000, 000

h. Remains the same.

i.
25. On January 1, 2015, Hope Company issued 8%, 5 year convertible bonds with a face amount of P8, 000, 000 for P7, 700,
000. Interest is payable every December 31, each year. The bonds were convertible into 50, 000 P100 par value ordinary
shares. When the debt instruments were issued, the prevailing market rate was 10%.Assume that the bonds were all retired
on December 31, 2017 for P8, 000, 000 when the market rate without the conversion option was 9%, what amount of gain
or loss on the retirement that must be presented in the income statement?
a. 305, 760
b. 165, 797

c. 138, 420
d. 136, 878

e.
26. On January 1, 2015, Davichi Co. signed an 8 year non cancellable lease for a new machine, requiring P60,000 annual
payments at the beginning of the year, starting January 1, 2015. Davichis incremental borrowing is 10%. The lease includes
a transfer of title clause at the end of the lease term. The machine has 12 years remaining useful life with no salvage value.
The right of use asset should be initially recorded at?
a. 480, 000
b. 352, 080

c. 320, 094
d. 260, 094

e.
27. On March 1, 2015, Ria Company issued 10, 000 ordinary shares with P20 par value and 20, 000 preference shares with P20
par value for a total of P800, 000. At this date, the ordinary share was selling for P36 and the preference share was selling
for P27. What amount of the proceeds should be allocated to the preference share capital?
a. 600, 000
b. 540, 000

c. 480 000
d. 440, 000

e.
28. On July 1, 2015, Famous Company issued 11% P2, 000, 000 bonds. The bonds mature on June 30, 2019. Interest is payable
every January 1 and July 1. The bonds were issued to yield 10%. The carrying amount of the bonds on December 31, 2015
is
a. 2, 064, 552
b. 2, 057, 778

c. 2, 050, 669
d. 2, 043, 202

e.
29. The following information is available for Regret Company:
The companys lawyer informed you that the company is involved in a lawsuit for violating environmental laws
regulating hazardous waste. Although the litigation is pending, the lawyer is certain that the company will most
probably have to pay cleanup costs and fines of P5, 500, 000.
The company is also a defendant in a patent infringement suit by Sorry Company over the companys use of a
hydraulic compressor in several of its manufactured appliances. The lawyer informed your that if the suit goes
against the company, the loss may be as much as P10 million. However, the lawyer believes that the loss of this suit
is only possible.
a. What amount of lawsuit liability should be reported as a provision on the companys December 31, 2012
Statement of Financial Position?
a. 10, 000, 000
c. 15, 500, 000
b. 5, 500, 000
d. 0
e.
f.

Use this information for the next two questions:

At the beginning of the year Mundane Inc. entered into a 5-year rental contract to rent space of a warehouse to store
finished goods form the factory. The company will occupy unit N. 13 of 2, 500 cubic meters in the sector A of that
warehouse. Mundane has to pay P450, 000 pesos to the lessor at the end of each year. The lessee incurred P15, 000 cost
directly associated with obtaining lease. The company also paid P50, 000 on the same day. Further, the lessee agreed to
guarantee a residual value of P250, 000. Based on the information Mundane reasonably expects that the fair value at
the end of the lease term is P200,000. The rental payment was determined to include weekly cleaning services made by
the lessor. Mundane also determined that the unit can be rented at P420, 000 without the cleaning services and the latter
can be employed at a cost of P60, 000. The incremental borrowing cost of the lessee was 10%.

g.
30. What is the initial of cost of the right of use asset?
a. 1, 801, 905
b. 1, 705, 860

c. 1, 770, 860
d. 1, 588, 668

e.
31. What is the carrying amount lease liability at the end of the first year?
a. 1, 460, 595.5
b. 1, 426, 446

c. 1, 497, 946
d. 1, 282, 284.8

e.
32. The following information pertains to Parrot Companys defined benefit pension plan:
a.
b.
c.
d.
e.
f.

Prepaid pension cost, January 1, 2014

Current service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Employer contributions

120, 000
190, 000
380, 000
220, 000
520, 000
400, 000

g.
h. The fair value of plan assets exceeds the accumulated benefit obligation. In its December 31, 2014 statement of
financial position, what amount should the company report as unfunded accrued pension cost?
a. 350, 000
b. 490, 000

c. 670, 000
d. 870, 000

33. Instruments Inc. has taken out a foreign loan of P100, 000 that is recorded at P4, 400, 000. At the reporting date, the
carrying value of the loan is P4, 000, 000. The unrealized exchange gain of P400, 000 is included in profit or loss, but will
be taxable when the gain is realized on the repayment of the loan. If the current and future tax rates are 34% and 35%
respectively, what amount of deferred tax asset should the company recognize?
a. None
c. P140, 000
b. P276, 000
d. P136, 000
e.
34. At its yearend, The Beauty Corporation has the following balances in relation to a defined benefit post employment plan:
a.
Plan Assets
690, 000
b.
Define benefit obligation
1,140, 000
c.
Remeasurement loss
120, 000
d.
What figure should be shown in the Statement of Financial Position as plan deficit?
e. P1, 140, 000
g. P450, 000
f. P570, 000
h. P330, 000
i.
35. Hopeful Company has incurred heavy losses since its inception. At the recommendation of the president of the company,
the board of directors voted to implement quasi reorganization through share recapitalization, reduction of par value,
subject to shareholders approval. Prior to restatement on December 31, 2015, the shareholders equity was as follows:

36.

37.

38.

39.

40.

a.
Ordinary Share capital, P50 par,
75, 000, 000
b.
Share premium
30, 000, 000
c.
Deficit
27, 000, 000
d.
e. The shareholders approved the quasi reorganization on January 2, 2016 to be accomplished by:
a reduction of P3, 500, 000 in the value of their inventory
the intangible asset, and plant and equipment should be written down by P6, 500, 000 and P5, 000, 000,
respectively, and
recognition of unrecorded liabilities of P3, 000, 000.
To complete the quasi reorganization, the par value per share should be reduced, what should be the par value
after the quasi reorganization?
f. P45
h. P35
g. P40
i. P30
j.
An entity grants to an employee the right to choose either 1, 000 phantom shares or 1, 200 shares with par value of P10 per
share. The grant is conditional upon the completion upon the three year service. If the employee chooses the share
alternative, the shares must be held for three years after vesting date. At grant date, the entitys share price is P50 per share.
At the end of years 1, 2, and 3, the share price is P52, P55, and P60. The entity does not expect to pay dividends in the next
three years. After taking into account the effects of post vesting transfer restrictions, the entity estimates that the grant
date of the share alternative is P48 per share. What is the compensation expense in year 2?
a. 21, 866
c. 19, 333
b. 19, 866
d. 17, 333
e.
Party Inc., in its first year of operation, has the following differences between the carrying value and tax base of its assets
and liabilities at the end of 2015:
a.
Carrying value Tax Base
b.
Equipment
P 800, 000
P 600,000
c.
Estimated warranty liability
400, 000
0
d.
e.
Party estimates that the warranty liability will be settled in 2016. The difference in equipment will result in
taxable amounts as shown below:
f.
Year
Amount
2016
40, 000
g.
2017
60, 000
h.
2018
20, 000
i.
The company has taxable income of P1, 040, 000 for 2015. The income tax rate is 30%. What amount of
income tax payable to be reported in Partys Statement of Financial Position at December 31, 2015?
a. 396, 000
c. 228, 000
b. 312, 000
d. 156, 000
e.
What is the total income tax expense?
a. 396, 000
c. 228, 000
b. 348, 000
d. 192, 000
e.
On January 1, 2014, Eastwood Co. issued 10, 000 shares of P10 par value convertible preference shares for P12 cash per
share. Each share is convertible into 2 ordinary shares. On This date, the P2 par value ordinary shares are selling for P3 per
share. The preference shareholders converted their preference shares when the preference shares were selling at P16 while
ordinary shares at P5. The journal entry on conversion date will include
a. Credit Share Premium Ordinary P80, 000
c. Debit Share Premium Ordinary P20, 000
b. Credit Share Capital Preference P120, 000
d. Credit Share Capital Preference P100, 000
e.
Brad Company provided the following information for the current year:
a.
Current service cost
520, 000
b.
Actual return on plan assets
810, 000
c.
Interest expense on PBO
590, 000
d.
Interest income on plan assets
350, 000
e.
Loss on plan assets
240, 000
f.
Past service cost during the year
360, 000
g.
Contribution to the plan
1, 500, 000
h. What is the net remeasurement gain or loss to be recognized in OCI?
i. 460, 000 gain
k. 220, 000 loss
j. 460, 000 loss
l. 220, 000 gain

m.