Financial Acctg & Reporting 2&3

1 - STATEMENT OF FINANCIAL POSITION

AP. 1. Good Company reported the following items in its December 31, 2010 trial balance:

Accounts payable P108,900

Advances to employees 4,500
Unearned rent revenue 28,800
Estimated liability under warranties 25,800
Cash surrender value of officers’ life insurance 7,500
Bonds payable 555,000
Discount on bonds payable 22,500
Trademark 3,900

What is the amount that should be recorded as total liabilities?

A. P696,000
B. P700,500
C. P703,500
D. P741,000

AA10. Pink Company prepared a draft of its 2010 statement of financial position. The draft statement
reported total assets of P4,375,000. Included in this total assets figure were the following items:

Treasury shares of Pink Company at cost,

which approximates market value on December 31 P120,000
Unamortized patent 56,000
Cash surrender value of life insurance 68,500
Cumulative unrealized loss on available for sale securities 42,000

At what amount should total assets be correctly reported in the December 31, 2010 statement of
financial position?
A. P4,208,500
B. P4,213,000
C. P4,250,500
D. P4,255,000

AA50. Nice Company leased machinery with a fair value of P2,500,000 from another entity on
December 31, 2010. The contract is a six-year noncancelable lease with an implicit interest rate
of 10%. The lease requires annual payments of P500,000 beginning December 31, 2010. Nice
appropriately accounted for the lease as a finance lease. Nice incremental borrowing rate is
12%. The present value of an annuity due of 1 for 6 years at 10% is 4.7908 and the present value
of an annuity due of 1 for 6 years at 12% is 4.6048.

What is the lease liability that Nice should report in the statement of financial position on
December 31, 2010?
A. P1,895,400
B. P2,000,000
C. P2,395,400
D. P2,395,400

AB17. On December 27, 2010, Sampaguita Company sold a building, receiving as a consideration a
P4,000,000 noninterest bearing note due in three years. The building had a cost of P3,800,000
and the accumulated depreciation was P1,600,000 at the date of sale. The prevailing rate of
interest for a note of this type was 12%. The present value of 1 for three periods at 12% is 0.71.
 In its 2010 income statement, how much gain should Sampaguita report on the sale?
A. P1,800,000
B. P 640,000
C. P 200,000
D. P 0

AB25. The following data pertain to Rose Company on December 31, 2010:

Trade accounts payable, including cost of goods received on

consignment of P150,000 P1,350,000
Accrued taxes payable 125,000
Stock dividends payable 300,000
Customers’ deposit 100,000
Manila Company as guarantor 200,000
Bank overdraft 55,000
Accrued electric and power bills 60,000
Reserve for contingencies 150,000

How much should be shown as current liabilities in the statement of financial position on
December 31, 2010?
A. P1,840,000
B. P1,740,000
C. P1,650,000
D. P1,540,000

AB28. Irog Company was organized on January 1, 2010 with authorized capital of 50,000 ordinary
shares of P100 par value. During 2010, Irog had the following transactions affecting
shareholders’ equity:

January 7 Issued 20,000 shares at P120 per share

December 2 Purchased 3,000 shares of treasury at P130 per share

The cost method was used to record the acquisition of treasury shares. Irog’s net income for 2009
is P1,500,000.

What is the shareholders’ equity on December 31, 2010?

A. P3,200,000
B. P3,510,000
C. P3,540,000
D. P3,600,000

AB47. Paul Company’s liability account balances at June 30, 2008 included a 10% note payable in the
amount of P7,200,000. The note is dated October 1, 2007, and is payable in three equal annual
payments of P2,400,000 plus interest. The first interest and principal payment was made on
October 1, 2008 and second payment was made on October 1, 2009.

In the June 30, 2010 statement of financial position, what amount should be reported as accrued
interest payable for this note?
A. P360,000
B. P180,000
C. P120,000
D. P240,000

AA49. On July 1, 2010, Cane Company purchased 400 of the P2,000 face amount, 8% bonds of Sugar
Company for P738,400 to yield 10% per annum. The bonds which mature on July 1, 2014, pay
interest semiannually on January 1 and July 1. Cane uses the interest method of amortization and
the bonds are appropriately recorded as held to maturity investment.
 The bonds should be reported on Cane’s December 31, 2010 statement of financial position at
A. P748,240
B. P743,320
C. P733,480
D. P795,080

2 – STATEMENT OF COMPREHENSIVE INCOME

AB37. The following information is available from the records of Hilander Company for the current
year.
Beginning inventory P 400,000
Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000

The cost of goods sold is six times the selling expenses.

What is the amount of gross purchases?

A. P6,500,000
B. P6,700,000
C. P8,000,000
D. P8,200,000

AB42. Euro Company leases a warehouse to Pacific Company. Euro company granted Pacific
Company, as inducement to enter into a lease with Euro, nine months of free rent, under a 5-
year operating lease. The lease provides for a monthly rental of P 389,000 to begin April 1, 2011
and is effective on July 1, 2010.

The income statement of Euro Company for the year ended June 30, 2011 shall report a rent
income at
A. P3,501,000
B. P1,167,000
C. P3,967,800
D. P 991,950

AB43. After the issuance of its 2010 financial statements, Narda Company discovered a computational
error of P150,000 in the calculation of its December 31, 2010 inventory. The error resulted in a
P150,000 overstatement of cost of goods sold for the year ended December 31,2010. In October
2011, Narda paid the amount of P500,000 in settlement of litigation instituted against it during
2010. Ignore income tax.

In the 2011 financial statements, the January 1, 2011 retained earnings, as previously reported,
should be adjusted by a
A. P150,000 credit
B. P350,000 debit
C. P500,000 debit
D. P650,000 credit

AA44. Mile Company owns 2,000 shares of Stones’ 20,000 shares of P200 par, 6% cumulative,
nonparticipating preference share capital and 1,000 shares (2%) of Stones ordinary share capital.
During 2010 Stones declared and paid dividend of P480,000 on preference share capital. No
dividends had been declared or paid during 2009. In addition, Mile received a 5% ordinary stock
dividend from Stones when quoted price was P20 per share.
 What amount should Mile report as dividend income in its 2010 income statement?
A. P48,000
B. P25,000
C. P24,000
D. P49,000

AB45. The net income of Angie Company for the current year was P480,000. Percentage distribution of
the items in the income statement was as follows:

Selling expenses 10% of sales

Administrative expenses, excluding bad debts 15% of sales
Bad debt expense 3% of sales

It is ascertained that administrative expenses are 25% of cost of sales.

Sales for the current year amounted to

A. P1,920,000
B. P3,200,000
C. P4,000,000
D. P4,800,000

3 – NONCURRENT ASSET HELD FOR SALE- DISCONTINUED OPERATION

1. Lala Company accounts for noncurrent assets using the cost model. On October 1, 2010, Lala
classified a noncurrent asset held for sale. At that date, the asset’s carrying amount was
P1,600,000, its fair value was estimated at P1,100,000 and the cost to sell at P100,000. On
December 15, 2010, the asset was sold for net proceeds of P925,000.

What amount should be included as an impairment loss in Lala’s statement of comprehensive

income for the year ended December 31 ,2010?
A. P500,000
B. P600,000
C. P675,000
D. P 0

2. Rose Company accounts for noncurrent assets using the cost model. On October 30 2010, Rose
classified a noncurrent asset as held for sale. At that date, the asset’s carrying amount was
P750,000,its fair value was estimated at P550,000 and the cost to sell at P75,000. On November
20, 2010, the asset was sold for net proceeds of P400,000.

What amount should be included as loss on disposal in Rose statement of comprehensive income
for the year ended December 31, 2010?
A. P275,000
B. P350,000
C. P 75,000
D. P 0

6. Big company committed to sell its comic book division (a component of the business) on
September 1, 2010. The carrying amount of the division was P2,000,000 and the fair value was
P1,750,000. The disposal date is expected to be June 1, 2011. The division reported an operating
loss of P100,000 for the year ended December 31, 2010.

Ignoring income tax, what amount should be reported as loss from discontinued operation in
2010?
A. P250,000
 B. P100,000
C. P350,000
D. P0

4 – ACCOUNTING CHANGE

2. Golda Company had used the FIFO method of inventory valuation since it began operations in
2007. Golda decided to change to the weighted average method for determining inventory costs
at the beginning of 2010. The following schedules shows year-end inventory balances under
FIFO and weighted average method:
Year FIFO Weighted average
2007 4,500,000 5,400,000
2008 7,800,000 7,100,000
2009 8,300,000 7,800,000

What amount, before income tax, should be reported in the 2010 statement of retained earnings
as the cumulative effect of the change in accounting policy?
A. P500,000 decrease
B. P300,000 decrease
C. P500,000 increase
D. P300,000 increase

3.) On January 1, 2010 Ron Company changed its inventory method to FIFO from LIFO for both
financial and income tax reporting purposes. The change resulted in a P250,000 increase in the
January 1, 2010 inventory. The income tax rate is 30%.

The cumulative effect of the accounting change should be reported by Ron in its 2010

A. Retained earnings statement as a P175,000 addition to the beginning balance.

B. Income statement as P 175,000 cumulative effect of accounting change.
C. Retained earnings statement as a P250,000 addition to the beginning balance.
D. Income statement as P 250,000 cumulative effect of accounting change.

4. On January 1, 2011, Prince Construction Company changed to the percentage of completion

method from cost recovery method of income recognition. As of December 31, 2010, Prince
compiled data showing that income under the cost recovery method aggregated P7,000,000. If
the percentage of completion had been used, the accumulated income through December 31,
2010, would have been P9,000,000. The income tax rate is 30%.

The cumulative effect of this accounting change should be reported by Prince in the 2011
A. Retained earnings statement as P2,000,000 credit adjustment to the beginning balance.
B. Income statement as P2,000,000 credit.
C. Retained earnings statement as a P1,400,000 credit adjustment to the beginning
balance.
D. Income statement as a P1,400,000 credit.

9). On January 1, 2009, Ford Company purchased for P2,400,000 a machine with a useful life of 10
years and a residual value of P100,000. The machine was depreciated by the double declining
balance method and the carrying amount of the machine was P1,536,000 on December 31,2010.
Ford changed to the straight line method on January 1, 2011. The residual value did not change.

What should be the depreciation expense on this machine for the year ended December 31,
2011?
A. P143,600
B. P192,000
C. P230,000
 D. P179,500

16). On January 1, 2009, Andres Company acquired a machine at a cost of P1,000,000. The machine
is depreciated on the straight line method over a five-year period with no residual value.
Because of a bookkeeping error, no depreciation was recognized in Andres 2009 financial
statements. The oversight was discovered during the preparation of Andres 2010 financial
statements.

Depreciation expense on this machine for 2010 should be

A. P400,000
B. P200,000
C. P250,000
D. P 0

17). Hans Company failed to accrue warranty cost of P200,000 in its December 31, 2010 financial
statements. In addition, a change from straight line to accelerated depreciation made at the
beginning of 2011 resulted in a cumulative effect of P120,000 on Hans retained earnings.

What amount before tax should Hans report as prior period error in 2010?
A. P200,000
B. P320,000
C. P120,000
D. P 0

18). During the year ended December 31, 2010, the following events occurred at Hans Company:

 It was decided to write off P400,000 from inventor which was over two years old as it
was obsolete.
 Sales of P300,000 had been omitted from financial statements for the year ended
December 31, 2009.

How much should be shown as prior period error in the financial statements for the year ended
December 31, 2010?
A. P700,000
B. P300,000
C. P400,000
D. P100,000

22.) During the year ended December 31,2010, the following events occurred in relation to Star Co.

 Accounting error relating to the inventory at December 31, 20o9 was discovered. This
required a reduction in the carrying amount of inventory at that date of P140,000.
 The provision for uncollectible receivables at December 31, 2009 was P150,000. During
2010, P250,000 was written off the December 31, 2009 receivables.

What adjustment is required to restate retained earnings at December 31, 2010?

A. P140,000
B. P150,000
C. P290,000
D. P 0

5 – OPERATING SEGMENT

4.) The following information pertains to Alma Company and its divisions for the current year:

Sales to unaffiliated customers P10,000,000

 Intersegment sales of products similar to those
Sold to unaffiliated customers 3,000,000
Interest earned on loans to other operating segments 200,000

Alma and all of its divisions are engaged solely in manufacturing operations. Alma has a
reportable segment if that segment’s revenue is at least
A. P1,320,000
B. P1,300,000
C. P1,020,000
D. P1,000,000

6.) Gina Company, a publicly owned entity, is subject to the requirements of PFRS 8. In its income
statement for the year ended December 31, 2010, Gina reported revenue of P25,000,000,
excluding intersegment sales of P5,000,000, expenses of P23,500,000 and net income of
P1,500,000. Expenses include payroll costs of P7,500,000. Gina’s combined identifiable assets
of all operating segments at December 31, 2010 were P20,000,000.

In its financial statements, Gina should disclose major customer data if sales to any single
customer amount to at least
A. P2,500,000
B. P2,000,000
C. P3,000,000
D. P2,350,000

External revenue reported by operating segments must be at least

A. P11,250,000
B. P15,000,000
C. P16,875,000
D. P18,750,000

7. Good Company discloses supplemental operating segment information. The following

information is available for the current year:

Segment Sales Traceable expenses

X P 5,000,000 P3,000,000
Y 4,000,000 2,500,000
Z 3,000,000 1,750,000
P12,000,000 P7,250,000

Additional expenses, not included above, are as follows:

Indirect expenses P1,800,000

General corporate expense 1,200,000

Appropriate common expenses are allocated to segments based on the ratio of a segment’s sales
to total sales. Segment Z’s profit for the current year was
A. P1,250,000
B. P 650,000
C. P 800,000
D. P 500,000

8.) Cindy Company has three lines of business, each of which was determined to be reportable
segment. Cindy Company sales aggregated P15,000,000 in the current year, of which Segment
No. 1 contributed 40%. Traceable costs were P3,500,000 for Segment No. 1 out of a total of
P10,000,000 for an entity as a whole. For external reporting, Cindy allocates common costs to
the total income before common costs.
 In its financial statements for the current year, how much should Cindy report as profit for
Segment No. 1?
A. P2,500,000
B. P2,000,000
C. P1,350,000
D. P1,000,000

10.) Tinny Company a publicly owned entity, assesses performance and makes operating decisions
using the following information for its reportable segments:

Total revenue P3,840,000

Total profit or loss 203,000

Included in the total profit and loss are intersegment profit of P30,500. In addition, Tinny has
P2,500 of common costs for its reportable segments that are not allocated in reports used
internally. For purposes of segment reporting.

Tinny should report segment profit of

A. P175,000
B. P172,500
C. P205,500
D. P203,000

6 – INTERIM REPORTING

1. Fay Company had the following transactions during the quarter ended March 31, 2010.

Loss from typhoon P350,000

Payment of fire insurance premium for calendar year 2010 50,000

What amount should be included in the income statement for the quarter ended March 31, 2010?
Casualty loss Insurance expense
A. P350,000 P50,000
B. P350,000 P12,500
C. P 87,500 P12,500
D. P 0 P50,000

2. Happy Company incurred an inventory loss from market decline of P420,000 on June 30,
2010.
What amount of the inventory loss should be recognized in Happy’s quarterly income statement
for the three months ended June 30, 2010?
A. P105,000
B. P240,000
C. P210,000
D. P420,000

3. Wilvina Company experienced a P250,000 decline in the market value of its inventory at the
end
of the first quarter. Wilvina had expected this decline to reverse in the second quarter, and in
fact, the second quarter recovery exceeded the previous decline by P50,000.

What amount of gain or loss should Wilvina report in its interim statements for the first and
second quarters.

First quarter Second quarter

 A. P250,000 loss P250,000 gain
B. P250,000 loss P300,000 gain
C. P250,000 loss P 50,000 gain
D. 0 0

4. On June 30, 2010, Moon Company incurred a P500,000 net loss from disposal of a business
segment. Also, on June 30, 2010, Moon paid P200,000 for property taxes assessed for the
calendar year 2010.

What amount of the foregoing items should be included in the determination of the net income or
loss for the six-month interim period ended June 30, 2010?
A. P700,000
B. P600,000
C. P450,000
D. P350,000

7. Dagupan Company prepares quarterly interim financial reports. The entity sells electrical goods
and normally 5% of customers claim on their warranty. The provision in the first quarter was
calculated at 5% of sales to date which amounted toP10,000,000. However, in the second quarter,
a design fault was found and warranty claims were expected to be 10% for the whole year. Sales
for the second quarter amounted to P15,000,000.

What would be the provision charged in the second quarter’s interim income statement?
A. P2,000,000
B. P1,250,000
C. P1,500,000
D. P 750,000

9. Vilma Company has estimated that total depreciation expense for the year ended December 31,
2010 will amount to P300,000 and that 2010 year-end bonuses to employees will total P600,000.
In Vilma’s interim income statement for the six months ended June 30, 2010, what total amount
of expense relating to these two items should be reported?
A. P900,000
B. P150,000
C. P450,000
D. P 0

12 . On January 1, 2010, Irish Company paid real estate taxes on its property for the calendar year
2010 in the amount of P300,000. In the first week of April 2010, Irish made unanticipated major
repairs to its plant equipment at a cost of P1,200,000. It is ascertained that these repairs will
benefit operations for the remainder of the calendar year. How should these expenses be
reflected in Irish quarterly income statements for 2010?

March 31 June 30 September 30 December 31

A. P75,000 P475,000 P475,000 P475,000
B. P375,000 P375,000 P375,000 P375,000
C. P 75,000 P1,075,000 P75,000 P75,000
D. P300,000 P1,200,000 P 0 P 0

7 – CASH AND CASH EQUIVALENTS

7-5. On December 31, 2010, Wonderful Company had the following cash balances:

Cash in Bank P1,800,000

Petty Cash Fund (all funds were reimbursed on 12/31/2010) 50,000
Time deposit (due February 1, 2011) 250,000
 Cash in bank includes P600,000 of compensating balance against short-term borrowing
arrangement at December 31, 2010. The compensating balance is legally restricted as to
withdrawal by Wonderful.

In the current assets section of Wonderful’s December 31, 2010 statement of financial position
what total amount should be reported as cash and cash equivalents?
A. 1,850,000 C. 2,100,000
B. 1,250,000 D. 1,500,000

AA14.Young Company holds the following assets at year-end and classifies as cash equivalents
everything allowed by professional standards.

Treasury bills acquired with less than 3 months before maturity P1,500,000
Treasury bills acquired with greater than 3 months before maturity 2,000,000
Commercial papers 1,200,000
Investment in marketable equity securities 1,000,000

What would be the total cash equivalents at year-end for Young Company?
A. P1,500,000
B. P4,700,000
C. P2,700,000
D. P3,700,000

8 – BANK RECONCILIATION

8-17. The cash account in the ledger of K Company shows a balance of P1,652,000 at December 31.
The bank statement, however, shows a balance of P2,090,000 at the same date. The only
reconciling items consist of bank service charge of P2,000, a large number of outstanding checks
totaling P590,000 and a deposit in transit.

What is the deposit in transit in the December 31 bank reconciliation?

A. 150,000 C. 154,000
B. 440,000 D. 592,000

9 – ACCOUNTS RECEIVABLE

9-5. In the December 31, 2010 statement of financial position of MM Company, the current
receivables consisted of the following:

Trade accounts receivable P 930,000

Allowance for uncollectible accounts ( 20,000)
Claim against shipper for goods lost in transit(November 2010) 30,000
Selling price of unsold goods sent by MM on consignment at 130% of cost
(not included in MM’s ending inventory) 260,000
Security deposit on lease of warehouse used for storing some inventories 300,000
Total P1,500,000

At December 31, 2010, the correct total of current net receivables was
A. 940,000 C. 1,240,000
B. 1,200,000 D. 1,500,000

10 – RECEIVABLE FINANCING
10-14. Rain Company accepted from a customer a P4,000,000, 90-day, 12% interest-bearing note dated
August 31, 2010. On September 30, 2010, Rain discounted the note with recourse at the AA State
Bank at 15%. However, the proceeds were not received until October 1, 2010.

The discounting with recourse is accounted for as a conditional sale with recognition of a
contingent liability.

What is the loss on note receivable discounting?

A. 40,000 C. 17,000
B. 23,000 D. 20,000

11- NOTES RECEIVABLE AND LOAN IMPAIRMENT

11-7. Calasiao Company is a dealer in equipment. On December 31,2009, Calasiao Company sold an
equipment in exchange for a noninterest bearing note requiring five annual payments of
P500,000. The first payment was made December 31, 2010. The market interest for similar notes
was 8%. The relevant present value factors are:

PV of 1 @ 8% for 5 periods .68

PV of an ordinary annuity of 1 @ 8% for 5 years 3.99

In its December 31,2009 statement of financial position, what should Calasiao report as notes
receivable?
A. 2,500,000 C. 1,700,000
B. 1,995,000 D. 1,495,000

6. What interest income should be reported for 2010?

A. 505,000 C. 159,600
B. 101,000 D. 119,600

INVENTORY

12-17.
On December 1, 2010, Pete Department Store received 505 sweaters on consignment from Tiny.
Tiny’s cost for the sweaters was P800 each, and they were priced to sell at P1,000. Pete’s
commission on consigned goods is 10%.

At December 31, 2010 statement of financial position, what amount should Pete report as
payable for consigned goods?

A. P490,000 C. P450,000
B. P454,000 D. P404,000

12-27.
Ram Company records its purchases at gross amount but wishes to change to recording
purchases net of purchase discounts. Discount available on purchases for the current year totaled
P100,000. Of this amount, P10,000 is still available in the accounts payable balance. The
balances in the accounts as of and for the year ended December 31 before conversion are:

Purchases P5,000,000
Purchase discounts taken 40,000
Accounts payable 1,500,000

What is the accounts payable balance as of December 31 after the conversion?

A. P1,490,000 C. P1,440,000
B. P1,460,000 D. P1,410,000
12-29.
Ben Company began operations late in 2009. For the first quarter ended March 31, 2010, Ben
made available the following information:

Total merchandise purchased through March 15, 2010

recorded at net P4,900,000
Merchandise inventory at December 31, 2009, at
selling price 1,500,000

All merchandise was acquired on credit and no payments have been made on accounts payable
since the inception of the entity. All merchandise is marked to sell at 50% above invoice cost
before time discounts of 2/10, n/30. No sales were made in 2010.

How much cash is required to eliminate the current balance in accounts payable?
A. P6,000,000 C. P6,400,000
B. P5,900,000 D. P5,750,000

12-30.
The balance in Rey Company’s accounts payable at December 31, 2010 was P4,900,000 before
the following information was considered:

 Goods shipped FOB destination on December 21, 2010 from a vendor to Rey were lost in
transit. The invoice cost of P180,000 was not recorded by Rey. On December 28, 2010, Rey
notified the vendor of the lost shipment.
 Goods were in transit from a vendor to Rey on December 31, 2010. The invoice cost was
P240,000 and the goods were shipped FOB shipping point on December 28, 2010. Rey
received the goods on January 6, 2011.

What amount should Rey report as accounts payable in its December 31, 2010 statement of
financial position?
A. P5,320,000 C. P5,080,000
B. P5,140,000 D. P4,900,000

12-31.
Green Company’s accounts payable at December 31, 2010, totaled P4,500,000 before any
necessary year-end adjustments relating to the following transactions:

 On December 27, 2010, Green wrote and recorded checks to creditors totaling P2,000,000
causing an overdraft of P500,000 in Green’s bank account at December 31, 2010. The checks
were mailed on January 10,2011.

 On December 28, 2010, Green purchased and received goods for P750,000, terms 2/10, n/30.
Green records purchases and accounts payable at net amount. The invoice was recorded and
paid January 3, 2011.

 Goods shipped FOB destination on December 20, 2010 from a vendor to Green were
received January 2, 2011. The invoice cost was P325,000.

At December 31, 2010, what amount should Green report as accounts payable?
A. P7,575,000 C. P7,235,000
B. P7,250,000 D. P7,553,500

12-32.
Liane Company is preparing its financial statements for the year ended December 31, 2010.
Accounts payable amounted to P3,600,00 before any necessary year-end adjustment related to
the following:
  At December 31, 2010, Liane has a P500,000 debit balance in its accounts payable to Rose, a
supplier, resulting from a P500,000 advance payment for goods to be manufactured to
Liane’s specifications.

 Checks in the amount of P1,000,000 were written to vendors and recorded on December 29,
2010. The checks were mailed on January 5, 2011.

What amount should Liane report as accounts payable in its December 31, 2010 statement of
financial position?
A. P5,100,000 C. P3,100,000
B. P4,100,000 D. P2,100,000

12-33.
Kim Company’s accounts payable balance at December 31, 2010, was P2,200,000 before
considering the following data:

 Goods shipped to Kim FOB shipping point on December 22, 2010, were lost in transit. The
invoice cost of P40,000 was not recorded by Kim. On January 27, 2011, Kim filed a P40,000
claim against the common carrier.

 On December 27, 2010, a vendor authorized Kim to return, for full credit, goods shipped and
billed at P70,000 on December 3, 2010. The returned goods were shipped by Kim on
December 28, 2010. A P70,000 credit memo was received and recorded by Kim on January
5, 2011.

What amount should Kim report as accounts payable in its December 3, 2011 statement of
financial position?
A. P2,170,000 C. P2,230,000
B. P2,180,000 D. P2,280,000

16 – FIN’L ASSETS AT FAIR VALUE

16-2. On January 1, 2009, ABC Company purchased marketable equity securities to be held as
“trading” for P5,000,000. The entity also paid commission, taxes and other transaction costs
amounting to P200,000. The securities had a market value of P5,500,000 on December 31, 2009.

No securities were sold during 2009.

What amount of unrealized gain or loss on these securities should be reported in the 2009 income
statement?
A. 500,000 unrealized gain C. 300,000 unrealized gain
B. 500,000 unrealized loss D. 300,000 unrealized loss

(?)16-9.
On January 2, 2008, Handsome Company acquired an investment property and the initial cost of
investment property was P5,000,000. On the date of acquisition, the company chooses the cost
model to account for its investment. As of December 31, 2009, it has a carrying value of
P4,900,000 and a fair value of P5,100,000. On December 31, 2010, the company decided to
transfer the investment property to owner occupied property. On this date of transfer, the fair
value of property is P5,000,000 while its carrying value was P4,800,000.

What amount of gain or loss on transfer should the company recognize on December 31, 2010?
A. No gain or loss C. P200,000 loss
B. P100,000 loss D. P300,000 loss

(?)16-10.
 On January 2, 2010, Wishco Company converted its occupied property to investment property
that is to be carried at fair value. The carrying value of the property in the company’s books is
P4,000,000.

Assuming the fair value of the property on the date of transfer or conversion is P3,800,000,
Wishco Company should recognize
A. An impairment loss of P200,000 in the income statement.
B. A P200,000 deferred loss as an asset
C. A P200,000 unrealized loss in the shareholders’ equity
D. A P4,000,000 cost of the investment property

Base on the above, assuming the fair value of the property on the date of transfer or conversion is
P4,400,000, Hope Company should recognize
A. A P400,000 unrealized gain in the income statement
B. A P400,000 revaluation surplus in the shareholders’ equity
C. A P400,000 unrealized gain in the liability section
D. A P400,000 direct credit to accumulated profits and losses

(?)16-13.
On January 2, 2009, Joy Corporation acquired a track of land that is to be sold in the ordinary
conduct of business. The purchase price of the property of P50,000,000 was paid in cash and a
total transaction costs of P500,000 related to the acquisition of the property was also paid at a
later date. The land was subdivided into 2,000 lots (200 square meters for every lot) for an
additional cost of P5,500,000. On December 31, 2009, the market value of the lot was P1,500 per
square meter.

As of December 31, 2010, only 20,000 square meters are still unsold and market value of the lot
had increased to P1,600 per square meter. On this date, Joy decided to transfer the remaining lots
into investment property that is to be carried under the fair value model. There was no additional
cost incurred on the change of intention on the property.

What amount of gain should Joy Corporation recognize as a result of the transfer?
A. P29,200,000 C. P29,475,000
B. P29,225,000 D. P29,500,000

INVESTMENT IN EQUITY SECURITIES

17-6.
Paperdoll Company owns 20,000 shares of Sanrio Company’s 200,000 shares of P100 par, 6%
cumulative, non-participating preference share capital and 10,000 shares representing 2 %
ownership of Sanrio’s ordinary share capital. During 2010, Sanrio declared and paid preference
dividends of P2,400,000. No dividends had been declared or paid during 2009.

In addition, Paperdoll received a 5% stock dividend on ordinary share from Sanrio’s ordinary
share was P10.

What amount should Paperdoll report as dividend income in its 2010 income statement?
A. P120,000 C. P240,000
B. P125,000 D. P245,000

17-10.
On March 1, 2010, Rose Company purchased 10,000 ordinary shares of Cherry Company at P80
per share. On September 30, 2010, Rose received 10,000 stock rights to purchase an additional
10,000 shares at P90 per share. The stock rights had an expiration date of February 1, 2011. On
September 30, 2010, Cherry’s share had a market value ex-right of P95 and the stock right had a
market value of P5.
 What amount should Rose report in its September 30, 2010 statement of financial position for
investment in stock rights?
A. P 40,000 C. P100,000
B. P50,000 D. P150,000

17-5. During 2009, Mayon Company bought the shares of Lava Company as follows:

June 1 20,000 shares @ P100 P2,000,000

December 1 30,000 shares @ P120 3,600,000
P5,600,000

The transactions for 2010 are:

January 10 Received cash dividend at P10 per share.
January 20 Received 20% stock dividend.
December 10 Sold 30,000 shares at P125 per share.

The gain on sale of the shares assuming the FIFO approach is

A. P1,150,000 C. P150,000
B. P 950,000 D. P550,000

17-6. May Company owns 20,000 shares of April Company’s 200,000 shares of P100 par, 6%
cumulative, non-participating preference share capital and 10,000 shares representing 2%
ownership of April’s ordinary share capital. During 2010, April declared and paid preference
dividends of P2,400,000. No dividends had been declared or paid during 2009.

In addition, May received a 5% stock dividend on ordinary share from April when the quoted
market price of April’s ordinary share was P10.

What amount should May report as dividend income in its 2010 income statement?
A. 120,000 C. 240,000
B. 125,000 D. 245,000

17-11. Food Company owns 30,000 ordinary shares of Beverages Company acquired on July 31, 2010,
at a total cost of P1,100,000. On December 1, 2010, Food received 30,000 stock rights from
Beverages. Each right entitles the holder to acquire one share at P45. The market price of
Beverages’s share on this date, ex-right, was P50 and the market price of each right was P5. Food
sold its rights the same date at P5 a right less a P10,000 commission.

The gain from the sale of the rights should be reported by Food at
A. P150,000 C. P50,000
B. P140,000 D. P40,000

17-13. Apple Company owns 50,000 ordinary shares of Orange Company, which has several hundred
thousand shares publicly traded. These 50,000 shares were purchased by Apple in 2008 for P100
per share. On August 30, 2010, Orange distributed 50,000 stock rights to Apple. Apple was
entitled to buy one new share of Orange for P90 cash and two of these rights. On August 30,
2010, each share had a market value of P132 ex-right, and each right had a market value of P18.

What cost should be recorded for each new share that Apple acquired by exercising the rights?
A. P 90 C. P126
B. 114 D. P132

AA23. In January 2010, Jenny Company acquired 20% of the outstanding voting ordinary shares of Lyn
Company for P2,800,000. This investment enabled Jenny to exercise significant influence over
Lyn. The book value of the acquired shares was P2,100,000. The excess of cost over book value
 was attributed to an identifiable intangible asset that was undervalued in Lyn’s statement of
financial position and that had a remaining useful life of 10 years.

For the year ended December 31, 2010, Lyn reported income of P630,000 and paid cash dividend
of P140,000 on its ordinary shares.

What is the proper carrying value of Jenny’s investment Lyn at December 31, 2010?
A. P2,700,000
B. P2,730,000
C. P2,800,000
D. P2,828,000

INVESTMENT IN ASSOCIATE

18-5. On January 1, 2010, Dry Company paid P18,000,000 for 50,000 ordinary shares of Rain
Company which represent a 25% interest in the net assets of Rain. The acquisition cost is equal
to the book value of the net assets acquired. Dry has the ability to exercise significant influence
over Rain. Dry received a dividend of P35 per share from Rain in 2009, Rain reported net
income of P9,600,000 for the year ended December 31, 2010.

In its December 31, 2010 statement of financial position, Dry should report the investment in
Rain Company at
A. P22,150,000 C. P18,650,000
B. P20,400,000 D. P18,000,000

18-6. On January 1, 2010, Moon Company purchased 10% of Light Company’s outstanding ordinary
shares for P4,000,000. Moon is the largest single shareholder in Light and Moon’s officers are a
majority of Light’s board of directors. Light reported net income of P5,000,000 for 2010 and
paid dividends of P1,500,000.

In its December 31, 2010 statement of financial position, what amount should Moon report s
investment in Light?
A. P4,500,000 C. P4,000,000
B. P4,350,000 D. P3,850,000

18-17. Red Company owns 30% of the outstanding ordinary shares and 100% of the outstanding
noncumulative nonvoting preference shares of White Company. In 2010, White declared
dividend of P1,000,000 on its ordinary share capital and P600,000 on its preference share capital.

What amount of dividend revenue should Red report in its income statement for the year ended
December 31, 2010?
A. P900,000 C. P600,000
B. P300,000 D. 0

18-26. Chest Company owns 20% of Nut Company’s preference share capital and 80% of its ordinary
share capital. Nut’s share capital outstanding at December 31, 2010 is as follows:

10% cumulative preference share capital P5,000,000

Ordinary share capital 7,000,000

Nut reported net income P3,000,000 for the year ended December 31, 2010.

What amount should Chest record as equity in earnings of Nut for the year ended December 1,
2010?
A. P2,000,000 C. P2,100,000
B. P2,400,000 D. P2,300,000
INVESTMENT (HELD TO MATURITY SECURITIES)

19-1. On July 1, 2010, Wonderful Company purchased as trading investment a P2,000,000 face value
Bright Company 8% bond for P1,850,000 plus accrued interest to yield 10%. The bonds mature
on January 1, 2015, and pay interest annually on December 31. On December 31, 2010, the
bonds had a market value of P1,890,000. On February 15, 2011, Wonderful sold the bonds for
P1,900,000.

In its December 31, 2010 statement of financial position, what amount should Wonderful report
for investment in trading securities?
A. P1,850,000 C. P1,890,000
B. P1,875,000 D. P1,900,000

19-5. On October 1, 2010, Micro Company purchased 4,000 of the P1,000 face value,10% bonds of
Bac Company for P4,400,000 which includes accrued interest of P100,000. The bonds, which
mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Micro uses the
straight line method of amortization and appropriately recorded the bonds as held to maturity.

The bonds should be shown in Micro’s December 31, 2010 statement of financial position at
A. P4,284,000 C. P4,300,000
B. P4,288,000 D. P4,400,000

19-7. Sun Company purchased bonds at a discount of P100,000. Subsequently, Sun sold these bonds at
a premium of P140,000. During the period hat Sun held this held for maturity investment,
amortization of the discount amounted to P20,000.

What amount should Sun report as gain on the sale of bonds?

A. P120,000 C. P240000
B. P220,000 D. P260,000

19-16. On January 1, 2010, Mini Company purchased ten-year bonds with a face value of P1,000,000
and a stated interest rate of 8% per year payable semiannually July 1 and January 1. The bonds
were acquired to yield 10%. Present value factors are as follows:

Present value of 1 for 10 periods at 10% .386

Present value of 1 for 20 periods at 5% .377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462

The purchase price of the bonds is

A. P1,124,620 C. P1,000,000
B. P1,100,000 D. P 875,380

20 – INVESTMENT PROPERTY

20-4. Dream Company owns three properties which are classified as investment properties. Details of
the properties are as follows:

Initial cost Fair value at 12/31/2009 Fair value at 1/31/2010

Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,050,000 2,850,000
Property 3 3,300,000 3,850,000 3,600,000

Each property was acquired in 2006 with a useful life of 25 years. The entity’s accounting policy
is to use the fair value model for investment properties.
 What is the gain or loss to be recognized for the year ended December 31,2010?
A. P189,000 loss C. P300,000 gain
B. P150,000 loss D. P450,000 loss

21 – FUND AND OTHER INVESTMENTS

21-1. In January 2010 Cool Company established a sinking fund in connection with its issue of bonds
due in 2012. A bank was appointed as independent trustee of the fund. On December 31, 2010,
the trustee held P364,000 cash in the sinking fund account representing P300,000 in annual
deposits to the fund, and P64,000 of interest earned on those deposits.

How should the sinking fund be reported in Cool’s statement of financial position at
December 31,2010?
A. No part of the sinking fund should appear in Cool’s statement of financial position
B. P64,000 should appear as a current asset
C. P364,000 should appear as a current asset
D. P364,000 should appear as a noncurrent asset

23 – PROPERTY, PLANT & EQUIPMENT

23-13. In October of the current year, Everest Company exchanged an old packing machine, which cost
P1,200,000 and was 50% depreciated, for another used machine and paid a cash difference of
P160,000. The fair value of the old packaging machine was determined to be P700,000.

What is the cost of the machine acquired in the exchange on the books of Everest Company?
A. P860,000 C. P760,000
B. P700,000 D. P540,000

25 – LAND, BUILDINGS & MACHINERY

25-13. On December 31, 2010, the property, plant and equipment account of Pure Company includes
the details below:

Plant assets acquired from Zip Company P7,500,000

Repairs made on building prior to occupancy 200,000
Special Tax assessment 30,000
Construction of platform for machinery 70,000
Remodeling of office space in building including new partitions
and walls 400,000
Purchase of new machinery 800,000
Total property, plant and equipment P9,000,000

In exchange for the plant assets of Zip company, Pure Company issued 50,000 shares with P100
par value. On the date of purchase, the share had a quoted price of P150 and the plant assets had
the following fair value:
Land P 500,000
Building 4,000,000
Machinery 1,500,000

The Land should be reported at

A. P530,000 C. P625,000
B P500,000 D. P655,000

16. The building should be reported at

 A. P4,400,000 C. P5,600,000
B. P4,600,000 D. P5,400,000

17. The machinery should be reported at

A. P2,300,000 C. P2,370,000
B. P2,675,000 D. P2,745,000

26 – BORROWING COST

26-5. Coco Company commenced construction of a new plant on February 1, 2010. The cost of
P18,000,000 was funded from existing general borrowings. The construction was completed on
September 30,2009. Coco Company’s borrowings during 2009 comprised of the following:
Bank A - 6% P 8,000,000
Bank B - 6.6% 10,000,000
Bank C - 7% 30,000,000

What is the amount of borrowing costs that should be capitalized in relation to the plant?
A. P1,215,000 C. P911,250
B. P 810,000 D. P 0

27 - DEP’N.

27-4. Pacific Company’s depreciation policy on machinery is as follows:

 A full year’s depreciation is taken in the year of an asset’s acquisition.

 No depreciation is taken in the year of an asset’s disposition.
 The estimated useful life is five years.
 The straight line method is used.

On June 30, 2010, Pacific sold for P2,300,000 a machine acquired in 2007 for P4,200,000. The
estimated residual value was P600,000.

How much gain on the disposal should Pacific record in

2010?
A. P140,000 C. P620,000
B. P260,000 D. P980,000

27-8. Hills Company provided the following information with respect to its building.

 The building was acquired January 1, 2005 at a cost of P7,800,000 with an estimated useful
life of 40 years and residual value of P200,000. Yearly depreciation was computed on the
straight line method.
 The building was renovated on January 1, 2007 at a cost of P760,000. This was considered as
improvement. Residual value did not change.
 On January 1, 2010, the management decided to change the total life of the building to 30
years.

What is the depreciation of the building for 2010?

A. P292,400 C. P334,400
B. P266,000 D. P294,000

27-15. Euro Company purchased a machine for P4,500,000 on January 1, 2009. The machine has an
estimated useful life of four years and a residual value of P500,000. The machine is being
depreciated using the sum of the year’s digits method.
 The December 31, 2010 asset balance, net of accumulated depreciation, should be
A. P2,900,000 C. P1,700,000
B. P2,700,000 D. P1,350,000

27-20. On July 1, 2009, Dagupan Company purchased factory equipment for P5,000,000. Residual
value was estimated at P20,000. The equipment is depreciated over ten years using the double
declining balance method.

Counting the year of acquisition as one half year, Dagupan should record depreciation expense
for 2010 at
A. P1,000,000 C. P768,000
B. P 900,000 D. P960,000

27-26. In January 2009, Nova Company purchased equipment at a cost of P6,000,000 to be used in its
manufacturing operations. The equipment was estimated to have a useful life of eight years with
residual value estimated at P600,000. Nova considered various methods of depreciation and
selected the sum of years’ digits method.

On December 31,2010, the accumulated depreciation should have a balance of

A. P750,000 less than under the straight line method
B. P750,000 less than under the double declining balance method
C. P900,000 greater than under the straight line method
D. P900,000 greater than under the double declining balance method

DEPLETION

28-3. At the beginning of the current year, Von Company purchased a mineral mine for P26,400,000
with removable ore estimated at 1,200,000 tons. After it had extracted all the ore, Von will be
required by law to restore the land to its original condition at a discounted amount of P1,800,000.
Von believes it will be able to sell the property afterwards for P3,000,000. During the current
year, Von incurred P3,600,000 of development cost preparing the mine for production and
removed and sold 60,000 tons of ore.

In its income statement for the current year, what amount should Von report as depletion?
A. P1,350,000 C. P1,500,000
B. P1,440,000 D. P1,590,000

28-12. On July 1, 2010, Bohol Company, a calendar year corporation, purchased the rights to a mine.
The total purchase price was P13,200,000, of which P400,000 was allocable to the land.
Estimated reserves were 1,600,000 tons. Bohol expects to extract and sell 25,000 tons per month.
Bohol purchased new equipment on July 1, 2010. The equipment cost P6,600,000 and had a
useful life of 8 years. However, after all the resource is removed, the equipment will be of no use
and will be sold for P200,000.

. Bohol Company should record depletion for 2010 at

A. P1,200,000 C. P1,237,500
B. P2,400,000 D. P2,475,000

. Bohol Company should record depreciation of the mining equipment for 2010 at
A. P400,000 C. P600,000
B. P800,000 D. P300,000

REVALUATION

29-4. On January 1, 2010, the historical balances of the land and building of Diner Company are:
 Cost Accumulated depreciation
Land P 50,000,000
Building 300,000,000 P90,000,000

The land and building were appraised on same date and the revaluation revealed the following:

Sound Value
Land P 70,000,000
Building 315,000,000

There were no additions or disposals during 2010. Depreciation is computed on the straight line.
The estimated life of the building is 20 years.

The depreciation of the building for 2010 should be

A. P22,500,000 C. P15,000,000
B. P25,750,000 D. P10,500,000

Ignoring income tax, the December 31, 2010 statement of financial position should show
revaluation surplus at
A. P117,500,000 C. P105,000,000
B. P125,000,000 D. P119,750,000

30 – IMPAIRMENT OF ASSETS

AB5. Rupert Company owns a noncurrent asset which is damaged and is to be reviewed for
impairment. The following information relates to the noncurrent asset:

Current carrying amount P2,000,000

Fair value 2,200,000
Expected disposal costs 100,000
Value in use 2,050,000

What should be the carrying amount of the net asset after the impairment review?
A. P2,000,000
B. P2,200,000
C. P2,100,000
D. P2,050,000

INTANGIBLES

31-8. On January 1, 2007, Hope Company purchased patent for P7,140,000. The patent was amortized
over its remaining life of 15 years expiring on January 1, 2022. During 2010, Hope determined
that the economic benefits of the patent would not last longer than ten years from the date of
acquisition.

What amount should be reported in the statement of financial position for the patent, net of
accumulated amortization, at December 31, 2010?
A. P4,284,000 C. P5,050,000
B. P4,896,000 D. P5,236,000

31-12 .On January 1, 2010, Matt Company purchased Pia Company at a cost that resulted in
recognition of goodwill of P2,000,000. During the first quarter of 2010, Matt spent an additional
P800,000 on expenditures designed to develop and maintain goodwill by training and hiring new
employees. Due to these expenditures, at December 31, 2010, Matt estimated that the benefit
period of goodwill was indefinite.
 In its December 31, 2010 statement of financial position, what amount should Matt report as
Goodwill?
A. P1,800,000 C. P2,000,000
B. P1,900,000 D. P2,660,000

33 – CURRENT LIABILITIES

33-9. On April 1, 2011, Adel Company began offering a new product for sale under a one-year
warranty. Of the 50,000 units in inventory at April 1, 2011, 30,000 had been sold by June 30,
2011. Based on its experience with similar products, Adel estimated that the average warranty
cost per unit sold would be P80. Actual warranty costs incurred from April through June 30,
2011 amounted to P700,000.

At June 30, 2011, what amount should Adel report as estimated warranty liability?
A. P 900,000 C. P1,700,000
B. P1,600,000 D. P3,300,000

34 – PROVISION AND CONTINGENT LIABILITY

34-15. During 2010, North Company filed suit against East Company seeking damages for patent
infringement. At December 31, 2010, North legal counsel believed that it was probable that
North would be successful against East for an estimated amount of P1,500,000. In March 2011,
North was awarded P1,000,000 and received full payment thereof.

In North’s 2010 financial statements issued February 2011, how should this award be reported?
A. As a receivable and revenue of P1,000,000.
B. As a receivable and deferred revenue of P1,000,000.
C. As a disclosure of a contingent asset of P1,000,000.
D. As a disclosure of contingent asset of P1,500,000.

35 – NOTE PAYABLE

35-15. Doris Company has P2,000,000 of note payable due June 30,2011. At the financial statement
date of December 31, 2010. Doris signed an agreement to borrow up to P2,000,000 to refinance
the note payable on a long-term basis. The financing agreement called for borrowing not to
exceed 80% of the value of the collateral Doris was providing. On December 31, 2010, the value
of the collateral was P3,000,000. Under the existing loan facility, Doris has the discretion to
refinance or roll over the note payable for at least twelve months after the end of reporting
period.

On December 31, 2010, What amount of the note payable should Doris report as noncurrent
liability?
A. P2,000,000 C. P3,000,000
B. P2,400,000 D. P 0

37 - BONDS PAYABLE

37-5. On March 1, 2010, Abel Company issued at 103 plus accrued interest 4,000 of its 9%, P1,000
face value bonds. The bonds are dated January 1, 2010 and mature on January 1, 2020. Interest is
payable semiannually on January 1 and July 1. Abel paid bond issue cost of P200,000.

Abel received net cash from the bond issuance of

A. P4,320,000 C. P4,120,000
B. P4,180,000 D. P3,980,000
37-9. On June 30, 2010, Gale Company issued at 99, five thousand of its 8%, P1,000 face value bonds.
The bonds were issued through an underwriter to whom Gale paid bond issue cost of P425,000.

On June 30, 2010, Gale should report the bond liability at

A. P4,525,000 C. P5,000,000
B. P4,950,000 D. P4,575,000

37-11. On January 1, 2010, Mark Company issued 5,000 of its 9%, P1,000 face value bonds at 95.
Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2020.
Mark uses the straight line method of amortizing bond discount.

In Mark’s December 31,2010 statement of financial position, how much would be shown as the
carrying amount of the bonds payable?
A. P5,000,000
B. P4,775,000
C. P4,750,000
D. P5,225,000

37-18. On January 1, 2010, Well Company issued 9% bonds in the face amount of P5,000,000, which
mature on January 1, 2020. The bonds were issued for P4,695,000 to yield 10%. Interest is
payable annually on December 31. Well uses the interest method of amortizing bond discount.

In its December 31, 2010 statement of financial position, what amount should Well report as
bonds payable?
A. P4,695,000 C. P4,704,750
B. P4,714,500 D. P5,000,000

38 – COMPOUND FINC’L INSTRUMENT

38-1. On December 30, 2010, Faye Company issued 5,000 of its 8% 10-Year, P1,000 face value bonds
with detachable share warrants at 110. Each bond carried a detachable warrant for ten ordinary
shares of Faye Company at a specified option price of P25 per share. The par value of the
ordinary share is P20.

Immediately after issuance, the market value of the bonds without the warrants was P5,400,000
and the market value of the warrants was P600,000.

In its December 31, 2010 statement of financial position, what amount should Faye report as
bonds payable?
A. P5,000,000 C. P4,900,000
B. P4,950,000 D. P5,400,000

39 – OPERATING LEASE

39-18. Joy Company purchased a new machine for P4,800,000 on January 1, 2010 and leased it to Ray
the same day. The machine has an estimated 12-year life and will be depreciated P400,000 per
year. The lease is for a three-year period expiring January 1, 2013 at an annual rental of
P850,000. Additionally, Ray paid P300,000 to Joy as a lease bonus to obtain the three-year
lease. Joy incurred insurance expense of P80,000 for the leased machine during 2010.

What is the 2010 operating profit on this leased asset?

A. P670,000 C. P470,000
B. P550,000 D. P370,000
40 – SALE AND LEASEBACK

40-4. On January 1, 2010, Active Company sold a building with a book value of P4,200,000 to another
entity for P4,050,000. Active Company immediately entered into a leasing agreement wherein
Active would lease the building back for an annual payment of P640,000. The term of the lease
is 10 years, the expected remaining useful life of the building.

The first annual lease payment is to be made immediately, and future payments will be made on
January 1 of each succeeding year. The lessor’s implicit interest rate is 12%.

How much loss on sale and leaseback should be recognized for 2010?
A. P150,000 C. P15,000
B. P135,000 D. P 0

41 - FINANCE LEASE - LESSEE

41-4. On January 1, 2011, Aim Company entered into a ten-year noncancelable lease requiring year-
end payments of P1,000,000. Aim’s incremental borrowing rate is 12%, while the lessor’s
implicit interest rate, known to Aim, is 10%. Present value factors for an ordinary annuity for ten
periods are 6.145 at 10%, and 5.650 at 12%. On same date, Aim Company paid initial direct cost
of P200,000 in negotiating and securing the leasing arrangement. Ownership of the property
remains with the lessor at expiration of the lease. There is no bargain purchase option. The leased
property has an estimated economic life of 12 years.

What amount should Aim capitalize as cost of the leased property on January 1, 2011?
A. P6,145,000 C. P5,650,000
B. P6,345,000 D. P5,850,000

41-3. Novelty Company leased a warehouse with adjoining land for a period of 15 years. The fair
values of the leasehold interests in the land and the warehouse are P5,000,000 and P2,500,000
respectively. The land has an indefinite economic life whereas the warehouse has a useful life of
15 years. Title to the land is not expected to pass at the end of the lease.

At what amount should the assets in relation to finance leases be recognized in the financial
statements of Novelty?
A. P7,500,000 C. P2,500,000
B. P5,000,000 D. 0

41-5. Newlook Company entered into a nine-year finance lease on a warehouse on December 31,
2010. Lease payment of P 520,000 which includes real estate taxes and other executory cost of
P20,000, are due annually, beginning on December 31, 2011 and every December 31 thereafter.
The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity of
1 for nine years at 9% is 5.6.

What amount should Newlook report as lease liability at December 31, 2010?
A. P2,800,000 C. P4,500,000
B. P2,912,000 D. P4,680,000

41-10. On January 1, 2010, Cane Company signed an eight-year noncancellable lease for a new
machine, requiring P150,000 annual payments at the beginning of each year. The machine has a
useful life of 12 years, with no residual value. Title passes to Cane at the lease expiration date.
Cane uses straight line depreciation for all of its plant assets. Aggregate lease payments have a
present value on January 1, 2010 of P1,080,000 based on an appropriate rate of interest.
 Cane should record depreciation expense of the leased machine for 2010 at
A. P 0 C. P135,000
B. P90,000 D. P150,000

FINANCE LEASE – LESSOR

42-1. Moonlight Company leased equipment to Sunlight Company on January 1, 2010, for an eight-
year period expiring December 31, 2017. Equal payments under the lease are P500,000 and are
due on January 1 of each year. The first payment was made on January 1, 2010. The selling price
of the equipment is P2,900,000 and its carrying amount on Moonlight’ books is P2,000,000. The
lease is appropriately accounted for as a sales type lease. The present value of the lease payments
at an implicit interest rate of 12% is P2,780,000.

What amount of profit on the sale should Moonlight report for the year ended December 31,
2010?
A. P900,000 C. P240,000
B. P780,000 D. P333,600

42-9. On January 1, 2010 Luzon Company, acting as a lessor, leased an equipment for ten years at an
annual rental of P1,200,000, payable by Visayas, the lessee, at the beginning of each year. The
equipment had a cost of P8,400,000 with an estimated life of 12 years and no residual value.
Luzon uses the straight line depreciation. The implicit rate is 9%.

What amount of interest income should be reported in 2010 by Luzon if the lease was accounted
for as a direct financing lease?
A. P500,000 C. P756,000
B. P648,000 D. P360,000

43 – EMPLOYEE BENEFITS

43-17. Queen Company adopted a defined benefit pension plan on January 1, 2010. Queen amortizes
the past service cost over 16 years and funds past service cost by making equal payments to the
fund trustee at the end of each of the first ten years.
The current service cost is fully funded at the end of each year. The following data are available
for the current year:

Current service cost P220,000

Past service cost:
Amortized 83,400
Funded 114,400

Queen’s prepaid pension cost at December 31, 2010 is

A. P114,400 C. P31,000
B. P 83,400 D. P 0

43-17. Best Company determined that it has an obligation relating to employees’ rights to receive
compensation for future absences attributed to employees’ services already rendered. The
obligation relates to rights that vest, and payment of the compensation is probable. The amount
of Best’s obligations as of December 31, 2010 are reasonably estimated as follows:

Vacation pay P1,100,000

Sick pay 900,000

In its December 31, 2010 statement of financial position, what amount should Best report as its
liability for compensated absences?
 A. P1,100,000 C. P900,000
B. P2,000,000 D. P 0

44 – AACTG FOR INCOME TAX

44-7. On January 1, 2009, Hilander Company purchased a machine for P1,400,000. This machine has
a 5-year useful life, a residual value of P200,000, and is depreciated using the straight line
method for financial statement purposes. For tax purposes, depreciation expense was P500,000
for 2009 and P400,000 for 2010, Hilander’s 2009 income before tax and depreciation expense
was P2,000,000 and its tax rate was 30%.

If Hilander has made no estimated tax payments during 2010, what amount of current income tax
liability would Hilander report in its December 31, 2010 statement of financial position?
A. P450,000 C. P330,000
B. P480,000 D. P600,000

44-10. On June 30, 2010, Lovely Company prepaid a P1,000,000 premium on an annual insurance
policy. The premium payment was a tax deductible expense in Lovely’s 2010 cash basis tax
return. The accrual basis income statement will report a P500,000 insurance expense in 2010 and
2011. The income tax rate is 30%.

In Lovely’s December 31, 2010 statement of financial position, what amount related to the
insurance should be reported as deferred tax liability?
A. P300,000 C. P200,000
B. P150,000 D. P 0

45 – SHAREHOLDERS’ EQUITY

45-1. The accounts below appear in the December 31, 2010 trial balance of Moon Company:

Authorized share capital P5,000,000

Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained Earnings unappropriated 600,000
Retained Earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares at cost 100,000

In its December 31, 2010 statement of financial position, Moon should report total shareholders’
equity at
A. P5,100,000 C. P4,900,000
B. P5,500,000 D. P4,800,000

45-3. Sunrise Company’s records included the following shareholders’ equity accounts?

Preference share capital, par value P15, authorized 200,000 shares P2,550,000
Share premium, preference share 150,000
Ordinary share capital, no par, P50 stated value, 100,000
Shares authorized 3,000,000

In Sunrise’s statement of shareholders’ equity, the number of issued and outstanding shares for
each class is
Ordinary Preference Ordinary Preference
 A. 60,000 170,000 C. 63,000 170,000
B. 60,000 180,000 D. 63,000 180,000

45-23. Ox Company was organized on January 1, 2009 at which date it issued 100,000 ordinary shares
of P10 par value at P15 per share. During the period January 1, 2009 through December 31,
2010, Ox reported net income of P450,000 and paid cash dividend of P230,000. On January 10,
2010, Ox Purchased 6,000 treasury shares at P12 per share. On December 31, 2010, Ox sold
4,000 treasury shares at P8 per share and retired the remaining treasury shares. Ox uses the cost
method of accounting for treasury shares.

What is the total shareholders’ equity at December 31, 2010?

A. 1,720,000 C. 1,688,000
B. 1,704,000 D. 1,680,000

47 – RETAINED EARNINGS

47-1. Short Company had 10,000 shares issued and outstanding at January 1, 2010. During 2010, Short
took the following actions:

March 15 Declared a 2-for a share split, when the fair value of the share was P80 per share.
December 15 Declared a P5 per share cash dividend.

In Shorts statement of changes in equity for 2010, what amount should Short report as
dividends?
A. 50,000 C. 850,000
B. 100,000 D. 950,000

47-3. Jen Company issued 200,000 shares of P5 par value at P10 per share. On January 1, 2010, Jen’s
retained earnings amounted to P3,000,000. In March 2010 Jen reacquired 50,000 treasury shares
at P20 per share. In June 2010, Jen sold 10,000 of these shares to its corporate officers for P25
per share. Jen used the cost method to record treasury shares. Net income for the year ended
December 31, 2010 was P600,000.

On December 31, 2010, what amount should Jen report as unappropriated retained earnings?
A. 3,600,000 C. 3,750,000
B. 3,650,000 D. 2,800,000

AA42. The balance in retained earnings of Magic Company at the beginning of the year was P650,000.
During the year, Magic Company earned revenue of P4,500,000 and incurred expenses of
P3,800,000, dividend of P500,000 was declared and paid, and the balance of the cash account
increased by P220,000.

The entity’s ending balance in the retained earnings account is

A. P1,070,000
B. P 700,000
C. P 850,000
D. P 770,000

51 – SINGLE ENTRY

1. On January 1, 2010, the capital of Connie Company was PP3,400,000 and on December 31,
2010, the capital was P1,200,000. During the current year, Connie withdrew merchandise costing
P50,000 and with sales value of P90,000, and paid a P500,000 note payable of the business with
interest of 12% for six months with a check drawn on a personal checking account.
 What was the net income or loss for 2010?
A. P130,000 income
B. P130,000 loss
C. P90,000 income
D. P90,000 loss

2. On January 1, 2010, the statement of financial position of Ren Company showed total assets
of
P2,500,000, total liabilities of P1,000,000 and contributed capital of P1,000,000. During the
current year, the corporation issued share capital of P250,000 par value at a premium of
P150,000. Dividend of P125,000 was paid on December 31, 2010. The statement of financial
position on December 31, 2010 showed total assets of P3,750,000 and total liabilities of
P1,600,000.

What was the net income for the current year?

A. P875,000
B. P500,000
C. P375,000
D. P250,000

3. The December 31, 2010 statement of financial position of Mimi Company showed
stockholders’ equity of P5,000,000. Transactions during the year which affected the equity
were:
 An adjustment of retained earnings for 2009 overdepreciation P100,000
 Gain on sale of treasury shares 300,000
 Dividend declared, of which P400,000 was paid 600,000
 Net income for 2010 800,000

The share capital balance of P3,000,000 remained unchanged during the year.

What was the retained earnings balance on January 1, 2010?

A. P1,400,000
B. P1,700,000
C. P1,200,000
D. P1,600,000

6. Moonlight Company had total assets of P4,000,000 and shareholders’ equity of P2,080,000 at
the beginning of the year. During the year, assets increased by P520,000 and liabilities decreased
by P820,000.

What was the shareholders’ equity at the end of the year?

A. P3,420,000
B. P3,700,000
C. P3,380,000
D. P1,340,000

8. The following changes in Big Company’s account balances occurred during the current year:

Increase
Assets P8,900,000
Liabilities 2,700,000
Share Capital 6,000,000
Share Premium 600,000
 Except for a P1,300,000 dividend payment and the year’s earnings, there were no changes in
retained earnings for the year.

What was Big’s net income for the year?

A. P 400,000
B. P 900,000
C. P1,300,000
D. P1,700,000

52 – CASH AND ACCRUAL BASIS

3. During 2010, King Company had P200,000 in cash sales and P3,000,000 in credit sales The
accounts receivable balances were P400,00 and P485,000 at December 31,2009 and 2010,
respectively.

If King desires to prepare a cash basis income statement, how much should be reported as sales
for 2010?
A. P3,285,000
B. P3,200,000
C. P3,115,000
D. P2,915,000

6. On January 1, 2010 Red purchased the net assets of Yellow Laundry, a sole proprietorship, for
P3,500,000, and commenced operations of Orange Laundry, a sole proprietorship. The assets had
a carrying amount of P3,750,000 and a market value of P3,600,000. In Orange’s cash basis
financial statements for the current year, Orange should reported revenue in excess of expenses
of P600,000. Reds’ drawings during the current year were P200,000.

In Orange’s financial statements, what should be reported as Capital-Red on December 31,

2010?
A. P4,000,000
B. P3,900,000
C. P4,150,000
D. P4,100,000

7. Aquino Company, which began operations on January 1, 2009, has elected to use cash basis
accounting for tax purposes and accrual basis accounting for its financial statements. Aquino
reported sales of P1,750,000 and P800,000 in its tax returns for the years ended December 31,
2010 and 2009, respectively. Aquino reported accounts receivable of P300,000 and P500,000 as
of December 31, 2010 and 2009 respectively.

What amount should Aquino report as sales in its income statement for the year ended December
31, 2010?
A. P1,450,000
B. P1,550,000
C. P1,950,000
D. P2,050,000

9. The following balances were reported by Megan Company at December 31:

12/31/2010 12/31/2009
Inventory P 2,600,000 P 2,900,000
Accounts Payable 750,000 500,000

Megan paid suppliers P4,900,000 during the year ended December 31, 2010.
What amount should Megan report for cost of goods sold in 2010?
 A. P5,450,000
B. P4,950,000
C. P4,850,000
D. P4,350,000

12. Calamba Company borrows money under various loan agreements involving notes discounted
and notes requiring interest payments at maturity. During the year ended 31,2010, Calamba paid
interest totaling P100,000. Calamba’s December 31 balance sheets included the following
information:
2009 2010
Prepaid interest 23,500 18,000
Interest payable 45,000 53,500

How much interest expense should Calamba report for 2010?

A. P 86,000
B. P 97,000
C. P103,000
D. P114,000

19. Under Harold Company’s accounting system, all insurance premiums paid are debited to prepaid
insurance. For interim financial reports, Harold makes monthly estimated charges to insurance
expense with credits to prepaid insurance. Additional information for the year ended December
31, 2010 is as follows:

Prepaid insurance at January 1, 2010 P210,000

Charges to insurance expense during 2010 (including a year-end
Adjustment of P35,000) 875,000
Unexpired insurance premiums at December 31, 2010 245,000

What was the total amount of insurance premiums paid by Harold during 2010?
A. P910,000
B. P875,000
C. P840,000
D. P665,000

25. For the year 2010, P1,100,000 of wages expense was reported in the income statement. The
previous year’s statement of financial position reported P100,000 of wages payable. An analysis
of the payroll records showed wage payments during the year of P950,000.

If the previous year’s adjusting entry for unpaid wages was reversed on January 1, 2010, what is
the amount of the adjusting entry for accrued wages payable on December 31,2010?
A. P250,000
B. P400,000
C. P150,000
D. P850,000

30. Bay Company maintains the accounting records using the cash basis of accounting but uses
accrual basis in preparing its financial statements. During 2010, the entity collected P5,000,000
in fees from clients. At December 31, 2009, accounts receivable of P800,000 and unearned fees
of P500,000 had been recorded.

At December 31, 2010, accounts receivable increased to P1,500,000 while unearned fees
increased to P900,000.

In the accrual basis of income statement, what was the service revenue for 2010?
A. P5,000,000
B. P4,700,000
 C. P6,100,000
D. P5,300,000

53 – ERROR AND CORRECTION

6. June Company failed to recognize accruals and prepayments since the inception of its business
three years ago. The earnings before tax, accrual and prepayments at the end of the current year
are:

Earnings before tax P1,400,000

Prepaid insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000

The corrected earnings before tax should be

A. P1,385,000
B. P1,415,000
C. P1,400,000
D. P1,375,000

17. Universal Company had the following financial statement information:

2010 2009
Revenue P1,350,000 P1,000,000
Expenses 980,000 650,000
Net income 370,000 350,000

12/31/2010 12/31/2009
Total assets P1,570,000 P1,050,000
Total liabilities 500,000 350,000
Total owners’ equity P1,070,000 P 700,000

Universal failed to record P120,000 of accrued wages at the end of 2009. The wages were
recorded and paid in January 2010. The correct accruals were made on December 31, 2010.

What is the corrected net income for 2009?

A. P230,000
B. P350,000
C. P470,000
D. P250,000

What is the corrected net income for 2010?

A. P490,000
B. P370,000
C. P250,000
D. P430,000

The corrected total liabilities on December 31, 2009 should be

A. P470,000
B. P230,000
C. P400,000
D. P500,000

The corrected total owners’ equity on December 31, 2010 should be

 A. P1,070,000
B. P1,190,000
C. P1,010,000
D. P 950,000

10. Cola Company reported a retained earnings balance of P4,000,000 at January 1, 2010. Cola
determined that insurance premiums of P900,000 for the three-year period beginning January 1,
2009, had been paid and fully expensed in 2009. The entity has a 30% income tax rate.

What amount should Cola report as corrected beginning retained earnings in its 2010 statement
of retained earnings?
A. P3,400,000
B. P4,420,000
C. P4,600,000
D. P3,580,000

12. Victory Company’s statements for 2009 and 2010 included errors as follows:

Year Ending Inventory Depreciation

2009 P200,000 understated P50,000 understated
2010 P300,000 overstated P90,000 overstated

How much should retained earnings be retroactively adjusted at January 1, 2011?

A. P260,000 increase
B. P260,000 decrease
C. P410,000 decrease
D. P210,000 decrease

8. On December 31, 2010, Blue Company sold merchandise forP750,000 to Red Company. The
terms of the sale were net 30,F.O.B shipping point. The merchandise was shipped on December
31, 2010, and arrived at Red on January 5, 2011. Due to a clerical error, the sale was not
recorded until January 2011 and the merchandise sold at a25% markup on cost was included in
Blue’s inventory at December 31, 2010.

As a result, Red’s cost of goods sold for the year ended December 31, 2010 was
A. Understated by P750,000
B. Understated by P600,000
C. Understated by P150,000
D. Correctly stated

AB14. 29. Jupiter Company’s financial statements contained the following errors:

2009 2010
Ending inventory 60,000 understated 90,000 overstated
Depreciation expense 120,000 overstated 75,000 overstated

None of the errors were detected or corrected, and that no additional errors were made in 2011.

What amount will current assets at December 31, 2010 be overstated or understated?
A. P90,000 understated
B. P90,000 overstated
C. P30,000 overstated
D. P 0

AB43. After the issuance of its 2009 financial statements, Narda Company discovered a computational
error of P150,000 in the calculation of its December 31, 2009 inventory. The error resulted in a
P150,000 overstatement of cost of goods sold for the year ended December 31,2009. In October
 2010, Narda paid the amount of P500,000 in settlement of litigation instituted against it during
2009. Ignore income tax.

In the 2010 financial statements, the January 1, 2010 retained earnings, as previously reported,
should be adjusted by a
A. P150,000 credit
B. P350,000 debit
C. P500,000 debit
D. P650,000 credit

54 – CASH FLOW - OPERATING

6. Moon Company provided the following data for the preparation of statement of cash flows for
the current year using the direct method:
Cash balance, beginning P 1,500,000
Cash paid to purchase inventory 7,800,000
Cash received from sale of building 5,600,000
Cash paid for interest 450,000
Cash paid to repay a loan 1,000,000
Cash collected from customers 10,000,000
Cash received from issuance of ordinary shares 1,200,000
Cash paid for dividend 780,000
Cash paid for income taxes 1,320,000
Cash paid to purchase machinery 1,950,000

How much was the cash flow from operating activities?

A. P1,750,000
B. P 970,000
C. P 880,000
D. P 430,000

8. The net income for the current year for Elvy Company was P3,520,000. Additional data follows:

Purchase of plant assets P2,800,000

Depreciation of plant assets 1,480,000
Dividends declared 970,000
Net decrease in noncash current assets 290,000
Loss on sale of equipment 130,000

What should be the net cash provided by operating activities in the statement of cash flows for
the current year using the indirect method?
A. P5,420,000
B. P5,130,000
C. P7,250,000
D. P5,290,000

55 – CASH FLOW – INVESTING AND FINANCING

8. In preparing its statement of cash flows for the current year, Vic Company collected the
following data:

Gain on sale of equipment P 60,000

Proceeds from sale of equipment 100,000
Purchase of XY bonds (par value, P2,000,000) 1,800,000
Amortization of bond discount 20,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury shares(carrying amount,P650,000) 750,000

What amount should Vic report as net cash provided by financing activities?
A. P200,000
B. P270,000
C. P300,000
D. P370,000

What amount should Vic report as net cash used in investing activities?
A. P1,700,000
B. P1,760,000
C. P1,880,000
D. P1,940,000