REVIEW 105 DAY 13

P1

1. Bocaue Company had the following account balances on December 31, 2005.

Petty cash fundP50,000Cash in bank current account 10,000,000Cash in bank payroll account 2,000,000Cash on hand500,000Cash in bank restricted account for plant additions, expected to

be disbursed in 2006 4,000,000Treasury bills, due February 15, 2006 3,000,000

The petty cash fund includes unreplenished December 2005 petty cash expensevouchers of P20,000 and employee IOUs of P10,000. The cash on hand includes aP100,000 check payable to Bocaue dated January 15, 2006. What should be reportedas cash and cash equivalents on December 31, 2005?a. P12,420,000 C. P15,420,000b. P19,420,000 d. P15,450,000

2. On December 1, 2005 Pirena Company assigned on a nonnotification basis accountsreceivable of P10,000,000 to a bank in consideration for a loan of 90% of the receivables lessa 5% service fee on the accounts assigned. Pirena signed a note for the bank loan. OnDecember 31, 2005, Pirena collected assigned accounts of P6,000,000 less discount ofP400,000. Pirena remitted the collections to the bank in partial payment for the loan. Thebank applied first the collection to the interest and the balance to the principal. The agreedinterest is 1% per month on the loan balance. In its December 31, 2005 balance sheet,Pirena should report note payable as a current liability at

a. P4,500,000 c. P3,090,000b. P3,400,000 D. P3,490,000

3. The following pertains to the notes receivable of Amihan Corporation for the calendar year2005:

Notes ReceivableDate Particulars Debit CreditSept. 1 Michelle, 21%, due in 3 months P320,000

1 Discounted Michelle note P320,000Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000Nov. 1 Eleanor, 24%, due in 13 months 2,400,000

30 Rigby Co., no interest, due in one year 2,000,00030 Discounted Rigby Co. note 2,000,000

Dec. 1 Sgt. Pepper, 18%, due in 5 months 3,600,000

1 Ms. Anna, President, 12%, due in 3 months (Forcash loan given to Ms. Anna) 4,800,000

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

At what amount on the current assets section of the balance sheet as of December 31,2005 will Notes Receivable-trade be carried?a. P3,600,000 c. P7,200,000B. P6,000,000 d. P8,000,000

4. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, inexchange for an P800,000 non-interest bearing note due on April 1, 2007. The note had noready market, and there was no established exchange price for the equipment. Theprevailing interest rate for a note of this type at April 1, 2005, was 12%. The carrying value ofthe note receivable on December 31, 2005 is

a. P800,000 C. P694,984b. P620,864 d. P714,112

5. On October 15, 2005, Danaya Company purchased goods costing P4,500,000. The freightterm is FOB Destination. Some of the costs incurred with the sale and delivery of the goodswere:

Packaging for shipment 200,000Shipping 200,000Special handling charges 100,000

These goods were received on October 17, 2005. What amount of cost for these goodsshould be included in Danayas inventory?A. P4,500,000 c. P4,700,000b. P4,900,000 d. P5,000,000

6. The physical count conducted in the warehouse of Imaw Company on December 31, 2005revealed merchandise with a total cost of P3,600,000 was on hand on that date. Howeverthe following items were excluded from the count:

Goods sold to a customer, which are being held for the customer to call for at thecustomers convenience with a cost of P200,000. A packing case containing a product costing P80,000 was standing in theshipping room when the physical inventory was taken. It was not included in theinventory because it was marked hold for shipping instructions. Your investigationrevealed that the customers order was dated December 20, 2005, but that the casewas shipped and the customer billed on January 10, 2006. Merchandise held by Finishing Company costing P300,000 for further processingand packaging.

The correct amount of inventory that should be reported in Imaw Companys balancesheet at December 31, 2005 isa. P4,180,000 c. P3,880,000B. P3,980,000 d. P4,100,000

7. The records of Awoos Wholesale and Retail Store report the following data for the monthof January 2005:

Beginning inventory at cost 860,000 Net Additional mark up 425,000Purchases at cost 6,550,000 Net Mark down 750,000Freight on purchases 150,000 Sales 9,450,000Purchase returns at cost 360,000 Sales discounts 400,000Beginning inventory at sales price 1,200,000 Employee discounts 300,000Purchase returns at sales price 525,000 Theft and breakage 150,000Initial mark up on purchases 4,350,000

Using the average retail inventory method, Awoos cost of sales isa. P6,390,000 c. P6,080,000b. P6,150,000 D. P6,336,000

8. Mangatarem Company had the following information relating to its accounts receivable forthe year 2005:

Accounts receivable January 1 P12,000,000Credit sales 20,000,000Collection from customers, excluding the recovery of accounts written off 17,000,000Accounts written off as worthless 300,000Sales returns 1,000,000Recovery of accounts written off 100,000Estimated future sales returns on December 31 400,000Estimated uncollectible accounts on December 31, per aging 1,000,000

Mangatarem should report the December 31, 2005 accounts receivable, beforeallowance for sales returns and uncollectible accounts, atA. P13,700,000 c. P13,800,000b. P12,300,000 d. P13,130,000

9. Urdaneta Company accepted from a customer P5,000,000, 120-day, 12% note datedAugust 31, 2005. On September 30, 2005, Urdaneta discounted the note at the NationalBank. 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 revenueof

a. P200,000 C. P44,000b. P156,000 d. P 0

10. A physical inventory taken on December 31, 2005 resulted in an ending inventory ofP1,440,000. Banak Company suspects some inventory may have been taken by employees.To estimate the cost of missing inventory, the following were gathered:

Inventory, Dec. 31, 2004 P1,280,000Purchases during 2005 5,640,000Cash sales during 2005 1,400,000Shipment received on December 26, 2005, included in physical inventory,

but not recorded as purchases 40,000Deposits made with suppliers, entered as purchases. Goods were not

received in 2005 80,000Collections on accounts receivable, 2005 7,200,000Accounts receivable, January 1, 2005 1,000,000Accounts receivable, December 31, 2005 1,200,000Gross profit percentage on sales 40%

At December 31, 2005 what is the estimated cost of missing inventory?a. P200,000 c. P1,000,000B. P160,000 d. P 0

11. Nakba Company installs replacement siding, windows, and louvered glass doors forfamily homes. At December 31, 2005, the balance of raw materials inventory account wasP502,000, and the allowance for inventory writedown was P33,000. The inventory cost andmarket data at December 31, 2005, are as follows:

Cost ReplacementCost

SalesPrice

NetRealizable

value

NormalProfit

Aluminum siding89,000 86,000 91,500 87,000 5,000

Mahogany siding 94,000 92,000 93,000 85,000 7,000Louvered glass door

125,000 135,000 129,000 111,000 10,000Glass windows 194,000 114,000 205,000 197,000 20,000Total 502,000 427,000 518,500 480,000 32,000

The loss on inventory write down isa. P 8,000 c. P11,000b. P25,000 D. P 0

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

a. P260,000 c. P200,000b. P 20,000 D. P 60,000

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

P150,000 in goods located in Alcalas warehouse that are on consignment fromanother company.

P200,000 in goods that were sold by Alcala and shipped on December 30 and werein transit on December 31; the goods were received by the customer on January 2.Terms were FOB Destination.

P300,000 in goods were purchased by Alcala and shipped on December 30 andwere in transit on December 31; the goods were received by Alcala on January 2.Terms were FOB shipping point.

P400,000 in goods were sold by Alcala and shipped on December 30 and were intransit on December 31; the goods were received by the customer on January 2.Terms were FOB shipping point.

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

14. On September 30, 2005, Asingan Company discounted at the bank a customersP5,000,000 6-month 10% note receivable dated June 30, 2005. The bank discounted thenote at 12%. The proceeds from this discounted note amounted to

A. P5,092,500 c. P4,842,000b. P5,250,000 d. P5,170,000

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

Cost Market ValueX 4,000,000 3,700,000Y 2,000,000 1,800,000Z 5,000,000 4,500,000

Total 11,000,000 10,000,000

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

a. P300,000 C. P1,500,000b. P500,000 d. P1,000,000

TOA

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

A. INITIAL OPERATING LOSSES INCURRED PRIOR TO AN ASSETACHIEVING PLANNED PERFORMANCEb. Cost of site preparationc. Delivery, handling and installation costsd. Estimated cost of dismantling and removing the asset and restoring the site, to theextent that it is recognized as a provision

2. A contingent liability isa. A liability of uncertain timing or amount.b. A possible obligation depending on whether some uncertain future event occurs.c. A present obligation but payment is not probable or the amount cannot be measuredreliably.D. EITHER B OR C.

3. Which statement is incorrect?a. Provisions should only be used for the purpose for which they were originallyrecognized.b. Enterprises should not recognize contingent liabilities but should disclose them, unlessthe possibility of an outflow of economic resources is remote.c. Contingent assets should not be recognized but should be disclosed where an inflow ofeconomic benefits is probable.D. WHEN THE REALIZATION OF INCOME IS VIRTUALLY CERTAIN,THEN THE RELATED ASSET IS NOT A CONTINGENT ASSET BUT ITSRECOGNITION IS INAPPROPRIATE UNLESS RECEIVED.

4. Which statement is incorrect regarding classification of leases?a. A lease is classified as a finance lease if it transfers substantially all the risks andrewards incident to ownership.b. All other leases that do not transfer substantially all the risks and rewards incident toownership are classified as operating leases.c. Classification is made at the inception of the lease.D. WHETHER A LEASE IS A FINANCE LEASE OR AN OPERATINGLEASE DEPENDS ON THE FORM OF THE TRANSACTION.

5. Which statement is incorrect in classifying a lease of land and buildings?a. In classifying a lease of land and buildings, land and buildings elements wouldnormally be separately.b. The minimum lease payments are allocated between the land and buildings elementsin proportion to their relative fair values.c. The land element is normally classified as an operating lease unless title passes to thelessee at the end of the lease term.D. THE BUILDINGS ELEMENT IS NORMALLY CLASSIFIED AS AFINANCE LEASE UNLESS TITLE WILL NOT PASS TO THE LESSEEAT 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 APRICE WHICH IS EXPECTED TO BE EQUAL TO THE FAIR VALUE ATTHE DATE THE OPTION BECOMES EXERCISABLE THAT, AT THEINCEPTION OF THE LEASE, IT IS REASONABLY CERTAIN THAT THEOPTION WILL BE EXERCISED.c. The lease term is for the major part of the economic life of the asset, even if title is nottransferred.d. At the inception of the lease, the present value of the minimum lease paymentsamounts 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 bedepreciated over the

a. Useful life of the assetb. Lease termC. USEFUL LIFE OF THE ASSET IF THERE IS REASONABLECERTAINTY THAT THE LESSEE WILL OBTAIN OWNERSHIP BY THEEND 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 ofproperty, plant and equipment include all of the following, except

A. COST OF EMPLOYEE BENEFITS ARISING DIRECTLY FROM THECONSTRUCTION ON ACQUISITION OF AN ITEM OF PROPERTY,PLANT AND EQUIPMENT.b. Cost of opening a new facilityc. Cost of introducing a new product or service, including cost of advertising andpromotion.d. Cost of relocating or reorganizing part or all of an entitys operations.

9. Which is correct concerning measurement of property, plant and equipment?I. An entity shall choose either the cost model or the revaluation model as its accountingpolicy 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 anyaccumulated depreciation and any accumulated impairment loss.II. The revaluation model means that property, plant and equipment are carried atrevalued amount, being the fair value at date of revaluation less any accumulateddepreciation 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 anonmonetary asset or a combination of monetary and nonmonetary asset is measured at

A. FAIR VALUE OF ASSET GIVEN PLUS CASH PAYMENTb. Fair value of asset received plus cash paymentc. Book value of asset given plus cash paymentd. 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 theasset to working condition for its intended use.b. If payment for an item of property, plant, and equipment is deferred, interest at amarket rate must be recognized or imputed.c. If an asset is acquired in exchange for another asset the cost will be measured at thefair value.D. IF AN ASSET ACQUIRED IN EXCHANGE FOR ANOTHER ASSET ISNOT MEASURED AT FAIR VALUE, ITS COST IS MEASURED AT THECARRYING 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 paymentb. Fair value of asset received plus cash paymentC. CARRYING AMOUNT OF ASSET GIVEN PLUS CASH PAYMENTd. Carrying amount of asset received plus cash payment

13. When payment for an item of property, plant and equipment is deferred beyond normalcredit terms, its cost is the

A. CASH PRICE EQUIVALENT c. Invoice priceb. Installment price d. List price

14. If an asset is acquired on credit or by installment, the difference between the totalpayments and cash price, if any, should be

a. Considered interest expense of the current yearb. Included as part of the asset costc. Amortized as interest expense over the life of the assetD. AMORTIZED AS INTEREST EXPENSE OVER THE CREDIT PERIOD

15. Which is incorrect concerning self-constructed asset?a. The cost of self-constructed asset is determined using the same principles as for anacquired asset.b. Any internal profits from construction are eliminated in arriving at the cost of self-constructed asset.C. THE COST OF ABNORMAL AMOUNTS OF WASTED MATERIAL,LABOR OR OTHER RESOURCES INCURRED IN THE PRODUCTIONOF A SELF- CONSTRUCTED ASSET IS INCLUDED IN THE COST OFASSET.d. The cost of normal amounts of wasted material, labor or other resources incurred inthe production of a self-constructed asset is included in the cost of the asset.

MAS

1. The following characterize management advisory services exceptA. involve decision for the futureB. broader in scope and varied in natureC. UTILIZE MORE JUNIOR STAFF THAN SENIOR MEMBERS OF THE

FIRMD. relate to specific problems where expert help is required

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

for additional facilities, budgeted fixed costs for 60,000 units are 25% more thanbudgeted fixed costs for P50,000 units. How much is Careras budgeted variable costper unit of output?A. P1.60 C. P3.00B. P1.67 D. P5.00

3. ABC Company finances all of its seasonal inventory needs from the local bank at aneffective interest cost of 9%. The firms supplier promises to extend trade credit on termsthat will match the 9% bank credit rate. What terms would the supplier have to offer(approximately)?a. 2/10, n/60. b. 2/10, n/100. C. 2/10, N/90. d. 3/10,n/60.

4. A company has accounts payable of $5 million with terms of 2% discount within 15 days,net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or itcan wait until the 30th day when it will receive revenues to cover the payment. If itborrows funds on the last day of the discount period in order to obtain the discount, itstotal cost will beA. $51,000 less. B. $75,500 LESS. C. $100,000 less. D.

$24,500 more.

5. Every 15 days a company receives $10,000 worth of raw materials from its suppliers. Thecredit terms for these purchases are 2/10, net 30, and payment is made on the 30th dayafter 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 willbe the net dollar savings over the year by borrowing and then taking the discount on thematerials?A. $3,624 B. $1,176 C. $4,800 D. $1,224

6. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for taxpurposes will be P100,000 annually for six years. The new machine is expected toproduce cash flow from operations, net of income taxes, of P150,000 a year in each ofthe next six years. The accounting (book value) rate of return on the initial investment isexpected to be

A. 8.3% C. 16.7%B. 12.0% D. 25.0%

7. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its currentliabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximumlevel of new short-term loans it can secure without violating the policy?A. P400,000 b. P300,000 c. P266,667 d. P800,000

8. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would beexpected on the balance sheet of its customer if the firm went to a net cash 30 policy?A. INCREASED PAYABLES AND INCREASED BANK LOAN.

b. Increased receivables.c. Decreased receivables.d. Decrease in cash.

9. The sales director of Lloyd Company suggested that certain credit terms be modified. Heestimates the following effects:

Sales will increase by at least 20%Accounts receivable turnover will be reduced to 8 times from the present turnoverof 10 timesBad debts, now at 1% of sales will increase to 1.5%

Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and thedesired rate of return is 20%. Fixed expenses amount to P150,000.Should the company allow revision of its credit terms?A. YES, BECAUSE INCOME WILL INCREASE BY P64,800B. Yes, because losses will be reduced by P73,800C. No, because income will be reduced by P13,000D. No, because losses will be increased by P28,000

10. Which of the following actions would not be consistent with good management?a. Increased synchronization of cash flows.B. MINIMIZE THE USE OF FLOAT.c. Maintaining an average cash balance equal to that required as a compensatingbalance or that which minimizes total cost.d. Use of checks and drafts in disbursing funds.

11. Clara Building Corporation uses the critical path method to monitor construction jobs. Thecompany is currently 2 weeks behind schedule on Job 181, which is subject to aP10,500-per-week completion penalty. Path A-B-C-F-G-H-I has normal completion timeof 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.The following activities can be crashed:

Activities Cost to Crash 1 Week Cost to Crash 2 WeeksBC P 8,000 P15,000DE 10,000 19,600EF 8,800 19,500

Clara desires to reduce the normal completion time of Job 181 and, at the same time,report the highest possible income for the year. Clara should crashA. BC 1 week and EF 1 week C. EF 2 weeksB. BC 2 weeks D. DE 1 WEEK AND EF 1WEEK

12. A company obtaining short-term financing with trade credit will pay a higher percentagefinancing cost, everything else being equal, whenA. The discount percentage is lower.B. The items purchased have a higher price.C. The items purchased have a lower price.D. THE SUPPLIER OFFERS A LONGER DISCOUNT PERIOD.

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

14. A major advantage of obtaining a package of applications programs from a softwarevendor isA. THE LIKELIHOOD OF REDUCING THE TIME SPAN FROM

PLANNING TO IMPLEMENTATIONB. the ability to more easily satisfy the unique needs of usersC. greater operating efficiency from the computerD. the assurance the programs will be written in a high-level language

15. A change in credit policy has caused an increase in sales, an increase in discounts taken,a reduction of the investment in accounts receivable, and a reduction in the number ofdoubtful accounts. Based on this information, we know that:a. Net profit has increased.B. THE AVERAGE COLLECTION PERIOD HAS DECREASED.c. Gross profit has declined.d. The size of the discount offered has decreased.

P21. Vibe Company purchased the net assets of Atlantic Company in a business combinationaccounted for as a purchase. As a result, goodwill was recorded. For tax purposes, thiscombination was considered to be a tax-free merger. Included in the assets is a building withan appraised value of 210,000 on the date of the business combination. This asset had a netbook value of 70,000, based on the use of accelerated depreciation for accounting purposes.The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of120,000. Assuming a 36% income tax rate, at what amount should Vibe record this buildingon its books after the purchase?

a. 120,000b. 134,400c. 140,000D. 210,000

2. Goodwill represents the excess cost of an acquisition over the

a. sum of the fair values assigned to intangible assets less liabilities assumed.B. SUM OF THE FAIR VALUES ASSIGNED TO TANGIBLE AND

IDENTIFIABLE INTANGIBLE ASSETS ACQUIRED LESS LIABILITIESASSUMED.

c. sum of the fair values assigned to intangibles acquired less liabilities assumed.d. book value of an acquired company.

3. Cozzi Company is being purchased and has the following balance sheet as of thepurchase date:

Current assets 200,000 Liabilities 90,000Fixed assets 180,000 Equity 290,000

Total 380,000 Total 380,000

The price paid for Cozzi's net assets is 500,000. The fixed assets have a fair value of220,000, and the liabilities have a fair value of 110,000. The amount of goodwill to berecorded in the purchase is ____.

a. 0b. 150,000c. 170,000D. 190,000

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

5. Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchaseoccurred Jersey Company had the following information related to fixed assets:

Land $ 80,000Building 200,000Accumulated Depreciation (100,000)Equipment 100,000Accumulated Depreciation (50,000)

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

Land 100,000Building 130,000Equipment 75,000

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

a. 8,000b. 15,000C. 28,000d. 30,000

6. In performing impairment test for goodwill, the company had the following 20X6 and20X7 information available.

20X6 20X7Fair value of the reporting unit 350,000 400,000Net book value (including $50,000 goodwill) 360,000 380,000

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

20X620X7

a. no adjustment 20,000 decreaseb. 10,000 increase 20,000 decreasec. 10,000 decrease 20,000 decreaseD. 10,000 DECREASE NO ADJUSTMENT

7. Polk issues common stock to acquire all the assets of the Sam Company on January1, 20X5. There is a contingent share agreement, which states that if the income of the SamDivision exceeds a certain level during 20X5 and 20X6, additional shares will be issued onJanuary 1, 20X7. The impact of issuing the additional shares is to

a. increase the price assigned to fixed assets.

B. HAVE NO EFFECT ON ASSET VALUES, BUT TO REASSIGN THEAMOUNTS ASSIGNED TO EQUITY ACCOUNTS.

c. reduce retained earnings.d. record additional goodwill.

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

a. sales for the periodb. income tax expenseC. EXTRAORDINARY ITEMSd. cost of goods sold

9. Acquisition costs such as the fees of accountants and lawyers that were necessary tonegotiate and consummate the purchase are

a. recorded as a deferred asset and amortized over a period not to exceed 15 yearsb. expensed if immaterial but capitalized and amortized if over 2% of the acquisition priceC. EXPENSED IN THE PERIOD OF THE PURCHASEd. included as part of the price paid for the company purchased

10.

Account Investor InvesteeSales 500,000 300,000Cost of Goods Sold 230,000 170,000Gross Profit 270,000 130,000Selling & Admin. Expenses 120,000 100,000Net Income 150,000 30,000

Dividends paid 50,000 10,000

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as NetIncome for the Controlling Interest?

a. 164,000B. 171,000c. 178,000d. 180,000

11. Consolidated financial statements are designed to provide:

a. informative information to all shareholders.b. the results of operations, cash flow, and the balance sheet in an understandable and

informative manner for creditors.C. THE RESULTS OF OPERATIONS, CASH FLOW, AND THE BALANCE

SHEET AS IF THE PARENT AND SUBSIDIARY WERE A SINGLEENTITY.

d. subsidiary information for the subsidiary shareholders.

12.The goal of the consolidation process is for:

A. ASSET ACQUISITIONS AND 100% STOCK ACQUISITIONS TO RESULTIN THE SAME BALANCE SHEET.

b. goodwill to appear on the balance sheet of the consolidated entity.c. the assets of the noncontrolling interest to be predominately displayed on the balance

sheet.d. the investment in the subsidiary to be properly valued on the consolidated balance sheet.

13. A subsidiary was acquired for cash in a business combination on December 31, 20X1. Thepurchase price exceeded the fair value of identifiable net assets. The acquired companyowned equipment with a fair value in excess of the book value as of the date of thecombination. 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 ofgoodwill.

B. REPORT THE EXCESS OF THE FAIR VALUE OVER THE BOOK VALUEOF THE EQUIPMENT AS PART OF THE PLANT AND EQUIPMENTACCOUNT.

c. reduce retained earnings for the excess of the fair value of the equipment over its bookvalue.

d. make no adjustment for the excess of the fair value of the equipment over book value.Instead, it is an adjustment to expense over the life of the equipment.

14. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000shares of its 5 par voting common stock. On that date the fair value of those shares totaled4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountantsof 200,000, and stock issuance fees of 100,000. Immediately prior to the purchase, the equitysections of the two firms appeared as follows:

Pavin SuttonCommon stock 4,000,000 700,000Paid-in capital in excess of par 7,500,000 900,000Retained earnings 5,500,000 500,000Total 17,000,000 2,100,000

Immediately after the purchase, the consolidated balance sheet should report paid-in capitalin excess of par of

a. 8,900,000b. 9,100,000C. 9,200,000d. 9,300,000

15.Judd Company issued nonvoting preferred stock with a fair value of 1,500,000 inexchange for all the outstanding common stock of the Bath Corporation. On the date of theexchange, Bath had tangible net assets with a book value of 900,000 and a fair value of1,400,000. In addition, Judd issued preferred stock valued at 100,000 to an individual as afinder's fee for arranging the transaction. As a result of these transactions, Judd should reportan increase in net assets of ____.

a. 900,000b. 1,400,000C. 1,500,000

APPROBLEM NO. 3

The stockholders equity section of the Determination Inc. showed the following data onDecember 31, 2004: Common stock, P3 par, 450,000 shares authorized, 375,000 sharesissued 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. Thestock options were granted to key executives and provided them the right to acquire45,000 shares of common stock at P35 per share. Each option has a fair value of P5 atthe time the options were granted.

The following transactions occurred during 2005:

Feb. 1Key executives exercised 6,750 options outstanding at December 31,2004. The market price per share was P44 at this time.

Apr. 1

The company issued bonds of P3,000,000 at par, giving each P1,000bond a detachable warrant enabling the holder to purchase two sharesof stock at P40 each for a 1-year period. The bonds would sell at P996per P1,000 bond without the warrant.

July 1The company issued rights to stockholders (one right on each share,exercisable within a 30-day period) permitting holders to acquire oneshare at P40 with every 10 rights submitted. All but 9,000 rights wereexercised on July 31, and the additional stock was issued.

Oct. 1All warrants issued in connection with the bonds on April 1 wereexercised.

Dec. 1The market price per share dropped to P33 and options came due.Because the market price was below the option price, no remainingoptions were exercised.

Dec. 31Net income for 2005 was P375,750.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December31, 2005:

1. Common stocka. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,0502. Total additional paid-in capitala. P12,629,175 b. P11,283,300 c. P12,329,475 d. P12,604,2003. Retained earningsa. P870,750 b. P1,095,750 c. P1,287,000 d. P981,2254. Total stockholders equitya. P13,545,000 b. P15,000,000 c. P14,676,000 d. P14,973,000

PROBLEM NO. 2

With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm wasengaged in the audit of the Fortitude Company at the close of the companys first year ofoperations on December 31, 2005. The company closed its books prior to the time youbegan your year-end fieldwork.

Your audit and review showed the following stockholders equity accounts in the generalledger:

Common Stock

08/30/05 CD P550,000 01/02/05 CR P6,000,00012/29/05 J 545,000

12/29/05 JRetained EarningsP545,000 12/01/0512/31/05CRJP287,5004,000,00012/31/0512/31/05JJIncome SummaryP26,000,000 12/31/054,000,000J P30,000,000

Based on the other working papers submitted by your audit staff, the following additionalinformation was forwarded:

From the Articles of Incorporation of Fortitude Company:

Authorized capital stock 150,000 sharesPar value per share P100From the board of directors minutes of meetings, the following resolutions were extracted:

01/02/05 authorized the issuance of 50,000 shares at P120 per share.08/30/05 authorized the acquisition of 5,000 shares at P110 per share.12/01/05 authorized the re-issuance of 2,500 treasury shares at P115 per share.

12/29/05 Declared a 10% stock dividend, payable January 31, 2006, tostockholders on record as of January 15, 2006. The market value of the stock onDecember 29, 2005 was P130 per share.

REQUIRED:

Determine the adjusted balances ofthe following as of December 31, 2005.

A B C D

5. Capital stock5,995,000 5,545,000 5,000,000 5,475,000

6. APIC1,012,500 1,000,000 1,155,000 965,000

7. Total retained earnings3,525,000 3,572,500 3,382,500 3,512,500

8. Treasury stock250,000 550,000 275,000

9. Total stockholders equity10,012,500 9,215,000 9,737,500 9,262,500

10. During an audit of an entitys shareholders equity accounts, the auditor determineswhether there are restrictions on retained earnings resulting from loans, agreements,or law. This audit procedure most likely is intended to verify managements assertionofa. Existence c. Valuationb. Completeness D. PRESENTATION AND DISCLOSURE

11. If the auditee has a material amount of treasury stock on hand at year-end, theauditor shouldA. COUNT THE CERTIFICATES AT THE SAME TIME OTHER SECURITIESARE COUNTED.b. Count the certificates only if the company had treasury stock transactions duringthe year.c. No count the certificates if treasury stock is a deduction from shareholders equity.d. Count the certificates only if the company classifies treasury stock with otherassets.

12. In performing tests concerning the granting of stock options, an auditor shoulda. Confirm the transaction with the Securities and Exchange Commission.b. Verify the existenceof option holders in the entitys payroll records or stockledgers.c. Determine that sufficient treasury stock is available to cover any new stock issued.

D. TRACE THE AUTHORIZATION FOR THE TRANSACTION TO A VOTEOF THE BOARD OF DIRECTORS.

13. The auditor would not expect the client to debit retained earnings for which of thefollowing transactions?A. A 4-FOR 1 STOCK SPLIT.b. "Loss" resulting from disposition of treasury shares.c. A 1-for 10 stock dividend.d. Correction of error affecting prior year's earnings.

14. Only one of the following four statements, which compare confirmation of accountspayable with suppliers and confirmation of accounts receivable with debtors is false. Thefalse statement is thata. Confirmation of accounts receivable with debtors is a more widely accepted auditingprocedures than is confirmation of accounts payable with suppliers.B. STATISTICAL SAMPLING TECHNIQUES ARE MORE WIDELYACCEPTED IN THE CONFIRMATION OFACCOUNTS PAYABLE THAN IN THE CONFIRMATION OF ACCOUNTSRECEIVABLE.c. As compared with the confirmation of accounts receivable, the confirmation ofaccounts payable will tend to emphasize accounts with zero balances at thebalance sheet date.d. It is less likely that the confirmation request sent to the supplier will show theamount owed than that request sent to the debtor will show the amount due.

15. When title to merchandise in transit has passed to the audit client the auditor engaged inthe performance of a purchase cut-off will encounter the greatest difficulty in gainingassurance with respect to the

a. Quantity B. QUALITY c. Price d. Terms

BLT

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

the donors tax purposes.

A. True, Trueb. TRUE, FALSEc. False, True

d. False, False

2. A. As a rule, donation between husband and wife during marriage is voidB. Donation can be made to conceived or unborn children

a. TRUE, TRUEb. True, Falsec. False, Trued. False, False

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

a. Donation mortis causab. Partakes of the nature of a testamentary dispositionC. Shall be governed by the law on successiond. A, B AND C

4. A donation which is intended by the donor to take effect during his lifetime

a. Shall be subject to donors tax using the tax table for donationB. Shall be in writing if the value exceeds P 5,000c. DONATION INTER VIVOSd. A, B and C

5. A. gift is perfected from the moment the donor effects the delivery either actual orconstructively of the property donated.B. Donors tax is a property tax imposed on the property transferred by way of giftinter-vivos

a. True, True b. True, False c. False, True D. FALSE,FALSE

6. This requires a special power of attorney excepta. To accept or repudiate an inheritanceb. To effect novationC. To enter into compromised. TO LEASE REAL PROPERTY FOR ONE YEAR

7. It is a contract wherein a person binds himself to render some service inrepresentation or on behalf of another, with the consent or authority of the lattera. AGENCYb. Contract of servicec. Contract of piece of work

d. Partnership

8. If an agent enters into a contract in the name of his principal, exceeding the scope ofhis authority, the contract isA. Voidableb. UNENFORCEABLEc. Rescissibled. Void

9. Which of the following is the correct?a. A contract of agency must be in writing to be a valid agreementB. A sale of personal property made by an agent without authority from the owner is

voidc. A SALE OF A PIECE OF LAND MADE BY AN AGENT WITH

ORAL AUTHORITY FROM THE OWNER IS VOIDd. An unemancipated minor cannot be appointed as an agent

10. In which of the following acts may a person not appoint an agent?a. To represent the principal in a wedding ceremony where the principal is a

principal sponsorB. To vote for the principal during the meetings of stockholders where the principal

is a stockholderc. TO REPRESENT THE PRINCIPAL IN A BAPTISMAL CEREMONY

WHERE THE PRINCIPAL IS THE FATHER OF THE CHILD TO BEBAPTIZED

d. To attend a meeting of the board of directors of a corporation where the principalis a director

11.Which escape from taxation does not result in loss of revenue to thegovernment?

a. Tax evasionb. Tax avoidanceC. Tax exemptiond. SHIFTING

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

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

B. Contributions of the employer for the benefit of the employee toretirement, insurance and hospitalization benefits.c. MEMBERSHIP FEES, DUES AND OTHER EXPENSESBORNE BY THE EMPLOYER IN SOCIAL OR ATHLETIC CLUBSOR OTHER SIMILAR ORGANIZATIONS.d. Benefits given to rank and file employees, whether granted under acollective bargaining agreement or not.

13.The final tax on capital gains from sale of real property, classified ascapital asset is:

a. 20% based on the gross selling price or current fair market valuewhichever is higher.B. 7.5% based on the gross profit.c. 6% BASED ON THE GROSS SELLING PRICE OR ZONALVALUE, 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 whichare traded in the local stock exchange is subject to:

A. capital gains tax of 5% and 10% of capital gainb. PERCENTAGE TAX OF OF 1% OF SELLING PRICEc. 10% VATd. none of the above

15.Domeng bought a parcel of residential land for P 1,000,000 sometimein 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. TRUEb. 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 orbusiness.d. b and c are correct.