4th ANNUAL REGIONAL CONVENTION SRAW-FINALS

SEARCH FOR THE REGIONAL ACCOUNTING WIZARDS

THE FINAL CLASH
SRAW1. Number One Corporation is a manufacturer of a versatile statistical calculator. The following information
is a summary of defective and returned units for the previous year.
 Total defective units 1,000
 Number of units reworked 750
 Number customer units returned 150
 Profit for a good unit P40
 Profit for a defective unit P25
 Cost to rework a defective unit P10
 Cost of a returned unit P15
 Total prevention cost P10,000
 Total appraisal cost P5,000
What is the profit lost by selling defective units not reworked?
Answer: P3,750
250 units not reworked x P15 incremental difference = P3,750

SRAW2. Accounting for the interest in a non interest bearing note receivable is an example of what aspect of
accounting theory?
Answer: Substance over form

SRAW3. Crown and Tops established a partnership to operate a used furniture business under the name C&T
Furniture. Crown contributes furniture that cost P 60,000 and has a fair value of P 90,000. Tops contributes P
30,000 cash and delivery equipment that cost P 40,000 and has a fair value of P 30,000. The partners agree to
share profits and losses 60% to Crown and 40% to Tops.

Calculate the peso amount of inequity that will result if the initial non-cash contributions of the partners are
recorded at cost rather than fair market value.
Answer: P18,000

SRAW4. Four, a VAT registered taxpayer made the following acquisition of capital goods from VAT registered
suppliers (net of vat) during the quarter;
Date Cost Estimated Life
July 2 P 1, 500,000 8 years
10 500,000 2 years
Aug 5 400,000 3 years
20 500,000 4 years
Sep 10 500,000 4 years
15 600,000 6 years
The July 2 acquisition was retired in September. The input tax for July is _____.
Answer: P5,500 (1.5M x 12% divided by 60 months) plus (500,000 x 12% divided by 24 months)

SRAW5. Mark-to-market valuation loss from financial assets (i.e., foreign bonds and quoted equity securities)
designated at fair value through profit or loss (FVPL) amounting to P 143,000,000 was considered by FIVE, Inc. as a
future deductible amount resulting to a DTA of P 42,900,000. However, you noted that P 41,000,000 of the total
amount of said loss pertains to various bond investments with maturity of more than five (5) years and any gains
realized on subsequent sale, exchange or retirement of the related indebtedness are excluded from taxable income
pursuant to Section 32 (B) (7) (g) of the tax code, as amended. The amount of total decrease in deferred tax
expense amounts to?
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Answer: Nil

SRAW6. The following information for a recent project was taken from the records of Six Company:
 Process time 15.0 days
 Inspection time 0.5 days
 Waiting time:
o From order receipt until start of production 6.0 days
o From start of production through project completion 3.0 days
 Move Time 1.5 days
As judged by the cycle efficiency, what percentage of the overall production time was spent on (1) value-adding
activities and (2) non-value adding activities?
Answer: 75%; 25%

SRAW7. How should principles of IFRS 11 – Joint arrangements be applied?

a) Prospective
b) Retrospective
c) Modified retrospective
d) All of the above
Answer: C

SRAW8. Eight Supply Corporation has a uncertain liability at 12/31/2012. In January 2010, Eight Supply was sued
by a customer for breach of contract. In November 2011, a judgment for P400,000 was assessed against Eight
Supply by the court. The lawyers of Eight feel that it is probable that they can reduce the court’s assessment by
50% on appeal. Thus, no entries were made by the company pending completion of the appeal process which is
expected to take at least a year. Applying IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, what
amount should be reported as liability on the 12/31/2012 balance sheet of Eight Supply regarding the info above?
Answer: P400,000

SRAW9. In the most recent issuance of the tax authorities, clubs which are organized and operated exclusively for
pleasure, recreation, and other non-profit purposes are
a) Subject to both income tax and VAT
b) Subject to income tax but not VAT
c) Subject to VAT but not income tax
d) Exempt from income tax and VAT
Answer: A (see RMC 35-2012)

SRAW10. Which of the following information should be disclosed under PAS 41?
a) Separate disclosure of the gain or loss relating to biological assets and agricultural produce
b) The aggregate gain or loss arising on the initial recognition of biological assets and agricultural
produce and from the change in fair value less estimated point of sale costs of biological assets
c) The total gain or loss from biological assets, agricultural produce, and from changes in fair value less
estimated point of sale costs of biological assets
d) There is no requirement in the standard to disclose separately any gains or losses
ANSWER: B

SRAW11. The following data pertain to Eleven Industries: Interest rate on debt capital – 9%; Cost of equity capital
– 12%; Before-tax operating income – P35 million; Market value of debt capital – P60 million; Market value of
equity capital – P120 million; Total assets – P150 million; Income tax rate – 30%; Total current liabilities – P15
million.
Compute Dana’s economic value added.
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Answer: P10,865,000
EVA = (P35,000,000 x 70%) - [(P150,000,000 - P15,000,000) x 10.1%]
EVA = P24,500,000 - P13,635,000
EVA = P10,865,000
Economic value added (EVA) measures the amount of shareholder wealth being created from a company’s
activities and operations. To expand, debt and equity capital are used to fund activities—activities that are
hopefully conducted in a profitable manner. Profits cover the cost of the related capital, with shareholders
benefiting from the residual (i.e., EVA).

SRAW12. In measuring impairment losses, the asset’s value in use (VIU) is, in many aspects, similar to capital
budgeting’s concept of net present value (NPV), except that the VIU ignores this item while the NPV is computed
after considering this item. Identify the item.
Answer: Tax

SRAW13. Thirteen Unlimited has a signature scarf for ladies that are very popular. Certain production and
marketing data are indicated below:
 Cost per yard of cloth P36.00
 Allowance for rejected scarf 5% of production
 Yards of cloth needed per scarf 0.475 yards
 Airfreight from supplier P0.60 per yard
 Motor freight to customers P0.90 per yard
 Purchase discount from supplier 3%
 Sales discount to customers 2%
The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf. Rejects have no market value.
Materials are used at the start of production. Calculate the standard cost of cloth per scarf that Thirteen Unlimited
should use in its cost sheets

ANSWER: 17.76
Net purchase price (36 x 0.50* x 97%) 17.46
Airfreight from supplier/freight in (0.60 x 0.50) 0.30
Standard cost of materials per scarf 17.76

*materials input per unit of scarf (0.475/0.95) 0.50

SRAW14. Gains and losses arising from the derecognition of an item of property, plant and equipment shall be
determined as the difference between
a) Gross disposal proceeds and the cost of the asset
b) Gross disposal proceeds and the carrying amount of the asset.
c) Net disposal proceeds and the cost of the asset.
d) Net disposal proceeds and the carrying amount of the asset.
ANSWER: D

SRAW15. In RR No. 8-2012 dated May 11, 2012, provides that the uniform and clothing allowance, which shall be
considered as “de minimis” benefits not subject to income tax, withholding tax on compensation income and fringe
benefits tax, will increase from P4,000 to P5,000 per annum. This regulation shall take effect starting what date?
Answer: January 1, 2012 (see RR 8-2012)

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SRAW16. PAS 39 requires an entity to separate embedded derivatives that meet the certain conditions from the
host insurance contract that contains them. It also requires the embedded derivative to be measured at fair value
and any changes in fair value to go into profit or loss. An insurer need not separate an embedded derivative that
itself meets the definition of an insurance contract. Which of the following types of embedded derivative would
need to be fair-valued under PAS 39 when embedded in an insurance contract?
a) The guarantee of minimum interest rates when determining the surrender or maturity value of a
contract.
b) Death benefit linked to equity prices or stock market index payable only on death.
c) Policy holder’s option to surrender the insurance contract for a cash value that was specified in the
original insurance contract.
d) The guarantee of minimum equity returns that is available only if the policy holder decides to take a life
contingent annuity.
Answer: A- all of the others are actually insurance contract and (a) is an investment contract.

SRAW17. Seventeen, Inc. was involved in two default and repossession cases during the year:
a) A refrigerator was sold to Sweet Sixteen for P 18,000, including a 35% mark up on selling price. Sweet
made a down payment of 20%, four of the remaining 16 equal payments, and then defaulted on further
payments. The refrigerator was repossessed, at which time the fair value was determined to be P 6,000.

b) An oven that cost P 12,000 was sold to Teen Eighteen for P 16,000 on the installment basis. Teen made a
down payment of P 2,400 and paid P 800 a month for six months, after which he defaulted. The oven was
repossessed and the estimated value at the time of repossession was determined to be P 7,500.

Determine the gain or loss on repossession that Seventeen, Inc. must report for financial reporting purposes
Answer: P1,020

SRAW18. Which of the following statements is correct?

a) An independent auditor should determine that the company officers authorized the issuance of the
stock dividend.
b) An independent auditor should determine that the stock dividend was properly recorded by a
memorandum entry only.
c) An independent auditor should determine that the stock dividend was recorded by transferring
appropriate amounts from retained earnings to share capital and share premium.
d) When a company declared and paid stock dividend, an independent auditor should determine that
shareholders received their additional shares by confirming year-end holdings with them.
Answer: C - An independent auditor should determine that the stock dividend was recorded by
transferring appropriate amounts from retained earnings to share capital and share premium.

SRAW19. During the current year, Charice Company purchased a secondhand machine at a price of P300,000. A
cash down payment of P50,000 was made and a two-year, noninterest bearing note was issued for the balance.
Recent transactions involving similar machinery indicate that a used machine has a cash price of P240,000. A new
machine would cost P400,000. The following cost were incurred on the machine during the year:

Cost of removing the old machine – P2,000; Cash proceeds from the sale of the old machine – P1,200; General
overhaul and repair to recondition the machine prior to use – P10,000; Cost of spare parts purchased and set aside
for breakdowns during the first two years of normal use of the machine – P20,000; Cost of labor to install the
machine – P4,000; Cost of testing the machine prior to use – P1,800; Cost of hauling the machine from the vendor’s
place of business to the company’s premises – P5,000; Cost of repairing the damage to the machine when it was
dropped during installation – P3,000; Repairs incurred during the first year of operations – P6,000; Safety devices
added to the machine to comply with the terms of the collective bargaining agreement entered into with
employees’ union – P12,000; Cost of training workers to operate the machine – P1,500.

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Determine the amount to be capitalized as cost of the machine.

Answer: P272,800

SRAW20. On June 1, 2012 SME USA acquired 35% of the equity of CHI and UK for P 58,000 and P 37,000,
respectively. SME USA shares joint control, with other venturers, over the strategic financial and operating
decisions of entities CHI and UK. Transaction costs of 5% of purchase price of the shares were incurred by USA.
On December 31, 2012, entities CHI and UK declared and paid cash dividends of P 15,000 and P 24,000,
respectively. Also, for the year ended December 31, 2012, entity CHI recognized a net loss of P 42,000; while entity
UK recognized a net profit of P 18,000.
Published price quotations do not exist for shares of entities CHI and UK. Using appropriate valuation techniques,
SME USA determined the fair value of its investments in entities CHI and UK at December 31, 2012 as P 65,000 and
P 49,000, respectively. Cost to sell are estimated at 9% of the fair value of the investments. SME USA does not
prepare consolidated statements because they do not have any subsidiaries.
Applying principles of Section 15 of IFRS for SMEs, what is the investment balance of SME USA at the end of
the year in entity UK under the equity model?
Answer: P34,125

SRAW21. The civil code provides that by the contract of _______________ the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and
thereafter to the principal of his credit.
Answer: Antichresis

SRAW22. Twenty-Two Company’s cash and cash equivalents account is composed of the following as of December
31, 2012:
Cash on hand P 1,000,000
Petty cash fund 500,000
HSBC current account 12,000,000
BPI current account 10,000,000
Allied bank checking account (5,000,000)
Metro bank current account 16,000,000
Dollar deposit account in Php 4,000,000
Union bank, 60-day time deposit 19,000,000
Total P 57,500,000
Additional data are as follows:
 Cash on hand includes a check to supplier amounting to P50,000 dated January 2013
 Cash on hand includes receipts on New Year’s Day amounting to P100,000
 Petty cash fund includes check payable to the cashier representing her salary at P15,000
 Included on checks drawn against HSBC account were as follows:
 Check amounting to P60,000 delivered on New Year’s Day
 Check dated January 2013, delivered on December 2012 amounting to P10,000
 BPI cash balance is net of P300,000 over draft in the same bank
 Metrobank balance is net of BDO checking account amounting to (P4, 000,000), a bank overdraft. The
Company has no other checking account in BDO so it netted the negative balance in Metrobank.
 Dollar deposit account includes Bank of America account amounting to P1,500,000 restricted as to
withdrawal pending congressional inquiry to be settled on January 2013
 Dollar deposit account was converted using January 1, 2013 foreign exchange rate (P43 per USD). The
foreign exchange rate in December 31, 2012 is P42 per USD.
Cash and cash equivalent as of December 31, 2012 amounts to _____________________
Answer: P64,861,860.47

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SRAW23. Twenty-Four, Inc., agrees to transfer television sets to Twenty-Five Bros. on a consignment basis. The
consignee is to sell a set at 40% above cost exclusive of freight and is to receive a 10% commission on sales price.
The consignor agrees to reimburse the consignee for all expenses related to the consignment. The agreement also
calls for an advance payment by the consignee of 30% per set based on selling price; the said advance is to be
deducted as settlement is made for each set sold. The consignee is to provide an account sales quarterly and is to
make cash remittance for the amount owed at that time.

The following consignment sales activities occurred during the October 1 to December 31 of current year:

Sets shipped – 100; Unit cost each set – P 10,000; Freight charges on the shipment paid by the consignor – P
75,000; The consignee made advance payments on the sets received; Advertising cost paid by the consignee –
P 50,000

The consignee sold 80 sets for cash; expenses of delivery and installation were P 25,000. After notifying the
consignor with the total sets sold for the period, the consignee returned 10 sets representing a model that could
not be sold and paid freight charges of P 8,000 on the return.

The net income to be reported by the consignor as a result of the above is

Answer: P65,000

SRAW24. The following were gathered from MAY KAPIT Company, a VAT exempt entity:
 Interest counted in the bodega 4,000,000
 Items included in the count specifically segregated per sale contract 100,000
 Items in receiving department, returned by customer, in good condition 50,000
 Items ordered and in the receiving department, invoice not received 400,000
 Items ordered, invoice received but goods not received. Freight is
on the account of seller 300,000
 Items in receiving department, refused by the Company
because of damage 180,000
 Items included in count, damaged and unsalable 50,000
 Items in the shipping department 100,000
 Abnormal production costs 50,000
 INPUT VAT in acquiring inventories 25,000
 Brokerage costs in importing inventories 20,000
 Materials 1,400,000
 Advance for materials ordered 200,000
 Unexpired insurance on inventory 60,000
 Advertising catalogs and shipping cartons 150,000
 Finished goods in entity-owned retail store, including 50%
on cost 750,000
 Finished goods on hands of consignees including 40% profit on sales 400,000
 Finished goods in transit to customers, shipped FOB destination at cost 250,000
 Finished goods out on approval, at cost 100,000
 Unsalable finished goods, at cost 50,000
 Shipping supplies 20,000
 Gasoline and oil for testing finished goods 110,000
 Machine lubricants 60,000
Applying principles of IAS 2 – Inventories, what is the correct amount of inventory?
ANSWER: P7,105,000

SRAW25. It refers to a contract wherein one party imposes a ready-made form of contract, which the other may
accept or reject, but which the latter cannot modify.
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Answer: Contract of adhesion

SRAW26. Which of the following statements is correct concerning statistical sampling in tests of controls?
a) In determining the tolerable rate, an auditor considers detection risk and the sample size
b) Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower
rate.
c) As the population size increases, the sample size should increase proportionately.
d) There is an inverse relationship between the expected population deviation rate and the sample size.
Answer: B - Deviations from specific control activities at a given rate ordinarily result in misstatements at a
lower rate.
 Answer A is incorrect because the tolerable rate is a function of the planned assessed level of control risk and
the assurance sought from the evidence.
 Answer C is incorrect because as the population size increases, the sample size increases at a decreasing rate.
Thus, a large population size will have little or no effect on the sample size.
 Answer D is incorrect because the expected deviation rate is directly related to the required sample size.

SRAW27. The Twenty-Seventh Store accounts for its sales on the installment basis. At the beginning of 2012,
ledger accounts include the following balances: Installment contracts receivable, 2010 - P 30,000; Installment
contracts receivable, 2011 - P 96,000; Deferred gross profit, 2010 - P 12,600; Deferred gross profit, 2011 - P
36,000.

At the end of 2012, account balances before adjustment for realized gross profit on installment sales are:

Installment contracts receivable, 2010 - P 0; Installment contracts receivable, 2011 - P 24,000; Installment
contracts receivable, 2012 - P 130,000; Deferred gross profit, 2010 - P 12,600; Deferred gross profit, 2011 - P
34,350; Deferred gross profit, 2012 - P 60,000.

Installment sales in 2012 are made at 25% above cost of merchandise sold. During 2012 upon default in payment
by the customer, the company repossessed the merchandise with an estimated market value of P 2,000. The sales
was in 2011 for P 10,800, and P 6,400 had been collected prior to repossession.

Compute the gain or (loss) on repossession assuming profit is recognized when sale is made (Point of sale) under
IAS 18 - Revenue:
Answer: P2,400 loss

SRAW28. Consider the statements that follow.

1. Variable selling costs are expensed when incurred.
2. The income statement discloses a company’s contribution margin.
3. Fixed manufacturing overhead is attached to each unit produced.
4. Direct labor becomes part of a unit’s cost.
5. Sales revenue minus cost of goods sold equals contribution margin.
6. This method must be used for external financial reporting.
7. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing overhead.
8. This method is sometimes called full costing.
9. This method requires the calculation of a fixed manufacturing cost per unit.

Determine which of the nine statements relate only to absorption costing.

Answer: 3, 6, 8, 9

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SRAW29.
Cost-Volume-Profit Graph A
$100,000

H G
80,000 B

60,000 E

40,000 C

D
20,000

0 1,000 2,000 3,000 4,000 5,000 Units

Line A is __________________
Answer: Total Revenue line

SRAW30. What is the title of IFRS 12?

Answer: Disclosure of Interests in Other Entities

CLINCHER ROUND

C1. Matalino Tayo Ventures operates a branch in Cebu City. Selected accounts taken from the May 31,
2012 statements of Matalino Tayo and its branch follow:
Home Office Branch
Sales P380,000 P353,000
Shipments to branch 150,000 -
Shipments to branch-loading 39,500 -
Inventory, June 1, 2011 24,000 16,000
Purchases 300,000 60,000
Shipments from home office - 187,500
Inventory, May 31, 2012 28,000 20,700

The branch ending inventory included items costing 8,700 that were acquired from outside suppliers.
What is the realized markup on branch merchandise that would be recognized by the home office?

Answer: P 37,100
Shipments to branch-loading/allowance for overvaluation
of merchandise before adjustments 39,500
Allowance for overvaluation of ending inventory
(after adjustment):(20,700-8,700)x25/125* (2,400)
Realized mark up on branch merchandise 37,100

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*Since there are no shipments in transit and there was no error in recording shipments, therefore, the
shipments from office account was correctly recorded, so, to compute for the billing price would be:
187,500/150,000 = 25%. Markup on cost would be 25%

C2. The following information is available for Madagascar Company for the year 2012.
Installment contract Receivable 2011 has decrease by 250,000
Installment contract Receivable 2012 has increase by 300,000
The beginning deferred gross profit-2011 is 112,500 and the adjusted ending is 25,000.
The installment sale for 2012 is 500,000. There was repossession for 2011 sales of 20,000.
What is the amount of total gross profit realized during the year?
Answer: P 150,500
(112,500-25000)/ (250,000) =35%, the gross profit rate.
The total realized profit is 150,500 (35% *((200,000+250,000-20,000))

C3. The following information is presented for your analysis.

ROA = 8%
ROE = 20%
Financial Leverage = 1.5X
Operating Leverage = 2X
Fixed Asset to total Assets = 50%
What is the debt ratio?
Answer: 60%,
You know that ROA = Net profit/Asset and ROE is Net profit / Equity therefore you can derived that
Equity Ratio is = ROA/ROE. Equity Ratio is then 40% (8%/20%) and debt ratio is 60 %( 100%-40%)

C4. The following information is available for DEF Company

Beginning WIP 10000(40% completed)
Started and Completed 20,000
Ending WIP 4000 (80% completed)
Abnormal Lost units 2,000
Normal Lost units 1,000

There are 3 materials added as the production process occurs. For material 1, 20% are added when the
units are 20% converted, 50% when the units are 50% converted and the remaining 30% are added
when the units are 90% converted. The company does not account for normal lost units and therefore no
cost is assigned to it.
What is the EUP for Material 1 under FIFO method?
Answer: P30,800
Material 1
Beginning WIP 8,000 10,000*80% (20% was already added last period)
Started and Completed 20,000
Ending WIP 2,800 4,000*70%(30% is not yet added)
Abnormal Loss -
Normal Loss -
30,800

C5. On January 1, 2005 Roxana Company sold to Matsudo Company of Japan for 20,000,000 yen, payment
to be received on January 1, 2008. On January 1, 2005, the exchange rate is .50 yen=1 peso. On the same
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date, Roxana enters into futures contract and agrees to sell 20,000,000 yen on January 1, 2008 at the rate
of .50 yen = 1 peso
The following information is also available:
Spot rates
12/31/2005 0.47
12/31/2006 0.49
12/31/2007 0.54
What is the increase/decrease on cash flow due to derivative on January 1, 2008? (Please also indicate if
it is an increase or a decrease).
P2,962,963 increase
(20,000,000/.5-20,000,000/.54) = 2,962,963 increase

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