REVIEW 105 – DAY 13 1 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
1. Bocaue Company had the following account balances on December 31, 2005. 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
Petty cash fund full collectibility.
P50,000
Cash in bank – current account 10,000,000 At what amount on the current assets section of the balance sheet as of December 31,
Cash in bank – payroll account 2,000,000 2005 will Notes Receivable-trade be carried?
Cash on hand a. P3,600,000 c. P7,200,000
500,000 b. P6,000,000 d. P8,000,000
Cash in bank – restricted account for plant additions, expected to
be disbursed in 2006 4,000,000 4. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, in
Treasury bills, due February 15, 2006 3,000,000 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
The petty cash fund includes unreplenished December 2005 petty cash expense prevailing interest rate for a note of this type at April 1, 2005, was 12%. The carrying value of
vouchers of P20,000 and employee IOUs of P10,000. The cash on hand includes a the note receivable on December 31, 2005 is
P100,000 check payable to Bocaue dated January 15, 2006. What should be reported a. P800,000 c. P694,984
as “cash and cash equivalents” on December 31, 2005? b. P620,864 d. P714,112
a. P12,420,000 c. P15,420,000
b. P19,420,000 d. P15,450,000 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:
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 Packaging for shipment 200,000
a 5% service fee on the accounts assigned. Pirena signed a note for the bank loan. On Shipping 200,000
December 31, 2005, Pirena collected assigned accounts of P6,000,000 less discount of Special handling charges 100,000
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 These goods were received on October 17, 2005. What amount of cost for these goods
interest is 1% per month on the loan balance. In its December 31, 2005 balance sheet, should be included in Danaya’s inventory?
Pirena should report note payable as a current liability at a. P4,500,000 c. P4,700,000
a. P4,500,000 c. P3,090,000 b. P4,900,000 d. P5,000,000
b. P3,400,000 d. P3,490,000
6. The physical count conducted in the warehouse of Imaw Company on December 31, 2005
3. The following pertains to the notes receivable of Amihan Corporation for the calendar year revealed merchandise with a total cost of P3,600,000 was on hand on that date. However
2005: the following items were excluded from the count:
Notes Receivable  Goods sold to a customer, which are being held for the customer to call for at the
Date Particulars Debit Credit customer’s convenience with a cost of P200,000.
Sept. 1 Michelle, 21%, due in 3 months P320,000  A packing case containing a product costing P80,000 was standing in the shipping
1 Discounted Michelle note P320,000 room when the physical inventory was taken. It was not included in the inventory
Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000 because it was marked “hold for shipping instructions”. Your investigation revealed
Nov. 1 Eleanor, 24%, due in 13 months 2,400,000 that the customer’s order was dated December 20, 2005, but that the case was
30 Rigby Co., no interest, due in one year 2,000,000 shipped and the customer billed on January 10, 2006.
30 Discounted Rigby Co. note 2,000,000  Merchandise held by Finishing Company costing P300,000 for further processing and
Dec. 1 Sgt. Pepper, 18%, due in 5 months 3,600,000 packaging.
 The correct amount of inventory that should be reported in Imaw Company’s balance 10. A physical inventory taken on December 31, 2005 resulted in an ending inventory of
sheet at December 31, 2005 is P1,440,000. Banak Company suspects some inventory may have been taken by employees.
a. P4,180,000 c. P3,880,000 To estimate the cost of missing inventory, the following were gathered:
b. P3,980,000 d. P4,100,000
Inventory, Dec. 31, 2004 P1,280,000
7. The records of Awoo’s Wholesale and Retail Store report the following data for the month Purchases during 2005 5,640,000
of January 2005: Cash sales during 2005 1,400,000
Shipment received on December 26, 2005, included in physical inventory,
Beginning inventory at cost 860,000 Net Additional mark up 425,000
but not recorded as purchases 40,000
Purchases at cost 6,550,000 Net Mark down Deposits
750,000made with suppliers, entered as purchases. Goods were not
Freight on purchases 150,000 Sales 9,450,000
received in 2005 80,000
Purchase returns at cost 360,000 Sales discounts Collections
400,000 on accounts receivable, 2005 7,200,000
Beginning inventory at sales price 1,200,000 Employee discounts Accounts
300,000 receivable, January 1, 2005 1,000,000
Purchase returns at sales price 525,000 Theft and breakage Accounts
150,000 receivable, December 31, 2005 1,200,000
Initial mark up on purchases 4,350,000 Gross profit percentage on sales 40%

Using the average retail inventory method, Awoo’s cost of sales is At December 31, 2005 what is the estimated cost of missing inventory?
a. P6,390,000 c. P6,080,000 a. P200,000 c. P1,000,000
b. P6,150,000 d. P6,336,000 b. P160,000 d. P 0

8. Mangatarem Company had the following information relating to its accounts receivable for 11. Nakba Company installs replacement siding, windows, and louvered glass doors for
the year 2005: 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
Accounts receivable – January 1 P12,000,000 market data at December 31, 2005, are as follows:
Credit sales 20,000,000
Collection from customers, excluding the recovery of accounts written off 17,000,000 Cost Replacement Sales Net Normal
Accounts written off as worthless 300,000 Cost Price Realizable Profit
Sales returns 1,000,000 value
Recovery of accounts written off 100,000 Aluminum siding
Estimated future sales returns on December 31 400,000 89,000 86,000 91,500 87,000 5,000
Estimated uncollectible accounts on December 31, per aging 1,000,000 Mahogany siding 94,000 92,000 93,000 85,000 7,000
Louvered glass door
Mangatarem should report the December 31, 2005 accounts receivable, before 125,000 135,000 129,000 111,000 10,000
allowance for sales returns and uncollectible accounts, at Glass windows 194,000 114,000 205,000 197,000 20,000
a. P13,700,000 c. P13,800,000 Total 502,000 427,000 518,500 480,000 32,000
b. P12,300,000 d. P13,130,000
The loss on inventory write down is
9. Urdaneta Company accepted from a customer P5,000,000, 120-day, 12% note dated a. P 8,000 c. P11,000
August 31, 2005. On September 30, 2005, Urdaneta discounted the note at the National b. P25,000 d. P 0
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 12. Hagorn Company purchased 10,000 shares of Dinky Company P100 par value common
of stock for P1,200,000 to be held as available for sale securities. On March 1, 2005, Hagorn
a. P200,000 c. P44,000 received a 20% stock dividend. On June 1, 2005, Hagorn sold all the stock dividends that
b. P156,000 d. P 0 were received on March 1 at P130 per share. The gain on sale of investment be recorded by
Hagorn is
 a. P260,000 c. P200,000 b. P500,000 d. P1,000,000
b. P 20,000 d. P 60,000
TOA
13. The Alcala Company counted its ending inventory on December 31. None of the
following items were included when the total amount of the company’s ending inventory was 1. Directly attributable costs of bringing the asset to working condition for its intended use
computed: include all, except
a. Initial operating losses incurred prior to an asset achieving planned performance
 P150,000 in goods located in Alcala’s warehouse that are on consignment from b. Cost of site preparation
another company.
c. Delivery, handling and installation costs
 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. d. Estimated cost of dismantling and removing the asset and restoring the site, to the
Terms were FOB Destination. extent that it is recognized as a provision
 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. 2. A contingent liability is
Terms were FOB shipping point. a. A liability of uncertain timing or amount.
 P400,000 in goods were sold by Alcala and shipped on December 30 and were in b. A possible obligation depending on whether some uncertain future event occurs.
transit on December 31; the goods were received by the customer on January 2. c. A present obligation but payment is not probable or the amount cannot be measured
Terms were FOB shipping point.
reliably.
The company’s reported inventory (before any corrections) was P2,000,000. What is the d. Either b or c.
correct amount of the company’s inventory on December 31?
a. P2,550,000 c. P2,500,000 3. Which statement is incorrect?
b. P1,950,000 d. P2,700,000 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
14. On September 30, 2005, Asingan Company discounted at the bank a customer’s
the possibility of an outflow of economic resources is remote.
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 c. Contingent assets should not be recognized but should be disclosed where an inflow of
a. P5,092,500 c. P4,842,000 economic benefits is probable.
b. P5,250,000 d. P5,170,000 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.

15. On January 1, 2004, Agana Company acquired trading securities with the following 4. Which statement is incorrect regarding classification of leases?
market value on December 31, 2004: a. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership.
Cost Market Value
X 4,000,000 3,700,000 b. All other leases that do not transfer substantially all the risks and rewards incident to
Y 2,000,000 1,800,000 ownership are classified as operating leases.
Z 5,000,000 4,500,000 c. Classification is made at the inception of the lease.
Total 11,000,000 10,000,000 d. Whether a lease is a finance lease or an operating lease depends on the form of the
transaction.
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 5. Which statement is incorrect in classifying a lease of land and buildings?
Security Y. The unrealized gain to be recognized Agana’s income statement on
December 31, 2005 is a. In classifying a lease of land and buildings, land and buildings elements would
a. P300,000 c. P1,500,000 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 entity’s 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 c. Invoice price
b. Installment 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 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
15. Which is incorrect concerning self-constructed asset? be the net dollar savings over the year by borrowing and then taking the discount on the
materials?
a. The cost of self-constructed asset is determined using the same principles as for an
A. $3,624 B. $1,176 C. $4,800 D. $1,224
acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of self- 6. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for
constructed asset. tax purposes will be P100,000 annually for six years. The new machine is expected to
c. The cost of abnormal amounts of wasted material, labor or other resources incurred in produce cash flow from operations, net of income taxes, of P150,000 a year in each of
the production of a self- constructed asset is included in the cost of asset. the next six years. The accounting (book value) rate of return on the initial investment is
d. The cost of normal amounts of wasted material, labor or other resources incurred in expected to be
A. 8.3% C. 16.7%
the production of a self-constructed asset is included in the cost of the asset.
B. 12.0% D. 25.0%
MAS 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
1. The following characterize management advisory services except level of new short-term loans it can secure without violating the policy?
A. involve decision for the future a. P400,000 b. P300,000 c. P266,667 d. P800,000
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm 8. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be
D. relate to specific problems where expert help is required 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.
2. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of b. Increased receivables.
budgeted output and P280,000 for 60,000 units of budgeted output. Because of the need c. Decreased receivables.
for additional facilities, budgeted fixed costs for 60,000 units are 25% more than d. Decrease in cash.
budgeted fixed costs for P50,000 units. How much is Carera’s budgeted variable cost
per unit of output? 9. The sales director of Lloyd Company suggested that certain credit terms be modified. He
A. P1.60 C. P3.00 estimates the following effects:
B. P1.67 D. P5.00  Sales will increase by at least 20%
 Accounts receivable turnover will be reduced to 8 times from the present turnover of
3. ABC Company finances all of its seasonal inventory needs from the local bank at an 10 times
effective interest cost of 9%. The firm’s supplier promises to extend trade credit on terms  Bad debts, now at 1% of sales will increase to 1.5%
that will match the 9% bank credit rate. What terms would the supplier have to offer Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the
(approximately)? desired rate of return is 20%. Fixed expenses amount to P150,000.
a. 2/10, n/60. b. 2/10, n/100. c. 2/10, n/90. d. 3/10, Should the company allow revision of its credit terms?
n/60. A. Yes, because income will increase by P64,800
B. Yes, because losses will be reduced by P73,800
4. A company has accounts payable of $5 million with terms of 2% discount within 15 days, C. No, because income will be reduced by P13,000
net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it D. No, because losses will be increased by P28,000
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 10. Which of the following actions would not be consistent with good management?
total cost will be a. Increased synchronization of cash flows.
A. $51,000 less. B. $75,500 less. C. $100,000 less. D. $24,500 b. Minimize the use of float.
more. c. Maintaining an average cash balance equal to that required as a compensating
balance or that which minimizes total cost.
5. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. The d. Use of checks and drafts in disbursing funds.
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day
 P2
11. Clara Building Corporation uses the critical path method to monitor construction jobs. 1. Vibe Company purchased the net assets of Atlantic Company in a business combination
The company is currently 2 weeks behind schedule on Job 181, which is subject to a accounted for as a purchase. As a result, goodwill was recorded. For tax purposes, this
P10,500-per-week completion penalty. Path A-B-C-F-G-H-I has normal completion time combination was considered to be a tax-free merger. Included in the assets is a building with
of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.
an appraised value of 210,000 on the date of the business combination. This asset had a net
The following activities can be crashed:
Activities Cost to Crash 1 Week Cost to Crash 2 Weeks book value of 70,000, based on the use of accelerated depreciation for accounting purposes.
BC P 8,000 P15,000 The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of
DE 10,000 19,600 120,000. Assuming a 36% income tax rate, at what amount should Vibe record this building
EF 8,800 19,500 on its books after the purchase?
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. 120,000
A. BC 1 week and EF 1 week C. EF 2 weeks b. 134,400
B. BC 2 weeks D. DE 1 week and EF 1week c. 140,000
d. 210,000
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. 2. Goodwill represents the excess cost of an acquisition over the
B. The items purchased have a higher price.
C. The items purchased have a lower price. a. sum of the fair values assigned to intangible assets less liabilities assumed.
D. The supplier offers a longer discount period. b. sum of the fair values assigned to tangible and identifiable intangible assets
acquired less liabilities assumed.
13. It is held that the level of accounts receivable that the firm has or holds reflects both the c. sum of the fair values assigned to intangibles acquired less liabilities assumed.
volume of a firm’s sales on account and a firm’s credit policies. Which one of the d. book value of an acquired company.
following items is not considered as part of the firm’s credit policies?
a. The minimum risk group to which credit should be extended.
3. Cozzi Company is being purchased and has the following balance sheet as of the
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. purchase date:
d. The size of the discount that will be offered.
Current assets 200,000 Liabilities 90,000
14. A major advantage of obtaining a package of applications programs from a software Fixed assets 180,000 Equity 290,000
vendor is Total 380,000 Total 380,000
A. the likelihood of reducing the time span from planning to implementation
B. the ability to more easily satisfy the unique needs of users The price paid for Cozzi's net assets is 500,000. The fixed assets have a fair value of
C. greater operating efficiency from the computer
220,000, and the liabilities have a fair value of 110,000. The amount of goodwill to be
D. the assurance the programs will be written in a high-level language
recorded in the purchase is ____.
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 a. 0
number of doubtful accounts. Based on this information, we know that: b. 150,000
a. Net profit has increased. c. 170,000
b. The average collection period has decreased. d. 190,000
c. Gross profit has declined.
d. The size of the discount offered has decreased. 4. Separately identified intangible assets are accounted for by amortizing:

a. exclusively by using impairment testing.

b. based upon a pattern that reflects the benefits conveyed by the asset. b. 10,000 increase 20,000 decrease
c. over the useful economic life less residual value using only the straight-line method. c. 10,000 decrease 20,000 decrease
d. over a period not to exceed a maximum of 40 years. d. 10,000 decrease no adjustment

5. Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchase 7. Polk issues common stock to acquire all the assets of the Sam Company on January
occurred Jersey Company had the following information related to fixed assets: 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
Land $ 80,000 January 1, 20X7. The impact of issuing the additional shares is to
Building 200,000
Accumulated Depreciation (100,000)
Equipment 100,000
Accumulated Depreciation (50,000) a. increase the price assigned to fixed assets.
b. have no effect on asset values, but to reassign the amounts assigned to equity
The building has a 10-year remaining useful life and the equipment has a 5-year remaining accounts.
useful life. The fair value of the assets on that date were: c. reduce retained earnings.
d. record additional goodwill.
Land 100,000
Building 130,000 8. Which of the following income factors should not be factored into an estimation of
Equipment 75,000 goodwill?

a. sales for the period

What is the 20X5 depreciation expense Balter will record related to purchasing Jersey
b. income tax expense
Company?
c. extraordinary items
a. 8,000 d. cost of goods sold
b. 15,000
c. 28,000 9. Acquisition costs such as the fees of accountants and lawyers that were necessary to
d. 30,000 negotiate and consummate the purchase are

a. recorded as a deferred asset and amortized over a period not to exceed 15 years
6. In performing impairment test for goodwill, the company had the following 20X6 and
b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
20X7 information available.
c. expensed in the period of the purchase
20X6 20X7 d. included as part of the price paid for the company purchased
Fair value of the reporting unit 350,000 400,000
Net book value (including $50,000 goodwill) 360,000 380,000 10.

Account Investor Investee

Assume that the carry value of the identifiable assets are a reasonable approximation of their
Sales 500,000 300,000
fair values. Based upon this information what are the 20X6 and 20X7 adjustment to goodwill,
Cost of Goods Sold 230,000 170,000
if any?
Gross Profit 270,000 130,000
20X620X7 Selling & Admin. Expenses 120,000 100,000
Net Income 150,000 30,000
a. no adjustment 20,000 decrease
Dividends paid 50,000 10,000 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
Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net 4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants
Income for the Controlling Interest? 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:
a. 164,000
b. 171,000 Pavin Sutton
c. 178,000 Common stock 4,000,000 700,000
d. 180,000 Paid-in capital in excess of par 7,500,000 900,000
Retained earnings 5,500,000 500,000
11. Consolidated financial statements are designed to provide: Total 17,000,000 2,100,000

a. informative information to all shareholders. Immediately after the purchase, the consolidated balance sheet should report paid-in capital
b. the results of operations, cash flow, and the balance sheet in an understandable and in excess of par of
informative manner for creditors.
c. the results of operations, cash flow, and the balance sheet as if the parent and a. 8,900,000
subsidiary were a single entity. b. 9,100,000
d. subsidiary information for the subsidiary shareholders. c. 9,200,000
d. 9,300,000
12.The goal of the consolidation process is for:
15.Judd Company issued nonvoting preferred stock with a fair value of 1,500,000 in
a. asset acquisitions and 100% stock acquisitions to result in the same balance sheet. exchange for all the outstanding common stock of the Bath Corporation. On the date of the
b. goodwill to appear on the balance sheet of the consolidated entity. exchange, Bath had tangible net assets with a book value of 900,000 and a fair value of
c. the assets of the noncontrolling interest to be predominately displayed on the balance 1,400,000. In addition, Judd issued preferred stock valued at 100,000 to an individual as a
sheet. finder's fee for arranging the transaction. As a result of these transactions, Judd should report
d. the investment in the subsidiary to be properly valued on the consolidated balance sheet. an increase in net assets of ____.

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.
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:

 engaged in the audit of the Fortitude Company at the close of the company’s first year of
Feb. 1 operations on December 31, 2005. The company closed its books prior to the time you
Key executives exercised 6,750 options outstanding at December 31, began your year-end fieldwork.
2004. The market price per share was P44 at this time.
Your audit and review showed the following stockholders’ equity accounts in the general
Apr. 1 ledger:
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 Common Stock
of stock at P40 each for a 1-year period. The bonds would sell at P996
per P1,000 bond without the warrant. 08/30/05 CD P550,000 01/02/05 CR P6,000,000
12/29/05 J 545,000
July 1
The company issued rights to stockholders (one right on each share, 12/29/05 J
exercisable within a 30-day period) permitting holders to acquire one Retained Earnings
share at P40 with every 10 rights submitted. All but 9,000 rights were P545,000 12/01/05
exercised on July 31, and the additional stock was issued. 12/31/05
CR
Oct. 1 J
All warrants issued in connection with the bonds on April 1 were P287,500
exercised. 4,000,000
12/31/05
Dec. 1 12/31/05
The market price per share dropped to P33 and options came due. J
Because the market price was below the option price, no remaining J
options were exercised. Income Summary
P26,000,000 12/31/05
Dec. 31 4,000,000
Net income for 2005 was P375,750. J P30,000,000

QUESTIONS: Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
Based on the above and the result of your audit, determine the following as of December
31, 2005: From the Articles of Incorporation of Fortitude Company:

1. Common stock •
a. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,050 Authorized capital stock – 150,000 shares
2. Total additional paid-in capital •
a. P12,629,175 b. P11,283,300 c. P12,329,475 d. P12,604,200 Par value per share – P100
3. Retained earnings From the board of directors’ minutes of meetings, the following resolutions were extracted:
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 01/02/05 – authorized the issuance of 50,000 shares at P120 per share.
•
PROBLEM NO. 2 08/30/05 – authorized the acquisition of 5,000 shares at P110 per share.
•
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was 12/01/05 – authorized the re-issuance of 2,500 treasury shares at P115 per share.
 b. Verify the existence
• of option holders in the entity’s payroll records or stock
12/29/05 – Declared a 10% stock dividend, payable January 31, 2006, to ledgers.
stockholders on record as of January 15, 2006. The market value of the stock on c. Determine that sufficient treasury stock is available to cover any new stock issued.
December 29, 2005 was P130 per share. d. Trace the authorization for the transaction to a vote of the board of directors.

REQUIRED: 13. The auditor would not expect the client to debit retained earnings for which of the
following transactions?
Determine the adjusted balances of a. A 4-for 1 stock split.
the following as of December 31, 2005. b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
A B C D d. Correction of error affecting prior year's earnings.

5. Capital stock 14. Only one of the following four statements, which compare confirmation of accounts
5,995,000 5,545,000 5,000,000 5,475,000 payable with suppliers and confirmation of accounts receivable with debtors is false. The
false statement is that
6. APIC a. Confirmation of accounts receivable with debtors is a more widely accepted auditing
1,012,500 1,000,000 1,155,000 965,000 procedures than is confirmation of accounts payable with suppliers.
b. Statistical sampling techniques are more widely accepted in the confirmation of
7. Total retained earnings accounts payable than in the confirmation of accounts receivable.
3,525,000 3,572,500 3,382,500 3,512,500 c. As compared with the confirmation of accounts receivable, the confirmation of
accounts payable will tend to emphasize accounts with zero balances at the
8. Treasury stock balance sheet date.
250,000 550,000 275,000 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.
9. Total stockholders’ equity
10,012,500 9,215,000 9,737,500 9,262,500
15. When title to merchandise in transit has passed to the audit client the auditor engaged in
10. During an audit of an entity’s shareholders’ equity accounts, the auditor determines the performance of a purchase cut-off will encounter the greatest difficulty in gaining
whether there are restrictions on retained earnings resulting from loans, agreements, assurance with respect to the
or law. This audit procedure most likely is intended to verify management’s assertion a. Quantity b. Quality c. Price d. Terms
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 BLT
auditor should
a. Count the certificates at the same time other securities are counted. 1. A. For the purpose of donor’s tax, second degree cousins are strangers to each
b. Count the certificates only if the company had treasury stock transactions during other.
the year. B. Encumbrance of the property donated, if assumed by the donor is deductible for
c. No count the certificates if treasury stock is a deduction from shareholders’ equity. the donors tax purposes.
d. Count the certificates only if the company classifies treasury stock with other
assets. a. True, True
b. True, False
12. In performing tests concerning the granting of stock options, an auditor should c. False, True
a. Confirm the transaction with the Securities and Exchange Commission. d. False, False
 a. Voidable
2. A. As a rule, donation between husband and wife during marriage is void b. Unenforceable
B. Donation can be made to conceived or unborn children c. Rescissible
d. Void
a. True, True
b. True, False 9. Which of the following is the correct?
c. False, True a. A contract of agency must be in writing to be a valid agreement
d. False, False b. A sale of personal property made by an agent without authority from the owner is
void
3. A donation which takes upon the death of the donor c. A sale of a piece of land made by an agent with oral authority from the owner is
void
a. Donation mortis causa d. An unemancipated minor cannot be appointed as an agent
b. Partakes of the nature of a testamentary disposition
c. Shall be governed by the law on succession 10. In which of the following acts may a person not appoint an agent?
d. A, B and C a. To represent the principal in a wedding ceremony where the principal is a
principal sponsor
4. A donation which is intended by the donor to take effect during his lifetime b. To vote for the principal during the meetings of stockholders where the principal
is a stockholder
a. Shall be subject to donor’s tax using the tax table for donation c. To represent the principal in a baptismal ceremony where the principal is the
b. Shall be in writing if the value exceeds P 5,000 father of the child to be baptized
c. Donation inter vivos d. To attend a meeting of the board of directors of a corporation where the principal
d. A, B and C is a director

5. A. gift is perfected from the moment the donor effects the delivery either actual or 11. Which escape from taxation does not result in loss of revenue to the
constructively of the property donated. government?
B. Donors tax is a property tax imposed on the property transferred by way of gift
inter-vivos
a. Tax evasion
a. True, True b. True, False c. False, True d. False, False b. Tax avoidance
c. Tax exemption
6. This requires a special power of attorney except d. Shifting
a. To accept or repudiate an inheritance
b. To effect novation
c. To enter into compromise 12. The following fringe benefits are not taxable, except:
d. To lease real property for one year

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

a. Fringe benefits which are authorized and exempted from tax under
representation or on behalf of another, with the consent or authority of the latter
a. Agency special laws.
b. Contract of service b. Contributions of the employer for the benefit of the employee to
c. Contract of piece of work retirement, insurance and hospitalization benefits.
d. Partnership c. Membership fees, dues and other expenses borne by the employer in
social or athletic clubs or other similar organizations.
8. If an agent enters into a contract in the name of his principal, exceeding the scope of d. Benefits given to rank and file employees, whether granted under a
his authority, the contract is 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 ½ 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.