Review 105-----------Day 3 a.

Equity for the entire proceeds

b. Liability for the entire proceeds
THEORY OF ACCOUNTS c. Liability for the face amount of the bonds and equity for the excess
proceeds.
1. It is a possible asset that arises from past event and whose existence will be d. Partly liability and partly equity
confirmed only by the occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the enterprise. 7. After initial recognition, an entity shall measure a bond liability at amortized
a. Continge nt asset c. Goodwill cost using the
b. Intangible asset d. Other asset a. Effective interest method c. Straight line method
b. Bond outstanding method d. Either effective interest or straight
2. A contingent asset (choose the incorrect one)
line method
a. Disclosed where an inflow of economic benefits if probable.
b. Disclosed where an inflow of economic benefits is remote.
c. Not recognized in the financial statement.
d. No longer contingent if the realization of income is virtually certain. 8. Events after the balance sheet date are
a. 4. Adjusting events only c.Both adjusting and
3. These are the events, both favorable and unfavorable, that occur between the nonadjusting events
balance sheet date and the date when financial statements are authorized for issue. b. Nonadjusting events only d. Neither adjusting nor
1. Events after the balance sheet date c. Fundamental errors nonadjusting events
2. Contingencies d. Current events
9. Adjusting events after balance sheet date include all of the following, except
4. Which of the following statements concerning discount on note payable is a. The resolution after the balance sheet date of a court case.
false? b. The bankruptcy of a customer which occurs after the balance sheet date
a. Discount on note payable may be debited when a company discounts resulting to a loss on a trade receivable account.
its own note with the bank. c. The discovery of fraud or errors that show that the financial statements were
b. The discount on note payable is a contra liability account which is incorrect.
shown as a deduction from note payable. d. Dividends to holders of equity instruments proposed or declared after balance
c. The discount on note payable represents interest charges applicable to sheet date
future periods.
10. Financial statements portray the financial effects of transactions and other events
d. Amortizing the discount causes the carrying value of the liability to
by grouping them into broad classes according to their economic characteristics.
gradually decrease over the life of the note. These broad classes are termed as the
5. The proceeds from a bond issued with detachable stock purchase warrants a. Elements of financial statements c. Accounting constraints
b. Features of accounting d. Concepts of capital and capital
should be accounted for maintenance
a. Entirely as bonds payable
b. Entirely as stockholders’ equity 11. The elements directly related to the measurement of financial position are
c. Partially as unearned revenue and partially as bonds payable a. Assets, liabilities, equity, revenue and expenses
d. Partially as stockholders’ equity and partially as bonds payable b. Assets, liabilities, equity and revenue
c. Assets, liabilities and equity
6. The proceeds from the issuance of convertible bonds payable shall initially d. Revenue and expenses
be accounted for as
12. Asset is a. 9,568,400
a. A resource controlled by the enterprise as a result of past events and from b. 9,601,600
which future economic benefits are expected to flow to the enterprise. c. 9,551,800
b. A present obligation of the enterprise arising from past events the settlement d. 9,618,200
of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
c. The residual interest in the assets of the enterprise after deducting all its
liabilities. 2. On July 1, 2005, Tuguegarao Company purchased as a long term
d. Equivalent to all financial resources of the enterprise. investment P8,000,000 of Candon Company’s 8% bonds for P7,570,000,
including accrued interest of P320,000. The bonds were purchased to yield
13. It is the process of incorporating in the balance sheet or income statement an 10% interest. The bonds pay interest annually on December 31. Tuguegarao
item that meets the definition of an element of financial statements. uses the interest method. In its December 31, 2005 balance sheet, what
a. Recognition b. Allocation c. Realization d. amount should Tuguegarao report as investment in bonds?
Summarization
a. 7,292,500
14. It is the process of determining the monetary amounts at which the elements are b. 7,207,500
to be recognized and carried in the balance sheet and income statement. c. 7,628,500
a. Measurement b. Recognition c. Reporting d. d. 7,335,000
Interpreting

15. Historical cost is the measurement basis most commonly adopted by enterprises
in preparing the financial statements. This means the
a. Amount of cash or cash equivalent paid or the fair value of the consideration
given.
b. Amount of cash or cash equivalent that would have to be paid if the same or
an equivalent asset was acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling
the asset in an orderly disposal.
d. Discounted value of the future net cash inflows that an item is expected to
generate in the normal course of business.
3. On January 1, 2004, Sibalon Company purchased as a long-term
investment P5,000,000 face value of 8% bonds for P4,562,000. The bonds
were purchased to yield 10% interest. The bonds pay interest annually
December 31. Sibalon uses the interest method of amortization. What
amount (rounded to the nearest P100) should Sibalon report on its December
31, 2005 balance sheet for this long-term investment?
a. 4,680,000
b. 4,662,000
c. 4,618,000
d. 4,562,000

P1
1. On July 1, 2005, Cagayan Company paid P9,585,000 for 10% bonds with a
face amount of P8,000,000. Interest is paid on June 30 and December 31.
The bonds were purchased to yield 8%. Cagayan uses the effective interest
method to recognize interest income from this investment. What should be
reported as the carrying amount of the bonds in the December 31, 2005,
balance sheet?
4. On July 1, 2005, Solana Company purchased Amulong Company’s 10-
year, 8% bonds with face amount of P8,000,000 for P6,720,000. The bonds
mature on June 30, 2013 and pay interest semiannually on June 30 and
December 31. Using the interest method, Solana recorded bond discount
amortization of P28,800 for six months ended December 31, 2005. From this
long-term investment, Solana should report 2005 income of
a. 348,800
b. 291,200
 c. 320,000 7. Buguey Company insures the life of its president for P8,000,000, the
d. 384,000 corporation being the beneficiary of an ordinary life policy. The premium is
P200,000. The policy is dated January 1, 2002. The cash surrender value on
December 31, 2004 and 2005 are P60,000 and P80,000 respectively. The
5. On January 1, 2005 Aparri Company purchased 5-year bonds with face corporation follows the calendar year as its fiscal period. The president dies
value of P8,000,000 and stated interest of 10% per year payable on October 1, 2005 and the policy is collected on December 31, 2005. What
semiannually January 1, and July 1. The bonds were acquired to yield 8%. is the gain on life insurance settlement?
Present value factors are: a. 7,875,000
Present value of an annuity of 1 for 10 periods at 5% b. 7,890,000
7.72 c. 7,870,000
Present value of an annuity of 1 for 10 periods at 4% d. 7,800,000
8.11
What is the purchase price of the bonds? 8. On January 1, 2001 Baggao Company purchased P8,000,000 ordinary life
a. 7,382,400 policy on its president. Additional data for the year 2005 are:
b. 8,617,600
c. 8,648,800 Cash surrender value, January 1 100,000
d. 7,351,200 Cash surrender value, December 31 120,000
Annual advance premium paid on January 1, 2005 200,000
6. The following information relate to a noncurrent investment that Abra Dividend received on July 1, 2005 10,000
Company placed in trust as required by the underwriter of its bonds:
Baggao Company is the beneficiary under the life insurance policy.
Bond sinking fund, 1/1/05 5,000,000 Baggao should report life insurance expense for 2005 at
Additional investment in 2005 1,000,000 a. 200,000
Dividend on investment 500,000 b. 180,000
Interest revenue 1,500,000 c. 170,000
Administration costs 800,000 d. 190,000
Carrying amount of bonds payable 9,000,000

What amount should Abra report in its December 31, 2005 balance sheet 9. On January 1, 2005, Allacapan Company adopted a plan to accumulate
related to itsbond sinking fund? funds for a new building to be erected beginning January 1, 2008 at an
estimated cost of P21,000,000. Allacapan Company intends to make three
a. 9,000,000 equal annual deposits in a fund beginning December 31, 2005 that will earn
b. 8,000,000 interest at 10% compounded annually. Future amount factors at 10% for
c. 7,200,000 three periods are:
d. 5,200,000
Future value of 1 1.33
Future value of an ordinary annuity of 1 3.31
 Future value of an annuity of 1 in advance 3.64 expense receipts for P6,000) 10,000
Treasury bills, due 3/31/06 (purchased 200,000
What is the annual deposit to the fund? 12/31/05)
a. 7,000,000 c. 6,344,410 Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000
b. 5,769,230 d. 7,894,740
Based on the above information, compute for the cash and cash
equivalent that would be reported on the December 31, 2005 balance
sheet.
10. On March 1, 2005, Isabela Company adopted a plan to accumulate a. P2,784,000 c. P2,790,000
P20,000,000 by September 1, 2009. Isabela plans to make four annual b. P3,084,000 d. P2,704,000
deposits to a fund that will earn interest at 10% compounded annually.
Isabela made the first deposit on September 1, 2005. Future amount factors
at 10% for 4 periods are: Pandan Company’s accounting records showed the following investments at
Ordinary annuity of 1 4.64 January 1, 2005:
Annuity of 1 in advance 5.11 Common stock:
Kay Company (2,000 shares) 1,000,000
Isabela should make four annual deposits of (rounded to the nearest Aye Company (10,000 shares) 10,000,000
P100) Parking lot (leased to Zee Company) 5,000,000
a. 5,000,000 Trademark 4,000,000
b. 4,310,000 Total investments 20,000,000
c. 3,913,900
d. 4,102,000 Pandan owns 1% of Kay and 30% of Aye. The Zee lease which commenced on
January 1, 2004 is for 5 years at an annual rental of P2,500,000. In addition, on
11. The following data pertain to Angat Corporation on December 31, 2005: January 1, 2004, Zee paid a nonrefundable deposit of P800,000 as well as a
Current account at Metrobank P2,000,000 security deposit of P500,000, to be refunded upon expiration of lease. During the
Current account at BPI (100,000) year ended December 31, 2005, Pandan received cash dividends of P700,000
Payroll account 500,000 from Kay and P1,500,000 from Aye, whose 2005 net earnings were P8,000,000
Foreign bank account – restricted (in 1,000,000 and P20,000,000 respectively. Pandan also received P2,500,000 rent from Zee in
equivalent pesos) 2005.
Postage stamps 1,000
Employee’s post dated check 4,000 The trademark was licensed to Lawaan Company for royalties of 10% of sales of
IOU from controller’s sister 10,000 the trademark items. Royalties are payable semiannually on March 1, for sales in
Credit memo from a vendor for a purchase 20,000 July through December of the prior year, and on September 1, for sales in January
return through June of same year. On March 1, 2004 and 2005, Pandan received
Traveler’s check 50,000 royalties of P1,000,000 and P1,500,000 respectively. On September 1, 2004 and
Not-sufficient-funds check 15,000 2005, Pandan received royalties of P2,000,000 and P3,000,000 respectively.
Money order 30,000 Lawaan Company’s sales of the trademark items totaled P8,000,000 for the last
Petty cash fund (P4,000 in currency and
 half of 2005. In Pandan’s 2005 income statement, how much should be reported d. 3,500,000, and 6,750,000
as
MAS
12. Total income from investments in securities?
1.The following credit sales are budgeted by Roswell Company:
a. 2,200,000 c. 6,000,000
b. 6,700,000 d. 8,200,000 January $34,000
February 50,000
March 70,000
13. Rental revenue?
April 60,000
a. 2,500,000 c. 3,300,000
b. 2,660,000 d. 2,760,000 The company's past experience indicates that 70% of the accounts receivable are
collected in the month of sale, 20% in the month following the sale, and 8% in the
second month following the sale. The anticipated cash inflow for the month of April
14. Royalty revenue?
is
a. 3,000,000 c. 3,800,000
b. 4,000,000 d. 5,000,000 a. $61,720.
b. $56,000.
15. During 2005, Cavite Company made the following property, plant and c. $60,000.
equipment expenditures: d. $58,800.

Land and building acquired from Bacoor Company 9,000,000

2. A beverage stand can sell either soft drinks or coffee on any given day. If the
Repairs made to the building 300,000
stand sells soft drinks and the weather is hot, it will make P2,500; if the weather is
Special tax assessment 50,000 cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it
Remodeling of office space including new partitions and walls 400,000 will make P1,900; if the weather is cold, the profit will be P2,000.The probability
of cold weather on a given day at this time is 60%.
In exchange for the land and building acquired from Bacoor, Cavite issued
60,000 shares of its P100 par value common stock. On the date of The expected payoff for either selling coffee or soft drinks and the expected
purchase, the stock had a market value of P150 per share and the land payoff if the vendor has perfect information are
and building had fair value of P2,000,000 and P6,000,000 respectively. Coffee Soft drinks Perfect information
During the year, Cavite also received land from a shareholder to facilitate A. P1,360 P1,600 P3,000
the construction of a plant in the city. Cavite paid P100,000 for the land B. P1,960 P1,600 P2,200
transfer and charged this amount to legal expenses. The land is fairly
valued at P1,500,000. C. P2,200 P1,900 P1,360
D. P3,900 P1,900 P1,960
The cost of the land and building acquired should respectively be
a. 3,800,000, and 7,450,000
b. 3,550,000, and 6,700,000 3. Turnaround documents
c. 3,500,000, and 6,400,000 A. generally circulate only within the computer center.
B. can be read and processed only by the computer.
 C. are generated by the computer and eventually return to it.
D. are only used internally in an organization.
4. Why do the NPV method and the IRR method sometimes produce different
rankings of mutually exclusive investment projects?
A. The NPV method does not assume reinvestment of cash flows while the IRR
method assumes the cash flows will be reinvested at the internal rate of return.
B. The NPV method assumes a reinvestment rate equal to the discount rate while
the IRR method assumes a reinvestment rate equal to the internal rate of
return.*
C. The IRR method does not assume reinvestment of the cash flows while the
NPV assumes the reinvestment rate is equal to the discount rate.
D. The NPV method assumes a reinvestment rate equal to the bank loan interest
rate while the IRR method assumes a reinvestment rate equal to the discount
rate.
5. What is the effective annual interest rate on a 9% annual percentage rate
automobile loan that has monthly payments?
A. 9% B. 9.38% C. 9.81% D.
10.94%
6. Corbin, Inc. can issue 3-month commercial paper with a face value of $1,000,000
for $980,000. Transaction costs will be $1,200. The effective annualized
percentage cost of the financing, based on a 360-day year, will be
A. 8.48%. B. 8.66%. C. 8.00%. D. 2.00%.
7. ABC Company finances all of its seasonal inventory needs from the local bank at
an effective interest cost of 9%. The firm’s supplier promises to extend trade
credit on terms that 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.
8. 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 it can wait until the 30th day when it will receive revenues to
cover the payment. If it borrows funds on the last day of the discount period in
order to obtain the discount, its total cost will be
A. $51,000 less. B. $75,500 less. C. $100,000 less. D.
$24,500 more.
9. Every 15 days a company receives $10,000 worth of raw materials from its
suppliers. The credit terms for these purchases are 2/10, net 30, and payment is
made on the 30th day after each delivery. Thus, the company is considering a 1-
year bank loan for $9,800 (98% of the invoice amount). If the effective annual
interest rate on this loan is 12%, what will be the net dollar savings over the year
by borrowing and then taking the discount on the materials?
A. $3,624 B. $1,176 C. $4,800 D. $1,224
10. A lock-box system
A. Reduces the need for compensating balances.
B. Provides security for late night deposits.
C. Reduces the risk of having checks lost in the mail.
D. Accelerates the inflow of funds.
11. Ignoring cost and other effects on the firm, which of the following measures
would tend to reduce the cash conversion cycle?
a. Maintain the level of receivables as sales decrease.
b. Buy more raw materials to take advantage of price breaks.
c. Take discounts when offered.
d. Forgo discounts that are currently being taken.
12. In choosing from among mutually exclusive investments the manager should
normally select the one with the highest
A. NPV C. payback reciprocal
B. IRR D. book rate of return
13. For the past 12 years, the Blue Company has produced the small electric motors
that fit into its main product line of dental drilling equipment. As material costs
have steadily increased, the controller of the Blue Company is reviewing the
decision to continue to make the small motors and has identified the following
facts:
1. The equipment used to manufacture the electric motors has a book value of
P150,000.
 2. The space now occupied by the electric motor manufacturing department
could be used to eliminate the need for storage space now being rented.
3. Comparable units can be purchased from an outside supplier for P59.75. P2
4. Four of the persons who work in the electric motor manufacturing department
would be terminated and given eight weeks’ severance pay. 1. Paris LTD. owned a 75% interest in Scott Company prior to January 1,
5. A P10,000 unsecured note is still outstanding on the equipment used in the 20X3. On January 1, 20X1, Paris LTD. paid $600,000 for its interest when
manufacturing process. Scott Company had total equity of $550,000. On January 1, 20X3, Scott
Company had the following stockholders' equity:
Which of the items above are relevant to the decision that the controller has to Common stock, $10 par............... $100,000
make? Other paid-in capital............... 200,000
A. 1, 3, and 4 C. 2, 3, 4, and 5 Retained earnings................... 350,000
B. 2, 3, and 4 D. 1, 2, 4, and 5 On January 2, 20X3, Scott Company sold 2,500 additional shares of stock
for $80 each in a private offering to noncontrolling shareholders. As a
result of this sale, which of the following changes would appear in the
14. Ottawa Corporation produces two products from a joint process. Information 20X3 consolidated statements?
about the two joint products follows: a. $50,000 gain
b. $22,500 gain
Product Product
c. $50,000 increase in controlling paid-in capital
X Y
d. $22,500 increase in controlling paid-in capital
Anticipated production 2,000 4,000
lbs lbs 2. Paris LTD. owned a 75% interest in Scott Company prior to January 1,
Selling price per lb. at split-off P30 P16 20X3. On January 1, 20X1, Paris LTD. paid $600,000 for its interest when
Additional processing costs/lb after split-off P15 P30 Scott Company had total equity of $550,000. On January 1, 20X3, Scott
(all variable) Company had the following stockholders' equity:
Selling price/lb after further processing P40 P50 Common stock, $10 par............... $100,000
Other paid-in capital............... 200,000
The cost of the joint process is P85,000. Retained earnings................... 350,000
Ottawa currently sells both products at the split-off point. If Ottawa makes On January 2, 20X3, Scott Company sold 2,500 additional shares of stock
decisions which maximizes profit, Ottawa’s profit will increase by for $35 each in a public offering to noncontrolling shareholders. As a
result of this sale, which of the following changes would appear in the
A. P16,000 C. P50,000 20X3 consolidated statements?
B. P4,000 D. P10,000 a. $45,000 loss
b. $21,875 loss
15.Opportunity costs: c. $45,000 decrease in controlling paid-in capital
A. Are treated as period costs under variable costing. d. $21,875 decrease in controlling paid-in capital
B. Have already been incurred as a result of past action.
C. Are benefits that could have been obtained by following another course of
action. 3. When a parent purchases a portion of the newly issued stock of its
D. Do not vary among alternative courses of action. subsidiary and the ownership interest remains the same,
a. any difference between the change in equity and the price paid is c. $30,000 and $10,000
the excess of cost or book value attributable to the new block. d. $30,000 and $40,000
b. any difference between the change in equity and the price paid is
viewed as a gain or loss on the sale of an interest. 7. On 1/1/X1 Peck sells a machine with a $20,000 book value to its
c. any difference between the change in equity and the price paid is subsidiary Shea for $30,000. Shea intends to use the machine for 4
viewed as a change in paid-in capital or retained earnings. years. On 12/31/X2 Shea sells the machine to an outside party for
d. there will be no adjustment. $14,000. What amount of gain or (loss) for the sale of assets is
reported on the consolidated financial statements?
4. Apple Inc. owns a 90% interest in Banana Company. Banana Company, in a. loss of $6,000
turn, owns a 80% interest in Carrot Company. During 20X4, Carrot Company b. loss of $1,000
sold $50,000 of merchandise to Apple Inc. at cost plus 25%. Of this c. gain of $4,000
merchandise, $10,000 was still unsold by Apple Inc. at year end. The d. gain of $14,000
adjustment to the controlling interest in consolidated net income for
20X4 is __________. 8. Pease Corporation owns 100% of Sade Corporation common stock. On
a. $560 January 2, 20X6, Pease sold machinery with a carrying amount of $30,000 to
b. $1,440 Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year
c. $1,600 life using the straight-line method. The net adjustments to compute the 20X6
d. $1,800 and 20X7 consolidated income before income tax would be an increase
(decrease) of
5. Phelps Co. uses the sophisticated equity method to account for the 80% 20X6 20X7
investment in its subsidiary Shore Corp. Based upon the following a. $(16,000) $4,000
information what amount does Phelps Co. record as subsidiary income? b. $(16,000) $0
Phelps internally generated income: $250,000 c. $(20,000) $4,000
Shore internally generated income: $ 50,000 d. $(20,000) $0
Intercompany profit on Shore beginning inventory: $ 10,000
Intercompany profit on Shore ending inventory: $ 15,000 9. Company S is a 100%-owned subsidiary of Company P. On January 1,
a. $50,000 20X9, Company S has $100,000 of 8% face rate bonds outstanding. The
b. $44,000 bonds had 5 years to maturity on January 1, 20X9, and had an amortized
c. $40,000 discount of $5,000. On that date, Company P purchased the bonds for
d. $36,000 $99,000. The net adjustment needed to consolidate retained earnings on
December 31, 20X9
6. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquiredby is __________.
Pennie several years ago. On January 1, 20X2, Pennie sold land with a book a. $(4,000)
value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated b. $(3,200)
party for $100,000 on September 26, 20X3. The gain from sale of land that c. $(800)
will appear in the consolidated income statements for 20X2 and 20X3, d. $0
respectively, is _______.
a. $0 and $10,000 10. Sun Company is a 100%-owned subsidiary of Peter Company. On
b. $0 and $40,000 January 1, 20X1, Sun Company has $500,000 of 8% face rate bonds
outstanding, with an unamortized discount of $5,000 which is being amortized c. the subsidiary retiring the debt with the proceeds of a new stock
over a 5 year remaining life to maturity. On that date, Peter Company issue.
purchased the bonds for $497,000. The adjustment to the consolidated d. allowing the bonds to continue to be held by outside interests.
income of the two companies needed in the consolidation process for 20X2
(the following 14. Powell Company owns an 80% interest in Sauter, Inc. On January 1,
year) is __________. 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of
a. $2,800 $25,000. On December 31, 20X5, 5 years after original issuance, Powell
b. $(400) purchased all of the outstanding bonds for $390,000. Both firms use the
c. $400 straight-line method of amortization.
d. $(2,800) What is the extraordinary gain on retirement on the 20X5 consolidatedincome
statement?
11. Company S is a 100%-owned subsidiary of Company P. Company P a. $12,500
purchased all the outstanding bonds of Company S at a discount. The bonds b. $22,500
had a remaining issuance premium at the time of Company P's purchase. The c. $10,000
bonds have 5 years to maturity. At the end of 5 years, retained earnings: d. $35,000
a. is greater as a result of the purchase.
b. is less as a result of the purchase. 15. If a city issues a term bond to purchase property for a city park,which of
c. is not affected by the purchase. the following entries would be made?
d. cannot be determined from the information provided. a. Other Financing Sources would be credited in a Capital Projects
Fund.
12. Company P owns 80% of Company S. On January 1, 20X9 Company S b. Cash would be debited in the General Long-Term Capital Debt
has Account Group.
outstanding 6% bonds with a face value of $200,000 and an unamortized c. Term Bonds Payable would be credited in the General Fund.
discount of $3,000, which is being amortized on a straight-line basis d. All of these entries would be made.
over a remaining term of 10 years. On January 1, 20X9, Company P
purchased all the bonds for $205,000. The premium also is amortized on a AP
straight-line basis. The net impact of the purchase on the
noncontrolling interest as of December 31, 20X9, is __________. You are auditing the financial statements of UKG INC. for the year ended December 31,
a. $(8,000) 2007. The company maintains its books on a semi-accrual and semi-cash basis. Purchases
b. $(1,600) and sales are recognized on an accrual basis while other operating expenses are kept on
c. $(1,440) cash basis. The company bookkeeper presented to you a draft of its income statements for
d. $(1,200)
the year under audit:
13. The purchase of outstanding subsidiary bonds by the parent company has Sales P600,000
the same impact on consolidated statements as:
a. the subsidiary retiring its own debt with the proceeds of new debt Cost of Sales 360,000
issued to outside parties.
b. the subsidiary retiring the debt with the proceeds of a loan from Gross Profit P240,000
the parent.
 Depreciation Expense (29,000)

Other Expenses (166,000) You are performing, for the first time, the audit for the year ended December 31, 2007 of
GKNB CORP.financial statements. The company reported the following amounts of net
Interest Expense (20,000) income for the years ended December 31, 2005, 2006, and 2007:
Net Income P25,000 2005 P381,000
Your investigation revealed the following information: 2006 450,000
a. On January 1, 2007, UKG issued P200,000, 10%, 10 year bonds when the market 2007 385,500
rate of interest was 8%. Interest is payable on June 30 and December 31.
b. All purchases of inventory are on account and other expenses reflect those During your examination, you discovered the following errors:
expenses paid in cash during the period.
a. You observed that there were errors in the physical count: December 31, 2006
c. The company had open invoice (unpaid invoices) from suppliers amounting to
P120,000 on December 31, 2007 and P116,000 on January 1, 2007. inventories were understated by 42,000 and December 31, 2007 were overstated by
d. The company had outstanding invoices (uncollected invoices) to customers 69,000.
amounting to P96,000 on January 1, 2007 and P110,000 on December 31, 2007. b. On December 30, 2007 GKNB recorded on account, merchandise in transit which
cost 45,000. The merchandise was shipped FOB Destination and had not arrived by
e. Inventory taking at the end of each year revealed that inventory on hand on
December 31, 2006 amounted to P186,000 while inventory on December 31, 2007 December 31. The merchandise was not included in the ending inventory.
was at P174,000. c. Accrual sales at each year end were consistently omitted as follows:
2005 12,000
f. Accrued utilities at the beginning and at the end of the year amounted to P5,000
and P7,000 respectively while prepaid rentals at the beginning and at the end of the 2006 15,000
year amounted to P10,000 and P14,000, respectively. 2007 10,500

Based on the information available and as a result of your audit, determine the following: d. Accrual of salaries were consistently omitted as follows:

1. How much was paid for inventory purchases? December 31, 2005 30,000
a. 344,000 b. 348,000 c. 368,000 d. 372,000 December 31, 2006 42,000
2. How much was received from customers in 2007?
a. 490,000 b. 566,000 c. 586,000 d. 614,000 e. On march 5, 2006, a 10%stock dividend was declared and distributed. The par value
3. What is the carrying value of the bonds payable on December 31, 2007? of the shares amounted to 30,000 and market value was 39,000. The stock dividend
a. 225,318 b. 226,267 c. 226,840 d. 227,180 was recorded as follows:
4. What is the correct interest expense in 2007? Other expense 30,000
a. 21,862 b. 20,000 c. 19,087 d. 18,138 Ordinary shares 30,000
5. What is the correct net income in 2007? f. On July 1, 2006, GKNB paid a 3-year rent. The 3-year premium of 18,000 was paid on
a. 26,862 b. 28,862 c. 29,718 d. 46,000 that date, and the entire premium was recorded as insurance expense.
 g. On January 1, 2007, GKNB retired bonds with a book value of 360,000 for 318,000. Operating expenses (1,500,000) (1,800,000)
The gain was deferred and amortized over 10 years as a reduction of interest
expense on other outstanding bonds. Net profit 1,700,000 300,000

Accumulated profits, beg 1,150,000 1,000,000

6. What is the correct net income in 2005?
a. 399,000 b. 363,000 c. 351,000 d. 339,000 Net profit 1,700,000 300,000
7. What is the correct net income in 2006?
Dividends paid (500,000) (150,000)
a. 477,000 b. 498,000 c. 528,000 d. 534,000
8. What is the correct net income in 2007? Accumulated profits, end 2,350,000 1,150,000
a. 313,200 b. 388,800 c. 393,000 d. 418,800
9. What is the retroactive adjustment to the beginning retained earnings in 2007 to
correct the prior years’ errors?
Audit notes:
a. 21,000 cr. B. 21,000 dr. c. 69,000 dr. d. 69,000 cr.
10. What is the adjusting entry in 2007 to correct the error in item e above? a. The ending inventory for 2006 was understated by 100,000.
a. Accumulated profits 39,000 b. The company decided to change its method of depreciation from the double-
Other expense 30,000 declining balance method to the straight-line. The depreciable assets had a 10 year
Share premium 9,000 useful life and is 50% depreciated as at the end of 2006. The salvage value of the
b. Accumulated profits 30,000 said assets was estimated to be 50,000. Expenses in the income statements included
Accumulated profits 30,000 a 350,000 depreciation expense computed based on double-declining balance
c. Accumulated profits 9,000 method.
Share premium 9,000 c. On August 31, 2006, the company started the construction of a building it plans to
d. No adjustment is necessary use as a second factory. As of the current balance sheet, the construction is yet to
be finished. Total accumulated costs incurred on the construction and recorded in
its construction-in-progress account, amounted to 1,250,000, which included a
You are auditing the financial statements of Morlog Co. the company’s accountant provided 25,000 capitalized borrowing cost in 2006, since the company opted to apply the
you with the following comparative statements of income and accumulated profits for the alternative approach of accounting for finance cost in accordance with PAS 23.
years 2006 and 2007. During the current year, the company decided to change the method of accounting
for borrowing cost to follow the benchmark treatment. Actual borrowing cost in
2007 2006 2007 amounted to 75,000 it charged to current operations.
Sales P4,500,000 6,000,000 Answer the following questions based on the above information:
Cost of goods sold ( 2,800,000) (2,400,000) 11. What is the correct net income in 2006?
a. 400,000 b. 300,000 c. 275,000 d. 200,000
Gross income 3,200,000 2,100,000
12. What is the correct net income in 2007?
 a. 1,715,000 b. 1,685,000 c. 1,675,000 d. 1,610,000 d.P450,000
13. What is the adjusted accumulated profits balance at the beginning of 2007? 3.if it is a non-resident alien corporation, its income tax:
a. 1,025,000 b. 1,075,000 c. 1,225,000 d. 1,275,000 a. 1200,000
14. What is the adjusted accumulated profits at the end of 2007? b. 128,000
a. 2,335,000 b. 2,385,000 c. 2,835,000 d. 2,885,000 c. 880,000
15. What is the necessary adjusting entry as a result of the change described in item c? d. 730,000
a. No adjustment is necessary
b. Interest expense 25,000 4. if it is a private educational institution, its income tax after tax credit:
Retained earnings 25,000 a. 675,000
c. Interest expense 25,000 b. 832,000
Construction in progress 25,000 c. 275,000
d. Retained earnings 25,000 d. 150,000
Construction in progress 25,000
5. If it is a resident corporation and it remitted 60% of its head office abroad, its
BLT total tax liability is (original data):
a. 544,500
The BFABF corporation provided the following data for calendar year ending December
b. 571,800
31,2009: ($1-P50)
c. 196,000
Philippines Abroad d. 612, 750

GROSS INCOME P4,000,000 $40,000

6. In a contract of sale executed by S and B, it appears S sold his motor vehicle to B for P50,000. It
DEDUCTIONS P2,500,000 $15,000 turned out however, S has three motor vehicles. Gallant valued P80,000: Hi-Ace van valued
P70,000: and a Jeep valued P50,000. Which of the following is correct?
INCOME PAID 3,000 a. The contract shall be reformed because there was mistake.
b. The parties can ask interpretation because the word Motor vehicle is ambiguous.
1.If it is a domestic corporation, its income tax after credit is: c. The parties can ask for annulment of the contract.
d. There is no contract
a. P812,500
b.P832,000 7. An agreement restraint of trade or establishing monopoly is:
c.P880,000 a. Perfectly valid
d.P675,000 b. Voidable
c. Unenforceable
d. Valid
2.if it is a resident corporation, its income tax is:
a.P525,000 8. Three of the following is rescissible which is not?
a. Sale of property under litigation made by defendant without the consent of plaintiff or
b.P1,280,000
authority of the court
c.P880,000
 b. Those made to defraud creditors when the latter have no other means to recover their 14. Which of the following cannot be a close corporation?
claims. a. mining corporation
c. Those agreed upon representation of absentees, if the absentee suffers lesion by more b. stock exchange
than ¼ of the valued of the property subject of the contract c. educational institution
d. Contract of sale and the price is unusually inadequate resulting to lesion. d. All of the above
9. S and M agreed in print that S, debtor for P3,000, will work as a servant of M without pay until 15. In the following instances, approval of the majority of the board and
she could find money with which to pay her debt. S failed to comply with her obligation. Under concurrence of the stockholders representing 2/3 of the outstanding capital stock
this premise, which of the following statements is correct? is necessary in the exercise of the powers except:
a. The agreement to work as a servant is void because it is immoral. a. To deny pre-emptive right.
b. To act as a servant without pay is unconstitutional because this is equivalent to
b. To adopt, amend or repeal the by-laws.
involuntary servitude.
c. To increase or decrease capital stock.
c. The agreement to work without pay since written is enforceable.
d. To declare stock dividends.
d. The contract to work without pay as a servant until the debt is paid is void.

10. Which of the following contract is not required to appear in a public document?
a. Acts and contracts which have for their objective creation, transmission, modification,
or extinguishment of real rights over immovable property.
b. The cession, repudiation or renunciation of hereditary rights.
c. The power to administer property
d. Sale of immovable property

11. Which of the following are prohibited considerations for the issuance of
stocks?
a. goodwill
b. past services
c. accounts receivables
d. None of the above

12. The following are remedies available to a corporation to enforce payment of

stocks except:
a. Mandamus
b. Extra-judicial sale
c. Withholding of stock dividends
d. Deduction from cash dividends

13. In the following instances, appraisal right may be exercised, except:

a. Investment of corporate funds in another business or purpose.
b. Extension of term
c. Appointment of an executive committee.
d. Reduction of term.