RFJPIA-R12

ND
2 Annual Regional Convention 2008
Mock CPA Board Examinations

THEORY OF ACCOUNTS
1. Which of the following statements is (are) true, for purposes of financial reporting in the
Philippines?
I. Philippine practice is to present in the balance sheet current assets before non-current
assets, current liabilities before non-current liabilities; and equity accounts before
liabilities
II. Notes are normally presented in the following order: Significant accounting policies;
statement of compliance of PRFSs; supporting information on items presented on the face
of the financial statements; and lastly, other disclosures
III. The IAS term ”Reserves” in present Philippine practice, may refer to revaluation
increment, translation adjustments recognized in equity; unrealized gains and losses from
available for sale securities recognized in equity.
a. I and II only b. I and III only c. II and III only d. I, II and III

2. An entity purchases a building and the seller accepts payment partly in equity shares and
partly in debentures of the entity. This transaction should be treated in the cash flow
statement as follows:
a. The purchase of the building should be investing cash outflow and the issuance of shares
and the debentures financing cash outflows.
b. The purchase of the building should be investing cash outflow and the issuance of
debentures financing cash outflows while the issuance of shares investing cash outflow.
c. This does not belong in a cash flow statement and should be disclosed only in the notes to
the financial statements.
d. Ignore the transaction totally since it is a non-cash transaction. No mention is required in
either the cash flow statement or anywhere else in the financial statements

3. The scope of PAS 39 includes all of the following except

a. Financial instruments that meet the definition of a financial asset
b. Financial instrument that meet the definition of a financial liability
c. Financial instruments issued by the entity that meet the definition of an equity
instrument
d. Contracts to buy or sell non-financial items that can be settled net.

4. Deposits in foreign countries which are subject to a foreign exchange restrictions should be
a. Valued at current exchange rates and shown as current assets
b. Valued at historical exchange rates and presented as noncurrent assets
c. Valued at current exchange rates and presented as noncurrent assets /
d. Valued at historical exchange rates and presented as current assets

5. What is the proper accounting for credit card sales if the credit card company is
Affiliated with a bank Not affiliated with a bank
a. Sale on account Cash sales
b. Sale on account Sale on account
c. Cash sale Cash sale
d. Cash sale Sale on account

6. Losses which are expected to arise from firm and non-cancellable commitments for the future
purchase of inventory items, if material should be
a. Recognized in the accounts by debiting loss on purchase commitments and
crediting estimated liability for loss on purchase commitments
b. Disclosed in the notes
c. Ignored
d. Charged to retained earnings

7. Delta Corp. purchased 7,400 shares of Maiden Company’s common stock and classified it as
available-for-sale. The purchase price was P362,000, which is equal to 50% of Maiden
Company’s retained earnings balance. Maiden Company’s 46,000 shares of common stock
are actively traded. Delta should account for this using the
a. Cost method

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 b. Equity method
c. Cost method subject to fair value valuation in the balance sheet
d. Market value method subject to fair value valuation in the balance sheet

8. Which of the following statements regarding Investment Property is (are) true

I. An investment property shall be measured initially at its cost
II. Transaction cost shall be included in the initial measurement of investment property
III. With certain exceptions, an entity shall choose as its accounting policy either the
fair value model or the cost model and shall apply such policy to all its investment
property
a. I and II only b. I and III only c. II and III only d. I, II and III

9. In determining the fair value of a biological asset for balance sheet purposes, which of the
following should be considered?
a. Price change
b. Physical change
c. Both price change and physical change
d. Neither price change nor physical change

10. A company acquired some of its own common shares at a price greater than both their par
value and original issue price but less than their book value. The company uses the cost
method of accounting for treasury stock. What is the impact of this acquisition on total
stockholders’ equity (TSE), and the net book value (NBV) per common share?
a. SE – decrease ; NBV – increase c. SE – decrease; NBV – decrease
b. SE – increase ; NBV – decrease d. SE – increase; NBV - increase

11. What is the measurement basis of an asset that is acquired in non-monetary exchange
With commercial substance With no commercial substance
a. Fair value of asset given up Carrying amount of asset given up
b. Carrying amount of asset given up Carrying amount of asset received
c. Carrying amount of asset received Fair value of asset received
d. Fair value of asset given up Fair value of asset given up

12. Which of the following statements concerning borrowing costs is false?

a. Borrowing costs generally include interest costs, bank overdrafts, amortization of
discounts or premiums related to borrowings, finance charges with respect to
finance leases.
b. Borrowing costs are interest and other costs incurred by an enterprise in relation to
borrowed funds.
c. Per PAS 23, the benchmark treatment for borrowing costs is to capitalize it as part
of the cost of the asset to which it relates.
d. Borrowing costs include amortization of ancillary costs incurred in connection with the
arrangement of borrowings, as well as exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an adjustment to interest cost.

13. Easy Builders Inc. is in the middle of a two-year construction contract when it receives a
letter from the customer extending the contract by a year and requiring the construction
company to increase its output in proportion of the number of years of the new contract to
the previous contract period.
This is allowed in recognizing additional revenue according to PAS 11 if
a. Negotiations have reached an advanced stage and it is probable that the customer will
accept the claim
b. The contract is sufficiently advanced and it is probable that the specified performance
standards will be exceeded or met.
c. It is probable that the customer will approve the variation and the amount of revenue
arising
from the variation, and the amount of revenue can be reliably measured.
d. It is probable that the customer will approve the variation and the amount of revenue
arising
from the variation, whether the amount of revenue can be reliably measured or not.

14. Under IAS 20, which of the following is permitted in recognizing an intangible asset
acquired
free of charge, or for nominal consideration, by way of a government grant?
I. Recognize both the intangible asset and the grant initially at fair value.

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 II. Recognize the asset initially at a nominal amount plus any expenditure that is
directly
attributable to preparing the asset for its intended use
a. I only
b. Either I or II, at the option of the acquiring enterprise
c. II only
d. Neither I nor II

15. PAS 20, Government Grants provide two approaches to accounting for government grants :
(1) capitalization approach and (2) income approach. Arguments in support of the income
approach include the following except:
a. Government grants are considered earned through compliance with the condition and
meeting envisaged obligations
b. Government grants are receipts from a source other than shareholders or capital
providers
c. Government grants represent an incentive provided by the government without related
costs.
d. Government grants are considered as extension of fiscal policies similar to income and
other taxes

BUSINESS LAW & TAXATION

16. Holder H altered the amount of a negotiable note from P10,000 to P100,000 then negotiated
the note to I. As a result:
a. If I is a holder in due course, he can require the maker to pay P100,000
b. If I is not a holder in due course, he can require the maker to pay the sum of P100,000
c. I cannot require the maker to pay because of the forgery whether or not he is a holder in
due course
d. I is entitled to P10,000 if he is a holder in due course

17. To call a meeting for the purpose of removing a director of a corporation the required votes of
the stockholders is:
majority of the stockholders present
¾ of the outstanding capital stock
2/3 of the outstanding capital stock
majority of the outstanding capital stock

18. Which of the following instruments is negotiable?

a. “Pay to Bearer C P10,000.00”
b. “Pay to C P10,000.00 or his order out of the rental of my house in Manila”.
c. “Pay to C P10,000.00 and reimburse yourself out of the rental of my house in Manila”.
d. “Pay to the order of C P10,000.00”.

19. Paolo contributed P50,000; Ronald contributed P75,000; and Paul contributed P25,000. Jay is
the industrial partner. There is no stipulation regarding profits and losses. The partnership
suffered a P300,000 loss. The loss shall be shared by the partners as follows:
a. P100,000; P100,000; P100,000; and P0
b. P75,000; P75,000; P75,000; and P75,000
c. P100,000; P150,000; P50,000; and P0
d. P100,000; P100,000; P100,000; and P100,000

20. Case No. 1 – Pedro, the manager of XYZ Corporation, was promised of an increase in salary.
To facilitate the payment of the promised increase, he prepared a board resolution and had it
signed individually by a majority of the members of the Board of Directors. The treasurer of
the corporation refused to pay the increase in salary stating that the resolution is not valid. Is
the contention of the treasurer correct?
Case No. 2 – Jose agreed to sell for a 10% commission the land of Maria worth P500,000.
Accordingly, Jose looked for a buyer and found Pedro whom he introduced to Maria. Maria
however told Jose and Pedro that she is no longer selling her land. Subsequently, Maria sold
the land to Pedro for P500,000, without the knowledge of Jose. Jose upon learning of the sale,
asked Maria for his commission. Is Jose entitled to the commission?
a. YES; YES d. NO; YES
b. YES; NO
c. NO; NO

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21. 1st Statement – Melody bound herself to pay Lucas her indebtedness. This is evidenced by a
promissory note stating therein the words “I promise to pay Lucas or order the amount of
Php100,000”. Sgd. Melody. The instrument is non-negotiable.
2nd Statement – Mila gave Malou a check wherein the only item not filled up is the space for the
amount. Mila instructed the payee to place the amount Php1,000 in the check. However, Malou
placed therein Php100,000. Malou negotiated the check to Marissa who is a holder in due course.
Marissa can hold Mila liable for P100,000.
a. 1st statement is wrong, 2nd statement is correct
b. 1st statement is correct, 2nd statement is wrong.
c. Both statements are correct
d. Both statements are wrong.

22. Maggie makes a promissory note for P40,000 payable to the order of Homer. Homer negotiates the
note to Margie who indorses it to Henry. Henry indorsed the instrument to Melissa who with the
consent of Henry raises the amount to P100,000 and thereafter indorses it to Hilary, Hilary to
Menandro, and Menandro to Helen, who is a holder in due course. In this case
a. Helen can recover P40,000 as against Maggie.
b. Helen can recover P100,000 from Maggie.
c. Menandro and Melissa are liable to Helen for P40,000
d. Maggie and Homer are not liable to Helen.

23. X-cited Limited partnership has X, as general partner, Y, as limited partner, and Z, as industrial
partner contributing P150,000; P500,000; and services respectively. The partnership failed and
after disposing all its assets to pay partnership debts there still remains an outstanding obligation in
the sum of P120,000. The liability of the partners to the creditor will be as follows:
a. X = P120,000
b. X and Z = solidarily liable for P120,000
c. X = P40,00 Y= P40,000 Z= P40,000
d. X = P60,00 Y= P0 Z= P60,000

24. Which among the following statements is not correct?

a. The Bureau of Internal Revenue is part of the administrative machinery for the assessment and
collection of internal revenue taxes.
b. The Bureau of Customs is also charged with the collection of internal revenue taxes.
c. The local government units, such as the municipalities, cities and provinces, form part of the
national tax system.
d. Private banks may be authorized to collect internal revenue taxes.

25. Properties acquired by gratuitous title during the marriage are generally classified as:
I. Separate properties under conjugal partnership of gains.
II. Community properties under absolute community of properties.
a. Only I is correct c. Both I and II are correct
b. Only II is correct d. Both I and II are incorrect

26. A resident decedent, head of family, left the following:

Personal properties P1,000,00
0
Real properties (including family home valued at P1,500,000) 2,000,000
Deductions claimed (including actual funeral expenses of P200,000,
and medical expenses of P600,000) 900,000
How much was the taxable net estate?
a. P250,000 b. P1,100,000 c. P1,250,000 d. P2,100,000

27. Marzan sold his residential house under the following terms:
Cash received, January 10, 2008 P100,000
Amount received, June 10, 2008 100,000
Installment due, June 10, 2009 600,000
Additional information:
Cost of residential house 150,000
Mortgage assumed by the buyer 200,000
Mortgage on the residential house executed by the
buyer in favor of the seller to guarantee payment 600,000
Fair market value of residential house 900,000
How much was the capital gains tax due in 2008?
a. P15,882 b. P17,647 c. P54,000 d. P60,000

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28. Which of the following government-owned or controlled corporations shall be subject to the
corporate income tax?
I. Philippine Amusement and Gaming Corporation (PAGCOR).
II. National Development Corporation (NDC).
III. Philippine Charity Sweepstakes Office (PCSO).
IV. Social Security System (SSS).

29. The following fringe benefits were given by an employer to its employees for the quarter ending
March 31, 2008:
Housing benefits to supervisors and managers (representing total P340,000
rents)
Reimbursed expenses of rank and file employees 200,000
De minimis benefits (not exceeding the maximum) 100,000
How much was the fringe benefit tax payable for the quarter?
a. P80,000 b. P108,800 c. P160,000 d. P172,800

30. The BIR may compromise payment of internal revenue taxes when:
First ground: A reasonable doubt as to the validity of the claim against the taxpayer exists.
Second ground: When collection costs do not justify the collection of the tax.
a. Both grounds are correct c. Only first ground is correct
b. Both grounds are incorrect d. Only second ground is correct

AUDITING THEORY
31. The need for assurance services arises because:
a. There is a consonance of interests of the preparer and the user of the financial statements.
b. There is a potential bias in providing information.
c. Economic transactions are less complex than they were a decade ago.
d. Most users today have access to the system that generates the financial statements they use.

32. Which of the following is explicitly included in the Auditor’s responsibility section of the auditor's
report?
a. Reason for modification of opinion
b. “Philippine Financial Reporting Standards“
c. “Philippines Standards on Auditing”
d. Division of responsibility with another auditor

33. The term "present fairly, in all material respect", means

a. The financial statements conform to GAAP.
b. The auditor considers only those matters that are significant to the users of the financial
statements.
c. The financial statements may still be materially misstated because the auditors may not have
discovered the errors.
d. The financial statements are accurately prepared.

34. Based on R.A. 9298, how many years can a partner who survived the death or withdrawal of other
partner(s) continue to practice under the partnership name after becoming a sole practitioner?
a. 1 year
b. 2 years
c. 3 years
d. Indefinite period of time

35. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements most likely would withdraw from the engagement if
a. The illegal act is violation of generally accepted accounting principles.
b. The client does not take the remedial action that the auditor considers necessary.
c. The illegal act was committed during a prior year that was not audited.
d. The auditor has already assessed control risk at the minimum level.

36. Which of the following statements would least likely appear in an auditor's engagement letter?
a. Fees for our services are based on our regular per diem rates, plus travel and other out-
of-pocket expenses.
b. During the course of our audit we may observe opportunities for economy in, or improved
controls over, your operations.
c. Our engagement is subject to the risk that material errors or fraud, including defalcations,
if they exist, will not be detected

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 d. After performing our preliminary analytical procedures we will discuss with you the other
procedures we consider necessary to complete the engagement.
37. The audit work paper that reflects the major components of an amount reported in the financial
statements is the
a. Inter-bank transfer schedule
b. Carry forward schedule
c. Supporting schedule
d. Lead schedule

38. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or fraud
b. To comply with generally accounting principles
c. To gather sufficient, appropriate evidence
d. To verify the accuracy of account balances

39. Analytical procedures used in planning an audit should focus on identifying

a. Material weakness in the internal control system.
b. The predictability of financial data from individual transactions.
c. The various assertions that are embodied in the financial statements
d. Areas that may represent specific risks relevant to the audit.
40. As the acceptable level of detection risk decreases, an auditor may change the…
a. Timing of substantive tests; perform them at an interim date rather than at year-end
b. Nature of substantive tests; select from less effective to a more effective procedure.
c. Timing of tests of controls; perform them at several dates rather than at one time
d. Assessment of inherent risk; assume a higher level.
41. The audit work performed by each assistant should be reviewed to determine whether it was
adequately performed and to evaluate whether the
a. Audit has been performed by persons having adequate technical training and proficiency
as auditors.
b. Auditor's system of quality control has been maintained at a high level.
c. Results are consistent with the conclusions to be presented in the auditor's report.
d. Audit procedures performed are those prescribed in the technical standards.

42. Which of the following acts are considered a fraud?

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance.
V. Clerical mistakes.
a. III
b. I and III only
c. I, III, and IV only
d. All of them
43. When the auditor has to determine the need to use the work of an expert, he would consider the
following except:
a. The cost of using the services of an expert.
b. The quantity and quality of other audit evidence available.
c. The materiality of the financial statement item being considered
d. The risk of misstatement based on the nature and complexity of the matter being considered.

44. Which of the following does not require the services of an expert?
a. Valuations of certain types of assets like land and buildings.
b. Legal opinions concerning interpretations of engagements, rules and regulations.
c. Determination of amounts using specialized techniques.
d. Application of accounting methods in computing inventory balances.

45. An auditor should design a written audit program so that:

a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

MANAGEMENT ADVISORY SERVICES

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 46. From the given data you are to compute the unit sales price (adjusted to the nearest full centavo) at
which the Sta. Ana Manufacturing Inc. must sell its only product in 2005 in order to earn a budgeted
operating profit (before taxes of 35%) of P60,000. Sta. Ana Manufacturing Inc.’s condensed income
statement for 2004 follows:
Sales (30,000 units) P 450,000
Returns, allowances and discounts 13,500
Net sales P 436,500
Cost of goods sold 306,000
Gross profit P 130,500
Selling expenses 60,000
Administrative expenses 30,000
Operating profit P 40,500
The budget committee has estimated the following changes in income and costs for 2005:
o 30% increase in number of units sales.
o 20% increase in material unit cost.
o 13% increase in direct labor cost per unit.
o 10% increase in production overhead cost per unit.
o 14% increase in selling expenses, arising from increased volume as well as from a higher
price level,
o 7% increase in administrative expenses, reflecting anticipated higher wage and supply price
levels. Any changes in administrative expenses caused solely by increased sales volume are
considered immaterial for the purpose of this budget.

As inventory quantities remain fairly constant, the committee considered that, for budget purposes,
any change in inventory valuation can be ignored. The composition of the cost of a unit of finished
product during 2004 for materials, direct labor, and production overhead, respectively, was in the
ratio of 3 to 2 to No changes in production methods or credit policies were contemplated for 2005.
a. P16.01 5.53 d. P 14.92
b. P1 c.P 16.44

47. During your examination of the financial statements of San Pablo Industries, the president
requested your assistance in the evaluation of the following financial management problem in his
home appliances division which he summarizes for you as follows:
A. The division’s current margin ratio is 5% of annual sales of P1, 200,000. An investment of
P400, 000 is needed to finance these sales. The Company’s basis for measuring divisional suc-
cess is Return on Investment (ROI).
B. Management is considering the following two alternative plans submitted by employees for
improving operations in the home appliances division:
o Antonio believes that sales volume can be doubled by greater promotional effort, but his method
would lower the margin rate to 4% of sales and require an additional investment of P100,000.
o Guadalupe favors eliminating some unprofitable appliances and improving efficiency by adding
P200,000 in capital equipment, his method would decrease sales volume by 10% but improve the
margin ratio to 7%.
The projected sales price for a new product, Santto, (which is still in the development stage of the
product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the first-
year cost to be P60. On this type of product, the company requires a P12 per unit profit. What is
the target cost of Santto?
a. P60 b. P30 c. P38 d. P42

48. Yahweh Inc. has a return on assets of 15% and a 10% profit margin. The company has
sales equal to P5 million. What are Yahweh’s total assets (in millions)?
a. 3.00
b. 3.33
c. 3.73
d. 4.17

49. St. Jude Manufacturing has assembled the data appearing below pertaining to two
popular products. Past experience has shown that the fixed manufacturing overhead
component included in the cost per machine hour averages P10. St. Jude has a policy of
filling all sales orders, even if it means purchasing units from outside suppliers.

Juicer Slicer
Direct materials P6 P11

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 Direct labor 4 9
Factory overhead at P16 per hour 16 32
Cost if purchased from an outside 20 38
supplier
Annual demand (units) 20,000 28,000
If 50,000 machine hours are available, and St. Jude Manufacturing desires to follow an
optimal strategy, it should
a. Produce 25,000 Slicers and purchase all other units as needed.
b. Produce 20,000 Juicers and 15,000 Slicers and purchase all other units as needed.
c. Produce 20,000 Juicers and purchase all other units as needed.
d. Purchase all units as needed.

50. St. Christopher’s Motors, Inc. is considering a new product for the coming year, an
electric motor which it can purchase from a reliable vendor for P21.00 per unit. The
alternative is to manufacture the motor internally. St. Christopher’s Motors, Inc. has
excess capacity to manufacture the 30,000 motors needed in the coming year except for
manufacturing space and special machinery. The machinery can be leased for P45,000
annually. Finished goods warehouse space adjoining the main manufacturing facility,
leased for P39,000 annually, may be converted and used to manufacture the motors.
Additional off-site space can be leased at an annual cost of P54,000 to replace the
finished goods warehouse. The estimated unit costs for manufacturing the motors
internally, exclusive of the leasing costs itemized above, are:
Direct material P 8.00
Direct labor 4.00
Variable manufacturing overhead 3.00
Allocated fixed manufacturing 5.00
overhead
Total manufacturing cost per unit P20.00
A cost-benefit analysis would show that St. Christopher’s Motors, Inc. would save
a. P54,000 by purchasing the motors from the outside vendor.
b. P69,000 by purchasing the motors from the outside vendor.
c. P81,000 by making the motors internally.
d. P96,000 by making the motors internally.
51. Given the following information about St. Vincent, compute for its economic value added:
Earnings before interest and taxes P20,000 Tax rate 40%
Interest-bearing liabilities P50,000 Cost of equity capital 14%
Debt to equity 1:1
Additional information:
o St. Vincent pays 10% annual interest to its creditors.
o There are no current liabilities held significant by St. Vincent.
a. P 8,000.00 b. P 2,000.00 c. P 5600.00 d. P 0

52. The following data have been extracted from the budget working papers of WR Limited:
Activity Overhead cost
(In machine hours)(In pesos)

In March 2002, the actual activity was 13,780 machine hours and the actual overhead
cost incurred was P14,521.

The total overhead expenditure variance is nearest to

a. P1,750 (F) b. P250 (F) c. P250 (A) d. P4,520 (A)

53. In the context of budget preparation the term “goal congruence“ is…
a The alignment of budgets with objectives using feed-forward control
b The setting of a budget which does not include budget bias
c The alignment of corporate objectives with the personal objectives of a manager
d The use of aspiration levels to set efficiency targets.

54. MNP plc produces three products from a single raw material that is limited in supply.
Product details for period 6 are as follows:
Products M N P
Maximum demand 1,000 2,400 2,800
Optimum planned production 720 - 2,800

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 Unit Contribution (Pesos) 4.50 4.80 2.95
Raw materials cost per unit 1.25 1.50 0.75
(P0.50 per kg)

The planned production optimizes the use of the 6,000 kgs of raw material that is
available from MNP plc’s normal supplier at the price of P0·50 per kg. However, a new
supplier has been found that is prepared to supply a further 1,000 kgs of the material.

What is the maximum price that MNP plc should be prepared to pay for the additional
1,000 kgs of the material?
A P2,100 B P2,240 C P2,300 D P2,465

55. T plc has developed a new product, the TF8. The time taken to produce the first unit was
18 minutes. Assuming that an 80% learning curve applies, the time allowed for the fifth
unit (to 2 decimal places) should be
a. 5·79 minutes b. 7·53 minutes c. 10·72 minutes d. 11·52
minutes

Note: For an 80% learning curve y = ax -0·3219

56. Which of the following are required to determine the breakeven sales value in a multi
product manufacturing environment?
(i) individual product gross contribution to sales ratios;
(ii) the general fixed cost;
(iii) the product-specific fixed cost;
(iv) the product mix ratio;
(v) the method of apportionment of general fixed costs.
a. (i), (ii), (iii) and (iv) only.
b. (i), (iii) and (iv) only.
c. (i), (ii) and (iv) only.
d. All of them.

57. The cost of purchasing a machine is P100,000 payable immediately. Its disposal value is
expected to be P10,000 in five years' time.
The same asset can be leased for a period of five years with rentals of P25,000 payable
annually in advance.
The asset is returned to the lessor at the end of the lease period.
What is the net present value (to the nearest P10) to the lessor company if it purchases
the machine then leases it to the user on the above terms if it applies an annual discount
rate of 10%? (Ignore tax.)
a. P990 b. P10,460 c. minus P1,960 d. minus P11,440.

58. A company retains 70% of its earnings and distributes the remaining 30%. Capital
investment projects generate an annual post-tax return on investment of 15% and a pre-
tax return of 20%. Using the Gordon Growth Model, what is the annual rate of growth?
a 4.5% b 6.0% c 10.5% d 14.0%

59. A company uses the Baumol cash management model. Cash disbursements are constant
at P20,000 each month. Money on deposit earns 5% a year, while money in the current
account earns a zero return. Switching costs (that is, for each purchase or sale of
securities) are P30 for each transaction.
What is the optimal amount (to the nearest P100) to be transferred in each transaction?

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 a P500
b. P1,700
c P4,900
d P17,000

60. Using the capital asset pricing model (CAPM), the beta of company X's shares is 1·6, the
risk free rate is 5% and the required return on company X's shares is 16·2%. Company Y
is quoted in the same stock market, but has a beta of 1.4.
What is the required rate of return on company Y's shares?
a 12·0%
b 13·0%
c 13·2%
d 14·8%

AUDITING PROBLEMS

You were engaged to examine the accounts of Power Play Corp. as of December 31, 2007
and your audit disclosed the following:

61. The cash counted on December 31, 2007 included two customers’ checks amounting to
P5,000 both dated in January 2008. These checks were recorded in the books in
December and were accepted for deposit by the bank on due dates.

The adjusting entry is:

Debit Credit
a. Cash in bank 5,000 Cash on hand 5,000
b. Accounts receivable 5,000 Cash 5,000
c. Cash 5,000 Accounts receivable 5,000
d. Accounts receivable 5,000 Sales 5,000

62. Your audit disclosed that checks with a total of P10,000 as payment to suppliers were
prepared and taken up as debits to accounts payable. One of these checks in the
amount of P2,000 was cancelled on January 5, 2008 and replaced with another for the
correct amount of P2,500. No entry was made for the cancellation.

The adjusting entry is:

Debit Credit
a. Cash 2,500 Accounts payable 2,500
b. Cash 2,000 Accounts payable 2,000
c. Cash 500 Accounts payable 500
d. No adjustment necessary

63. Customers’ checks amounting to P4,500 were returned during December 2007 by the
bank with the notation “NSF”. Of these checks P3,000 had been redeposited and cleared
by the bank during the month. No entries were made for the return or redeposit.

The adjusting entry is:

Debit Credit
a. Cash 3,000 Accounts receivable 3,000
b. Accounts receivable 4,500 Cash 4,500
c. Cash 1,500 Accounts receivable 1,500
d. Accounts receivable 1,500 Cash 1,500

64. Goods costing P20,000 were excluded from the ending inventory. The selling price of
these goods was P30,000. The goods were shipped by your client on December 29,
2007. FOB shipping point. The transaction was not recorded in 2007.

The adjusting entry is:

Debit Credit
a. Cost of sales 20,000 Inventory 20,000
b. Inventory 20,000 Cost of sales 20,000
c. Accounts receivable 30,000 Sales 30,000
d. Sales 30,000 Accounts receivable 30,000

65. Merchandise costing P15,000 were still included in ending inventory although these were
already invoiced and recorded as sales to customers on December 31. The sales

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 invoices totaling P25,000 were no longer recorded when the goods were delivered on
January 5, 2008.

The adjusting entry is:

Debit Credit
a. Cost of sales 15,000 Inventory 15,000
b. Accounts receivable 25,000 Sales 25,000
c. Sales 25,000 Accounts receivable 25,000
d. None of the above

The Stock Investment account showed the following details:

Stock Investment in Platinum

Jan 1 audited balance, Feb 28 cash dividend 1,000
2,000 shares 40,000 April 1 sale of rights 3,000
Mar 31 bought shares 4,500 June 30 sale of shares 5,000

The following transactions occurred:

66. A cash dividend of P0.50 per share was received on Feb. 28

The adjusting entry is:
Debit Credit
a. Stock investment 1,000 Dividend income 1,000
b. Retained earnings 1,000 Dividend income 1,000
c. Dividend income 1,000 Stock investment 1,000
d. Cash 1,000 Dividend income 1,000

67. On March 15, stock rights were received entitling shareholders to purchase one share for
every five held at P15 per share. Market values on this date were shares, P20; rights P5.

The adjusting entry to recognize the cost allocated to the right is:
Debit Credit
a. Stock rights 8,000 Stock investment 8,000
b. Stock rights 10,000 Stock investment 10,000
c. Stock rights 5,000 Stock investment 5,000
d. No entry

68. On March 31, 300 shares were purchased with the partial exercise of these right.
The adjusting entry, after the adjustment in No. 35 above has been effected, is
Debit Credit
a. Stock investment 9,000 Stock rights 9,000
b. Stock investment 6,000 Stock rights 6,000
c. Stock rights 6,000 Stock investment 6,000
d. Stock investment 6,000 Cash 6,000

69. On April 1, the remaining rights were sold for P3,000.

The adjusting entry is:
Debit Credit
a. Stock investment 3,000 Gain on sale of rights 3,000
b. Stock investment 3,000 Stock rights 2,000
gain on sale of rights 1,000
c. Stock investment 2,000 Stock rights 3,000
Loss on sale of 1,000
rights
d. Cash 3,000 Stock rights 3,000

70. Power Play Corp. decided that the allowance for bad debts should be adjusted to equal
the estimated amount required based on aging the accounts as of December 31.
Following date were gathered:
Allowance for bade debts, January 1, 2007 P120,00
0
Provision for bad debts during 2007
(2% of P3,000,000 sales) 60,000
Bad debts written off in 2007 75,000
Estimated bad debts per aging of

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 accounts on December 31, 2007 80,000
The bad debts provision should be adjusted by
Debit Credit
a. Bad debts expense 15,000 Allowance for bad 15,000
debts
b. Allowance for bad 45,000 Accounts receivable 45,000
debts
c. Allowance for bad 25,000 Bad debts expense 25,000
debts
d. Bad debts expense 80,000 Allowance for bad debt 80,000
71. The land account was debited for P300,000 on March 31, 2007 for an adjoining piece of
land which was acquired in exchange for 15,000 shares of Power Play Corp.’s own stock
with a par value of P10. At the time of the exchange, the shares were selling at P24.
Transfer and legal fees of P20,000 were paid and charged to Professional Fees.

The adjusting entry is

Debit Credit
a. Land 140,000 Premium on capital 140,000
stock
b. Land 160,000 Capital stock 150,000
Cash 10,000
c. Land 80,000 Professional fees 20,000
Premium on capital 60,000
stock
d. Land 20,000 Professional fees 20,000

72. You completed your filed work for 2007 on April 10, 2008. Before issuance of your audit
report on April 25, 2008, you were advised that on April 15, 2008 a large receivable from
a customer who is facing bankruptcy was written off as uncollectible. What should you
do about this fact?
a. disclose the loss in the 2007 statements
b. adjust the 2007 financial statements
c. date your report April 10, 2008
d. take up the loss in the 2008 statements

PRACTICAL ACCOUNTING 1

73. In 2008, Paul Hypermarket awards loyalty points to customers who use Paul
Hypermarket’s own credit card to pay for purchases. The award is at the rate of one
point for every P250 charged to the card and each point entitles the customer to a
certain credit against future purchases, without time limit. Paul Hypermarket estimates
the fair value of each point at P4 and in 2008, P250,000,000 is charged to the Paul
Hypermarket’s credit card. None of the customers have claimed their corresponding
credit points during 2008.
The amount to be reported as revenue for 2008 by Paul Hypermarket is
a. P250,000,000 b. P249,000,000 c. P246,000,000 d. P245,000,000

Use the following information for numbers 74 and 75

On January 1, 2006 Luke Company, a financial services entity which is also involved in real
estate development, has purchased a plot of land in Makati City for P2,000,000 which it
intends to develop and eventually sell. On July 1, 2006, Luke Company purchased 10
passenger vehicles for a total consideration of P2,500,000. Luke Company’s intention was to
use the passenger vehicles to transport Luke Company’s employees. Luke Company uses
the straight-line depreciation method for the passenger vehicles with no expected salvage
value and an estimated useful life of 8 years.
On December 31, 2007, Luke Company entered in a lease agreement with John Company for
its land in Makati City and its passenger vehicles. Development cost incurred until
December 31, 2007 was P700,000. The fair values of the land in Makati City and the 10
passenger vehicles were P2,950,000 and P2,181,250 respectively. Assets classified by Luke
Company as investment properties are presented at fair value.
At the end of 2008, the fair values of land and 10 passenger vehicles were 3,100,000 and
P2,201,250 respectively.
74. The gain (loss) to be reported in 2007 in relation to the reclassification to investment
property is
a. 0 b. 150,000 c. 250,000 d. 400,000

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75. The revaluation surplus balance at December 31, 2008 is
a. 0 b. 150,0 c. 355,5 d. 482,5
00 77 00

76. Before year-end adjusting entries, Bass Company's account balances at December 31,
2001, for accounts receivable and the related allowance for uncollectible accounts were
P500,000 and P45,000, respectively. An aging of accounts receivable indicated that
P62,500 of the December 31 receivables are expected to be uncollectible. The net
realizable value of accounts receivable after adjustment is
a.P482,500. b. P437,500. c. P392,500. d. P455,000.
77. Isaac Co. assigned P500,000 of accounts receivable to Dixon Finance Co. as security for
a loan of P420,000. Dixon charged a 2% commission on the amount of the loan; the
interest rate on the note was 10%. During the first month, Isaac collected P110,000 on
assigned accounts after deducting P380 of discounts. Isaac accepted returns worth
P1,350 and wrote off assigned accounts totaling P3,700.
The amount of cash Isaac received from Dixon at the time of the transfer was
a. P378,000. b. P410,000. c. P411,600. d. P420,000.

78. On June 1, 2008, Oslo Corp. sold merchandise with a list price of P15,000 to Mead on
account. Oslo allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and
the sale was made f.o.b. shipping point. Oslo prepaid P300 of delivery costs for Mead as
an accommodation. On June 12, 2008, Oslo received from Mead a remittance in full
payment amounting to
a. P8,232 b. P8,526. c. P8,532. d P8,397.

79. In January 2008, Jenks Mining Corporation purchased a mineral mine for P4,200,000 with
removable ore estimated by geological surveys at 3,000,000 tons. The property has an
estimated value of P400,000 after the ore has been extracted. Jenks incurred P1,150,000
of development costs preparing the property for the extraction of ore. During 2008,
340,000 tons were removed and 300,000 tons were sold. For the year ended December
31, 2008, Jenks should include what amount of depletion in its cost of goods sold?
a. P430,667 b. P380,000 c. P495,000 d. P561,000

80. Down Co. bought a trademark from Cater Corp. on January 1, 2008, for P112,000. An
independent consultant retained by Down estimated that the remaining useful life is 50
years. Its unamortized cost on Cater's accounting records was P56,000. Down decided to
write off the trademark over the maximum period allowed. How much should be
amortized for the year ended December 31, 2008?
a. P1,120. b. P1,400. c. P2,240. d. P2,800.

Use the following information for questions 80 and 81

On January 2, 2008, Hernandez, Inc. signed a ten-year non-cancelable lease for a heavy duty
drill press. The lease stipulated annual payments of P70,000 starting at the end of the first
year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this
transaction as a capital lease. The drill press has an estimated useful life of 15 years, with
no salvage value. Hernandez uses straight-line depreciation for all of its plant assets.
Aggregate lease payments were determined to have a present value of P420,000, based on
implicit interest of 10%.
81. In its 2008 income statement, what amount of interest expense should Hernandez report
from this lease transaction?
a. P0. b. P26,250 c. P35,000. d. P42,000.
82. In its 2008 income statement, what amount of depreciation expense should Hernandez
report from this lease transaction?
a. P70,000. b. P46,667. c. P42,000. d. P28,000.

83. On October 31, 2008, Beta Company engaged in the following transactions:
Obtained a P500,000, six-month loan from City Bank, discounted at 12%. The company
pledged P500,000 of accounts receivable as security for the loan.
Factored P1,000,000 of accounts receivable without recourse on a non notification basis
with Hype Company. Hype charged a factoring fee of 2% of the amount of receivables
factored and withheld 10% of the amount factored.
What is the total cash received from the financing of receivables?
a. P1,320,000 b. P1,350,000 c. P1,380,000 d.
P1,470,000
84. The closing inventory of Gandhi Company amounted to P284,000 at December 31, 2008.
This total includes two inventory lines about which the inventory taker is uncertain.

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 Item 1 - 500 items which had cost P15 each and which were included at P7,500.
These items were found to have been defective at the balance sheet date.
Remedial work after the balance sheet date cost P1,800 and they were then
sold for P20 each. Selling expenses were P400.
Item 2 - 100 items that had cost P10 each but after the balance sheet date, these
were sold for P8 each with selling expenses of P150.
What figure should appear in Gandhi’s balance sheet for inventory?
a. P283,650 b. P283,950 c. P284,000 d.
P284,300

85. In reconciling the Cash in bank of Yna Company with the bank statement balance for the
month of November 2008, the following data are summarized:
Book debits for November, including October CM for note collected, P
P60,000 800,000
Book credits for November, including NSF of P20,000 and service charge of
P800 for October 620,000
Bank credits for November including CM for November for bank loan of
P100,000 and October deposit in transit for P80,000 700,000
Bank debits for November including October outstanding checks of
P170,800 and November service charge of P200 600,000
What is the amount of outstanding checks for November ?
a. P 20,000 b. P170,200 c. P171,000 d.
P191,000

PRACTICAL ACCOUNTING 2

86. Roel, Jekell and Mike, CPAs, decide to form a partnership and agree to distribute profits
in the ratio 5:3:2. It is agreed, however, that Roel and Jekell shall guarantee fees from
their own clients of P600,000 and P500,000 respectively, that any deficiency is to be
charged directly against the account of the partner failing to meet the guarantee, and
that any excess is to be credited directly to the account of the partner with fees
exceeding the guarantee. Fees earned during 20x4 are classified as follows:
From clients of Roel P1,000,000
From clients of Jekell 400,000
From clients of Mike 100,000
Operating expenses for 20x4 are P200,000. Determine the share of Roel on the
operating results for the year 20x4.
a. P900,000 b. P500,000 c. P200,000 d. P300,000

87. Caine, Osman, and Roberts formed a partnership on January 1, 20x4, agreeing to
distribute profits and losses in the ratio of original capitals. Original investments were
P625,000, P250,000 and P125,000 respectively. Earnings of the firm and drawings by
each partner for the period 20x4-20x6 follows:
Drawings .
Net income (loss) Caine Osman
Roberts
20x4 P440,000 P150,000 P78,000 P52,000
20x5 185,000 150,000 78,000 52,000
20x6 ( 105,000) 100,000 52,000 52,000
At the beginning of 20x7, Caine and Osman agreed to permit Roberts to withdraw
from the firm. Since the books for the firm had never been audited, the partners agreed
to an audit in arriving at the settlement amount. In withdrawing, Roberts was allowed to
take certain furniture and was charged P15,000, although the book value was P45,000;
the balance of Roberts’ interest was paid in cash.
The following items were revealed in the course of the audit.
End of 20x4 End of 20x5 End of
20x6
Understatement of accrued expenses P 4,000 P 5,000 P 6,500
Understatement of accrued revenue 2,500 1,000
1,500
Overstatement of inventories 15,000 20,000
20,000
Understatement of depreciation expense
On assets still held 1,500 3,500 2,000

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 How much must Roberts received from the partnership?
a. P511,250 b. P156,500 c. P15,250 d. P11,250

88. At the beginning of 2008, S Video established a QC Branch and a MC Branch in order to
provide wider distribution of its merchandise. Merchandise is transferred to the
branches at a pricd 30% above cost. All branch merchandise is acquired from the home
office. At the end of 2008, the QC Branch and the MC Branch reported net income and
ending inventory balances as follows:
Net income Ending inventory
QC Branch P45,500
P65,000
MC Branch 52,000 78,000
The year-end balances in the home office account’s allowance for unrealized gross
margin in branch inventory are P 48,750 for the QC Branch and P58,500 for the MC
branch.
The income from Branch, home office should record is:
a. P171,750 b. P97,500 c. P130,500 d. P74,250

89. On January 1, 2008, Ashley Corp. purchased 75% of the common stock of Racks Corp.
Separate balance sheet data for the companies at the combination date are given below:
Ashley Racks
Cash P 84,000 P 721,000
Trade Receivable 504,000 91,000
Merchandise Inventory 462,000 133,000
Land 273,000 112,000
Plant Assets 2,450,000 1,050,000
Accumulated Depreciation (840,000) (210,000
)
Investment in Racks 1,372,000
Total Assets P4,305,000 P1,897,000

Accounts Payable P 721,000 P

497,000
Capital Stock 2,800,000 1,050,00
0
Retained Earnings 784,000 350,00
0
Total Equities P4,305,000 P
1,897,000
At the date of combination the book values of Racks net assets was equal to the fair
value of the net assets except for Rack’s inventory which has a fair value of P210,000.

On the date of acquisition in the consolidated balance sheet:

How much is the total assets?
a. P 3,533,250 b. P4,984,000 c. P 6,543,250 d. P
5,171,250

90. The following data pertained to Pogi Company’s construction jobs, which commenced
during 2008:
PROJECT 1 PROJECT 2
Contract Price P420,000 P300,000
Cost incurred during 2008 240,000 280,000
Estimated cost to complete 120,000 40,000
Billed to customers during 2008 150,000 270,000
Received from customers during 2008 90,000 250,000
If Pogi company used the percentage of completion method, what amount of profit (loss)
would Pogi Company report in its 2008 income statement?
a. P(20,000) c. P22,500
b. P20,000 d. P40,000

91. On April 1, 2008, Ringo Corp. entered into franchise agreement with Quart Corp. to sell
their products. The agreement provides for an initial franchise fee of P4,218,750 payable
as follows: P1,181,250 cash to be paid upon signing of the contract and the balance in
five equal annual payment every December 31, starting at the end of 2008. Ringo signs
12% interest learning note for the balance. The agreement further provides that the

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 franchise must pay a continuing franchise fee equal to 5% of its monthly gross sales. On
August 30 the franchisor completed the initial services required n the contract at a cost
of P1,350,000 and incurred indirect costs of P232,500. The franchise commenced
business operations on September 3, 2008. The gross sales reported to the franchisor
are September sales, P110,000; October sales, P125,000; November sales P138,000; and
December sales, P159,000. The first installment payment was made on due date.

Assume the collectivity of the note is reasonably assured. In its income statement for the
year ended December 31, 2008 how much is the realized gross profit?
a. P2,868,750 b. P2,936,225 c. P2,895,350 d.
P3,168,725

92. The trustee for John Corp. prepares a statement of affairs which shows that unsecured
creditors whose claims total P 540,000 may expect to receive approximately P 405,000 if
assets are sold for the benefit of creditors.
a. Danielle Corp. holds a note for P22,500 on which interest of P1,350 is accrued,
property with a book value of P18,000 and a realizable amount of P 27,000 is
pledged on the note.
b. Randolph, an employee is owed P6,750 for his salary.
c. Baltimore Corp. holds a note of P54,000 on which interest of P2,700 is
accrued, securities with a book value of P 58,500 and a realizable amount of
P45,000 is pledged on the note.
d. Nick Corp. holds a note for P9,000 on which interest of P500 is accrued,
nothing has been pledged for the note.
How much may each of the following creditors receive? Danielle Corp; Randolph Corp;
Baltimore Corp.; Nick Corp., respectively.
a. P 27,000 ; P5,063; P53,775 ; P 0 c. P27,000 ; P6,750; P56,700 ; P 0
b. P 23,850; P 6,750; P56,700; P7,125 d, P23,850; P6,750; P53,775 ; P
7,125

93. The following information was taken from H Company’s accounting records for the year
December 31, 2008:
Increase in raw materials inventory P 15,000
Decrease in finished goods inventory 35,000
Raw materials purchased 430,000
Direct labor cost 200,000
Factory overhead control 260,000
Freight-in 45,000
There was no work in process inventory at the beginning or end of the year. H’s 2008
cost of goods sold is if FOH is applied at 140% of labor costs:
a. P950,000 b. P965,000 c. P975,000 d. P995,000

94. C Company has underapplied factory overhead of P45,000 for the year ended December
31, 2008. Before disposition of the underapplied overhead, selected December 31, 2008,
balances from C’s accounting records are as follows:
Sales P1,200,000
Cost of goods sold 720,000

Inventories:
Direct materials 36,000
Work in process 54,000
Finished goods 90,000
Under C’s cost accounting system, over – or underapplied overhead is allocated to
appropriate inventories and cost of goods sold based on year – end balances. In its 2008
income statement, C should report cost of goods sold of
a. P682,500 b. P684,000 c. P756,000 d. P757,500

95. Violeta company adds materials at the beginning of the process in Department A.
Information concerning the materials used in April 2008 is as follows:
Units
Work in process April ………………………………………………............... P10,000
Started during April……………………………………………………………….. 50,000
Completed & Transferred to the next department during April…………. 36,000
Normal spoilage incurred………………………………………………………… 3,000
Abnormal spoilage incurred……………………………………………………… 5,000

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 Work in process at April 30………………………………………………………. 16,000
Under Violeta’s accounting system, the cost of normal spoilage are treated as part of the
cost of good units produced. However, the cost of abnormal spoilage is charged to
factory overhead. Using weighted average method, what are the equivalent units for the
materials unit cost calculation for the month of April?
a. 47,000 b. 52,000 c. 55,000 d. 57,000

96. Agency Makabayan received Notice of Cash Allocation (NCA) – P45,000,000 for the year
2008, the entry would be:
a. No entry
b. Memorandum entry in Registry of Allotments
c. National Clearing Account 45,000,000
Appropriation Alloted 45,000,000
d. Cash-National Treasury, MDS 45,000,000
Subsidy Income from National government45,000,000

97. Save the Planet, a private nonprofit research organization, received a $500,000
contribution from Ms. Susan Clark. Ms. Clark stipulated that her donation be used to
purchase new computer equipment for Save the Planet’s research staff. The contribution
was received in August of 2001, and the computers were acquired in January of 2002.
For the year ended December 31, 2001, the $500,000 contribution should be reported by
Save the Planet on its
a. Statement of activities as unrestricted revenue.
b. Statement of activities as deferred revenue.
c. Statement of activities as temporarily restricted revenue.
d. Statement of financial position as deferred revenue.

98. On January 1, 20x3, Pike Company purchased 80% of the outstanding voting shares of
Sword company for P800,000. On that date, Sword had P300,000 of capital stock and
P600,000 of retained earnings. All assets and liabilities of Sword had book values
approximately equal to their fair market values. Goodwill, if any, is not amortized. Pike
uses the complete equity method to account for its investment in Sword.
On April 1, 20x3, Pike sold equipment with a book value of P40,000 to Sword for P60,000.
The equipment is expected to have a useful life of five years from the date of the sale
and no salvage value. Sword will use straight-line depreciation. For year 20x3, Sword
reported net income of P200,000 and paid dividends of P40,000.
Determine the income from investment under the complete equity method.
a. P143,000 b. P144,000 c. P163,000 d. P111,000

99. P Company owns controlling interests in S and T Corporations, having acquired an 80

percent interest in S in 20x1 and a 90 percent interest in T on January 1, 20x2. P’s
investments in S and T were at book value equal to fair value.
Inventories of the affiliated companies at December 31, 20x2 and December 31,
20x3 were as follows:
December 31, 20x2 December 31, 20x3
P inventories P60,000 P54,000
S inventories 38,750 31,250
T inventories 24,000 36,000
P sells to S at a 25 percent markup based on cost, and T sells to P at a markup of 20
percent. P’s beginning and ending inventories for 20x3 consisted of 40% and 50%,
respectively, of goods acquired from T. All of S inventories consisted of merchandise
acquired from P.
The inventory that should appear in the December 31, 20x3 consolidated balance
sheet should amount to:
a. P109,600 b. P106,000 c. P110,500 d. P121,250

100. In year 20x8, a 90 percent-owned subsidiary sold land to its parent at a gain. The
parent still owns the land. In the consolidated balance sheet at December 31, 20x9, the
minority interest in the subsidiary should be shown at:
a. 10 percent of the subsidiary’s total equity.
b. 10 percent of the subsidiary’s total equity less 10 percent of the gain on the land sale.
c. 10 percent of the subsidiary’s total equity plus 10 percent of the gain on the land sale.
d. 10 percent of the subsidiary’s total equity less 100 percent of the gain on the land
sale.
END OF EXAMINATIONS
GOODLUCK!!! 

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