INTERMEDIATE ACCOUNTING -PRACTICAL ACCOUNTING 1

P1

1. Mankayan Company uses the first-in, first-out retail method of inventory valuation. The following
information is available:

Cost Retail
Beginning inventory P 2,500,000 4,000,000
Purchases 13,500,000 16,000,000
Net markups 3,000,000
Net markdowns 1,000,000
Sales 15,000,000

What would be the estimated cost of the ending inventory?

a. P7,000,000 c. P5,110,000
b. P5,250,000 d. P4,750,000

2. Data regarding Kiangan Company’s trading securities follow:

Cost Market_
December 31, 2004 10,000,000 8,500,000
December 31, 2005 10,000,000 9,500,000
Differences between cost and market value are considered temporary. The income statement
for 2005 should report unrealized gain on these securities at
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

3. Data regarding Lamut Company’s available for sale securities follow:

Cost Market_
December 31, 2004 10,000,000 8,500,000
December 31, 2005 10,000,000 11,000,000
Differences between cost and market value are considered temporary. The 2005 statement of
stockholders’ equity should report unrealized gain on these securities at
a. 2,500,000
b. 1,000,000
c. 1,500,000
d. 0

4. Hungduan Company had acquired investments in available for sale securities for P15,000,000 on
January 1, 2004. On December 31, 2005, Hungduan decided to reclassify the available for sale
securities as trading securities. The market value of the securities was P13,000,000 on December 31,
2004 and P12,000,000 on December 31, 2005. In its 2005 income statement, Hungduan should report
unrealized loss on the transfer of AFS securities at
a. 2,000,000
b. 3,000,000
 c. 1,000,000
d. 0

5. Hingyon Company had investments in marketable debt securities costing P10,000,000 which were
acquired on January 1, 2004 and classified as “available for sale”. On December 31, 2005, the
company decided to hold the investments to maturity and accordingly reclassified them as “held to
maturity” on that date. The investments’ market value was P9,000,000 at December 31, 2004, and
P7,500,000 on December 31, 2005. What amount should Hingyon Company report as unrealized
loss on these securities in its 2005 statement of stockholders’ equity?
a. 2,500,000
b. 1,000,000
c. 1,500,000
d. 0

6. On December 31, 2004, Mayayao Company purchased trading securities. Pertinent data on
December 31, 2005 are as follows:
Security Cost Market_value
X 4,000,000 3,500,000
Y 6,000,000 7,500,000
Z 8,000,000 6,000,000
On December 31, 2005, Mayayao reclassified its investment in security Z from trading to available
for sale. What amount of unrealized loss on the transfer of trading securities should be shown in
the 2004 income statement?

a. 2,000,000
b. 1,000,000
c. 3,000,000
d. 0

7. Ilocos Company received dividends from its common stock investments during the year 2005 as
follows:
 A stock dividend of 20,000 shares from A Company when the market price of A’s shares was
P30 per share.
 A cash dividend of P2,000,000 from B Company in which Ilocos owns a 20% interest.
 A cash dividend of P1,500,000 from C Company in which Ilocos owns a 10% interest.
 10,000 shares of common stock of D Company in lieu of cash dividend of P20 per share. The
market price of D Company’s shares was P180. Ilocos holds originally 100,000 shares of D
Company common stock. Ilocos owns 5% interest in D Company.
What amount of dividend revenue should Ilocos report in its 2005 income statement?
a. 3,300,000
b. 5,300,000
c. 3,500,000
d. 2,500,000

8. Data pertaining to dividends from Vigan Company’s common stock investments for the year 2005
follow:
  On October 1, 2005, Vigan received P2,000,000 liquidating dividend from X Company.
Vigan owns a 5% interest in X Company.
 Vigan owns a 10% interest in Y Company which declared a P30,000,000 cash dividend on
November 15, 2005 to stockholders of record on December 15, 2005 payable on January
15, 2006.
 On December 1, 2005, Vigan received from Z Company a dividend in kind of one share of
V Company common stock for every 5 Z Company common shares held. Vigan holds
200,000 Z Company shares which have a market price of P50 per share on December 1,
2005. The market price of V Company common is P30 per share.

What amount should Vigan report as dividend income in its 2005 income statement?
a. 6,200,000
b. 4,200,000
c. 3,000,000
d. 5,000,000

9. Caoayan Company owns 1,000,000 shares of Suyo Company’s 5,000,000 shares of P50 par, 10%
cumulative, nonparticipating preferred stock and 500,000 shares (2%) of Suyo’s common stock.
During 2005 Suyo declared and paid dividends of P40,000,000 on preferred stock. No dividends had
been declared or paid during 2004. In addition, Caoayan received a 15% common stock dividend
from Suyo when the quoted market price of common stock was P100. What amount should Caoayan
report as dividend income in its 2005 income statement?
a. 15,500,000
b. 20,000,000
c. 10,000,000
d. 8,000,000

10. On January 2, 2005, Narvacan Company acquired 100,000 shares of ABC Company common
stock for a total consideration of P6,000,000. On October 1, 2005, Narvacan received from ABC a
preferred stock dividend of one share for every 10 common shares held. On this date, the market
price of ABC common is P75 per share and the ABC preferred, P50 per share. Narvacan Company
should report its investment in ABC Company preferred stock at
a. 500,000
b. 750,000
c. 375,000
d. 0

11. Candon Company owns 100,000 shares of the outstanding common stock of Bantay Company
which has several hundred thousand shares publicly traded. These 100,000 shares were purchased
in 2002 for P100 per share. On December 1, 2005, Bantay Company distributed 100,000 rights to
Candon. Candon was entitled to buy one new share of Bantay common stock for P100 and five of
these rights. On December 1, 2005, each share of stock had a market value of P135 ex-right and
each right had market value of P15. On December 31, 2005, Candon exercised all rights. What cost
should be recorded for each new share that Candon acquired by exercising the rights?
a. 150
 b. 100
c. 135
d. 15

12. Tagudin Company invested in stocks of Kaunlaran Company as follows:

2003 50,000 shares at P80 4,000,000

2004 100,000 shares at P70 7,000,000

In 2005, Tagudin received 150,000 rights to purchase Kanluran stock at P80 per share plus five
rights. At issue date, rights had a market value of P5 each and stock was selling at P95 ex-right.
Tagudin used rights to purchase 22,000 additional shares of Kanluran stock and allowed the
remaining rights to lapse. The FIFO mathod is used in determining the stock rights exercised.
What is the cost of the new investment?
a. 1,760,000
b. 2,170,000
c. 2,310,000
d. 2,100,000

13. Nagbukel Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the
stockholders to subscribe for 1 share at P100. Sinait Company owns 200,000 shares of Nagbukel
Company with total cost of P15,000,000. The stock is quoted right-on at 125. What is the theoretical
value of the stock rights?
a. 1,000,000
b. 1,250,000
c. 1,500,000
d. 0

14. On January 1, 2004, Laoag Company purchased 15% of Vintar Company’s common stock for
P20,000,000. The following data concerning Vintar Company are available:

2004 _ 2005_
Net income 6,000,000 7,000,000
Cash dividend paid None 15,000,000

In its income statement for the year ended December 31, 2005, how much should Laoag report as
income from this investment?
a. 2,250,000
b. 1,950,000
c. 700,000
d. 600,000

15. In January 2005 Paoay Company acquired 25% of the outstanding common stock of Bangui
Company for P25,000,000. The book value of the acquired shares was P21,000,000. The excess of
cost over book value was attributable to an identifiable intangible asset which was undervalued on
Bangui’s balance sheet and which had an indefinite life. For the year ended December 31, 2005,
Bangui reported net income of P20,000,000 and paid cash dividends of P6,000,000 on its common
stock and thereafter issued 10% stock dividend. What is the proper carrying value of investment in
associate at December 31, 2005?
a. 28,300,000
b. 28,500,000
c. 20,400,000
d. 28,700,000
P1
1. On January 2, 2005, Currimao Company purchased 10% of Bacarra Company’s outstanding
common shares for P20,000,000. Currimao is the largest single shareholder in Bacarra and
Currimao’s officers are majority of Bacarra’s board of directors. Bacarra reported net income of
P10,000,000 and paid dividend of P4,000,000. In its December 31, 2005 balance sheet, what amount
should Currimao report as investment in Bacarra Company?
a. 20,000,000
b. 21,000,000
c. 20,600,000
d. 21,400,000

2. On July 1, 2005, Batac Company purchased 40% of the outstanding common stock of Dumalneg
Company for P50,000,000. On this date, Dumalneg’s net assets were P100,000,000 which
approximated their fair values, except for land whose fair value exceeded its carrying amount by
P15,000,000. Any implied goodwill has a useful life of 5 years. Dumalneg’s 2005 net income was
P25,000,000. The maximum amount which could be included in Batac’s 2005 income before tax to
reflect its “equity in earnings of Dumalneg” is
a. 9,200,000
b. 4,600,000
c. 3,000,000
d. 4,200,000

3. Culasi Company bought 20% of Bugasong Corporation’s common stock on January 1, 2005 for
P20,000,000. Carrying amount of Bugasong’s net assets at purchase date totaled P60,000,000. Fair
value and carrying amounts were the same for all items except for plant and inventory, for which fair
values exceed their carrying amounts by P15,000,000 and P5,000,000 respectively. The plant has a
5-year life. All inventory was sold during 2005. Goodwill, if any, has an indefinite life. During 2005,
Bugasong reported net income of P40,000,000 and paid a P15,000,000 cash dividend. What amount
should Culasi report as investment income for 2005?
a. 6,200,000
b. 6,400,000
c. 3,000,000
d. 7,600,000

4. Carasi Company purchased 15% of Badoc Company’s 500,000 outstanding shares of common
stock on January 2, 2005, for P15,000,000. On December 31, 2005, Carasi purchased additional
125,000 shares of Badoc for P35,000,000. There was no goodwill as a result during 2005. Badoc
reported earnings of P20,000,000 for 2005. What amount should Carasi report in its December 31,
2005 balance sheet as investment in Badoc Company?
 a. 50,000,000
b. 58,000,000
c. 55,000,000
d. 53,000,000

5. On January 1, 2004 Dingras Company acquired 10% of the outstanding voting stock of Piddig
Company. On January 1, 2005, Dingras gained the ability to exercise significant influence over
financial and operating control of Piddig by acquiring 30% of Piddig’s outstanding stock. The two
purchases were made at prices proportionate to the value assigned to Piddig’s net assets, which
equaled their carrying amounts. For the years ended December 31, 2004 and 2005, Piddig reported
the following:

2004 2005 __
Dividend paid 5,000,000 10,000,000
Net income 8,000,000 15,000,000

In 2005, what amounts should Dingras report as current year investment income and as an
adjustment to 2004 income, respectively?
a. 6,000,000 and 800,000
b. 6,000,000 and 300,000
c. 4,500,000 and 300,000
d. 4,500,000 and 800,000

6. Pagudpud Company owns 50% of Sarrat Company’s preferred stock and 30% of its common
stock. Sarrat’s stock outstanding at December 31, 2005 includes P20,000,000 of 10% cumulative
preferred stock and P50,000,000 of common stock. Sarrat reported net income of P10,000,000 for
the year 2005. What amount should Pagudpud report as investment income for the year 2005?
a. 3,000,000
b. 2,400,000
c. 3,400,000
d. 4,400,000

7. The following data pertain to Antique Company’s investments in debt securities:

Market value
Cost 12/31/2005 12/31/2004
Trading 5,000,000 5,200,000 4,500,000
Available for sale 5,000,000 4,800,000 4,700,000

What amount should Antique report as unrealized gain in its 2005 income statement?
a. 700,000
b. 200,000
c. 800,000
d. 100,000

8. On October 1, 2005, Bangued Company acquired P20,000,000 face value 12% bonds of Didigan
Company at 110 plus accrued interest. The bonds were dated July 1, 2004 and will mature on June
30, 2009. Interest is payable June 30 and December 31. The commission to acquire the bonds was
P500,000. The total amount paid for the investment in bonds was
a. 23,100,000
b. 22,600,000
c. 22,500,000
d. 21,900,000

9. On July 1, 2005 Tagum Company purchased as a long-term investment in Langiden Company’s

10-year 12% bonds, with face value of P20,000,000, for P18,500,000. Interest is payable
semiannually on June 30 and December 31. The bonds mature on July 1, 2010. Tagum uses the
straight line amortization method. What is the amount of interest income that Tagum should report in
its 2005 income statement?
a. 1,350,000
b. 1,200,000
c. 1,500,000
d. 1,050,000

10. On October 1, 2005 Bucay Company purchased 20,000 of the P1,000 face value 12% bonds of
Manabo Company for P23,000,000 including accrued interest of P600,000. The bonds which mature
on January 1, 2012, pay interest semiannually on January 1 and July 1. Bucay used the straight line
method of amortization and appropriately recorded the bonds as a long-term investment. On the
December 31, 2006 balance sheet the bonds should be reported at
a. 22,304,000
b. 21,920,000
c. 22,880,000
d. 22,400,000

11. On April 1, 2005, Caluya Company purchased P5,000,000 face value 9%. Treasury notes for
P4,962,500 including accrued interest of P112,500. The notes mature on July 1, 2006 and pay
interest semiannually. Caluya intends to hold the notes to maturity. In its October 31, 2005 balance
sheet, the carrying amount of this investment should be
a. 4,850,000
b. 4,920,000
c. 4,930,000
d. 4,975,000

12. Luba Company purchased bonds at a discount of P5,000,000. Subsequently, Luba sold these
bonds at a premium of P2,000,000. During the period that Luba held this investment, amortization of
the discount amounted to P1,500,000. What amount should Luba report as gain on the sale of the
bonds?
a. 2,000,000
b. 5,500,000
c. 3,500,000
d. 3,000,000

13. On January 1, 2005, Bucloc Company acquired for P6,500,000 the entire P8,000,000 issue 12%
serial bonds. Bonds of P2,000,000 mature at annual intervals beginning December 31, 2005.
Interest is payable semiannually on June 30 and December 31. What is the interest income for 2005
using the bond outstanding method of amortization?
 a. 1,560,000
b. 1,380,000
c. 780,000
d. 960,000

14. On January 1, 2005, Lacub Company purchased P8,000,000 face value 12% bonds at 120.
Bonds are due on January 1, 2015 but can be redeemed at earlier dates at premium values as
follows:
January 1, 2007 to December 31, 2010, at 110
January 1, 2011 to December 31, 2014, at 104
What is the interest income for 2005 using the accelerated method of amortization?
a. 1,360,000
b. 960,000
c. 560,000
d. 800,000

15. On July 1, 2005, Boloc Company purchased P2,000,000 of East Company’s 8% bonds due on
July 1, 2015. Boloc expects to hold the bonds until maturity. The bonds pay interest semiannully on
January 1 and July. The bonds were purchased for P1,750,000 to yield 10%. In its 2005 income
statement, Boloc should report interest income at
a. 175,000
b. 160,000
c. 92,500
d. 87,500
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?
a. 9,568,400
b. 9,601,600
c. 9,551,800
d. 9,618,200

2. On July 1, 2005, Tuguegarao Company purchased as a long term 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 10% interest. The bonds pay interest annually on December 31.
Tuguegarao uses the interest method. In its December 31, 2005 balance sheet, what amount should
Tuguegarao report as investment in bonds?
a. 7,292,500
b. 7,207,500
c. 7,628,500
d. 7,335,000
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

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
d. 384,000

5. On January 1, 2005 Aparri Company purchased 5-year bonds with face value of P8,000,000 and
stated interest of 10% per year payable semiannually January 1, and July 1. The bonds were
acquired to yield 8%. Present value factors are:
Present value of an annuity of 1 for 10 periods at 5% 7.72
Present value of an annuity of 1 for 10 periods at 4% 8.11
What is the purchase price of the bonds?
a. 7,382,400
b. 8,617,600
c. 8,648,800
d. 7,351,200

6. The following information relate to a noncurrent investment that Abra Company placed in trust as
required by the underwriter of its bonds:
Bond sinking fund, 1/1/05 5,000,000
Additional investment in 2005 1,000,000
Dividend on investment 500,000
Interest revenue 1,500,000
Administration costs 800,000
Carrying amount of bonds payable 9,000,000

What amount should Abra report in its December 31, 2005 balance sheet related to itsbond
sinking fund?
a. 9,000,000
b. 8,000,000
c. 7,200,000
d. 5,200,000
7. Buguey Company insures the life of its president for P8,000,000, the 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 corporation follows the calendar year as its fiscal period. The president dies on October 1, 2005
and the policy is collected on December 31, 2005. What is the gain on life insurance settlement?
a. 7,875,000
b. 7,890,000
c. 7,870,000
d. 7,800,000

8. On January 1, 2001 Baggao Company purchased P8,000,000 ordinary life policy on its president.
Additional data for the year 2005 are:

Cash surrender value, January 1 100,000

Cash surrender value, December 31 120,000
Annual advance premium paid on January 1, 2005 200,000
Dividend received on July 1, 2005 10,000

Baggao Company is the beneficiary under the life insurance policy. Baggao should report life
insurance expense for 2005 at
a. 200,000
b. 180,000
c. 170,000
d. 190,000

9. On January 1, 2005, Allacapan Company adopted a plan to accumulate 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 equal annual deposits in a fund beginning December 31, 2005 that will earn
interest at 10% compounded annually. Future amount factors at 10% for three periods are:
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
What is the annual deposit to the fund?
a. 7,000,000 c. 6,344,410
b. 5,769,230 d. 7,894,740

10. On March 1, 2005, Isabela Company adopted a plan to accumulate P20,000,000 by September 1,
2009. Isabela plans to make four annual 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:
Ordinary annuity of 1 4.64
Annuity of 1 in advance 5.11
 Isabela should make four annual deposits of (rounded to the nearest P100)
a. 5,000,000
b. 4,310,000
c. 3,913,900
d. 4,102,000

11. The following data pertain to Angat Corporation on December 31, 2005:
Current account at Metrobank P2,000,000
Current account at BPI (100,000)
Payroll account 500,000
Foreign bank account – restricted (in 1,000,000
equivalent pesos)
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from controller’s sister 10,000
Credit memo from a vendor for a purchase 20,000
return
Traveler’s check 50,000
Not-sufficient-funds check 15,000
Money order 30,000
Petty cash fund (P4,000 in currency and
expense receipts for P6,000) 10,000
Treasury bills, due 3/31/06 (purchased 200,000
12/31/05)
Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000

Based on the above information, compute for the cash and cash equivalent that would be reported
on the December 31, 2005 balance sheet.
a. P2,784,000 c. P2,790,000
b. P3,084,000 d. P2,704,000

Pandan Company’s accounting records showed the following investments at January 1, 2005:
Common stock:
Kay Company (2,000 shares) 1,000,000 Aye Company (10,000
shares) 10,000,000
Parking lot (leased to Zee Company) 5,000,000
Trademark 4,000,000
Total investments 20,000,000

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 January 1, 2004, Zee paid a nonrefundable deposit
of P800,000 as well as a security deposit of P500,000, to be refunded upon expiration of lease. During the
year ended December 31, 2005, Pandan received cash dividends of P700,000 from Kay and P1,500,000
from Aye, whose 2005 net earnings were P8,000,000 and P20,000,000 respectively. Pandan also received
P2,500,000 rent from Zee in 2005.

The trademark was licensed to Lawaan Company for royalties of 10% of sales of the trademark items.
Royalties are payable semiannually on March 1, for sales in July through December of the prior year, and on
September 1, for sales in January through June of same year. On March 1, 2004 and 2005, Pandan received
 royalties of P1,000,000 and P1,500,000 respectively. On September 1, 2004 and 2005, Pandan received
royalties of P2,000,000 and P3,000,000 respectively. Lawaan Company’s sales of the trademark items
totaled P8,000,000 for the last half of 2005. In Pandan’s 2005 income statement, how much should be
reported as

12. Total income from investments in securities?

a. 2,200,000 c. 6,000,000
b. 6,700,000 d. 8,200,000

13. Rental revenue?

a. 2,500,000 c. 3,300,000
b. 2,660,000 d. 2,760,000

14. Royalty revenue?

a. 3,000,000 c. 3,800,000
b. 4,000,000 d. 5,000,000

15. During 2005, Cavite Company made the following property, plant and equipment expenditures:
Land and building acquired from Bacoor Company 9,000,000
Repairs made to the building 300,000
Special tax assessment 50,000
Remodeling of office space including new partitions and walls 400,000

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 purchase, the stock had a market value of P150
per share and the land and building had fair value of P2,000,000 and P6,000,000 respectively.

During the year, Cavite also received land from a shareholder to facilitate the construction of a
plant in the city. Cavite paid P100,000 for the land transfer and charged this amount to legal
expenses. The land is fairly valued at P1,500,000.

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
c. 3,500,000, and 6,400,000
d. 3,500,000, and 6,750,000

P1
1. Silang Company acquired a welding machine with an invoice price of P3,000,000 subject to a cash
discount of 5% which was not taken. Silang incurred freight and insurance during shipment of
P50,000 and testing and installation cost of P200,000. Silang also incurred cost of P20,000 in
removing the old welding machine prior to the installation of the new one. Welding supplies were
acquired at a cost of P100,000. The VAT on the acquisition is P300,000. The cost of the new
welding machine should be
a. 3,100,000
b. 3,250,000
c. 3,220,000
d. 3,400,000
2. Imus Company acquired two items of machinery as follows:
 On December 30, 2005, Imus Company purchased a machine in exchange for a
noninterest bearing note requiring three payments of P1,000,000. The first payment was
made on December 30, 2005, and the others are due annually on December 30. The
prevailing rate of interest for this type of note at date of issuance was 12%. The present
value of an ordinary annuity of 1 at 12% is 1.69 for two periods and 2.40 for three periods.
The new machine was damaged during its installation and the repair cost amounted to
P50,000.

 On January 1, 2005, Imus Company acquired used machinery by issuing to the seller a
three-year, noninterest-bearing note for P3,000,000. In recent borrowing, Imus has paid a
12% interest for this type of note. The present value of 1 at 12% for 3 years is 0.71.
What is the total cost of the machinery?
a. 4,820,000
b. 4,530,000
c. 4,580,000
d. 4,870,000

3. In December 2005, Kawit Company exchanged an old machine, with a cost P6,000,000 and 50%
depreciated, for a dissimilar used machine and paid a cash difference of P1,500,000. The fair value
of the old machine was determined to be P2,000,000. Kawit should record the machine at
a. 6,000,000
b. 2,000,000
c. 3,500,000
d. 3,000,000

Romblon Company and Looc Company are fuel oil distributors. To facilitate the delivery of oil to
customers. Romblon and Looc exchanged ownership of 5,000 barrels of oil without physically
moving the oil. Romblon paid Looc P9,000,000 to compensate for a difference in the grade of oil. On
the date of exchange, cost and fair value of oil were:
Romblon Company Looc Company
Cost 45,000,000 40,000,000
Fair value 51,000,000 60,000,000

4. Romblon should record the oil inventory received in exchange at

a. 45,000,000
b. 54,000,000
c. 51,000,000
d. 60,000,000

5. Looc Company should record the oil inventory received in exchange at

a. 40,000,000
b. 34,000,000
c. 60,000,000
d. 51,000,000

6. In Looc’s income statement, what amount of gain should be reported from the exchange of oil?
 a. 20,000,000
b. 6,000,000
c. 3,000,000
d. 0

7. Naic Company acquired an equipment by exchanging a similar used equipment with the following
data:

Equipment 10,000,000
Accumulated depreciation 3,500,000
Fair value 8,000,000
Cash received on exchange 2,000,000

Naic Company should record gain on exchange at

a. 1,500,000
b. 2,000,000
c. 375,000
d. 0

8. During 2005 Magdiwang Company had the following transactions pertaining to its new office
building:
Purchase price of land 1,500,000
Legal fees for contract to purchase land 50,000
Architect’s fees 200,000
Demolition of old building on site 150,000
Sale of scrap from old building 20,000
Construction cost of new building (fully 9,000,000
completed)

In Magdiwang’s December 31, 2005 balance sheet, what amounts should be reported as the cost
of land and building?
Land Building
a. 1,500,000 9,380,000
b. 1,680,000 9,200,000
c. 1,550,000 9,330,000
d. 1,550,000 9,200,000

9. On January 1, 2005, Tagaytay Company purchased a tract of land with an old building which was
razed shortly after acquisition. The costs incurred in connection with the acquisition were:
Purchase price 5,000,000
Agent commission 250,000
Legal fees for the purchase contract 100,000
Guarantee insurance 10,000
Cost of razing the old building 200,000
Salvage value of old building materials 50,000
Property taxes for 2004 and 2005 (equally each year) 300,000
Option paid for an alternative land which was not acquired 30,000
 Cost of relocating squatters 20,000
The cost of the land should be
a. 5,680,000
b. 5,660,000
c. 5,830,000
d. 5,530,000

10. Tanza Company entered into a P10,000,000 fixed contract with Philstress Company on January
1, 2005 for the construction of a new building. On January 1, 2005, Tanza obtained a loan of
P10,000,000 at an interest rate of 12% to finance specifically the construction. Availments from the
loan may be made quarterly at unequal amounts. Total interest incurred for 2005 was P900,000.
Prior to their disbursement, the proceeds from the loan were temporarily invested and earned interest
income of P50,000. The building was completed on December 31, 2005. Additional costs incurred
during the construction were P200,000 for plans, specifications and blueprint, and P350,000 for
architectural design and supervision.

Tanza Company follows the alternative treatment of capitalizing borrowing cost. The cost of the
building should be
a. 11,400,000
b. 11,450,000
c. 10,000,000
d. 10,550,000

11. Maragondon Company had the following borrowings during 2005. The borrowings were made for
general purposes but the proceeds were used in part to finance the construction of a new building:
Principal Interest
12% bank loan 10,000,000 1,200,000
15% long-term loan 20,000,000 3,000,000
The construction began on January 1, 2005 and was completed on December 31, 2005.
Expenditures on the building were made as follows:
January 1 8,000,000
June 30 8,000,000
December 31 4,000,000
Following the alternative treatment, the capitalizable borrowing cost should be
a. 1,680,000
b. 4,200,000
c. 1,400,000
d. 1,620,000

12. On January 1, 2005, Kawit Company borrowed P6,000,000 at an interest rate of 10% specifically for the
construction of its new building. Interest earned from the temporary investment of the proceeds the loan prior
to their disbursement amounted to P75,000. Kawit also had the following other loans in 2005 which were
borrowed for general purposes. The proceeds of these loans were used in part for the construction of the
building:
Principal Interest
10% bank loan 4,500,000 450,000
12% long-term loan 6,000,000 720,000
 The construction began on January 1, 2005 and the building was completed on December 31,
2005. Expenditures on the building were made as follows:
January 2 1,500,000
April 1 3,750,000
July 1 4,500,000
September 30 3,750,000
December 31 1,500,000
15,000,000

The amount of capitalizable borrowing cost is

a. 1,350,000
b. 690,000
c. 525,000
d. 165,000

13. During 2005 Dasmariñas Company installed a production assembly line to manufacture furniture.
In 2005 Dasmariñas purchased a new machine and rearranged the assembly line to install this
machine. The rearrangement did not increase the estimated useful life of the assembly line but it did
result in significantly more efficient production. The following expenditures were incurred in
connection with this project:
Machine 5,000,000
Labor to install new machine 400,000
Parts added in rearranging the assembly line to provide future benefits 2,000,000
Labor and overhead to rearrange the assembly line 600,000
What amount of the above expenditures should be capitalized in 2005?
a. 8,000,000
b. 5,400,000
c. 7,400,000
d. 2,600,000

14. On January 1, 2005, Carmona Company received a grant of P50 million from the British
government in order to defray safety and environmental costs within the area where the enterprise is
located. The safety and environmental costs are expected to be incurred over four years,
respectively, P4 million, P8 million, P12 million and P16 million.
How much income from the government grant should be recognized in 2005?
a. 50,000,000
b. 12,500,000
c. 5,000,000
d. 0

15. On January 1, 2004, Indang Company received a grant of P50 million from the US government for
the construction of a laboratory and research facility with an estimated cost of P60 million and useful
life of 25 years. The facility was completed in early 2005.
Indang Company should include in its 2005 income statement an income from the government at
a. 50,000,000
b. 2,000,000
 c. 2,400,000
d. 0
P1

1. On January 1, 2005, Corregidor Company is granted a large tract of land in the Cordillera region by the Philippine
government. The fair value of the land is P10 million. Corregidor Company is required by the grant to construct chemical
research facility and employ only personnel residing in the Cordillera region. The estimated cost of the facility is P50
million with useful life of 20 years. Corregidor Company should recognize in 2005 an income from government grant at
a. 10,000,000
b. 2,500,000
c. 500,000
d. 0

2. On April 1, 2004, Batangas Company bought machinery under a contract that required a down payment of P500,000
plus 24 monthly payments of P300,000 for total payments of P7,700,000. The cash price of the machinery was
P6,500,000. The machinery has an estimated useful life of four years and estimated residual value of P500,000.
Batangas uses SYD method of depreciation. In its 2005 income statement, what amount should Batangas report as
depreciation for this machinery?
a. 2,400,000
b. 1,800,000
c. 1,950,000
d. 2,275,000

3. A schedule of plant assets owned by Bauan Company is presented below.

Depreciable
Cost Scrap cost Life Annual dep

Building 8,800,000 800,000 20 years

Machinery 3,200,000 320,000 15 years

Equipment 640,000 5 years

Bauan computes depreciation on the straight line method. The composite life of the assets should be
a. 19.8
b. 13.3
c. 18.0
d. 16.0

4. Alitagtag Company purchased factory equipment which was installed and put into service July 1, 2004 at a total cost of
P9,000,000. Residual value was estimated at P1,000,000. The equipment is being depreciated over 10 years by the
double declining balance method. For the year 2005 how much depreciation expense should Alitagtag record on this
equipment?
a. 1,620,000
b. 1,440,000
c. 2,220,000
d. 1,280,000

5. On January 1, 2004, Taal Company acquired equipment to be used in its manufacturing operations. The equipment
has an estimated useful life of 5 years and residual value of P3,000,000. The depreciation applicable to this equipment
was P3,200,000 for 2005 computed under the sum of year’s digits method. What was the acquisition cost of the
equipment?
a. 12,000,000
b. 15,000,000
c. 12,600,000
d. 19,000,000
 6. Lemery Company acquired property in 2005 which contains mineral deposit. The acquisition cost of the property was
P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be extracted. It is further estimated that
the property can be sold for P5,000,000 following mineral extraction. For P2,000,000, Lemery is legally required to
restore the land to a condition appropriate for resale. After acquisition, the following costs were incurred:

Exploration cost 13,000,000

Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000

The company extracted 600,000 tons of the mineral in 2005 and sold 450,000 tons. In the 2005 income statement,
what amount of depletion is included in cost of sales?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000

7. Calaca Company quaries limestone, crushes it and sells it to be used in road building. Calaca paid P20,000,000 for a
certain quarry on January 1, 2004. The property can be sold for P4,000,000 after production ceases. The original total
estimated reserves totaled 5,000,000 tons. Calaca quarried 500,000 tons in 2004 and 1,500,000 tons in 2005. An
engineering study performed in 2005 indicated that as of December 31, 2005, 4,500,000 tons were available. Calaca
Company should record 2005 depletion at
a. 3,600,000
b, 4,800,000
c. 6,000,000
d. 4,500,000

8. On July 1, 2005 Balayan Company purchased rights to a mine. The total purchase price was P50,000,000 of which
P5,000,000 was allocated to the land. Estimated reserves were 6,000,000. Balayan expects to extract and sell 100,000
tons per month. Balayan Company purchased new equipment on July 1, 2005 for P21,000,000 with estimated life of 8
years. However, after all the resource is removed, the equipment will be of no use and will be sold for P3,000,000. What
is the depreciation of the equipment for 2005?
a. 1,800,000
b. 2,100,000
c. 1,125,000
d. 3,600,000

9. Calatagan Company provides the following balances at the end of 2005:

Wasting asset, at cost 100,000,000

Accumulated depletion 30,000,000
Capital liquidated 10,000,000
Retained earnings 15,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Inventory of resource deposit (50,000 units) 6,000,000

Calatagan can declare maximum dividend on December 31, 2005 of

a. 32,500,000
b. 45,000,000
c. 29,000,000
d. 15,000,000

10. Lian Company acquired a building on January 1, 2001 at a cost of P50,000,000. The building has an estimated life of
10 years and residual value of P5,000,000. The building was revalued on January 1, 2005 and the revaluation revealed
replacement cost of P80,000,000, residual value of P2,000,000 and revised life of 12 years. What is the revaluation
surplus on December 31, 2005?
a. 30,000,000
 b. 26,250,000
c. 16,800,000
d. 14,700,000

11. On January 1, 2005, the historical balances of the land and building of Lipa Company are:

Cost Accumulated depreciation

Land 50,000,000
Building 300,000,000 90,000,000

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

Sound value
Land 80,000,000
Building 350,000,000

There were no additions or disposals during 2005. Depreciation is computed on the straight line. The estimated life of
the building is 20 years. The depreciation of the building for the year ended December 31, 2005 should be
a. 25,000,000
b. 10,000,000
c. 15,000,000
d. 17,500,000

Capiz Company has the following information on January 1, 2005 relating to its land and building.

Land 20,000,000
Building 450,000,000
Accumulated depreciation 75,000,000

There were no additions or disposals during 2005. Depreciation is computed using straight line over 15 years for
building. On June 30, 2005, the land and building were revalued as follows:

Replacement cost Sound value

Land 35,000,000 35,000,000
Building 600,000,000 480,000,000

12. What is the depreciation of the building for 2005?

a. 30,000,000
b. 35,000,000
c. 40,000,000
d. 32,000,000

13. What is the revaluation surplus on June 30, 2005?

a. 135,000,000
b. 125,000,000
c. 120,000,000
d. 160,000,000

14. What is the revaluation surplus on December 31, 2005?

a. 125,000,000
b. 130,000,000
c. 123,750,000
d. 115,000,000

15. During December 2005, Talisay Company determined that there had been a significant decrease in market value of its
equipment. At December 31, 2005, Talisay compiled the following information concerning the equipment:

Original cost 20,000,000

 Accumulated depreciation 12,000,000
Expected undiscounted net future cash inflows from the
continued use and eventual disposal 7,000,000
Expected discounted net future cash inflows from the
continued use and eventual disposal 5,000,000
Fair value less cost to sell 6,500,000

What is the impairment loss that should be reported in the 2005 income statement?
a. 1,000,000
b. 2,000,000
c. 1,500,000
d. 0
P1

1. Tanauan Company has one division that performs machining operations on parts that are sold to contractors. A group
of machines have an aggregate cost and accumulated depreciation on December 31, 2005 as follows:

Machinery 90,000,000
Accumulated depreciation 30,000,000

The machines have an average remaining life of 4 years and it has been determined that this group of machinery
constitutes a cash generating unit. The fair value less cost to sell of this group of machines in an active market is
determined to be P45,000,000. Based on supportable and reasonable assumptions, the financial forecast for this
group of machines reveals the following cash inflows and cash outflows for the next four years:

Cash inflows Cash outflows

2006 30,000,000 12,000,000
2007 32,000,000 17,000,000
2008 26,000,000 14,000,000
2009 16,000,000 6,000,000

It is believed that a discount rate of 8% is reflective of time value of money. The table of present value shows that the
present value of 1 at 8% is as follows:

Period Present value of 1

1 .93
2 .86
3 .79
4 .74

Tanauan Company should recognize an impairment loss in 2005 at

a. 13,480,000
b. 15,000,000
c. 5,000,000
d. 0

2. Odiongan Company acquired a machine for P6,400,000 on August 31, 2002. The machine has a 5-year life, a
P1,000,000 salvage value, and was depreciated using the straight line method. On May 31, 2005, a test for recoverability
reveals that the expected net future undiscounted cash inflows related to the continued use and eventual disposal of the
machine total P3,000,000. The machine’s fair value on May 31, 2005 is P2,700,000 with no residual value. Assuming a
loss on impairment is recognized on May 31, 2005, what is Odiongan’s depreciation for June 2005?
a. 127,040
b. 100,000
c. 111,110
d. 45,000
3. On December 31, 2005, Baliuag Company had the following cash balances:

Cash in bank P15,000,000

Petty cash fund (all funds were reimbursed on December 31, 2005) 50,000
Time deposit 5,000,000
Saving deposit 2,000,000

Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at December
31, 2005. The compensating balance is legally restricted as to withdrawal by Baliuag. A check of P300,000 dated
January 15, 2006 in payment of accounts payable was recorded and mailed on December 31, 2005. In the current
assets section of the December 31, 2005 balance sheet, what amount should be reported as “cash and cash
equivalents”?
a. P21,850,000 c. P21,800,000
b. P16,850,000 d. P14,850,000

4. Lobo Company reported an impairment loss of P4,000,000 in its income statement for the year 2004. This loss was
related to an item of property, plant and equipment which was acquired on January 1, 2003 with cost of P25,000,000,
useful life of 10 years and no residual value. On December 31, 2004 balance sheet, Lobo reported this asset at
P16,000,000 which is the fair value on such date. On December 31, 2005, Lobo determined that the fair value of its
impaired asset had increased to P19,000,000. The straight line method is used in recording depreciation of this asset.
What amount of gain on impairment recovery should Lobo report in its 2005 income statement?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0

5. Kuyab Company incurred P900,000 of research and development cost to develop a product for which a patent was
granted on January 2, 2005. Legal fees and other costs associated with the registration of the patent totaled P200,000.
On July 31, 2005, Kuyab paid P400,000 for legal fees in a successful defense of the patent. The total amount capitalized
for this patent through July 31, 2005 should be
a. 1,500,000
b. 1,100,000
c. 600,000
d. 200,000

6. Laguna Company acquired three patents in January 2005. The patents have different lives as indicated in the following
schedule:

Cost Remaining useful life Remaining legal life

Patent A 2,000,000 10 8
Patent B 3,000,000 5 10
Patent C 6,000,000 Indefinite 15

Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June 2005, the
company successfully defended its right to Patent B. Legal fees of P800,000 were incurred in this action. The
company’s policy is to amortize intangible assets by the straight-line method to the nearest half year. The company
reports on a calendar-year basis. The amount of amortization that should be recognized for 2005 is
a. 1,330,000
b. 1,250,000
c. 2,050,000
d. 950,000

7. Nagcarlan Company purchased a patent on January 1, 2002, for P3,570,000. The patent was being amortized over its
remaining legal life of 15 years expiring on January 1, 2017. During 2005 Nagcarlan 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 balance sheet as patent, net of accumulated amortization, at December 31, 2005?
a. 2,618,000
b. 2,520,000
c. 2,448,000
 d. 2,142,000

8. On January 2, 2002, San Pedro Company purchased a patent for a new consumer product for P3,000,000. At the time
of purchase, the patent was valid for 15 years. However, the patent’s useful life was estimated to be only 10 years due to
the competitive nature of the product. On December 31, 2005, the product was permanently withdrawn from sale under
governmental order because of a potential health hazard in the product. What amount should San Pedro charge against
income during 2005, assuming amortization is recorded at the end of such year?
a. 1,800,000
b. 2,400,000
c. 2,100,000
d. 300,000

9. On January 1, 2005, Mambusao Company bought a trademark from Panitan Company for P6,000,000. Mambusao
retained an independent consultant who estimated the trademark’s life to be indefinite. Its carrying amount in Panitan’s
accounting records was P4,000,000. In Mambusao’s December 31, 2005 balance sheet, what amount should be reported
as trademark?
a. 6,000,000
b. 5,700,000
c. 3,800,000
d. 3,600,000

10. On January 1, 2005, Calamba Company signed an agreement to operate as a franchise of Bay Company for an initial
franchise fee of P30,000,000. Of this amount, P10,000,000 was paid when the agreement was signed and the balance is
payable in equal annual payment of P5,000,000 beginning December 31, 2005. The agreement provides that the down
payment is not refundable and no future services are required of the franchisor. Calamba’s credit rating indicates that it
can borrow money at 12% for a loan of this type. Information on present value factors at 12% for 4 period is:

Present value of 1 0.64

Present value of an ordinary annuity of 1 3.04

a. 30,000,000
b. 15,200,000
c. 25,200,000
d. 21,600,000

11. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company which provided
the following:

Net income Net assets

2002 1,400,000 6,000,000
2003 1,600,000 8,000,000
2004 2,000,000 8,800,000
2005 2,200,000 9,200,000

It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on average net
assets at 15%. How much is the purchase price for Calauan Company?
a. 11,600,000
b. 10,400,000
c. 11,200,000
d. 11,000,000

12. Panay Company is negotiating to acquire Sapian Company. Panay manufactures and sells wood burning stoves and
Sapian Company produces parts that are required to manufacture stoves. Sapian enjoys an exceptional reputation and
Panay management believes it can continue Sapian’s level of income and satisfy its own need for parts. Under the
contemplated arrangement, Panay will negotiate for the acquisition of the net assets of Sapian Company. The recorded
amounts and current values of the assets and liabilities of Sapian are:
 Assets Liabilities
Recorded amounts 20,000,000 8,000,000
Current values 25,000,000 5,000,000

Sapian’s earnings for the past 5 years averaged P5,000,000. This is believed to be the a reasonable estimate of
future income. The level of income normally experienced by enterprises similar to Sapian is 15%. Panay and Sapian
agreed to capitalize average excess earnings at 25% in estimating the value of goodwill. How much should Panay pay
in acquiring Sapian?
a. 20,000,000
b. 28,000,000
c. 32,000,000
d. 20,500,000

13. Tublay uses the retail inventory method to approximate the lower of average cost or market. The following information
is available for the current year:

Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,400,000
Sales discounts 200,000
Employee discounts 600,000

What should be reported as the estimated cost of inventory at the end of the current year?
a. P3,120,000 c. P3,000,000
b. P3,200,000 d. P3,840,000

14. The owners of Majayjay Company are planning to sell the business to new interests. The cumulative net earnings for
the past 5 years was P9,000,000 including casualty loss of P500,000. The current value of net assets of Majayjay
Company was P20,000,000. Goodwill is determined by capitalizing average earnings at 8%. What is the amount of
goodwill?
a. 1,900,000
b. 1,700,000
c. 3,750,000
d. 1,250,000

15. On January 1, 2005, Carmona purchased Topaz Company at a cost that resulted in recognition of goodwill of
P5,000,000 having an expected benefit period of 10 years. During January of 2005, Carmona spent an additional
P2,000,000 on expenditures designed to maintain goodwill. Due to these expenditures, at December 31, 2005, Carmona
estimated that the benefit period of goodwill was indefinite. In its December 31, 2005 balance sheet, what amount should
Carmona report as goodwill?
a. 5,000,000
b. 7,000,000
c. 4,750,000
d. 4,500,000
P1
1. Sta. Rosa Company has been experiencing significant losses in prior years. On December 31, 2005, the assets and
liabilities are:

Cash 10,000,000
Accounts receivable 20,000,000
Inventory 30,000,000
Property, plant and equipment 50,000,000
Goodwill 5,000,000
Liabilities 40,000,000

On December 31, 2005, the fair value of the net assets of Sta. Rosa is P62,000,000. How much is the impairment
loss applicable to goodwill?
a. 13,000,000
b. 8,000,000
c. 5,000,000
d. 0

2. Benguet Company’s accounting records indicated the following for 2005:

Inventory, January 1 P6,000,000

Purchases 20,000,000
Sales 30,000,000

A physical inventory taken on December 31, 2005 resulted in an ending inventory of P4,500,000. The gross profit on
sales remained constant at 30% in recent years. Benguet suspects some inventory may have been taken by a new
employee. At December 31, 2005 what is the estimated cost of missing inventory?
a. P5,000,000 c. P500,000
b. P4,500,000 d. P 0

3. Luzon Company purchased Jolo Company for P100,000,000. The net assets of Jolo Company on the date of
acquisition amounted to P80,000,000. Thus, there is a goodwill of P20,000,000. Jolo Company has three segments, each
of which is considered a cash generating unit. The goodwill is allocated respectively to segments One, Two and Three,
P5,000,000, P6,000,000 and P9,000,000.

On December 31, 2005, Segment One suffered significant losses and its recoverable amount is P30,000,000. On
December 31, 2005, the carrying amounts are as follows:

Segment One 28,000,000

Segment Two 50,000,000
Segment Three 67,000,000
Goodwill 20,000,000

In its 2005 income statement, Luzon Company should report impairment loss at
a. 3,000,000
b. 5,000,000
c. 2,000,000
d. 1,000,000

4. On January 1, 2003, Paete Company signed a 12-year lease for a building. Paete has an option to renew the lease for
an additional 8-year period on or before January 1, 2007. During January 2005, Paete made substantial improvements to
the building. The cost of the improvements was P3,600,000, with an estimated useful life of 15 years. At December 31,
2005, Paete intended to exercise the renewal option. Paete has taken a full year’s amortization on this improvement. In
the December 31, 2005, balance sheet, the carrying amount of this leasehold improvement should be
a. 3,240,000
b. 3,360,000
c. 3,400,000
d. 3,300,000
5. On January 1, 2003, Puntavedra Company signed an eigth-year lease for office space. Puntavedra has the option to
renew the lease for an additional six-year period on or before January 1, 2009. During January 2005, Puntavedra incurred
the following costs.

General improvements to the leased premises with useful 5,400,000

life of 10 years
Office furniture and equipment with useful life of 8 years 2,400,000
Moveable assembly line equipment with useful life of 5 years 1,800,000

At December 31, 2005, Puntavedra’s intention as to the exercise of the renewal option is uncertain. A full depreciation
of leasehold improvement is taken for year 2005. In Puntavedra’s December 31, 2005 balance sheet, accumulated
depreciation of leasehold improvement should be
a. 1,200,000
b. 1,300,000
c. 540,000
d. 900,000

6. Maayon Company begins construction of a new facility. Following are some of the costs incurred in conjunction with
the start up activities of the new facility:

Production equipment 1,500,000

Travel costs of salaried employees 400,000
License fees 50,000
Training of local employees for production and maintenance operations 1,300,000
Advertising costs 100,000

What portion of the organizational costs will be expensed?

a. 1,700,000
b. 1,850,000
c. 3,350,000
d. 1,300,000

7. Siniloan Company incurred research and development costs in 2005 as follows:

Equipment acquired for use in various R&D projects 6,000,000

Depreciation on the above equipment 1,200,000
Materials used 3,000,000
Compensation costs of personnel 4,000,000
Outside consulting fees 1,500,000
Indirect costs appropriately allocated 1,300,000

The 2005 total research and development expense should be

a. 11,000,000
b. 15,800,000
c. 9,700,000
d. 9,800,000

8. Biñan Company incurred the following costs during 2005:

Design of tools, jigs, molds and dies involving new technology 2,500,000
Modification of the formulation of a process 3,200,000
Trouble shooting in connection of breakdowns during commercial production
2,000,000
Adaptation of an existing capability to a particular customer’s need as part of a continuing commercial
activity 2,200,000

In its 2005 income statement, Biñan should report research and development expense of
 a. 2,500,000
b. 3,200,000
c. 4,700,000
d. 5,700,000

9. Dumalag Company provided the following information relevant to the research and development expenditures for the
year 2005:

Current period depreciation on the building housing R and D activities 1,500,000

Cost of market research study 1,000,000
Current period depreciation on a machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼ of his time overseeing
R and D activities 2,400,000
Pension costs for salary of R and D director 50,000
Pension costs for salary of Vice-President 100,000

The R and D expense for the current period should be

a. 3,875,000
b. 4,875,000
c. 5,750,000
d. 3,800,000

10. Biñan Company made the following expenditures relating to Product X:

* Legal costs to file a patent on Product X. Production of the finished product would not have been 500,000
undertaken without the patent.
* Special equipment to be used solely for development of Product X. The equipment has no other 4,000,000
use and has an estimated useful life of four years.
* Labor and material costs incurred in producing a prototype model 3,000,000
* Cost of testing the prototype 2,000,000

What is the total amount of costs that will be expensed when incurred?
a. 9,000,000
b. 9,500,000
c. 6,000,000
d. 5,000,000

11. On January 1, 2005, Caliraya Company had capitalized cost of P10,000,000 for a new computer software product with
an economic life of 4 years. Sales for 2005 for the software product amounted to P4,000,000. The total sales of the
software over its economic life are expected to be P20,000,000. However, the pattern of the future sales from the
computer software cannot be determined reliably.

In its 2005 income statement, Caliraya should record amortization of computer software at
a. 2,500,000
b. 5,000,000
c. 2,000,000
d. 0

During 2005, Jamindan Company incurred costs to develop and produce a routine, low-risk computer software product as
follows:

Completion of detail program design 1,500,000

Cost incurred for coding and testing to establish technological feasibility 500,000
Other coding costs after establishment of technological feasibility 2,500,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 3,000,000
Duplication of computer software and training materials from
product master 4,000,000
Packaging product 1,000,000

12. In the December 31, 2005 balance sheet, what amount should be capitalized as software cost subject to amortization?
a. 7,500,000
b. 4,500,000
c. 9,500,000
d. 8,000,000

13. In the December 31, 2005 balance sheet, what amount should be reported as inventory?
a. 5,000,000
b. 7,000,000
c. 4,000,000
d. 6,500,000

14. To increase sales, Quezon Company inaugurated a promotional campaign on June 30, 2005. Quezon placed a
coupon redeemable for a premium in each package of cereal sold at P200. Each premium costs P100. A premium is
offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20. Quezon
estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2005, the
following is available:

Packages of cereal sold 100,000

Premiums purchased 10,000
Coupons redeemed 40,000

What is the estimated liability for coupons on December 31, 2005?

a. 1,080,000
b. 1,000,000
c. 720,000
d. 360,000

15. Sariaya Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to
customers who send in 10 coupons and a remittance of P5. Data for the premium offer are:

2004 2005
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000

In its 2005 income statement. Sariaya Company should report premium expense at
a. 3,000,000
b. 2,700,000
c. 2,610,000
d. 2,835,000
P1

1. During 2004, Lucena Company introduced a new product carrying a two-year warranty against defects. The estimated
warranty costs related to peso sales are 5% within 12 months following sale and 10% in the second 12 months following
sale. Sales and actual warranty expenditures for the years ended December 31, 2004 and 2005 are as follows:

Sales____ Actual expenditures

2004 20,000,000 1,500,000
2005 25,000,000 3,000,000

At December 31, 2005, Lucena would report estimated warranty liability of

 a. 1,500,000
b. 2,250,000
c. 750,000
d. 500,000

Lucban’s Music Emporium carries a wide variety of music promotion techniques - warranties and premiums – to attract
customers.

Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The
estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded
music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Lucban pays P34 for each
radio and estimates that 60% of the coupons given to customers will be redeemed.

Lucban’s total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument and sound reproduction equipment
and P1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P164,000
during 2005. A total of 6,500 AM/FM radio used in the premium program were purchased during the year and there were
1,200,000 coupons redeemed in 2005.

The accrual method is used by Lucban to account for the warranty and premium costs for financial reporting purposes.
The balance in the accounts related to warranties and premiums on January 1, 2005, were as shown below:

Inventory of Premium AM/FM radio P39,950

Estimated Premium Claims Outstanding 44,800
Estimated Liability from Warranties 136,000

Determine the amounts that will be shown on the 2005 financial statements for the following:

2. Warranty expense
a. P164,000 c. P108,000
b. 80,000 d. P144,000

3. Estimated liability from warranties

a. P108,000 c. P136,000
b. P164,000 d. P 80,000

4. Premium expense
a. P 75,600 c. P183,600
b. P126,000 d. P108,000

5. Inventory of AM/FM radio

a. P46,950 c. P77,350
b. P39,950 d. P56,950

6. Estimated liability for premiums

a. P75,600 c. P63,450
b. P36,400 d. P44,800

7. Pitogo Company sells gift certificates redeemable only when merchandise is purchased. The certificates have an
expiration date two years after issuance date. Upon redemption or expiration, Pitogo recognizes the unearned revenue as
realized. Data for 2005 are as follows:

Unearned revenue, 1/1/2005 1,000,000

Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Expired gift certificates 500,000
Cost of goods sold 60%
 At December 31, 2005, Pitogo report unearned revenue of
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

8. On September 1, 2004, Pagbilao Company issued a note payable to National Bank in the amount of P10,000,000,
bearing interest at 15%, and payable in five equal annual principal payments of P2,000,000. On this date, the bank’s
prime rate was 12%. The first payment for interest and principal was made on September 1, 2005. At December 31,
2005, Pagbilao should record accrued interest payable of
a. 1,400,000
b. 1,120,000
c. 400,000
d. 320,000

9. On December 31, 2005, Gumaca Company had a P15,000,000 note payable outstanding, due July 31, 2006. Gumaca
borrowed the money to finance construction of a new plant. On March 1, 2006, the note was replaced by an 18-month
note for the same amount. On March 31, 2006, Gumaca issued its 2005 financial statements. What amount of the note
payable should Gumaca include in the current liabilities?
a. 15,000,000
b. 12,000,000
c. 3,000,000
d. 0

10. On November 5, 2005, a Calauag Company truck was in an accident with an auto driven by Macalelon. Calauag
received notice on January 15, 2006, of a lawsuit for P4,000,000 damages for personal injuries suffered by Macalelon.
Calauag’s counsel believes it is probable that Macalelon will be awarded an estimated amount in the range between
P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other amount. The
accounting year ends on December 31, and the 2005 financial statements were issued on March 31, 2006. What amount
of provision should Calauag accrue at December 31, 2005?
a. 4,000,000
b. 3,000,000
c. 2,000,000
d. 2,500,000

11. During January 2005, Tagkawayan Company won a litigation award for P2,000,000 which was tripled to P6,000,000 to
include punitive damages. The defendant, who is financially stable, has appealed only the P4,000,000 punitive damages.
Tagkawayan was awarded P1,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is
unable to estimate the outcome of the appeals. In its 2005 income statement, Tagkawayan should report what amount of
pretax gain?
a. 6,000,000 c. 2,000,000
b. 4,000,000 d. 3,000,000

12. Sariaya Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash
receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to
service contract expense as incurred. Revenue from service contracts is recognized as earned over lives of the contracts.
Information for the year 2005 is as follows:

Unearned service contract revenue – 1/1/2005 3,000,000

Cash receipts from service contracts sold 5,000,000
Service contract revenue recognized 4,500,000
Service contract expense 2,500,000

What amount should Sariaya report as unearned service contract revenue at December 31, 2005?
a. 3,500,000 c. 2,000,000
b. 1,000,000 d. 500,000

13. For the year ended December 31, 2005, Talisay Company reported pretax financial income of P9,500,000. Its taxable
income was P9,000,000. The difference is due to accelerated depreciation for income tax purposes. The income tax rate
is 32% and Talisay made estimated tax payment during 2005 of P1,000,000. What should Talisay report as current tax
expense for 2005?
 a. P2,880,000 c. P3,040,000
b. P1,880,000 d. P2,040,000

14. The following information pertains to Bustos Company as of December 31, 2005:

Cash balance per general ledger P15,000,000

Cash balance per bank statement 14,550,000
Checksoutstanding (including certified check of P100,000) 1,000,000
Bank service charge shown in December bank statement 50,000
Error made by Bustos in recording a check that cleared the bank in
December (check was drawn in December for P500,000
but recorded at P700,000) 200,000
Deposit in transit 1,500,000

At the December 31, 2005 balance sheet cash in bank should be

a. P15,150,000 c. P14,250,000
b. P14,650,000 d. P14,550,000

15. For the year ended December 31, 2005, Silay Company reported pretax financial income of P12,000,000. Its taxable
income was P14,000,000. The difference is due to rental received in advance. Rental income is taxable when received.
The income tax rate is 32% and Silay made estimated tax payment of P1,000,000 in 2005. What amount should Silay
report as 2005 total income tax expense?
a. P2,840,000 c. P4,480,000
b. P3,840,000 d. P3,480,000
P1

1. The Plaridel Corporation was organized on January 3, 2005 with an authorized capital stock of P5,000,000. At
December 31, 2005 of the same year, the general ledger of said Company showed the following accounts and balances:

Accounts receivable P 200,000

Merchandise inventory 250,000
Land 1,200,000
Building 1,600,000
Furniture and fixtures 400,000
Accounts payable 420,000
Notes payable – bank 500,000
Common stock 1,500,000
Additional paid capital 100,000
Sales 5,800,000
Expenses paid (excluding purchases) 725,000

Your review of the bank statement for December disclosed the following information:

Bank balance, December 31, 2005 P 524,500

Bank service charge 6,000
Deposits in transit 62,500
Total checks not returned by the bank 128,000

Your review also revealed that the cash received of P62,500 on December 31, 2005 was deposited on January 2,
2006. The company’s mark up on sales is 40%.

How much is the adjusted cash balance as of December 31, 2005?

a. P459,000 c. P39,000
b. P536,000 d. P1,619,000

2. Manapla Company computed a pretax financial income of P15,000,000 for the year ended December 31, 2005. In
preparing the tax return, the following differences are noted between financial income and taxable income.
 Nondeductible expense 2,000,000
Nontaxable revenue 1,000,000
Estimated warranty cost that was recognized as expense
in 2005 but deductible for tax purposes when paid 1,500,000
Excess tax depreciation over financial depreciation 500,000

What is the current tax expense for 2005 if the tax rate is 32%?
a. P5,120,000 c. P4,800,000
b. P5,440,000 d. P5,600,000

3. Cadiz Company has the following financial statement elements for which the December 31, 2005 book value is different
from the December 31, 2005 tax basis:
Book value Tax basis Difference
Equipment 5,500,000 4,000,000 1,500,000
Prepaid officers’ insurance policy 50,000 0 50,000
Warranty liability 500,000 0 500,000
Computer software cost 2,250,000 0 2,250,000

The difference between the book value and tax basis of the equipment is due to accelerated depreciation for tax
purposes. The insurance premium on the officers’ insurance policy is paid on December 31 2005 and the amount is a
nondeductible expense for tax purposes. The warranty liability is the estimated warranty cost that was recognized as
expense in 2005 but deductible for tax purposes when actually paid.

In January 2005, Cadiz Company incurred P3,000,000 of computer software cost. Considering the technical feasibility
of the project, this cost was capitalized and amortized over 4 years for accounting purposes. However, the total
amount was expensed in 2005 for tax purposes. The income tax rate is 32%.

As a result of these differences, Cadiz Company shall report a deferred tax liability on December 31, 2005 at
a. P1,200,000 c. P1,040,000
b. P1,216,000 d. P 480,000

4. Sagay Company provides the following tax effects of temporary differences at the end of 2005:
Deferred tax Related asset
asset (liability) classification
Accelerated depreciation (500,000) Noncurrent
Additional cost in inventory for tax purposes 200,000 Current
(300,000)

A valuation allowance was not considered necessary. Sagay anticipates that P150,000 of the deferred tax liability will
reverse in 2006. In its December 31, 2005 balance sheet, what amount should Sagay report as noncurrent deferred
tax liability?
a. P300,000 c. P150,000
b. P500,000 d. P200,000

5. La Carlota Company is determining the amount of its pretax financial income for 2005 by making adjustment to taxable
income from the company’s 2005 tax return. The tax return indicates taxable income of P15,000,000 on which a tax
liability of P4,800,000 has been recognized. Following is a list of items that may be required to determine pretax financial
income from the amount of taxable income.

Accelerated depreciation for income tax purposes was P2,000,000 and straight line financial depreciation is P1,500,000.

Insurance premium of P100,000 on the life of an officer with La Carlota Company as beneficiary was not included as a
deduction in the tax return.

Interest on treasury bills was not included in the tax return. During the year, La Carlota received P2,500,000 on these
investments.

What was La Carlota Company’s pretax financial income?

a. P15,500,000 c. P18,000,000
b. P17,400,000 d. P17,900,000
On January 1, 2001, Manapla Company acquired a building for P5,000,000. The building is depreciated using straight line
method based on a useful life of 10 years with no residual value. On January 1, 2005, the building is revalued at a
replacement cost of P8,000,000 with no change in useful life. The 2005 pretax accounting income before depreciation is
P9,000,000. The income tax rate is 32% and there are no other temporary differences at the beginning of 2005.

6. What is the deferred tax liability arising from the revaluation on January 1, 2005?
a. P960,000 c. P384,000
b. P576,000 d. P 0

7. What is the 2005 current tax expense?

a. P2,720,000 c. P2,624,000
b. P2,880,000 d. P2,784,000

8. What is the deferred tax liability on December 31, 2005?

a. P576,000 c. P672,000
b. P480,000 d. P 0

9. What is the 2005 total income tax expense?

a. P2,624,000 c. P2,880,000
b. P2,720,000 d. P2,784,000

10. What is the revaluation surplus on December 31, 2005?

a. P1,020,000 c. P1,224,000
b. P1,500,000 d. P 924,000

11. Pampanga Company’s December 31, 2005 balance sheet reported the following
current assets:

Cash 3,000,000
Accounts receivable 5,200,000
Inventory 2,000,000
Prepaid expenses 700,000
Equipment used and held for resale 100,000
11,000,000

An analysis of the accounts receivable disclosed that accounts receivable comprised

the following:

Trade accounts receivable 4,000,000

Allowance for doubtful accounts ( 300,000)
Selling price of Pampanga Company’s unsold goods sent to XYZ
Company on consignment at 125% of cost and excluded
from Pampanga’s ending inventory 1,500,000
5,200,000
At December 31, 2005, the total current assets should be
a. P10,600,000 c. P10,700,000
b. P 9,800,000 d. P 9,900,000

12. The trial balance of Arayat Company reflected the following liability account balances
on December 31, 2005:

Accounts payable 4,000,000

Bonds payable, due 2006 8,000,000
Discount on bonds payable 1,000,000
Deferred tax liability 1,500,000
Dividends payable 3,000,000
Income tax payable 500,000
Note payable, due 1/15/2007 2,500,000

In its December 31, 2005 balance sheet, Arayat should report current liabilities at
 a. P16,000,000 c. P17,000,000
b. P14,500,000 d. P16,500,000

13. Candaba Company was incorporated on January 1, 2005, with proceeds from the issuance of P15,000,000 in common
stock and borrowed funds of P5,000,000. During the first year of operations, revenue from sales and consulting amounted
to P20,000,000, and operating costs and expenses totaled P12,000,000. On December 15, Candaba declared a
P2,000,000 cash dividend payable to stockholders on January 15, 2006. No additional activities affected owners’ equity in
2005. Candaba’s liabilities increased to P7,000,000 by December 31, 2005. On December 31, 2005 balance sheet, total
assets should be reported at
a. P30,000,000 c. P22,000,000
b. P21,000,000 d. P28,000,000

14. Apalit Company’s December 31, 2005 unadjusted current assets and stockholders’ equity are as follows:

Cash 5,000,000
Trading securities (including P2,000,000 of Apalit Company’s common stock)
8,000,000
Trade accounts receivable 10,000,000
Inventory 7,000,000
Total current assets 30,000,000

Common stock 15,000,000

Additional paid in capital 3,000,000
Retained earnings (including appropriated for contingencies of P3,000,000) 7,000,000
Total equity 25,000,000

The trading securities and inventory are reported at their costs which approximate market values. In the 2005

statement of changes in equity, the total amount of equity at December 31, 2005 is

a. P25,000,000 c. P20,000,000
b. P23,000,000 d. P22,000,000

15. The following items were among those that were reported on Bulacan Company’s income statement for the year
ended December 31, 2005:

Legal and audit fees 2,000,000

Rent for office space 6,000,000
Interest on acceptances payable 1,000,000
Loss on abandoned data processing equipment 500,000
Insurance 200,000

The office space is used equally by the sales and accounting departments. What amount should be classified as
general and administrative expenses?
a. P8,200,000 c. P6,200,000
b. P5,200,000 d. P5,000,000
P1

The following trial balance of Macabebe Company on December 31, 2005 has been adjusted except for income tax expense.

Cash 4,000,000
Accounts receivable 6,700,000
Inventory 11,000,000
Property, plant and equipment 19,000,000
Accounts payable and accrued liabilities 7,000,000
Income tax payable 4,800,000
Deferred tax liability 1,200,000
Common stock 10,000,000
Additional paid in capital 4,000,000
Retained earnings – 1/1 5,000,000
Nets sales and other revenues 80,000,000
 Costs and expenses 65,000,000
Income tax expense 6,300,000 ________
112,000,000 112,000,000

During the year, estimated tax payments of P1,500,000 were charged to income tax expense. The current and future tax
rate is 32% on all types of revenue. The deferred tax liability is unrelated and will reverse in 2006.

1. The adjusted retained earnings on December 31, 2005 should be

a. P15,200,000 c. P20,000,000
b. P13,700,000 d. P15,000,000

2. The total current liabilities on December 31, 2005 should be

a. P10,300,000 c. P11,800,000
b. P11,500,000 d. P13,000,000

The bookkeeper for Guagua Computers, Inc., reports the following balance sheet amounts as of June 30, 2005.

Current assets P2,440,500

Noncurrent assets 6,285,500
Current liabilities 1,386,000
Noncurrent liabilities 900,000
Owners’ equity 6,440,000

A review of account balances reveals the following data.

a. An analysis of current assets discloses the following:

Cash P 422,500
Investment securities – trading 600,000
Trade accounts receivable 568,000
Inventories, including advertising supplies of P20,000 850,000
P2,440,500

b. Noncurrent assets include the following:

Property, plant and equipment:

Depreciated book value (cost P6,560,000) P5,490,000
Deposit with a supplier for merchandise ordered
for August delivery 21,500
Goodwill recorded on the books to cancel losses
incurred by the company in prior years 774,000
P6,285,500

c. Current liabilities include the following:

Payroll payable P 71,500

Taxes payable 41,500
Rent payable 114,000
Trade accounts payable
Total owed to suppliers on account P1,014,000
Less: 6-month note received from a supplier
who purchased some used equipment
on June 29, 2005 15,000 999,000
Notes payable 160,000
P1,386,000

d. Noncurrent liabilities include the following:

9% mortgage on property, plant, and equipment, payable in

semiannual installment of P90,000 through to June 30, 2010 P900,000
e. Owners’ equity Includes the following:

Preferred stock: 190,000 shares outstanding (P20 par value) 3,800,000

Common stock: 1,600,000 shares at P1 stated value 1,600,000
Additional paid-in capital 1,040,000
P6,440,000

f. Common shares were originally issued for P3,910,000, but the losses of the company for the past years were charged
against additional paid-in capital.

QUESTIONS:

Determine the adjusted amounts of the following:

3. Current assets
a. P2,462,000 b. P2,477,000 c. P2,440,500 d. P2,435,500

4. Noncurrent assets
a. P5,490,000 b. P6,560,000 c. P5,511,500 d. P6,264,000

5. Current liabilities
a. P1,401,000 b. P1,602,500 c. P1,581,000 d. P1,491,000

6. Noncurrent liabilities
a. P720,000 b. P900,000 c. P810,000 d. P880,000

7. Owners’ equity
a. P7,710,000 b. P6,440,000 c. P8,750,000 d. P5,666,000

8. The following information pertains to Malolos Company’s 2005 cost of good sold.

Inventory, January 1 10,000,000

Purchases 40,000,000
Writeoff of obsolete inventory 5,000,000
Inventory, December 31 3,000,000

What amount should Malolos report as cost of goods sold?

a. P42,000,000 c. P47,000,000
b. P45,000,000 d. P50,000,000

9. Valenzuela Company incurred the following infrequent losses during 2005:

Loss on disposal of one of four dissimilar factories 1,000,000

Foreign exchange loss on an amount remitted by a foreign
customer due to major currency devaluation 2,000,000
Loss on worthless inventory due to a competitor’s
unexpected product innovation 5,000,000
Loss from major strike by employees 4,000,000
Loss on early extinguishment of long-term debt 1,500,000
Loss from expropriation of asset 3,000,000

In its 2005 income statement, what total amount should Valenzuela report as part of continuing operations?
a. P13,500,000 c. P12,000,000
b. P16,500,000 d. P15,500,000

10. The following information was taken from Hagonoy Company’s accounting records for the year ended December 31,
2005:
 Decrease in raw materials inventory 1,000,000
Increase in goods in process inventory 3,000,000
Increase in finished goods inventory 2,000,000
Raw materials purchased 40,000,000
Direct labor payroll 10,000,000
Factory overhead 6,000,000
Freight out 4,000,000
Freight in 5,000,000

The cost of goods sold is

a. P59,000,000 c. P61,000,000
b. P57,000,000 d. P63,000,000

11. On January 1, 2003, Calumpit Company purchased a machine for P12,000,000 and depreciated it by the straight line
method using an estimated useful life of eight years with no residual value. On January 1, 2005, Calumpit determined that
the machine had a useful life of six years from the date of acquisition and will have a residual value of P200,000. An
accounting change was made in 2005 to reflect these additional data. The accumulated depreciation for this machine
should have a balance on December 31, 2005 of
a. P5,200,000 c. P5,250,000
c. P6,000,000 d. P4,425,000

12. On January 1, 2003, Baliuag Company purchased for P5,400,000 a machine with a useful life of 10 years and no
residual value. The machine was depreciated by the double declining balance method and the carrying amount of the
machine was P3,456,000 on December 31, 2004. Baliuag changed to the straight line method on January 1, 2005. In its
2005 income statement, what amount should Baliuag report as depreciation for this machine?
a. P345,600 c. P540,000
b. P432,000 d. P691,200

13. During 2005, Angat Company decided to change from the FIFO method of inventory valuation to the weighted
average method. Inventory balances under each method were:
FIFO Weighted average
December 31, 2003 10,000,000 7,000,000
December 31, 2004 8,000,000 7,500,000
December 31, 2005 6,000,000 5,000,000

Ignoring income tax, in its 2005 statement of retained earnings, what amount should Angat report as the effect of this
accounting change?
a. P3,500,000 c. P3,000,000
b. P4,500,000 d. P 500,000

14. The Natividad Publishing Company follows the procedure of debiting Bad Debts Expense for 2% of all new sales.
Sales for 4 consecutive years and year-ended allowance account balances were as follows:

Allowance for Bad Debts

End-of-Year Credit Balance
Year Sales
2002 P2,100,000 P21,500
2003 1,975,000 35,500
2004 2,500,000 50,000
2005 2,350,000 66,000

Compute the amount of accounts written off for the year 2005.
a. P31,000 b. P25,500 c. P35,500 d. P5,500

15. The following information for 2005 is provided by Marilao Company:

Sales 20,000,000
Cost of goods sold 12,000,000
Selling expenses 1,200,000
General and administrative expenses 1,800,000
Interest expense 1,500,000
Gain on early extinguishment of long-term debt 500,000
Correction of inventory error, net of income tax – credit 800,000
Investment income – equity method 600,000
Gain on sale of investment 2,000,000
Income tax expense 2,100,000
Dividends declared 2,500,000

What was the 2005 income from continuing operations?

a. P4,900,0007.
b. P6,600,000
c. P4,500,000
d. P7,000,000
P1

1. On October 1, 2005, when the carrying amount of the net assets of a business segment was P50,000,000, Tarlac
Company signed a legally binding contract to sell the business segment. The sale is expected to be completed by March
31, 2006, at a selling price of P45,000,000. In addition, prior to March 31, 2006, the sale contract obliges Tarlac
Company to terminate the employment of certain employees of the business segment incurring an expected termination
cost of P3,000,000 to be paid on June 30, 2006. The segment’s revenues and operating expenses for 2005, respectively,
were P30,000,000 and P38,000,000. Before income tax, how much will be reported as loss from discontinued operations
for 2005?
a. P16,000,000
b. P10,000,000
c. P12,000,000
d. P 700,000

2. Siasi Company is a diversified company with nationwide interests in commercial real estate developments, banking,
mining and food distribution. The food distribution division was deemed to be inconsistent with the long-term direction of
the company. On October 1, 2005, the board of directors voted to approve the disposal of this division. The sale is
expected to occur in August 2006. The food distribution had the following revenue and expenses in 2005: January 1 to
September 30, revenue of P35,000,000 and expenses of P27,000,000; October 1 to December 31, revenue of
P15,000,000 and expenses of P10,000,000. The carrying amount of the division’s assets at December 31, 2005 was
P56,000,000 and the recoverable amount was estimated to be P59,000,000. The sale contract requires Siasi to terminate
certain employees incurring an expected termination cost of P4,000,000 to be paid by December 15, 2006. The income
tax rate is 32%. The income statement for the year ended December 31, 2005 will report income from discontinued
operation at
a. P12,000,000
b. P 8,160,000
c. P 9,000,000
d. P 6,120,000

3. Concepcion Company and its divisions are engaged solely in manufacturing operations. The following data pertain to
the industries in which operations were conducted for the year ended December 31, 2005.

Segments Total revenue Operatingprofit Identifiable assets

1 13,000,000 4,000,000 25,000,000
2 10,000,000 2,000,000 20,000,000
3 8,000,00 1,500,000 15,000,000
4 3,000,000 1,000,000 7,000,000
5 3,500,000 800,000 8,000,000
6 2,500,000 700,000 5,000,000
40,000,000 10,000,000 80,000,000

In its segment information for 2005, how many reportable segments does Concepcion have?
a. Three
 b. Four
c. Five
d. Six

4. Panamao Company, a publicly owned corporation, is subject to the requirements for segment reporting. In its income
statement for the year ended December 31, 2005, Panamao reported revenue of P150,000,000, operating expenses of
P100,000,000 and net income of P50,000,000. Operating expenses include payroll costs of P20,000,000. Panamao’s
combined identifiable assets of all industry segments at December 31, 2005 were P80,000,000. The reported revenue
includes P120,000,0000 of sales to external customers. External revenue reported by operating segments must be at
least
a. P112,500,000
b. P 90,000,000
c. P 37,500,000
d. P 60,000,000

5. Allapacan Company had the following consignment transactions during 2005:

Inventory shipped on consignment to Benguet Company, consignee P600,000

Freight paid by Allapacan 50,000
Inventory received on consignment from Ifugao, consignor 800,000
Freight paid by Ifugao 50,000

No sales of consigned goods were made through December 31, 2005. In its December 31, 2005 balance sheet,
Allapacan should include consigned inventory of
a. P600,000 c. P 650,000
b. P700,000 d. P1,500,000

6. Pura Company has three manufacturing divisions, each of which has been determined to be a reportable segment.
Common costs are appropriately allocated on the basis of each division’s sales in relation to Pura’s aggregate sales. In
2005, Division I had sales of P6,000,000, which was 20% of Pura’s total sales, and had traceable operating costs of
P3,800,000. In 2005, Pura incurred operating costs of P1,000,000 that were not directly traceable to any of the divisions.
In addition, Pura incurred interest expense of P600,000 in 2005. In reporting segment information, what amount should
be shown as operating profit of Division I for 2005?
a. P2,000,000
b. P1,880,000
c. P1,400,000
d. P2,200,000

7. Camiling Company has estimated that total depreciation expense for the year ending December 31, 2005 will amount
to P2,000,000, and the 2005 year-end bonuses to employees will total P4,000,000. Camiling paid P500,000 property
taxes assessed for the year 2005. On June 30, 2005, Camiling incurred a permanent inventory loss from market decline
of P800,000 and loss on sale of land of P200,000. In the interim income statement for the six months ended June 30,
2005, what total amount of expenses relating to these items should be reported?
a. P4,250,000
b. P3,750,000
c. P3,850,000
d. P3,450,000

8. Talipao Company’s P10,000,000 net income for the quarter ended September 30, 2005, included the following after-tax
items

 A P1,200,000 gain realized on April 30, 2005 was allocated equally to the second, third and fourth quarters of
2005.
 A P3,000,000 cumulative loss resulting from a change in inventory valuation method was recognized on August 2,
2005.

In addition, Talipao paid P600,000 on February 1, 2005, for 2005 calendar-year property tax. Of this amount,
P150,000 was allocated to the third quarter of 2005. For the quarter ended September 30, 2005, Talipao should
report net income of
 a. P12,600,000
b. P11,800,000
c. P12,750,000
d. P 9,600,000

Presented below are the balance sheet accounts of Maasin Company:

2005 2004_
Assets
Cash 6,000,000 4,500,000
Trading securities 2,500,000 3,000,000
Accounts receivable 4,800,000 3,200,000
Allowance for doubtful accounts ( 800,000) ( 200,000)
Inventories 5,200,000 6,000,000
Property , plant and equipment 13,000,000 8,000,000
Accumulated depreciation (3,700,000) (3,200,000)
Patent, net 1,000,000 1,700,000
Total assets 28,000,000 23,000,000

Liabilities and Equity

Accounts payable 4,800, 000 4,500,000
Note payable - bank 2,000,000 3,500,000
Deferred tax liability 700,000 500,000
Bonds payable 3,000,000 -
Common stock, P10 par value 12,000,000 10,000,000
Additional paid in capital 1,500,000 1,000,000
Treasury stock, at cost ( 500,000) -
Retained earnings 4,500,000 3,500,000
Total liabilities and equity 28,000,000 23,000,000

Additional information

 The net income for 2005 is P6,000,000. Maasin paid a cash dividend of P5,000,000 on October 1, 2005.
 During 2005, there were no transactions affecting trading securities except the change in market value.
 On January 2, 2005, Maasin sold equipment costing P1,000,000, with a carrying amount of P600,000, for
P500,000.
 On July 1, 2005, Maasin purchased equipment for P3,000,000 cash.
 On December 31, 2005, Maasin purchased land by issuing bonds payable at face value of P3,000,000.

9. Net cash provided by operating activities was

a. P8,500,000
b. P7,500,000
c. P8,000,000
d. P6,000,000

10. Net cash used in investing activities was

a. P2,500,000
b. P4,000,000
c. P3,000,000
d. P3,500,000

11. Net cash used in financing activities was

a. P4,500,000
b. P4,000,000
c. P6,500,000
d. P7,000,000

12. Tubungan Company provides the following information for 2005:

Cash received from customers 8,000,000

Rent received 500,000
 Interest received 300,000
Cash paid to suppliers and employees 3,000,000
Taxes paid 400,000
Interest paid on long term debt 600,000
Cash dividend paid 1,000,000

Under the direct method, cash provided by operating activities was

a. P3,800,000
b. P5,400,000
c. P4,800,000
d. P5,100,000

13. Mangaldan Company obtained a one-year loan of P5,000,000 from a bank on April 1, 2005. The loan was discounted
at 12%. The company signed a note and pledged its accounts receivable of P5,000,000 as collateral for the loan. In
relation to the loan, Mangaldan should report note payable on December 31, 2005 at
a. P4,850,000 c. P5,450,000
b. P4,400,000 d. P4,550,000

14. The following was taken from the statements of Badiangan Company for the year 2005:

Accounts receivable – January 1 500,000

Accounts receivable – December 31 1,000,000
Sales on account and cash sales 8,000,000
Uncollectible accounts 100,000

No accounts receivable were written off or recovered during 2005. If the direct method is used in the 2005 cash flow
statement, Badiangan should report cash collected from customers at
a. P7,500,000
b. P7,400,000
c. P8,500,000
d. P8,400,000

15. Trinidad Company uses the average cost retail method to estimate its inventory. Data relating to the inventory at
December 31, 2005 are:

Cost Retail
Inventory, January 1 P 2,000,000 P3,000,000
Purchases 10,600,000 14,000,000
Net markups 1,600,000
Net markdowns 600,000
Sales 12,000,000
Estimated normal shoplifting losses 400,000
Estimated normal shrinkage is 5% of sales

Trinidad’s cost of goods sold for the year ended December 31, 2004 is
a. P9,100,000 c. P8,400,000
b. P8,680,000 d. P7,700,000
P1

1. Bingawan Company reported net income of P10,000,000 for 2005. Changes occurred in several balance sheet
accounts during 2005 as follows:

Investment in stock, carried at equity 2,500,000 increase

Premium on bonds payable 500,000 decrease
Accumulated depreciation, caused by major repair to equipment
1,000,000 decrease
Deferred tax liability 400,000 increase

In the 2005 cash flow statement, the cash provided by operating activities should be
a. P7,400,000
b. P6,400,000
 c. P9,400,000
d. P7,000,000

2. During 2005, Sapa-Sapa has the following activities related to its financial operations:

Payment for the early retirement of long-term bonds payable (carrying amount
of bonds payable P5,000,000) 5,500,000
Distribution in 2005 of cash dividend declared in 2004 3,000,000
Carrying amount of convertible preferred stock converted into common shares 2,000,000
Proceeds from sale of treasury stock (cost, P2,000,000) 2,500,000

In the 2005 cash flow statement, net cash used in financing activities should be
a. P6,000,000
b. P3,000,000
c. P8,500,000
d. P6,500,000

3. The transactions of Lambunao Company for the year 2005 included the following:

Cash borrowed from bank for purchase of land 6,000,000

Purchase of land for cash 6,000,000
Sale of securities for cash 1,000,000
Dividend declared (of which P2,000,000 was paid during the year) 3,000,000
Issuance of common stock for cash 7,000,000
Payment of bank loan including interest of P500,000 3,500,000
Increase in customers’ deposits 500,000

The 2005 cash flow statement should report net cash provided by financing activities at
a. P8,000,000
b. P8,500,000
c. P7,500,000
d. P7,000,000

4. Loboc Company had the following activities during 2005:

* Acquired common stock of Marbel Company for P3,000,000.

* Sold an investment in Raya Company for P4,500,000 when the carrying amount was P3,800,000.
* Acquired a P5,000,000 one-year certificate of deposit from a bank. During the year, interest of P400,000 was
received from the bank.
* Collected dividends of P800,000 on stock investments.

In the 2005 cash flow statement, net cash used in investing activities should be
a. P3,500,000
b. P3,900,000
c. P4,300,000
d. P4,700,000

5. The Abulug Manufacturing Company reviewed its year-end inventory and found the following items:
 A packing case containing a product costing P100,000 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked “Hold for shipping
instructions.” The customer’s order was dated December 18, but the case was shipped and the costumer
billed on January 10, 2006.
 Merchandise costing P600,000 was received on December 28, 2005, and the invoice was recorded. The
invoice was in the hands of the purchasing agent; it was marked “On consignment”.
 Merchandise received on January 6, 2006, costing P700,000 was entered in purchase register on January 7.
The invoice showed shipment was made FOB shipping point on December 31, 2005. Because it was not on
hand during the inventory count, it was not included.
 A special machine costing P200,000, fabricated to order for a particular customer, was finished in the
shipping room on December 30. The customer was billed for P300,000 on that date and the machine was
excluded from inventory although it was shipped January 4, 2006.
  Merchandise costing P200,000 was received on January 6, 2006, and the related purchase invoice was
recorded January 5. The invoice showed the shipment was made on December 29,2005, FOB destination.
 Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took
possession of the goods on that date. The merchandise was included in inventory because Abulug still holds
legal title. Historical experience suggests that full payment on installment sale is received approximately 99%
of the time.
 Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory
because the sale was accompanied by a purchase agreement requiring Abulug to buy back the inventory in
February 2006.

How much of these items should be included in the inventory balance at December 31, 2005?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

6. In 2005, a tsunami completely destroyed a building belonging to Parian Comapny. The cost of the building was
P8,000,000 and had accumulated depreciation of P5,000,000 at the time of loss. Parian received a cash settlement from
an insurance company and reported a casualty loss of P500,000. In its 2005 cash flow statement, the net change reported
in the cash flows from investing activities should be
a. P3,000,000 decrease
b. P2,500,000 increase
c. P3,500,000 increase
d. P 500,000 decrease

7. Kiangan Company has provided the following 2005 current account balances:

January 1 December 31
Accounts receivable 1,500,000 2,800,000
Allowance for doubtful accounts 200,000 400,000
Prepaid insurance 600,000 450,000
Accounts payable 900,000 1,200,000

Kiangan’s net income for 2005 was P8,000,000. Net cash provided by operating activities should be
a. P7,350,000
b. P9,550,000
c. P7,150,000
d. P8,650,000

8. The following data pertain to Encantadia Corporation on December 31, 2005:

Metrobank current account no. 1 P1,000,000

Metrobank current account no. 2 (100,000)
Payroll account 500,000
Foreign bank account – restricted (in equivalent pesos) 1,000,000
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from controller’s sister 10,000
Credit memo from a vendor for a purchase return 20,000
Traveler’s check 50,000
Not-sufficient-funds check 15,000
Money order 30,000
Petty cash fund (P4,000 in currency and expense receipts for P6,000)
10,000
Treasury bills, due 3/31/06 (purchased 12/01/05) 200,000
Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000

Based on the above information, compute for the cash and cash equivalent that would be reported on the December
31, 2005 balance sheet.
a. P1,784,000 c. P1,684,000
b. P1,484,000 d. P1,704,000
9. Gonzaga Company uses the weighted average method to determine the cost of its inventory. Gonzaga recorded the
following information pertaining to its inventory:

Units Units cost Total cost

Balance 1/1 160,000 60 9,600,000
Sold on 1/15 140,000
Purchased on 1/31 80,000 90 7,200,000

What amount of inventory should Gonzaga report in its January 31, 2005 balance sheet?
Perpetual Periodic
a. P8,400,000 P7,000,000
b. P7,000,000 P8,400,000
c. P8,400,000 P7,500,000
d. P7,000,000 P7,500,000

10. Adamya Corporation’s checkbook balance on December 31, 2005 was P8,000,000. The same date Adamya held the
following items in its safe:

A P150,000 check payable to Adamya, dated January 4, 2006, that was included in the December 31, checkbook
balance.

A P200,000 check payable to Adamya, deposited on December 10 and recorded on the same date, that was returned
by the bank on December 22 marked “NSF”. The check was redeposited December 27, 2005, and cleared December
30, 2005. No entry has been made by Adamya for the receipt and the redeposit.

A P500,000 check payable to a supplier and drawn on Adamya’s account, that was dated and recorded December
31, 2005 but not mailed until January 10, 2006

In its December 31, 2005 balance sheet, Adamya should report cash at
a. P8,700,000 c. P8,350,000
b. P8,550,000 d. P8,150,000

11. Sapiro Company provided the following data for the purpose of reconciling the cash balance per book with the balance
per bank statement on December 31, 2005:

Balance per bank statement 2,000,000

Outstanding checks (including certified checks of P100,000) 500,000
Deposit in transit 200,000
December NSF checks 150,000
Proceeds of note collected by the bank for Sapiro,
net of service charge of P20,000 750,000
Erroneous bank debit to Sapiro’s account, representing
a withdrawal of Siparo Company 300,000

What was the cash balance per book on December 31, 2005?
a. P 900,000 c. P1,150,000
b. P1,500,000 d. P1,200,000

12. The LIREO Corporation started its business on January 1, 2005. After considering the collections experience of other
companies in the industry, LIREO Corporation established an allowance for bad debts estimated to be 5% of credit sales.
Outstanding receivables recorded in the books of accounts on December 31, 2005 totaled P575,000, while the allowance
for bad debts account had a credit balance of P62,500 after recording estimated doubtful account expense for December
and after writing off P12,500 of uncollectible accounts.

Further analysis of the company’s accounts showed that merchandise purchased in 2005 amounted to P2,250,000
and ending merchandise inventory was P375,000. Goods were sold at 40% above cost.

80% of total sales were on account. Total collections from customers, on the other hand, excluding proceeds from
cash sales, amounted to P1,500,000.

The net realizable value of accounts receivable as of December 31, 2005 is

 a. P495,000 c. P512,500
b. P993,750 d. P875,000

Binalonan Company factored P5,000,000 of accounts receivable to ABC Company on July 1, 2005. Control was
surrendered by Binalonan. ABC assessed a fee of 5% and retains a holdback equal to 20% of the accounts receivable.
In addition ABC charged 12% computed on a weighted average time to maturity of the receivables of 30 days.

13. Binalonan Company will receive and record cash of

a. P3,700,685 c. P3,750,000
b. P3,700,000 d. P4,700,685

14. Assuming all receivables are collected, Binalonan Company’s cost of factoring the receivables would be
a. P250,000 c. P49,315
b. P299,315 d. P 0

15. Hathoria Company began operations on January 1, 2004. On December 31, 2004, Hathoria provided for uncollectible
accounts based on 5% of annual credit sales. On January 1, 2005, Hathoria changed its method of determining its
allowance for uncollectible accounts by applying certain percentages to the accounts aging as follows:

Days past invoice date Percent deemed to be

uncollectible
0 – 30 5%
31 – 90 10%
91 -180 20%
Over 180 50%

In addition, Hathoria wrote off all accounts receivable that were over 1 year old. The following additional information
relates to the years ended December 31, 2005 and 2004:

2005 2004
Credit sales 10,000,000 8,000,000
Collections (excluding collections on recovery) 8,500,000 6,000,000
Accounts written off 300,000 200,000
Recovery of accounts previously written off 80,000 50,000

Days past invoice date at December 31

0 to 30 1,800,000 800,000
31 to 90 600,000 500,000
91 to 180 400,000 400,000
Over 180 200,000 100,000

What is the provision for uncollectible accounts for the year ended December 31, 2005?
a. P250,000 c. P330,000
b. P300,000 d. P380,000

P1

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

Petty cash fund P50,000

Cash in bank – current account 10,000,000
Cash in bank – payroll account 2,000,000
Cash on hand 500,000
Cash in bank – restricted account for plant additions, expected to
be disbursed in 2006 4,000,000
Treasury bills, due February 15, 2006 3,000,000

The petty cash fund includes unreplenished December 2005 petty cash expense vouchers of P20,000 and employee
IOUs of P10,000. The cash on hand includes a P100,000 check payable to Bocaue dated January 15, 2006. What
should be reported as “cash and cash equivalents” on December 31, 2005?
a. P12,420,000 c. P15,420,000
 b. P19,420,000 d. P15,450,000

2. On December 1, 2005 Pirena Company assigned on a nonnotification basis accounts receivable of P10,000,000 to a
bank in consideration for a loan of 90% of the receivables less a 5% service fee on the accounts assigned. Pirena signed
a note for the bank loan. On December 31, 2005, Pirena collected assigned accounts of P6,000,000 less discount of
P400,000. Pirena remitted the collections to the bank in partial payment for the loan. The bank applied first the collection
to the interest and the balance to the principal. The agreed interest 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. P3,090,000
b. P3,400,000 d. P3,490,000

3. The following pertains to the notes receivable of Amihan Corporation for the calendar year 2005:
Notes Receivable
Date Particulars Debit Credit
Sept. 1 Michelle, 21%, due in 3 months P320,000
1 Discounted Michelle note P320,000
Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000
Nov. 1 Eleanor, 24%, due in 13 months 2,400,000
30 Rigby Co., no interest, due in one year 2,000,000
30 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 (For cash loan given
to Ms. Anna) 4,800,000

All notes are trade notes receivable unless otherwise specified. The Michelle note was paid on December 1 as per
notification received from the bank. The Mabelle Co. note was dishonored on the due date but the legal department
has assured management of its full 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. P7,200,000
b. P6,000,000 d. P8,000,000

4. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, in exchange for an P800,000 non-
interest bearing note due on April 1, 2007. The note had no ready market, and there was no established exchange price
for the equipment. The prevailing interest rate for a note of this type at April 1, 2005, was 12%. The carrying value of the
note receivable on December 31, 2005 is
a. P800,000 c. P694,984
b. P620,864 d. P714,112

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

Packaging for shipment 200,000

Shipping 200,000
Special handling charges 100,000

These goods were received on October 17, 2005. What amount of cost for these goods should be included in
Danaya’s inventory?
a. P4,500,000 c. P4,700,000
b. P4,900,000 d. P5,000,000

6. The physical count conducted in the warehouse of Imaw Company on December 31, 2005 revealed merchandise with
a total cost of P3,600,000 was on hand on that date. However the following items were excluded from the count:
 Goods sold to a customer, which are being held for the customer to call for at the customer’s convenience with a
cost of P200,000.
 A packing case containing a product costing P80,000 was standing in the shipping room when the physical
inventory was taken. It was not included in the inventory because it was marked “hold for shipping instructions”.
Your investigation revealed that the customer’s order was dated December 20, 2005, but that the case was
shipped and the customer billed on January 10, 2006.
  Merchandise held by Finishing Company costing P300,000 for further processing and packaging.

The correct amount of inventory that should be reported in Imaw Company’s balance sheet at December 31, 2005 is
a. P4,180,000 c. P3,880,000
b. P3,980,000 d. P4,100,000

7. The records of Awoo’s Wholesale and Retail Store report the following data for the month of January 2005:

Beginning inventory at cost 860,000 Net Additional mark up 425,000

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

Using the average retail inventory method, Awoo’s cost of sales is

a. P6,390,000 c. P6,080,000
b. P6,150,000 d. P6,336,000

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

Accounts receivable – January 1 P12,000,000

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

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

9. Urdaneta Company accepted from a customer P5,000,000, 120-day, 12% note dated August 31, 2005. On September
30, 2005, Urdaneta discounted the note at the National Bank. However, the proceeds were not received until October 1,
2005. In the September 30, 2005 balance sheet, the amount receivable from the bank includes accrued interest revenue
of
a. P200,000 c. P44,000
b. P156,000 d. P 0

10. A physical inventory taken on December 31, 2005 resulted in an ending inventory of P1,440,000. 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 P1,280,000

Purchases during 2005 5,640,000
Cash sales during 2005 1,400,000
Shipment received on December 26, 2005, included in physical inventory, but not recorded as
purchases 40,000
Deposits made with suppliers, entered as purchases. Goods were not received in 2005
80,000
Collections on accounts receivable, 2005 7,200,000
Accounts receivable, January 1, 2005 1,000,000
Accounts receivable, December 31, 2005 1,200,000
Gross profit percentage on sales 40%

At December 31, 2005 what is the estimated cost of missing inventory?

a. P200,000 c. P1,000,000
 b. P160,000 d. P 0

11. Nakba Company installs replacement siding, windows, and louvered glass doors for family homes. At December 31,
2005, the balance of raw materials inventory account was P502,000, and the allowance for inventory writedown was
P33,000. The inventory cost and market data at December 31, 2005, are as follows:

Cost Replacement Cost Sales Price Net Realizable Normal

value Profit
Aluminum siding
89,000 86,000 91,500 87,000 5,000
Mahogany siding 94,000 92,000 93,000 85,000 7,000
Louvered glass door
125,000 135,000 129,000 111,000 10,000
Glass windows 194,000 114,000 205,000 197,000 20,000
Total 502,000 427,000 518,500 480,000 32,000

The loss on inventory write down is

a. P 8,000 c. P11,000
b. P25,000 d. P 0

12. Hagorn Company purchased 10,000 shares of Dinky Company P100 par value common stock for P1,200,000 to be
held as available for sale securities. On March 1, 2005, Hagorn received a 20% stock dividend. On June 1, 2005, Hagorn
sold all the stock dividends that were received on March 1 at P130 per share. The gain on sale of investment be recorded
by Hagorn is
a. P260,000 c. P200,000
b. P 20,000 d. P 60,000

13. The Alcala Company counted its ending inventory on December 31. None of the following items were included when
the total amount of the company’s ending inventory was computed:

 P150,000 in goods located in Alcala’s warehouse that are on consignment from another company.
 P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit on December 31;
the goods were received by the customer on January 2. Terms were FOB Destination.
 P300,000 in goods were purchased by Alcala and shipped on December 30 and were in transit on December 31;
the goods were received by Alcala on January 2. Terms were FOB shipping point.
 P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on December 31; the
goods were received by the customer on January 2. Terms were FOB shipping point.

The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount of the
company’s inventory on December 31?
a. P2,550,000 c. P2,500,000
b. P1,950,000 d. P2,700,000

14. On September 30, 2005, Asingan Company discounted at the bank a customer’s P5,000,000 6-month 10% note
receivable dated June 30, 2005. The bank discounted the note at 12%. The proceeds from this discounted note
amounted to
a. P5,092,500 c. P4,842,000
b. P5,250,000 d. P5,170,000

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

Cost Market Value

X 4,000,000 3,700,000
Y 2,000,000 1,800,000
Z 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 on December 31, 2005 had
market values of P4,200,000 for Security X and P2,300,000 for Security Y. The unrealized gain to be recognized
Agana’s income statement on December 31, 2005 is
a. P300,000 c. P1,500,000
b. P500,000 d. P1,000,000
P1

1. On July 1, 2005, Mila Company purchased as a long term investment 50,000 shares of Lucky Corporation
common stock for P80 per share. This purchase represents a 2% interest in Lucky. On August 1, 2005,
Lucky Corporation declared its annual dividend on its common stock of P10 per share payable on
September 10 to stockholders of record at August 31, 2005. A retirement of an issue of Mila’s serial bonds
payable on August 25, 2005 required additional working capital and Mila sold all 50,000 shares of Lucky’s
stock for P5,200,000 including the accrued dividend. For the year ended December 31, 2005, the gain on
disposal to be reported by Mila on this transaction should be
a. P 200,000 c. P500,000

b. P1,200,000 d. P700,000

2. Claveria Company installs replacement siding, windows, and louvered glass doors for family homes. At
December 31, 2005, the balance of raw materials inventory account was P502,000, and the allowance for
inventory writedown was P33,000. The inventory cost and market data at December 31, 2005, are as follows:

Cost Replacement Sales Price Net Realizable Normal

Cost value Profit

Aluminum siding

89,000 86,000 91,500 87,000 5,000

Mahogany siding 94,000 92,000 93,000 85,000 7,000

Louvered glass door

125,000 135,000 129,000 111,000 10,000

Glass windows 194,000 114,000 205,000 197,000 20,000

Total 502,000 427,000 518,500 480,000 32,000

The correct balance of the raw materials inventory after any allowance for write down is
a. P427,000 c. P480,000

b. P486,500 d. P477,000

3. Mira Company received dividends from its common stock investments during the year 2005 as follows:

 A stock dividend of 20,000 shares from A Company when the market price of A’s shares was P30 per
share.
 A cash dividend of P2,000,000 from B Company in which Mira owns a 20% interest.
 A cash dividend of P500,000 from C Company in which Mira owns a 10% interest.
 10,000 shares of common stock of D Company in lieu of cash dividend of P20 per share. The market
price of D Company’s shares was P180. Mira holds originally 100,000 shares of D Company common
stock. Mira owns 5% interest in D Company.
 What amount of dividend revenue should Mira report in its 2005 income statement?

a. P2,500,000 c. P2,300,000

b. P4,300,000 d. P 500,000

4. On January 2, 2004, Aquil Company purchased 10,000 shares of P100 par value common stock of Diwata
Corporation at P110 per share. The Diwata Corporation was expanding and on March 2, 2005 it issued stock
rights to its stockholders. Each right entitles Aquil to purchase one fourth (¼) share of common stock at par.
The market value of the stock on that date was P140 per share. There was no quoted price for the rights. On
April 2, 2005, Aquil exercised all its stock rights. What is the total cost of the shares acquired on April 2, 2005?

a. P323,333 c. P312,857

b. P250,000 d. P350,000

5. Banawe Company was organized on January 1, 2005. At December 31, 2005, Banawe had the following
investments:
Trading Available for sale
Aggregate cost 10,000,000 10,000,000
Aggregate market value 9,000,000 8,500,000
The declines are judged to be nontemporary. In 2005, what amount of unrealized loss should be shown as
component of income and stockholders’ equity?
Income Stockholders’ equity
a. 2,500,000 0
b. 0 2,500,000
c. 1,000,000 1,500,000
d. 1,500,000 1,000,000

6. Lagawe Company purchased trading equity securities. The cost and market value at December 31, 2004
were:
Security Cost Market_
A – 20,000 shares 2,000,000 2,500,000
B – 40,000 shares 4,000,000 3,000,000
C – 60,000 shares 6,000,000 5,500,000
Lagawe sold 60,000 shares of Security C on January 31, 2005, for P5,000,000, incurring P100,000 in
brokerage commission and taxes. On the sale, Lagawe should report a realized loss of
a. 1,100,000
b. 1,000,000
c. 600,000
d. 500,000

7. Information about Ifugao Company’s portfolio of available for sale securities is:

Aggregate cost – December 31, 2005 9,000,000

Unrealized gains– December 31, 2005 500,000
Unrealized losses – December 31, 2005 2,000,000
Net unrealized gains during 2005 300,000

On January 1, 2005 Ifugao reported an unrealized loss of P400,000 as a component of stockholders’

equity. In its December 31, 2005 stockholders’ equity, Ifugao should report what amount of unrealized
loss?
 a. 2,000,000
b. 1,500,000
c. 1,100,000
d. 1,200,000

8. Lasam Company sells one product, which it purchases from various suppliers. The trial balance at
December 31, 2005, included the following accounts:
Sales (100,000 units at P150) P15,000,000
Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
Freight in 100,000
Freight out 200,000
The inventory purchases during 2005 were as follows:
Units Unit cost Total cost
Beginning inventory, January 1 20,000 P60 P 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 P10,500,000
Lasam’s accounting policy is to report inventory in its financial statements at the lower of cost or market,
applied to total inventory. Cost is determined under the first-in, first-out method.
Lasam has determined that, at December 31, 2005, the replacement cost of its inventory was P70 per unit
and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What should Lasam report as cost of goods sold for the year 2005?
a. P6,400,000 c. P6,700,000
b. P6,600,000 d. P7,100,000

9. On January 1, 2004 Eugenie Company bought 15% of Celie Corporation common stock for P5,000,000.
During 2004, Celie reported net income of P3,000,000 and paid no dividends on its common stock. In 2005
Celie reported net income of P5,000,000 and paid a total amount of P10,000,000 as dividends to common
stockholders. Changes in fair value of Celie were insignificant during both years. In its income statement for
the year ended December 31, 2005, how much should Eugenie report as income from this investment?
a. P1,500,000 c. P750,000
b. P1,200,000 d. P450,000

10. The following quarterly cost data have been accumulated for Pamplona Mfg. Inc.
Raw materials – beginning inventory (Jan. 1, 2005) 10,000 units @P6.00
Purchases 8,500 units @P7.00
11,000 units @P7.50
Transferred 21,500 units of raw materials to work in process:
Work in process – beginning inventory (Jan. 1, 2005) 5,600 units @P13.50
Direct labor P250,000
Manufacturing over head P325,000
Work in process – ending inventory (Mar. 31, 2005) 4,200 units @P13.75
If Pamplona uses the FIFO method for valuing raw materials inventories, compute for the cost of goods
manufactured for the quarter ended Mar. 31 2005
 a. P699,150 c. P734,850
b. P717,000 d. P746,850

11. On January 1, 2005 Maria Company purchased 30% interest in Venus Company for P5,000,000. On this
date Venus’ stockholders’ equity was P10,000,000. The carrying amounts of Venus’ identifiable net assets
approximated their fair values, except for land whose fair value exceeded its carrying amount by P4,000,000.
Any implied goodwill has an indefinite life. Venus reported net income of P3,000,000 for 2005 and paid
dividends of P1,000,000. Maria accounts for this investment using the equity method. In its December 31,
2005 balance sheet, what amount should Maria report as investment in associate?
a. P5,560,000 c. P5,500,000
b. P5,600,000 d. P5,540,000

12. On August 30, 2005, Sta. Ana Company purchased a tract of land for P12,000,000. Sta. Ana incurred
additional cost of P3,000,000 during the remainder of 2005 in preparing the land for sale. The tract was
subdivided into residential lots as follows:
Lot class Number of lots Sales price per lot
A 100 240,000
B 100 160,000
C 200 100,000
Using the relative sales value method, what amount of cost should be allocated to Class C lots?
a. P6,000,000 c. P7,500,000
b. P5,000,000 d. P4,000,000

13. Bayambang Company sells to wholesalers on terms of 5/15, net 30. Bayambang has no cash
sale but 50% of customers take advantage of the discount. Bayambang uses the gross method of
recording sales. An analysis of trade receivables at December 31, 2005 revealed the following:
Age Amount _ Collectible
0 - 15 days 15,000,000 100%
16 - 30 days 3,000,000 95%
Over 30 days 2,000,000 1,500,000
On the December 31, 2005 balance sheet, what amount should be reported as allowance for
discounts?
a. P750,000 c. P375,000
b. P650,000 d. P500,000

14. On December 31, 2005, Frankie Company purchased as a long-term investment P10,000,000 face
amount, 10% bonds of Love Joy Corporation to yield 8% per year. The bonds mature on January 1, 2010 and
pay interest semiannually on June 30 and December 31. The relevant present value factors are as follows:
The carrying amount of this investment on December 31, 2005 is
a. P10,872,000 c. P9,189,000
b. P10,811,000 d. P9,128,000

15. The following accounts appear in the adjusted trial balance of Vicky Company on December 31, 2005:
Petty cash fund 20,000
Change fund 150,000
Bond sinking fund securities 1,000,000
Preferred redemption fund securities 1,500,000
Dividend receivable-sinking fund securities 100,000
Plant expansion fund 400,000
Cash surrender value 120,000
Investment property 1,200,000
Advances to subsidiary 600,000
Held to maturity securities 2,100,000
Treasury notes purchased 1 year ago, maturing on May 1, 2006 750,000
How much should be reported as long term investments on December 31, 2005?
a. P6,920,000 c. P7,070,000
b. P7,020,000 d. P7,820,000

P1

1. Eternal Company acquired an equipment on January 1, 2005. The asset has an estimate useful life of 5
years. An employee has prepared a depreciation schedule for this equipment using two methods, sum-of-
years digit method and double declining balance method, as follows:
Sum-of-years digit Double declining
2005 3,000,000 4,000,000
2006 2,400,000 2,400,000
2007 1,800,000 1,440,000
2008 1,200,000 864,000
2009 600,000 296,000

What is the acquisition cost of the equipment?

a. P9,500,000 c. P10,000,000
b. P9,000,000 d. 10,500,000

2. Binmaley Company operates in an industry that has a high rate of bad debts. On December 31,
2005, before any year-end adjustments, the accounts receivable balance was P20,000,000 and its
allowance for doubtful accounts balance was P1,500,000. The year-end balance reported for the
allowance for doubtful accounts is based on the following schedule:
Time Outstanding Accounts Receivable Percent Uncollectible
Under 30 days P10,000,000 5%
31 - 180 days 5,000,000 10%
181 - 360 days 3,000,000 30%
More than one year 2,000,000 100%
The accounts which have been outstanding for more than one year and 100% uncollectible would
be written off immediately. What should be the doubtful accounts expense for the year ended
December 31, 2005?
a. P1,900,000 c. P3,900,000
b. P2,400,000 d. P2,000,000

3. Ballesteros Company began operations late in 2004. For the first quarter ended March 31, 2005,
Ballesteros made available the following information:
Total merchandise purchased through March 15, recorded at net P4,900,000 Merchandise inventory at
December 31, 2004, 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 company. All merchandise is marked to sell at 50% above invoice cost before time discounts
of 2/10, n/30. No sales were made in 2005.
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
4. The following expenditures were incurred by Gina Company in 2005:
Purchase of land 10,000,000
Land survey 500,000
Fees for title search of title for land 200,000
Building permit 250,000
Temporary quarters for construction crew 100,000
Payments of tenants of old building for vacating the premises 600,000
Payment to demolition company to raze the old building and clean up 400,000
Excavating basement 350,000
Special assessment tax for street project 60,000
Salvage value of materials from old building retained
by the demolition company 150,000
Damages awarded for injuries sustained in construction 90,000
Costs of construction 20,000,000
Cost of paving parking lot adjoining the building 180,000
Cost of shrubs, trees and other landscaping 40,000

The total costs to be capitalized as land is

a. P11,610,000 c. P11,800,000
b. 11,730,000 d. P11,650,000

5. Joan Company acquired a machine on March 1, 2003 for P8,000,000. The machine has a 10 year useful
life and a P500,000 residual value, and was depreciated using the straight-line method. Joan records a full
year’s depreciation on the year of an asset’s acquisition and no depreciation on the year an asset is disposed
of. On December 31, 2004 the machine had a significant decline in its market value. A test for recoverability
revealed the expected net future undiscounted cash flows related to the continued use and eventual disposal
of the machine total P7,200,000. The machine’s fair value on December 31, 2004 is P6,000,000 with no
salvage value while the discounted future cash flows amounts to P6,600,000. On December 31, 2005, the
machine should have a carrying value of
a. P5,687,500 c. P5,750,000
b. P5,775,000 d. P5,250,000

6. Calayan Company has determined its December 31, 2005 inventory on a FIFO basis at P9,500,000.
Information pertaining to that inventory follows:
Estimated selling price P14,000,000
Estimated cost to complete and cost of disposal 5,000,000
Normal profit margin 2,000,000
Current replacement cost 8,000,000
Calayan records losses that result from applying the lower of cost or market rule. At December 31, 2005,
Calayan should report inventory at
a. P9,500,000 c. P9,000,000
b. P8,000,000 d. P7,000,000

7. In 2004, The Young Mining Company purchased property with natural resources for P29,000,000. The
property was relatively close to a large city and had an expected residual value of P4,000,000. However
P2,000,000 will have to be spent to restore the land for use. The following information relates to the use of the
property:
 In 2004,Young spent P3,000,000 in development costs and P1,500,000 in buildings on the property.
Young does not anticipate that the buildings will have any utility after the natural resources are
depleted. The original estimated output is 5,000,000 tons.
 In 2005 and additional P2,400,000 were spent for additional developments on the mine.
 The tonnage mined and estimated tons remaining for years 2004 and 2005 are as follows:
 Estimated tons remaining
Year Tons extracted
2004 1,500,000 3,500,000
2005 1,200,000 1,800,000
The depletion recorded by Young Company in 2005 is
a. P8,400,000 c. P9,360,000
b. P7,200,000 d. P5,616,000

8. Essel Company uses the composite method of depreciation and has a composite rate of 20%. During 2005,
it sold assets with an original cost of P500,000 and a residual value of P100,000 for P300,000 and eventually
acquired P400,000 of new assets with a residual value of P40,000. Information regarding the original group of
assets as of January 1, 2005 is presented below:
Total cost 5,000,000
Total residual value 800,000
Accumulated depreciation 1,000,000
What was the depreciation expense recorded by Essel Company in 2005?
a. P1,000,000 c. P832,000
b. P 632,000 d. P980,000

9. The bookkeeper of Calumpit Company recently prepared the following bank reconciliation on December 31,
2005:

Balance per bank statement 20,000,000

Add: Deposit in transit 1,500,000
Checkbook and other bank charge 50,000
Error made by Calumpit in recording check No.
1005 (issued in December) 150,000
Customer check marked DAIF 500,000 2,200,000
Total 22,200,000
Deduct: Outstanding checks 1,900,000
Note collected by bank (includes P200,000 interest) 2,300,000 4,200,000
Balance per book 18,000,000

Calumpit has P1,000,000 cash on hand on December 31, 2005. The amount to be reported as cash on the
balance sheet as of December 31, 2005 should be
a. P19,600,000 c. P20,600,000
b. P18,600,000 d. P19,750,000

10. On January 1, 2003, Tulsa Company purchased a machine for P10,560,000 and depreciated it by the
straight line method using an estimated life of ten years with no residual value. On January 1, 2005, Tulsa
determined that the machine had a useful life of eight years from the date of acquisition and will have a
residual value of P450,000. An accounting change was made in 2005 to reflect this additional information.
The accumulated depreciation for this machine should have a balance at December 31, 2005 of
a. P3,445,000 c. P3,055,000
b. P3,168,000 d. P3,033,000

11. Ursula Mathey Company incurred the following costs during 2005 in connection with its research and
development activities:
Cost of equipment acquired that will have alternative uses in future
research and development projects over the next five years
(straight-line depreciation) 600,000
Materials consumed in research and development projects 150,000
Consulting fees paid to outsiders for research and
 development projects 250,000
Personnel costs of persons involved in research and
development projects 80,000
Indirect costs reasonably allocable to research and
development projects 220,000
Materials purchased for future research and development projects 300,000
The amount to be reported by Ursula as research and development expense on its income statement for
2005 is
a. P720,000 c. P1,600,000
b. P820,000 d. P1,120,000

12. On January 1, 2005, the balance of accounts receivable of Manaoag Company was P5,000,000
and the allowance for doubtful accounts on same date was P800,000. The following data were
gathered:
Credit sales Writeoffs Recoveries
2002 P10,000,000 P250,000 P20,000
2003 14,000,000 400,000 30,000
2004 16,000,000 650,000 50,000
2005 25,000,000 1,100,000 145,000
Doubtful accounts are provided for as percentage of credit sales. The accountant calculates the
percentage annually by using the experience of the three years prior to the current year. How
much should be reported as 2005 doubtful accounts expense?
a. P750,000 c. P330,000
b. P812,500 d. P875,000

13. Cagayan Company included the following items under inventories:

Materials P 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retails store, including 50% profit on cost
750,000
Finished goods in hands on consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at cost
250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000
330,000
Goods held on consignment, at sales price, cost P150,000 200,000
How much is the correct amount of inventories?
a. P5,610,000 c. P5,375,000
b. P5,500,000 d. P5,450,000

14. Kula Company has the following information as of January 1, 2005 on its property plant and equipment
account:
Land 30,000,000
Buildings and improvements 250,000,000
 Less: Accumulated depreciation . 62,500,000
Net book value 217,500,000

There were no additions or disposals during 2005. Depreciation expense is computed on the straight-line
method over 20 years for buildings and improvements. On January 1, 2005, all of Kula’s property, plant
and equipment were appraised as follows:
Replacement cost
Land 50,000,000
Buildings and improvements 400,000,000
As a result of the appraisal, the buildings and improvements were also determined to have a revised useful
life of 25 years. What is the revaluation surplus that will appear in Kula’s stockholders’ equity on December
31, 2005?
a. P132,500,000 c. P145,875,000
b. P125,000,000 d. P126,875,000

15. Lovable Corporation is considering the purchase of Adorable Company, whose balance sheet as of
December 31, 2005 is summarized as follows:
Current assets 800,000 Current liabilities 600,000
Fixed assets (net) 1,100,000 Long-term liabilities 700,000
Other assets 700,000 Common stock 850,000
. . Retained earnings 450,000
Total 2,600,000 Total 2,600,000
The fair market value of the current assets is P1,100,000 because of the undervaluation of inventory. The
normal rate of return on the net assets for the industry is 15% and the average expected annual earnings
for Adorable Company is P300,000. Assuming that the excess earnings continue for the next five years
and Lovable follows the “years’ multiple of excess earnings” approach of computing goodwill, how much
would Lovable be willing to pay for the net assets of Adorable?
a. P1,900,000 c. P2,125,000
b. P2,000,000 d. P2,300,000
P1
1. Arvak Company owns 50% of Sarrat Company’s preferred stock and 30% of its common stock. Sarrat’s stock
outstanding at December 31, 2005 includes P20,000,000 of 10% cumulative preferred stock and P50,000,000 of common
stock. Sarrat reported net income of P10,000,000 for the year 2005. What amount should Arvak report as investment
income for the year 2005?

a. P3,000,000 c. P2,400,000
b. P3,400,000 d. 4,400,000

2. Umingan Company has a 10% note receivable dated June 30, 2005, in the original amount of P9,000,000. Payments
of P3,000,000 in principal plus accrued interest are due annually on July 1, 2006, 2007 and 2008. In its June 30, 2007
balance sheet, what amount should Umingan report as a current asset for interest on the note receivable?
a. P900,000 c. P300,000
b. P600,000 d. P 0

3. On January 1, 2005, Armeo 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. Armeo
uses the interest method of amortization. What amount (rounded to the nearest P100) should Armeo report on its
December 31, 2005 balance sheet for this long-term investment?
a. P4,680,000 c. P4,662,000
b. P4,618,000 d. 4,562,000

4. On January 1, 2001 Apitong Company purchased P8,000,000 ordinary life policy on its president. Additional data for
the year 2005 are:
 Cash surrender value, January 1 200,000
Cash surrender value, December 31 240,000
Annual advance premium paid on January 1, 2005 400,000
Dividend received on July 1, 2005 20,000

Apitong Company is the beneficiary under the life insurance policy. Apitong should report life insurance expense for
2005 at
a. P400,000 c. P360,000
b. P340,000 d. P380,000

5. Balungao Company accepted a P5,000,000, 2% interest bearing note from Rosales Company on December 31, 2005,
in exchange for a machine with a list price of P4,000,000 and a cash price of P3,750,000. The note is payable on
December 31, 2007. In its 2005 income statement, Balungao should report the sale at
a. P3,750,000 c. P5,000,000
b. P4,000,000 d. P5,200,000

6. The work-in-process inventory of Bakun Company were completely destroyed by fire on June 1, 2005. You were able
to establish physical inventory figures as follows:

January 1, 2005 June 1, 2005

Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on
purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance adjusters than an
average gross profit rate of 35% based on cost be used and that direct labor cost was 160% of factory overhead.

The work in process inventory destroyed as computed by the adjuster

a. P314,612 c. P185,000
b. P366,000 d. P265,000

7. On January 1, 2005, Ynang Reyna Company received a grant of P50 million from the British government in order to
defray safety and environmental costs within the area where the enterprise is located. The safety and environmental
costs are expected to be incurred over four years, respectively, P4 million, P8 million, P12 million and P16 million.

How much income from the government grant should be recognized in 2005?
a. P50,000,000 c. P12,500,000
b. P 5,000,000 d. P 0

8. The liabilities section of the balance sheet of Pug Company on December 31, 2005 detailed the following:

Accounts payable 2,000,000

Notes payable-trade 2,500,000
Bank note payable -10% 800,000
Bank note payable – 12% 1,000,000
Accrued expenses 350,000
Accrued interest payable 500,000
Mortgage note payable – 6% 4,000,000
Bonds payable – 10% due June 30, 2006 5,000,000

The 10% bank note payable is issued on January 1, 2005, payable on demand and interest is payable every six
months. The 12% bank note payable is a two-year note issued on July 1, 2004.

The 6%, 10 year mortgage note was issued on October 1, 2002. Terms of the note give the holder to demand
payment if the company fails to make monthly interest payment. On December 31, 2005, Pug is three months behind
in paying its required interest.

What is the total amount of current liabilities on December 31, 2005?

 a. P10,150,000 c. P15,750,000
b. P15,150,000 d. P16,150,000

9. A new product introduced by Wilkenson Promotions carries a two-year warranty against defects. The estimated
warranty costs related to dollar sales are as follows:

Year of sale .............................. 3 percent

Year after sale ........................... 5 percent

Sales and actual warranty expenditures for the years ended December 31, 2004 and 2005, are as follows:

Actual Warranty
Sales Expenditures
2004 P 8,000,000 P200,000
2005 10,000,000 700,000

What amount should Wilkenson report as its estimated liability as of December 31, 2005?
a. P 40,000 c. P540,000
b. P240,000 d. P740,000

10. On November 5, 2005, a Calauag Company truck was in an accident with an auto driven by Macalelon. Calauag
received notice on January 15, 2006, of a lawsuit for P4,000,000 damages for personal injuries suffered by Macalelon.
Calauag’s counsel believes it is possible that Macalelon will be awarded an estimated amount in the range between
P2,000,000 and P3,000,000, and no amount is a better estimate of potential liability than any other amount. The
accounting year ends on December 31, and the 2005 financial statements were issued on March 31, 2006. What amount
of provision should Calauag accrue at December 31, 2005?
a. P4,000,000 c. P2,500,000
b. P3,000,000 d. P 0

Anda Corporation provided for uncollectible accounts receivable under the allowance method since the start of its
operations to December 31, 2005. Provisions were made monthly at 2 percent of credit sales; bad debts written off were
charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account;
and no year-end adjustments to the allowance account were made. Anda's usual credit terms are net 30 days.

The credit balance in the allowance for doubtful accounts was P260,000 at January 1, 2005. During 2005, credit sales
totaled P18,000,000, interim provisions for doubtful accounts were made at 2 percent of credit sales, P180,000 of bad
debts were written off, and recoveries of accounts previously written off amounted to P30,000. Anda installed a computer
system in November 2005 and an aging of accounts receivable was prepared for the first time as of December 31, 2005.
A summary of the aging is as follows:

Balance in Estimated %
Classifications by Month of Sale Each Category Uncollectible
November-December 2005 P2,280,000 2%
July-October 2005 1,200,000 15%
January-June 2005 800,000 25%
Prior to January 1, 2005 260,000 80%

Based on the review of collectibility of the account balances in the "prior to January 1, 2005" aging category, additional
receivables totaling P120,000 were written off as of December 31, 2005. Effective with the year ended December 31,
2005, Anda adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated
by the year-end aging analysis of accounts receivable.

QUESTIONS:

11. How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2005?
a. P537,600 b. P350,000 c. P633,600 d. P753,600

12. How much is the doubtful accounts for the year 2005?
a. P427,600 b. P577,600 c. P547,600 d. P457,600

13. The recorded allowance for doubtful accounts should be increased by

a. P283,600 b. P187,600 c. P67,600 d. P0
14. On December 31, 2005, Atimonan Company issued 8,000 of its 8%, 10-year P1,000 face value bonds with detachable
stock warrants at 120. Each bond carried a detachable warrant for two shares of Atimonan’s P100 par value common
stock at a specified option price of P150. Immediately after issuance, the market value of the bonds ex-warrants was
P8,100,000 and the market value of the warrants was P900,000. In its December 31, 2005 balance sheet, what amount
should Atimonan report as bonds payable?
1. P8,000,000 c. P8,100,000
2. P8,640,000 d. P9,600,000

15. The Atok Corporation was organized on January 1, 2004. On December 31, 2005, the corporation lost most of its
inventory in a warehouse fire just before the year-end count of inventory was to take place. Data from the records
disclosed the following:

2004 2005
Beginning inventory, January 1 P 0 P1,020,000
Purchases 4,300,000 3,460,000
Purchases returns and allowances 230,600 323,000
Sales 3,940,000 4,180,000
Sales returns and allowances 80,000 100,000

On January 1, 2005, the Corporation’s pricing policy was changed so that the gross profit rate would be three
percentage points higher than the one earned in 2004.

Salvaged undamaged merchandise was marked to sell at P120,000 while damaged merchandise was marked to sell
at P80,000 had an estimated realizable value of P18,000.

How much is the inventory loss due to fire?

a. P918,200 c. P856,200
b. P947,000 d. P824,600

P1

1. On January 2, 2005, the Santiago, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2009 and interest is payable annually every January 1. The bond contract entitles
the bondholders to receive 6 shares of P100 par value common stock in exchange for each P1,000 bond.
On the date of issue, the prevailing market interest rate for similar debt without the conversion option is
10%.

How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
a. P634,000 b. P126,816 c. P221,664 d. P0

2. Using the same information is no. 15 above, how much is the carrying value of the bonds payable as of
December 31, 2005?
a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502

3. On April 1, 2004, Jerry Company sold 12,000 of its P1,000 11%, 5-year face value bonds at 96. The bonds
are dated April 1, 2004 and interest payment dates are April 1 and October 1, and the company uses the
straight-line method of bond discount amortization. On March 31, 2005, Jerry took advantage of favorable
prices of its stock to extinguish all of the bonds by issuing 800,000 shares of its P10 par value common
stock. At this time, accrued interest was paid in cash. The company’s stock was selling for P30 per share
on March 1, 2005. The increase in additional paid in capital due to the conversion of Jerry’s bonds is
a. P4,000,000 c. P3,616,000
b. P3,520,000 d. P 0

4. On June 1, 2005 Amulung Company sold merchandise with a list price of P5,000,000 to ABC. Amulung
allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was made FOB shipping
point. Amulung prepaid P200,000 of delivery cost for ABC as an accommodation. On June 11, 2005,
Amulung received from ABC full remittance of
a. P3,420,000 c. P3,600,000
b. P3,620,000 d. P3,800,000

5. On November 17, 2005, Solana Airways entered in to a commitment to purchase 3,000 barrels of aviation
fuel for P9,000,000 on March 23, 2006. Solana entered into this purchase commitment to protect itself against
the volatility in the aviation fuel market. By December 31, 2005, the purchase price of aviation fuel had fallen
to P2,200 per barrel. However, by March 23, 2006, when Solana took delivery of the 3,000 barrels, the price of
aviation fuel had risen to P2,500 per barrel. How much should be recognized as loss on purchase commitment
on December 31, 2005?
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0

6. Bran Company leased equipment for its entire 10 year economic life, agreeing to pay P1,000,000 at the start
of the lease term on January 1, 2005 and P1,000,000 annually on each January 1 for the next nine years. The
present value factors using the implicit rate in the lease which is 10% for an annuity due with ten payments:
6.76 and for an ordinary annuity with ten payments: 6.15. Bran properly recorded the finance lease and
depreciated the asset using the straight line method. What is the current portion of the lease liability on
December 31, 2005?
a. P424,000 c. P324,000
b. P466,400 d. P516,040

7. Bulacan Corporation's checkbook balance on December 31, 2005, was P800,000. In addition, Bulacan held
the following items in its safe on December 31:

Check payable to Bulacan Corporation, dated January 2, 2006, not included in December
31 checkbook balance P200,000
Check payable to Bulacan Corporation, deposited December 20, and included in December
31 checkbook balance, but returned by bank on December 30, stamped "NSF." The
check was redeposited January 2, 2006, and cleared January 7
40,000
Post-dated checks 15,000
Check drawn on Bulacan Corporation's account, payable to a vendor, dated and recorded
December 31, but not mailed until January 15, 2006 100,000

The proper amount to be shown as cash on Bulacan's balance sheet at December 31, 2005, is
a. P760,000 c. P860,000
b. P800,000 d. P975,000

8. Total debits and total credits in selected accounts of Piat Company, after closing entries were posted on
December 31, 2005 are given below.
Debits Credits
Materials P 600,000 P 200,000
Goods in process 500,000 300,000
Material purchases 2,500,000 2,500,000
Purchase discounts 100,000 100,000
Transportation in 200,000 200,000
Direct labor 3,000,000 3,000,000
Manufacturing overhead 1,500,000 1,500,000
Finished goods 700,000 400,000
Cost of goods sold was
a. P7,100,000 c. P6,900,000
b. P7,000,000 d. P7,400,000
9. On January 2, 2005, Trent Company signed an 8-year noncancelable lease for a new machine requiring
P1,500,000 annual payments at the beginning of each year. The machine has a useful life of 12 years with no
residual value. Title passes to Trent at the lease expiration date. Trent uses the straight-line depreciation for
all of its plant assets. Aggregate lease payments have a present value on January 2, 2005 of P5,400,000
based on an appropriate interest rate. For 2005, Trent should record depreciation expense for the leased
machine at
a. P1,500,000 c. P675,000
b. P 450,000 d. P325,000

Sabarre Inc. leases equipment to its customers under noncancelable leases. On January 1, 2005, Sabarre
leased equipment costing P4,000,000 to Rebasa Co., for nine years. The rental cost was P440,000 payable in
advance semiannually (January 1 and July 1), plus P20,000 semiannually for executory costs. The equipment
had an estimated life of 15 years and sold for P5,330,250 with an estimated unguaranteed residual value of
P800,000. The implicit interest rate is 12 percent.

10. How much is the total interest income from lease that will be earned by Sabarre, Inc.?
a. P2,869,988 b. P3,675,616 c. P3,389,748 d. P0

11. Using the same information in no. 20, Sabarre, Inc. should report profit on the sale at
a. P1,330,252 b. P1,050,012 c. P1,044,384 d. P1,338,492

12. Using the same information in no. 20, how much should be reported by Rebasa Co. as liability under
finance lease as of December 31, 2005?
a. P4,143,593 b. P4,273,410 c. P4,446,613 d. P0

13. Cabusao Company is indebted to Ragay Company under a P5,000,000, 10% three-year note dated
December 31, 2002. Because of financial difficulties, Cabusao owed accrued interest of P500,000 on the note
at December 31, 2005. Under a debt restructuring on December 31, 2005, Ragay Company agreed to settle
the note and accrued interest for a tract of land having a fair value of P3,500,000. The acquisition cost of the
land is P1,000,000. The income tax rate is 32%. In its 2005 income statement Cabusao should report gain on
restructuring at
a. P4,000,000 c. P1,020,000
b. P2,720,000 d. P2,000,000

14. Baggao Company’s accounts payable balance at December 31, 2005 was P8,000,000 before considering
the following data:
 Goods shipped to Baggao FOB shipping point on December 15, 2005 were lost in transit. The
invoice cost of P500,000 was not recorded by Baggao. On January 15, 2006, Baggao filed a
P500,000 claim against the common carrier.
 On December 30, 2005, a vendor authorized Baggao to return for full credit goods shipped and
billed at P200,000 on December 15, 2005. The returned goods were shipped by Baggao on
December 31, 2005. A P200,000 credit memo was received and recorded on January 5,
2006.
What should Baggao report as accounts payable on December 31, 2005?
a. P8,300,000 c. P7,800,000
b. P8,500,000 d. P7,500,000

15. Manapla Company computed a pretax financial income of P15,000,000 for the year ended December 31,
2005. In preparing the tax return, the following differences are noted between financial income and taxable
income.
 Nondeductible expense 2,000,000
Nontaxable revenue 1,000,000
Estimated warranty cost that was recognized as expense in 2005 but deductible for tax purposes
when paid 1,500,000
Excess tax depreciation over financial depreciation 500,000
What is the current tax expense for 2005 if the tax rate is 32%?
a. P5,440,000 c. P4,800,000
b. P5,600,000 d. P5,120,000

1. Calasiao Company determined that the net realizable value of its accounts receivable at December
31, 2005 based on an aging of the receivables, was P15,000,000. Additional information is as follows:
Allowance for uncollectible accounts – 1/1/2005 P1,500,000
Uncollectible accounts written off during 2005 1,000,000
Uncollectible accounts recovered during 2005 200,000
Accounts receivable – December 31, 2005 17,000,000
For 2005, what should be Calasiao’s uncollectible accounts expense?
a. P2,000,000 c. P1,800,000
b. P1,500,000 d. P1,300,000

2. Matalam Company has one temporary difference at the end of 2005 that will reverse and cause taxable
amounts of P2,000,000 in 2006 and P3,000,000 in 2007. Matalam’s pretax financial income for 2005 is
P20,000,000 and the tax rate is 32%. There are no deferred taxes on January 1, 2005. The income tax
payable for 2005 should be

1. P4,800,000 c. P6,400,000
2. P5,760,000 d. P5,440,000

3. Reconciliation of Malolos Corporation’s bank account at November 30, 2005 follows:

Balance per bank statement P3,150,000
Deposits in transit 450,000
Checks outstanding (45,000)
Correct cash balance P3,555,000

Balance per books P3,558,000

Bank service charge (3,000)
Correct cash balance P3,555,000
December data are as follows:
Bank Books
Checks recorded P3,450,000 P3,540,000
Deposits recorded 2,430,000 2,700,000
Collection by bank (P600,000 plus interest) 630,000 -
NSF check returned with December bank statement 15,000 -
Balances 2,745,000 2,715,000

The checks outstanding on December 31, 2005 amount to

a. P45,000 b. P135,000 c. P90,000 d. P0

4. The following information relates to the defined benefit pension plan of the Casino Company as of January
1, 2005:
 Projected benefit obligation (PBO) P16,150,000
Fair value of plan assets 15,135,000
Unrecognized prior service cost 1,050,000
Unrecognized net pension gain or loss 0
Pension data for the year 2005 follows:
Current service cost P 870,000
Contributions to the plan 1,200,000
Benefits paid to retirees 1,320,000
Actual return on plan assets 263,500
Amortization of past service cost 210,000
Actuarial change increasing PBO 800,000
Settlement interest rate 11%
Long-term expected rate of return on plan assets 10%
What is the 2005 net benefit expense?
a. P2,593,000 b. P1,200,000 c. P4,370,000 d. P1,343,000

5. Using the same information in no. 26, the projected benefit obligation as of December 31, 2005 is
a. P18,276,500 c. P17,476,500
b. P16,973,000 d. P16,173,000

6. Using the same information in no. 26, the prepaid/accrued benefit cost on December 31, 2005 is
a. P1,358,000 b. P108,000 c. P3,135,000 d. P0

7. In connection with a stock option plan for the benefit of key employees, Matanao Company intends to
distribute treasury shares when the options are exercised. These shares were originally bought at P70 per
share. On January 1, 2005, Matanao granted stock options for 50,000 shares at P150 per share as
additional compensation for services to be rendered over the next two years. The options are exercisable
during a 4-year period beginning January 1, 2007, by grantees still employed by Matanao. Market price of
Matanao stock was P200 per share at the grant date. The fair value of each stock option is P60 on grant
date. No stock options were terminated during 2005. In Matanao’s 2005 income statement, what amount
should be reported as compensation expense pertaining to the options?
a. P1,500,000 c. P1,250,000
b. P1,750,000 d. P 750,000

8. On January 1, 2004, Bansalan Company offered its top management stock appreciation right with the
following terms:
Predetermined price P100 per share
Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2007
The stock appreciation right is to be exercised on January 1, 2007. The quoted prices of Bansalan
Company stock are 100, 124, and 151 on January 1, 2004, December 31, 2004 and December 31, 2005,
respectively. What amount should Bansalan charge to compensation expense for the year ended
December 31, 2005 as a result of the stock appreciation right?
a. P1,700,000 c. P1,200,000
b. P1,300,000 d. P 500,000
9. Rex Company was organized on January 1, 2000. After 5 years of profitable operations, the equity section
of the balance sheet on December 31, 2004 was as follows:
Common stock, P50 par, 1,000,000 shares authorized
400,000 shares issued and outstanding 20,000,000
Additional paid in capital 5,000,000
Retained earnings 10,000,000
 On January 20, 2005, Rex Company reacquired 50,000 shares of common stock at P100 per share. The
treasury stock is recorded at cost. On March 1, 2005, the company issued a 20% stock dividend. The
market value of the stock is P100 on this date. On June 30, 2005 the company declared a P5 cash
dividend per share payable on September 10, 2005. The company reported net income of P8,000,000 for
the year ended December 31, 2005. What should be the balance of retained earnings on December 31,
2005?
1. P16,250,000 c. P11,850,000
2. P12,400,000 d. P18,900,000
10. Aparri Company included the following items in its inventory on December 31, 2005:
Merchandise out on consignment, at sales price,
including 25% markup on cost P4,000,000
Goods purchased in transit, FOB destination 2,000,000
Goods held on consignment by Aparri Company 1,000,000
By what amount should the inventory at December 31, 2005 be reduced?
a. P3,800,000 c. P1,800,000
b. P2,000,000 d. P1,000,000

11. The following information pertains to Babak Company:

* Dividends on its 50,000 shares of 10%, P100 par value cumulative preferred
stock have not been declared or paid for 3 years.
* Treasury stock was acquired at a cost of P1,000,000 during the year. The treasury stock had
been reissued as of year-end.
What amount of retained earnings should be appropriated as a result of these items?
a. P1,500,000 c. P2,500,000
b. P1,000,000 d. P 0

12. The petty cash fund of Guiguinto Company on December 31, 2005 is composed of the following:

Coins and currencies P14,000

Petty cash vouchers:
Gasoline payments 3,000
Supplies 1,000
Cash advances to employees 2,000
Employee’s check returned by bank marked NSF 5,000
Check drawn by the company payable to the order of Kristine
Anson, petty cash custodian, representing her salary 20,000
A sheet of paper with names of employees together with contribution
for a birthday gift of a co-employee in the amount of 8,000
Total P53,000

The petty cash ledger account has an imprest balance of P50,000. What is the correct amount of petty
cash on December 31, 2005?
a. P34,000 b. P39,000 c. P14,000 d. P42,000

13. The stockholders’ equity of Sunny Company on December 31, 2005, consists of the following capital
balances:

Preferred stock, 10% cumulative, 3 years in arrears, P100 par,

P110 liquidation price 150,000 shares 15,000,000
Common stock, P100 par, 200,000 shares 20,000,000
Subscribed common stock, net of subscription receivable of
P4,000,000 6,000,000
Treasury common stock, 50,000 shares at cost 4,000,000
Additional paid in capital 3,000,000
Retained earnings 20,000,000
The book value per share of the common stock is
a. P156.00 b. P190.00 c. P172.00 d. P286.67

14. Bindayan Company has incurred heavy losses since its inception. At the recommendation of its president
and CEO, the board of directors voted to implement quasi-reorganization, through reduction of par value
subject to stockholders’ approval. Immediately prior to the restatement on December 31, 2005. Bindayan
Company’s stockholders’ equity was as follows:
Common stock, P100 par 500,000 shares 50,000,000
Additional paid in capital 15,000,000
Retained earnings (deficit) (10,000,000)
The stockholders approved the quasi reorganization on December 31,2005 to be accomplished by a reduction
in inventory of P2,000,000, a reduction in property, plant and equipment of P6,000,000, and writeoff of goodwill
at P5,000,000. To eliminate the deficit, Bindayan should reduce common stock by
a. P23,000,000 c. P13,000,000
b. P10,000,000 d. P 8,000,000

15. The following data pertain to Balagtas Corporation on December 31, 2005:

Checkbook balance P10,000,000

Bank statement balance 15,000,000
Check drawn on Balagtas’ account, payable to supplier, dated and
recorded on Dec. 31, 2005, but not mailed until Jan. 15, 2006 3,000,000
Cash in sinking fund 4,000,000
Money market, three months due January 31, 2006 5,000,000
On December 31, 2005, how much should be reported as “cash and cash equivalents”?
a. P13,000,000 c. P18,000,000
b. P12,000,000 d. P17,000,000
P1

1. On January 1, 2005 Gingoog Company had 300,000 common shares outstanding, P100 par, or a total par
value of P30,000,000. During 2005, Gingoog issued rights to acquire one common share at P100 in the ratio of
one share for every 5 shares held. The rights are exercised on March 31, 2005. The market value of each
common share immediately prior to March 31, 2005 was P160. The net income for 2005 was P6,000,000. The
2005 income statement should report basic earnings per share at
a. 17.14 b. 16.67 c. 18.75 d. 17.39

2. The following accounts were abstracted from Villasis Company’s unadjusted trial balance at
December 31, 2005:
Debit Credit
Accounts receivable P20,000,000
Allowance for doubtful accounts 300,000
Net credit sales P70,000,000
VilIasis estimates that 5% of the gross accounts receivable will become uncollectible. The
doubtful accounts expense for the year ended December 31, 2005 should be
a. P1,000,000 c. P1,300,000
b. P3,500,000 d. P 700,000
3. On December 1, 2005 Pozurrubio Company assigned on a nonnotification basis accounts
receivable of P5,000,000 to a bank in consideration for a loan of 90% of the receivables less a 5%
service fee on the accounts assigned. Pozurrubio signed a note for the bank loan. On December 31,
2005, Pozurrubio collected assigned accounts of P3,000,000 less discount of P200,000. Pozurrubio
remitted the collections to the bank in partial payment for the loan. The bank applied first the
collection to the interest and the balance to the principal. The agreed interest is 1% per month on the
loan balance. In its December 31, 2005 balance sheet, Pozurrubio should report note payable as a
current liability at
a. P1,745,000 c. P1,545,000
b. P1,700,000 d. P2,250,000

On January 2, 2005 Tayog Company sold equipment with a carrying amount of P6,500,000 in
exchange for P8,000,000 noninterest bearing note due January 2, 2008. There was no established
exchange price for the equipment. The prevailing interest rate for this note on January 2, 2005 was
10%. The present value of 1 at 10% for three periods is 0.75.
4. In the 2005 income statement, what amount should be reported as interest income?
a. P800,000 c. P660,000
b. P600,000 d. P740,000

5. In the 2005 income statement, what amount should be reported as gain or loss on sale of
equipment?
a. P1,500,000 gain c. P500,000 gain
b. P 100,000 gain d. P500,000 loss

6. You noted the following composition of Hagonoy Company’s “cash account” as of December 31, 2005:

Demand deposit account P2,000,000

Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2006) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer check dated January 1, 2006 50,000
Customer check outstanding for 18 months 40,000
Total P7,760,000
Additional information follows:

 Check of P200,000 in payment of accounts payable was recorded on December 31, 2005 but mailed to
suppliers on January 5, 2006.
 Check of P100,000 dated January 15, 2006 in payment of accounts payable was recorded and mailed
on December 31, 2005.
 The company uses the calendar year. The cash receipts journal was held open until January 15, 2006,
during which time P400,000 was collected and recorded on December 31, 2005.

The cash and cash equivalents to be shown on the December 31, 2005 balance sheet is
a. P3,310,000 c. P1,910,000
b. P2,910,000 d. P4,410,000
7. In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices in
accordance with Statement of Financial Accounting Standards 89, Financial Reporting and Changing Prices.
Hila computed the increase in current cost of inventory as follows:
Increase in current cost (nominal dollars) $15,000
Increase in current cost (constant dollars) $12,000
What amount should Hila disclose as the inflation component of the increase in current cost of inventories?
a. $ 3,000
b. $12,000
c. $15,000
d. $27,000

8. Kerr Company purchased a machine for $115,000 on January 1, 2003, the company’s first day of
operations. At the end of the year, the current cost of the machine was $125,000. The machine has no salvage
value, a five-year life, and is depreciated by the straight-line method. For the year ended December 31, 2003,
the amount of the current cost depreciation expense which would appear in supplementary
current cost financial statements is
a. $14,000
b. $23,000
c. $24,000
d. $25,000

9. At December 31, 2003, Jannis Corp. owned two assets as follows:

Equipment Inventory Current cost $100,000 $80,000
Recoverable amount $ 95,000 $90,000
Jannis voluntarily disclosed supplementary information about current cost at December 31, 2003. In such a
disclosure, at what amount would Jannis report total assets?
a. $175,000
b. $180,000
c. $185,000
d. $190,000

10. All of Urdaneta Company’s sales are on a credit basis. The following information is available for
2005:
Allowance for doubtful accounts, 1/1/2005 P1,000,000
Sales 22,000,000
Sales returns 2,000,000
Accounts written off as uncollectible 600,000
Recovery of accounts written off 200,000
Urdaneta provides for doubtful accounts expense at the rate of 10% of net sales. At December
31, 2005, the allowance for doubtful accounts balance should be
a. P3,200,000 c. P2,800,000
b. P2,600,000 d. P2,000,000

11. Enrile Company had 180,000 units of Product A on hand at January 1, 2005 costing P20 each. Purchases
of product A during the month of January were as follows:
Units Unit cost
January 5 160,000 30
15 200,000 40
31 140,000 50
A physical count on January 31, 2005 shows 200,000 units of product A on hand. The inventory
on January 31, should be
FIFO LIFO
 a. P9,400,000 P4,200,000
b. P4,200,000 P9,400,000
c. P9,400,000 P5,800,000
d. P4,200,000 P7,000,000

12. On January 1, 2003, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and
income tax reporting purposes. The change resulted in a $500,000 increase in the January 1, 2003 inventory.
Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should
be reported by Roem in its 2003
a. Retained earnings statement as a $350,000 addition to the beginning balance.
b. Income statement as a $350,000 cumulative effect of accounting change.
c. Retained earnings statement as a $500,000 addition to the beginning balance.
d. Income statement as a $500,000 cumulative effect of accounting change.

13. On January 1, 2003, Poe Construction, Inc. changed to the percentage-of-completion method of income
recognition for financial statement reporting but not for income tax reporting. Poe can justify this change in
accounting principle. As of December 31, 2002, Poe compiled data showing that income under the completed-
contract method aggregated $700,000. If the percentage-of-completion method had been used, the
accumulated income through December 31, 2002, would have been $880,000. Assuming an income tax rate of
40% for all years, the cumulative effect of this accounting change should be reported by Poe in the 2003
a. Retained earnings statement as a $180,000 credit adjustment to the beginning balance.
b. Income statement as a $180,000 credit.
c. Retained earnings statement as a $108,000 credit adjustment to the beginning balance.
d. Income statement as a $108,000 credit.

14. On January 1, 2000, Taft Co. purchased a patent for $714,000. The patent is being amortized over its
remaining legal life of fifteen years expiring on January 1, 2015. During 2003, Taft 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 balance sheet for the patent, net of accumulated amortization, at December 31,
2003?
a. $428,400
b. $489,600
c. $504,000
d. $523,600

15. Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, 2003, the effective date of the
policy. At March 31, 2003, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200
for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial
statements for the three months ended
March 31, 2003? Prepaid insurance Insurance expense
a. $7,000 $300
b. $7,000 $500
c. $7,200 $300
d. $7,300 $200
P1

Questions 1 to 10 are based on the following information:

The following information relates to Danaya Company’s obligations as of December 31, 2005. For each of the
numbered items, determine the amount if any, that should be reported as current liability in Danaya’s
December 31, 2005 balance sheet.

1. Accounts payable:
 Accounts payable per general ledger control amounted to P3,400,000, net of P150,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that not had
been recorded as of December 31, 2005:

a) Earth Company – P140,000 merchandise shipped on December 31, 2005, FOB destination; received
on January 10, 2006.
b) Gemstone, Inc. – P120,000 merchandise shipped on December 26, 2005, FOB shipping point;
received on January 16, 2006.

On December 28, 2005, a supplier authorized Danaya to return goods billed at P100,000 and
shipped on December 20, 2005. The goods were returned by Danaya on December 28, 2005, but
the P100,000 credit memo was not received until January 6, 2006.

a. P3,670,000 b. P3,520,000 c. P3,570,000 d. P3,420,000

2. Payroll:

Items related to Danaya’s payroll as of December 31, 2005 are:

Accrued salaries and wages P485,000

Payroll deductions for:
Income taxes withheld 35,000
SSS contributions 40,000
Philhealth contributions 10,000
Advances to employees 50,000

a. P485,000 b. P620,000 c. P570,000 d. P520,000

3. Litigation:

In May, 2005, Danaya became involved in a litigation. The suit being contested, but Danaya’s
lawyer believes there is reasonable possibility that Danaya may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a better estimate
of potential liability than any other amount.

a. P2,000,000 b. P2,500,000 c. P3,000,000 d. P0

4. Bonus obligation:

Danaya Company’s president gets an annual bonus of 10% of net income after bonus and income
tax. Assume the tax rate of 30% and the correct income before bonus and tax is P6,000,000.
(Ignore the effects of other given items on net income.)

a. P451,600 b. P392,500 c. P247,000 d. P1,400,000

5. Note payable:

A note payable to the Bank of the Philippine Islands for P1,500,000 is outstanding on December
31, 2005. The note is dated October 1, 2004, bears interest at 18%, and is payable in three equal
 annual installment of P500,000. The first interest and principal payment was made on October 1,
2005.

a. P67,500 b. P567,500 c. P545,000 d. P45,000

6. Purchase commitment:

During 2005, Danaya entered in a noncancellable commitment to purchase 200,000 units of

inventory at fixed price of P5 per unit, delivery to be made in 2006. On December 31, 2005, the
purchase price of this inventory item had fallen to P4.40 per unit. The goods covered by the
purchase contract were delivered on January 28, 2006.

a. P120,000 b. P1,000,000 c. P880,000 d. P0

7. Deferred taxes:

On December 31, 2005, Danaya’s deferred income tax account has a 2005 ending credit balance
of P483,000, consisting of the following items:

Caused by temporary differences in accounting Deferred tax

For gross profit on installment sales P235,000 Cr.
For depreciation on property and equipment 360,000 Cr
For product warranty expense 112,000 Dr
P483,000 Cr.

a. P483,000 b. P595,000 c. P123,000 d. P0

8. Product warranty:

Danaya has a one year product warranty on selected items in its product line. The estimated
warranty liability on sales made during 2004, which was outstanding as of December 31, 2004,
amounted to P260,000. The warranty costs on sales made in 2005 are estimated at P940,000.
Actual warranty costs incurred during the current 2005 fiscal year are as follows:

Warranty claims honored on 2004 sales P260,000

Warranty claims honored on 2005 sales 620,000
Total warranty claims honored P880,000

a. P940,000 b. P60,000 c. P320,000 d. P0

9. Premiums:

To increase sales, Danaya Company inaugurated a promotional campaign on June 30, 2005.
Danaya placed a coupon redeemable for a premium in each package of product sold. Each
premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance
of P30. The distribution cost per premium is P20. Danaya estimated that only 60% of the
coupons issued will be redeemed. For the six months ended December 31, 2005, the following is
available:
 Packages of product sold 100,000
Premiums purchased 10,000
Coupons redeemed 40,000

a. P1,080,000 b. P360,000 c. P720,000 d. P1,000,000

10. Due to Lireo Finance company:

Danaya’s accounting records show that as of December 31, 2005, P800,000 was due to Lireo
Finance Company for advances made against P1,000,000 of trade accounts receivable assigned
to the finance company with recourse.

a. P1,000,000 b. P200,000 c. P800,000 d. P0

11. Lin Co., a distributor of machinery, bought a machine from the manufacturer in November 2003 for $10,000. On
December 30, 2003, Lin sold this machine to Zee Hardware for $15,000, under the following terms: 2% discount if paid
within thirty days, 1% discount if paid after thirty days but within sixty days, or payable in full within ninety days if not
paid within the discount periods. However, Zee had the right to return this machine to Lin if Zee was unable to resell the
machine before expiration of the ninety-day payment period, in which case Zee’s obligation to Lin would be canceled.
In Lin’s net sales for the year ended December 31, 2003, how much should be included for the sale of this machine to
Zee?
a. $0
b. $14,700
c. $14,850
d. $15,000

12. Regal Department Store sells gift certificates, redeemable for store merchandise, that expire one year after their
issuance. Regal has the following information pertaining to its gift certificates sales and redemptions:
Unredeemed at 12/31/02 $ 75,000
2003 sales 250,000
2003 redemptions of prior year sales 25,000
2003 redemptions of current year sales 175,000
Regal’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 2003 balance
sheet, what amount should Regal report as unearned
revenue?
a. $125,000
b. $112,500
c. $100,000
d. $ 50,000

13. In 2002, Super Comics Corp. sold a comic strip to Fantasy, Inc. and will receive royalties of 20% of future revenues
associated with the comic strip. At December 31,
2003, Super reported royalties receivable of $75,000 from Fantasy. During 2004, Super received royalty payments of
$200,000. Fantasy reported revenues of $1,500,000 in 2004 from the comic strip. In its 2004 income statement, what
amount should Super report as royalty revenue?
a. $125,000
b. $175,000
c. $200,000
d. $300,000

14. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on January 31 for the oil sold
between the previous June 1 and November 30, and on
July 31 for oil sold between December 1 and May 31. Production reports show the following oil sales:
June 1, 2002 - November 30, 2002 $300,000
December 1, 2002 - December 31, 2002 50,000
December 1, 2002 - May 31, 2003 400,000
June 1, 2003 - November 30, 2003 325,000
December 1, 2003 - December 31, 2003 70,000

What amount should Rill report as royalty revenue for 2003?

a. $140,000
b. $144,000
c. $149,000
d. $159,000

15. Luge Co., which began operations on January 2, 2003, appropriately uses the installment sales method of accounting.
The following information is available for 2003:
Installment accounts receivable, December 31, 2003 $800,000
Deferred gross profit, December 31, 2003 (before
recognition of realized gross profit for 2003) 560,000
Gross profit on sales 40%
For the year ended December 31, 2003, cash collections and
realized gross profit on sales should be
Cash collections Realized gross profit
a. $400,000 $320,000
b. $400,000 $240,000
c. $600,000 $320,000
d. $600,000 $240,000