Comprehensive P1 Handouts(1)

Since 1977

PRACTICAL ACOUNTING 1

L. R. CABARLES

PROBLEMS INVENTORIES 1. The physical inventory of Pangasinan Company on December 31, 2012, showed merchandise with a cost of P4,000,000 was on hand at that date. You also discovered the following items were all excluded from the count: a. Merchandise costing P160,000, which was held by Pangasinan on consignment. The consignor is a subsidiary. b. A special machine, fabricated to order for a customer costing P400,000, was finished and specifically segregated in the back part of the shipping room on December 31, 2012. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2013. c. Merchandise costing P80,000, which was shipped by Pangasinan f.o.b. destination to a customer on December 31, 2012. The customer expects to receive the merchandise on January 3, 2013. d. Merchandise costing P120,000 which was shipped by Pangasinan f.o.b. shipping point to a customer on December 29, 2012. e. Merchandise costing P50,000 shipped by a vendor f.o.b. seller on December 28, 2012 and received by Pangasinan on January 10, 2013. The corrected balance of Pangasinan’s inventory should be a. P4,530,000 c. P4,480,000 b. P4,130,000 d. P4,690,000 2. On December 15, 2012, Boston purchased goods costing P100,000. The terms were FOB shipping point. Costs incurred by Boston in connection with the purchase and delivery of the goods were as follows: Normal freight charges Handling costs Insurance on shipment Abnormal freight charges for express shipping

P3,000 2,000 500 1,200

What is the total amount to be charged to inventory? a. P106,700 c. P105,000 b. P105,500 d. P103,000 Use the following information for the next two questions. Transactions for the month of June were: Purchases June 1 400 @ P3.20 (balance) 3 1,100 @ 3.10 7 600 @ 3.30 15 900 @ 3.40 22 250 @ 3.50

June

2 6 9 10 18 25

Sales 300 @ P5.50 800 500 200 700 150

@ @ @ @ @

5.50 5.50 6.00 6.00 6.00

3. Assuming that perpetual inventory records are kept in pesos, the ending inventory on a FIFO basis is a. P1,900 c. P2,065 b. P1,920 d. P2,100

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4. Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost basis is a. P1,980 c. P1,970 b. P1,956 d. P1,995 5. Alcala Company installs replacement siding, windows, and louvered glass doors for family homes. At December 31, 2012, the balance of inventory account was P502,000, and the allowance for inventory writedown was P33,000. The inventory cost and other data at December 31, 2012, are as follows: (amounts in thousands)

Item A B C D Total

Cost P 89 94 125 194 P502

Replace ment Cost P 86 92 135 114 P427

Sales Price P 91 93 129 205 P518

Normal Profit P 5 7 10 20 P32

NRV P 87 85 111 197 P480

The gain on reversal of inventory writedown is a. P33,000 c. P8,000 b. P11,000 d. P 0 6. On November 15, 2011, Socrates entered in to a commitment to purchase 200,000 units of raw material X for P8,000,000 on March 15, 2012. Socrates entered into this purchase commitment to protect itself against the volatility in the price of raw material X. By December 31, 2011, the purchase price of material X had fallen to P35 per unit. However, by March 15, 2012, when Socrates took delivery of the 200,000 units, the price of the material had risen to P42 per unit. How much will be recognized as gain on purchase commitment on March 15, 2012? a. P1,400,000 c. P400,000 b. P1,000,000 d. P 0 7. A physical inventory taken on December 31, 2012 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, 2011 Purchases during 2012 Cash sales during 2012 Shipment received on December 26, 2012, included in physical inventory, but not recorded as purchases Deposits made with suppliers, entered as purchases. Goods were not received in 2012 Collections on accounts receivable, 2012 Accounts receivable, January 1, 2012 Accounts receivable, Dec. 31, 2012 Gross profit percentage on sales

P1,280,000 5,640,000 1,400,000 40,000 80,000 7,200,000 1,000,000 1,200,000 40%

At December 31, 2012 what is the estimated cost of missing inventory? a. P200,000 c. P240,000 b. P160,000 d. P320,000

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. Use the following information for the next two questions. Pugo uses the retail inventory method. The following information is available for the current year: Beginning inventory Purchases Freight in Purchase returns Purchase allowances Departmental transfer in Net markups Net markdowns Sales Sales returns Sales discounts Employee discounts Loss from breakage

Cost P 1,300,000 18,000,000 400,000 600,000 300,000 400,000

Retail P 2,600,000 29,200,000 1,000,000 600,000 600,000 2,000,000 24,700,000 350,000 200,000 600,000 50,000

8. The estimated cost of inventory at the end of the current year using the conventional (lower of cost or market) retail inventory method is a. P3,200,000 c. P3,250,000 b. P3,000,000 d. P3,360,000 9. The estimated cost of inventory at the end of the current year using the average retail inventory method is a. P3,200,000 c. P3,250,000 b. P3,000,000 d. P3,584,000 10. The estimated cost of inventory at the end of the current year using the FIFO retail inventory method is a. P3,200,000 c. P3,250,000 b. P3,000,000 d. P3,658,480 AGRICULTURE A herd of 10 2 year old animals was held at 1 January 2012. One animal aged 2.5 years was purchased on 1 July 2012 for 108, and one animal was born on 1 July 2012. No animals were sold or disposed of during the period. Per-unit fair values less costs to sell were as follows: 2 - year old animal on January 1, 2012 Newborn animal at July 1, 2012 2.5 - year old animal on July 1, 2012 New born animal on December 31, 2012 0.5 - year old animal on December 31, 2012 2 - year old animal on December 31, 2012 2.5 - year old animal on December 31, 2012 3 - year old animal on December 31, 2012 11. The carrying amount December 31, 2012 is a. P1,292 b. P1,400

of

biological

100 70 108 72 80 105 111 120

assets

as

of

c. P1,338 d. P1,320

12. The increase in fair value of biological assets in 2012 due to price change is a. P 55 c. P 53 b. P222 d. P212 13. The increase in fair value of biological assets in 2012 due to physical change is a. P 70 c. P237 b. P229 d. P167 PROPERTY, PLANT AND EQUIPMENT ACQUISITION 14. During the current year, Benguet Company purchased a secondhand machine at a price of P300,000. A cash down payment of P50,000 was made and a two-year, noninterest bearing note was issued for the balance. Recent transactions involving similar machinery

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indicate that the used machine has a cash price of P240,000. A new machine would cost P400,000. The following costs were incurred on the machine during the year: Cost of removing the old machine Cash proceeds from the sale of the old machine General overhaul and repair to recondition the machine prior to use Cost of spare parts purchased and set aside for breakdowns during the first two years of normal use of the machine Cost of labor to install the machine Cost of the testing the machine prior to use Cost of hauling the machine from the vendor's place of business to the company's premises Cost of repairing the damage to the machine when it was dropped during installation Repairs incurred during the first year of operations Safety devices added to the machine to comply with the terms of the collective bargaining agreement entered into with the employees' union Cost of training workers to operate the machine

P2,000 1,200 10,000 20,000 4,000 1,800 5,000 3,000 6,000

12,000 1,500

Determine the amount to be capitalized as cost of the machine. a. P262,800 c. P272,800 b. P280,800 d. P292,800 15. During 2012, Cavite Company made the following property, plant and equipment expenditures: Land and building acquired from Bacoor Company Repairs made to the building Special tax assessment Remodeling of office space including new partitions and walls

P9,000,000 300,000 50,000 400,000

In exchange for the land and building acquired from Bacoor, Cavite issued 60,000, P100 par value, ordinary shares. On the date of purchase, the shares 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. P3,800,000, and P7,450,000 b. P3,550,000, and P6,700,000 c. P3,500,000, and P6,400,000 d. P3,500,000, and P6,750,000 GOVERNMENT GRANT 16. Lively Inc. received a consolidated grant of P120 million. Three-fourths of the grant is to be utilized to purchase a college building for students from underdeveloped or developing countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from the date of grant. The college building, which costs P100 million, will be depreciated using the straight-line method over 10

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. years. Assuming that the tuition subsidy will be offered evenly over the period of 4 years, the amount that should be recognized as income at the end of year 1 is a. P12.0 million c. P16.5 million b. P10.0 million d. P17.5 million BORROWING COSTS Use the following information for the next two questions. Lodi Department Stores, Inc., constructs its own stores. Management’s policy is to include interest as part of the cost of new store just being completed. Additional information follows: Total construction expenditures: January 2, 2011 May 1, 2011 November 1, 2011 March 1, 2012 September 1, 2012 December 31, 2012

600,000 600,000 500,000 700,000 400,000 500,000 P3,300,000

P1,000,000

P

500,000

P1,000,000 14%

17. The capitalizable borrowing cost for 2011 is a. P122,850 c. P120,000 b. P125,667 d. P250,000 18. The capitalizable borrowing cost for 2012 is a. P253,938 c. P120,000 b. P274,233 d. P250,000 DEPRECIATION 19. Bugis Corp. acquired a machine on January 1, 2004. Details of the machine at December 31, 2011 are given below:

Outer casings Other components

Cost P170,000,000 510,000,000 255,000,000 P765,000,000

Depreciation basis Useful life of 40,000 hours 25 years straight line 12 years straight line

During the year 2012, the following events took place: a) Engine, which had run for 30,000 hours till date developed serious snags. It was replaced by a better engine with a cost of P238 million and estimated life of 50,000 hours. The new engine was used for 5,000 hours during the year. b) Polishing and painting was done to the outer casings at a cost of P1.3 million. c) Other components were upgraded at a cost of P102 million. The remaining life of the other components is 5 years. Compute the total depreciation for the year 2012, assume that all the work mentioned above was completed at the beginning of 2012. a. P85,850,000 c. P90,950,000 b. P81,676,470 d. P81,600,000

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In 2010, Lepanto spent P1,000,000 in development costs and P3,000,000 in buildings on the property. Lepanto does not anticipate that the buildings will have utility after the natural resources are removed. In 2011, an amount of P1,000,000 was spent for additional development on the mine. The tonnage mined and estimated remaining tons for years 2010 to 2012 are as follows:

P

Outstanding company debt: Mortgage related directly to new store; interest rate, 12%; term, 5 years from beginning of construction General liability: Bonds issued just prior to construction of store; interest rate, 10% for 10 years Bonds issued just prior to construction; interest rate, 8%, mature in 5 years Estimated cost of equity capital

Component Engine

WASTING ASSETS 20. In 2010, Lepanto Mining Company purchased property with natural resources for P28,000,000. The property had a residual value of P5,000,000. However, the company is required to restore the property to its original condition for P2,000,000.

2010 2011 2012

Tons extracted 0 3,000,000 3,500,000

Tons remaining 10,000,000 7,000,000 2,000,000

The company should recognize depletion for 2012 at a. P10,150,000 c. P14,245,000 b. P12,040,000 d. P 9,450,000 21. ABC Company provides the following balances at the end of 2012: Wasting asset, at cost Accumulated depletion Retained earnings Capital liquidated Depletion based on 100,000 units extracted at P50 per unit Inventory of resource deposit (20,000 units)

P80,000,000 20,000,000 10,000,000 15,000,000 5,000,000 2,000,000

Compute for the maximum amount of dividend that ABC can declare on December 31, 2012. a. P20,000,000 c. P15,000,000 b. P14,000,000 d. P13,000,000 REVALUATION MODEL Use the following information for the next three questions. On December 31, 2011, the statement of financial position of Twitter Corporation showed the following property and equipment after charging depreciation: Building Accumulated depreciation Equipment Accumulated depreciation

P3,000,000 (1,000,000) 1,200,000 (400,000)

P2,000,000 800,000

The company has adopted the revaluation model for the valuation of property and equipment. This has resulted in the recognition in prior periods of an asset revaluation surplus for the building of P140,000. The company does not make a transfer to retained earnings in respect of realized revaluation surplus. On December 31, 2011, an independent valuer assessed the fair value of the building to be P1,600,000 and the equipment to be P900,000. The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of that date. 22. The net amount to be recognized in comprehensive income for 2011 related to the revaluation of property and equipment is a. P160,000 c. P260,000 b. P240,000 d. P300,000

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. 23. The carrying amount of property and equipment as of December 31, 2012 is a. P2,500,000 c. P2,080,000 b. P2,400,000 d. P2,211,000 24. The revaluation surplus as of December 31, 2012 is a. P140,000 c. P75,000 b. P100,000 d. P 0 INVESTMENT PROPERTY 25. Quirino, Inc. and its subsidiaries have provided you, their PFRS specialist, with a list of the properties they own:  Land held by Quirino, Inc. for undetermined future use, P5,000,000.  A vacant building owned by Quirino, Inc. and to be leased out under an operating lease, P20,000,000.  Property held by a subsidiary of Quirino, Inc., a real estate firm, in the ordinary course of its business, P30,000,000.  Property held by Quirino, Inc. for use in production, P1,000,000.  A hotel owned by Sugo, Inc., a subsidiary of Quirino, Inc., and for which Sugo, Inc. provides security services for its guests’ belongings, P50,000,000.  A building owned by Quirino, Inc. being leased out to Status, Inc, a subsidiary of Quirino, Inc., P20,000,000. How much will be reported as investment properties in Quirino, Inc. and its subsidiaries consolidated financial statements? a. P75,000,000 c. P95,000,000 b. P25,000,000 d. P45,000,000 INTANGIBLE ASSETS 26. Gooden Enterprises Inc. developed a new machine for manufacturing baseballs. Because the machine is considered very valuable, the company had it patented. The following expenditures were incurred in developing and patenting the machine. Purchases of special equipment to be used solely for development of the new machine Research salaries and fringe benefits for engineers and scientists Cost of testing prototype Legal costs for filing for patent Fees paid to government patent office Drawings required by patent office to be filed with patent application

P1,820,000 171,000 236,000 127,000 25,000 47,000

Gooden elected to amortize the patent over its legal life. At the beginning of the second year, Gooden Enterprises paid P240,000 to successfully defend the patent in an infringement suit. At the beginning of the fourth year Gooden determined that the remaining estimated useful life of the patent was five years. The carrying amount of the patent at the end of fourth year is a. P135,320 c. P1,649,680 b. P131,100 d. P 39,800 27. Betterword Company is engaged in developing computer software. The following costs were incurred during 2012: Salaries of programmers doing research Expenses related to projects prior to establishment of technological feasibility Expenses related to projects after

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P235,000 78,400 49,500

technological feasibility has been established but before software is available for production Amortization of capitalized software development costs Costs to produce and prepare software for sale Additional data for 2012: Sales of products for the year Beginning inventory Portion of goods available for sale sold during the year

26,750 56,300 P515,000 142,000 60%

Determine the company’s profit for 2012. Income tax rate is 35%. a. P43,270 c. P36,315 b. P72,527 d. P49,927 28. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company which provided the following: Net income Net assets 2009 P1,400,000 P 6,000,000 2010 1,600,000 8,000,000 2011 2,000,000 8,800,000 2012 2,200,000 9,200,000 Total P7,200,000 P32,000,000 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. P11,600,000 c. P10,400,000 b. P11,200,000 d. P11,000,000 IMPAIRMENT OF NONFINANCIAL ASSETS 29. Twig Company reported an impairment loss of P4,000,000 in its income statement for the year 2011. This loss was related to an equipment which was acquired on January 1, 2010 with cost of P25,000,000, useful life of 10 years and no residual value. On December 31, 2011 statement of financial position, Twig reported this asset at P16,000,000 which is the recoverable amount on such date. On December 31, 2012, Twig determined that the recoverable amount of its impaired asset had increased to P19,000,000. The straight line method is used in recording depreciation of this asset. Compute the amount of gain on impairment recovery to be recognized in 2012 profit or loss. a. P5,000,000 c. P3,500,000 b. P4,000,000 d. P 0 Use the following information for the next two questions: One of the cash-generating units of Tweak Corporation is that associated with the manufacture of wine barrels. At 31 December 2011, Tweak Corporation believed, based on an analysis of economic indicators, that the assets of the unit were impaired. The carrying amounts the assets of the unit at 31 December 2011 were: Buildings, net (Depreciated at P60,000 per annum) Machinery, net (Depreciated at P45,000 per annum) Goodwill Inventory Receivables, net (Allow. for doubtful debts of P5,000) Cash Total

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P240,000 180,000 15,000 80,000 35,000 20,000 P570,000

P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. Tweak Corporation determined the value in use of the unit to be P535,000. The receivables were considered to be collectible, except those considered doubtful. During 2012, Tweak Corporation increased the depreciation charge on buildings to P65,000 per annum, and to P50,000 per annum for factory machinery. The inventory on hand at 31 December 2012 was sold by the end of 2012. At 31 December 2012, Tweak Corporation, due to a return in the market to the use of traditional barrels for wines and an increase in wine production, assessed the recoverable amount of the cash-generating unit to be P20,000 greater than the carrying amount of the unit. 30. How much is the carrying amount of buildings at 31 December 2011 after allocating impairment loss? a. P230,400 c. P231,028 b. P224,300 d. P228,571 31. How much is the carrying amount of factory machinery at 31 December 2012 after the reversal of impairment loss? a. P135,000 c. P131,322 b. P131,793 d. P123,271 CASH AND CASH EQUIVALENTS 32. The following data pertain to Lincoln Corporation on December 31, 2012: Current account at Metrobank P1,800,000 Current account at Allied Bank (100,000) Payroll account 500,000 Foreign bank account (in equivalent pesos) 800,000 Savings deposit in a closed bank 150,000 Postage stamps 1,000 Employee’s post dated check 4,000 IOU from employees 10,000 Credit memo from a vendor for a purchase return 20,000 Traveler’s check 50,000 Money order 30,000 Petty cash fund (P4,000 in currency and expense receipts for P6,000) 10,000 Pension fund 2,000,000 DAIF check of customer 15,000 Customer’s check dated 1/1/13 80,000 Time deposit – 30 days 200,000 Money market placement (due 6/30/13) 500,000 Treasury bills, due 3/31/13 (purchased 12/31/12) 200,000 Treasury bills, due 1/31/13 (purchased 2/1/12) 300,000 The cash and cash equivalents as of December 31, 2012 is a. P2,784,000 c. P3,784,000 b. P3,084,000 d. P3,584,000 BANK RECONCILIATION 33. The cash in bank account of S-mart, Inc. for April showed an ending balance of P129,298. Deposits in transit on April 30 was P18,200. Outstanding checks as of April 30, were P59,435, including a P5,000 check which the bank had certified on April 27. During the month of April, the bank charged back NSF checks in the amount of P3,435 of which P1,835 had been redeposited by April 20. On April 23, the bank charged S-Mart’s account for a P2,200 items which should have been charged against K-mart, Inc., the error was not detected by the bank. During April, the proceeds from notes collected by the bank for S-Mart, Inc. was P7,548 and bank charges for this services was P18.

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How much is the unadjusted balance per bank on April 30? a. P95,263 c. P173,663 b. P88,333 d. P169,263 Use the following information for the next two questions. Banaue Company deposits all receipts and makes all payments by check. The following information is available from the cash records: May 31 Bank Reconciliation Balance per bank

P262,460

Add: Deposits in transit

21,000

Deduct: Outstanding checks

( 38,000)

Balance per books

P245,460

Month of June Results Per Bank Per Books Balance June 30 P279,950 P303,550 June deposits 107,840 158,890 June checks 111,000 100,800 June note collected (not included in June deposits) 30,000 -0June bank service charge 350 -0June NSF check of a customer returned by the bank (recorded by bank as a charge) 9,000 -034. The deposits in transit as of June 30 is a. P72,050 c. P51,050 b. P70,250 d. P42,050 35. The outstanding checks as of June 30 is a. P27,800 c. P37,150 b. P28,700 d. P31,750 TRADE AND OTHER RECEIVABLES 36. On December 31, 2012 the accounts receivable control account of Ipil-ipil Co. had a balance of P181,000. An analysis of the accounts receivable account showed the following: Accounts known to be worthless Advance payments to creditors on purchase orders Advances to affiliated companies Customers’ accounts reporting credit balance arising from sales return Interest receivable on bonds Other trade accounts receivable – unassigned Subscriptions receivable for ordinary share capital due in 30 days Trade accounts receivable – assigned Trade installment receivable due 1 – 18 months, (including unearned finance charges, P2,000) Trade receivables from officers, due currently Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) Total

P

2,500 10,000 25,000

(15,000) 10,000 50,000 55,000 15,000 22,000 1,500 5,000 P181,000

The correct balance of trade accounts receivable of Ipil-ipil on December 31, 2012 is a. P 86,500 c. P 91,500 b. P103,500 d. P206,000 37. John Corp. has the following data relating to accounts receivable for the year ended December 31, 2012: Accounts receivable, January 1, 2012 Allowance for doubtful accounts, January 1, 2012

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P480,000 19,200

P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. Sales during the year, all on account, terms 2/10, 1/15, n/60 Cash received from customers during the year Accounts written off during the year

2,400,000 2,560,000 17,600

An analysis of cash received from customers during the year revealed that P1,411,200 was received from customers availing the 10-day discount period, P792,000 from customers availing the 15-day discount period, P4,800 represented recovery of accounts written-off, and the balance was received from customers paying beyond the discount period. The allowance for doubtful accounts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2012 is 125% of the rate used on December 31, 2011. The doubtful accounts expense for the year ended December 31, 2012 is a. P6,880 c. P8,720 b. P7,120 d. P8,960 LOANS AND RECEIVABLES – LONG-TERM Use the following information for the next two questions. Money Bank granted a loan to a borrower on January 1, 2012. The interest rate on the loan is 10% payable annually starting December 31, 2012. The loan matures in five years on December 31, 2016. The data related to the loan are: Principal amount Direct loan origination cost Indirect loan origination cost Origination fee received from borrower

P4,000,000 61,520 26,400 350,000

38. The effective interest rate of the loan is a. P10% c. P12% b. P11% d. P13% 39. The carrying amount December 31, 2012 is a. P4,000,000 b. P3,807,730

of

the

loan

receivable

on

c. P3,756,902 d. P3,711,520

RECEIVABLE FINANCING Use the following information for the next two questions. Seller Corp. factored P400,000 of accounts receivable with Buyer, Inc., on a without-recourse basis. The factor charge was 1.75% of the amount of receivables, and an additional 4% was retained to cover probable adjustments. In addition to the factor charge, a finance charge was withheld equal to 12% annually for any amounts advanced prior to the due dates of the receivables. This charge was based on 100% of the face value. The average credit term was 30 days from the date of transfer. According to the terms of the factoring agreement, Seller was to handle returned goods, allowances, and shipping disputes. Buyer was to collect the cash and acknowledge sales discounts, but such discounts were to be charged to Seller. Credit losses were to be absorbed by Buyer. Seller has not recorded any bad debt expense related to the factored receivables. The following transactions pertain to this factoring arrangement: Aug.

1 31

Sept. 20

The receivable records were transferred to Buyer. Buyer collected P234,000 during August after allowing for P9,000 of sales discounts. Sales returns and allowances during August totaled P2,400. Buyer wrote off a P2,000 account after

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30 Oct. 10

learning of the company's bankruptcy. Buyer collected P151,720 during September. Sales returns and allowances during September totaled P880. Seller and Buyer made a final cash settlement.

40. What net cash proceeds did Seller ultimately realize from the factoring? a. P389,000 c. P380,000 b. P385,720 d. P376,720 41. What was the factor's net income from the factoring? a. P11,000 c. P9,000 b. P 3,280 d. P2,000 42. The Hinoba-an Department Store wishes to discount two notes receivable arising from the sale of merchandise in order to meet some maturing obligations. Both notes have a face amount of P50,000 each and are due in one year. Note A is a non-interest bearing note while Note B is to be paid with an interest of 12%. The bank rate in discounting notes is 12%. Assuming that the notes were discounted ten months prior to maturity, the proceeds from both notes discounted is a. P94,280 c. P 95,400 b. P93,280 d. P103,880 INVESTMENT IN DEBT SECURITIES Use the following information for the next two questions. On April 1, 2012, Purefoods Company purchased as a short-term investment a P1,000,000 face value 8% bond for P905,000 including accrued interest. The bonds were designated as held for trading. The commission to acquire the bonds was P5,000. The bonds are dated January 1, 2012 and mature on January 1, 2017, and pay interest semi-annually on January 1 and July 1. On December 31, 2012, the bonds had a market value of P920,000. On April 1, 2013, Purefoods sold the bonds for a total consideration of P950,000. 43. What amount should Purefoods report as unrealized gain in its 2012 income statement? a. P35,000 c. P30,000 b. P15,000 d. P 0 44. How much is the gain from the sale of short-term investment in debt securities on April 1, 2013? a. P30,000 c. P10,000 b. P45,000 d. P65,000 Use the following information for the next two questions. On January 1, 2011, YOU TOO Corporation purchased P1,000,000 10% bonds designated as held-to-maturity. The bonds were purchased to yield 12%. Interest is payable annually every December 31. The bonds mature on December 31, 2015. On December 31, 2011 the bonds were selling at 99. On December 31, 2012, YOU TOO sold P500,000 face value bonds at 101. The bonds were selling at 103 on December 31, 2013. 45. How much is the realized gain on sale of the investment in bonds in 2012? a. P41,060 c. P35,387 b. P29,010 d. P10,000 46. How much should be reported as component of equity on December 31, 2013? a. P39,010 c. P31,895 b. P29,010 d. P 0

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC.

INVESTMENT IN EQUITY SECURITIES During 2011, the first year of its operations, Osprey Industries purchased the following securities: Fair value Sec. Class. Cost 12/31/11 12/31/12 A FVTPL P220,000 P140,000 P 90,000 B FVTPL 70,000 100,000 110,000 C FVTOCI 160,000 150,000 160,000 D FVTOCI 200,000 250,000 120,000 During 2012, Osprey sold one-half of security A for P100,000 and one-half of security D for P130,000. 47. The total amount to be recognized loss related to Osprey’s financial through profit or loss is a. P60,000 b. P40,000

in the 2012 profit or assets at fair value c. P 10,000 d. P100,000

48. The total amount to be recognized in the 2012 profit or loss related to Osprey’s financial assets at fair value through other comprehensive income is a. P30,000 c. P70,000 b. P 5,000 d. P 0 49. Lasam Company received dividends from its investments in ordinary shares during the year 2012 as follows:  A share 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 Lasam owns a 20% interest.  A cash dividend of P1,500,000 from C Company in which Lasam owns a 10% interest.  10,000 ordinary shares of D Company in lieu of cash dividend of P20 per share. The market price of D Company’s shares was P180. Lasam holds originally 100,000 ordinary shares of D Company. Lasam owns 5% interest in D Company.  A liquidating dividend of P2,000,000 from E Company. Lasam owns a 5% interest in E Company.  A dividend in kind of one ordinary share of X Company for every 5 ordinary shares of F Company held. Lasam holds 200,000 F Company shares which have a market price of P50 per share. The market price of X Company’s ordinary share is P30 per share. What amount of dividend income should Lasam report in its 2012 income statement? a. P4,500,000 c. P6,300,000 b. P5,700,000 d. P5,900,000 50. On January 2, 2012, Theodora Company purchased 40,000 shares of Byzantine, Inc. stock at P100 per share. Brokerage fees amounted to P120,000. A P5 dividend per share of Byzantine, Inc. shares had been declared on December 15, 2010, to be paid on March 31, 2012 to shareholders of record on January 31, 2012. The shares are designated as available-for-sale. On December 31, 2012 the investment has a fair value of P3,820,000. How much should be recognized in the 2012 other comprehensive income related to these securities? a. P100,000 c. P300,000 b. P180,000 d. P 0 INVESTMENT IN ASSOCIATES

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51. On January 2, 2011, Maco, Inc. acquired a 15% interest in Nacon Corp. by paying P2,000,000 for 10,000 ordinary shares. On this date, the net assets of Nacon Corp. totaled P12,000,000. The fair values of Nacon Corp.’s identifiable assets and liabilities were equal to their book values. The investment in Nacon Corp. is not intended for trading. On January 1, 2012, Maco paid P4,500,000 for 30,000 additional ordinary shares of Nacon, which represents a 25% interest in Nacon. The fair value of Nacon’s identifiable net assets, was equal to their book values of P13,000,000. During 2011, and 2012 the following occurred:

2011 2012

Nacon’s Profit P2,000,000 5,000,000

Dividends Declared by Nacon P1,000,000 1,500,000

The fair value of Maco's investment in Nacon securities is as follows: December 31, 2011, P2,700,000; December 31, 2012, P8,700,000. The balance of the investment in Nacon account at December 31, 2012 is a. P8,700,000 c. P8,050,000 b. P8,600,000 d. P7,525,000 DERIVATIVES AND HEDGE ACCOUNTING 52. On January 1, 2011, Doodles Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2014. Under the agreement, the market rate of interest on each January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. To protect itself from fluctuations in interest rates, the entity hedges the variable interest by entering into a four-year "receive variable, pay fixed" interest rate swap with a speculator. The interest rate swap is based on the notional amount of P5,000,000 and an 8% fixed interest rate. The entity has designated this interest rates swap as a cash flow hedge of the variability of interest payments on the variable rate loan. Assume that market interest rates are 8% on January 1, 2011, 10% on January 1, 2012, and 11% on January 1, 2013. (Round off present value factors to four decimal places) The amount to be recognized as derivative asset on December 31, 2012 is a. P122,185 c. P256,875 b. P366,555 d. P 85,625 Use the following information for the next two questions. On December 12, 2012, Slow Corp. entered into two forward exchange contracts, each to purchase 100,000 euros in ninety days. The relevant exchange rates are as follows: Forward Rates for Date Spot Rates March 12, 2013 11/30/12 P87 P89 12/12/12 88 90 12/31/12 92 93 53. Slow entered into a second forward contract to hedge a commitment to purchase equipment being manufactured to Slow’s specifications. The expected delivery date is March 2013 at which time settlement is due to the manufacturer. The hedge qualifies as a fair

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. value hedge. At December 31, 2012, what amount of foreign currency transaction gain from this forward contract should Slow include in net income? a. P1,000,000 c. P300,000 b. P 500,000 d. P 0 54. Slow entered into a third forward contract for speculation. At December 31, 2012, what amount of foreign currency transaction gain from this forward contract should Slow include in net income? a. P1,000,000 c. P300,000 b. P 500,000 d. P 0 55. On January 2, 2012, Jones Company purchases a call option for P300 on Merchant ordinary shares. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of P50 per share. The market price of a Merchant share is P50 on January 2, 2012 (the intrinsic value is therefore P0). On March 31, 2012, the market price for Merchant share is P53 per share, and the time value of the option is P200. What was the effect on profit of entering into the derivative transaction for the period January 2 to March 31, 2012? a. P3,000 c. P2,700 b. P2,900 d. P 0 ACCOUNTING FOR OTHER INVESTMENTS 56. Following are selected transactions in chronological order of Bayombong Company and its trustee in connection with a sinking fund. a. b. c. d. e. f. g.

Cash contribution to the sinking fund, P1,000,000. Acquisition of securities at par by the trustee, P700,000. The trustee receives interest on the securities, P60,000. The trustee pays expenses of P30,000. The trustee sells the securities for P800,000 plus accrued interest of P10,000. The trustee pays bonds payable of P1,000,000 and interest of P100,000. The trustee remits the remaining cash to Bayombong Company.

How much was remitted by the trustee to Bayombong Company? a. P150,000 c. P50,000 b. P140,000 d. P40,000 57. On January 1, 2007, Ball, Inc. purchased a P1,000,000 ordinary life insurance policy on its president. The policy year and Ball’s accounting year coincide. Additional data are available for the year ended December 31, 2012: Annual premium paid on 1/1/2012 Dividend received 7/1/2012 Cash surrender value, 1/1/2012 Cash surrender value, 12/31/2012

P20,000 3,000 43,500 54,000

Ball, Inc., is the beneficiary under the life insurance policy. How much should Ball report as life insurance expense for 2012? a. P6,500 c. P17,000 b. P9,500 d. P20,000 IMPAIRMENT OF FINANCIAL ASSETS Use the following information for the next two questions. On December 31, 2009, Entity X acquired Ms. Leading Corporation’s P1,000,000 bonds for P927,880. The market interest rate at that time was 12%. The stated interest rate was 10%, payable annually. The bonds mature in five years and classified as held-to-maturity. Unfortunately,

Page 8 of 16

because of lower sales, Ms. Leading’s financial condition worsened. On December 31, 2011, Entity X determined that it was probable that the issuer would pay back only P600,000 of the principal at maturity. In 2012, Ms. Leading’s officers consulted a feng shui expert to seek pieces of advice to improve the company’s financial condition. Fortunately, the company’s sales started to pick up and the credit rating of Ms. Leading improved. At December 31, 2012, Entity X reassessed the collectibility of the bonds and now expects to collect P1,300,000 from Ms. Leading at maturity date. 58. How much should be recognized as impairment loss in 2011? a. P572,920 c. P332,740 b. P524,900 d. P284,720 59. How much should be recognized as reversal impairment loss in 2012? a. P558,030 c. P524,900 b. P539,130 d. P487,880

of

TRADE AND OTHER PAYABLES 60. Case Corporation had accounts payable of P5,000,000 recorded in the general ledger as of December 31, 2012 before consideration of the following unrecorded transactions: Invoice Date date Amount shipped 1-3-13 P400,000 12-22-12 1-2-13

650,000 12-28-12

12-26-12 600,000 1-10-13

1-2-13

450,000 12-31-12

Date received 12-24-12 1-2-13 1-3-13 1-5-13

FOB terms Destination Shipping point Shipping point Destination

In the December 31, 2012 statement of financial position, the accounts payable should be reported in the amount of a. P5,000,000 c. P6,050,000 b. P5,400,000 d. P7,100,000 61. Pythagoras Co. must determine the December 31, 2012 year-end accruals for advertising and rent expenses. A P2,000 advertising bill was received January 7, 2013. It related to costs of P1,500 for advertisements in December 2012 issues and P500 for advertisements in January 2, 2013 issues of the newspaper. A store lease, effective December 16, 2011, calls for fixed rent of P4,800 per month payable 1 month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P1,200,000 per calendar year is payable on January 31 of the following year. Net sales for 2012 were P2,200,000. In its December 31, 2012 statement of financial position, Pythagoras should report accrued liabilities of a. P56,800 c. P56,300 b. P51,500 d. P53,900 NOTES PAYABLE Use the following information to answer the next two questions: Funan Industries purchases new specialized manufacturing equipment on July 1, 2011. The equipment cash price is P79,000. Funan signs a deferred payment contract that provides for a down payment of P10,000 and an 8-year note for P103,472. The note is to be paid in 8 equal annual payments of P12,934. The payments include 10% interest and are made on June 30 of each year, beginning June 30, 2012.

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC.

62. The carrying amount of the note payable on December 31, 2012 is a. P62,966 c. P66,115 b. P56,329 d. P59,818 63. The total interest expense for the year ended December 31, 2012 is a. P6,900 c. P6,612 b. P6,599 d. P5,982 DEBT RESTRUCTURING 64. On December 31, 2012, X Corp. was indebted to Zyland Co. on a P1,000,000, 10% note. Only interest had been paid to date, and the remaining life of the note was 2 years. Because X Corp. was in financial difficulties, the parties agreed that X Corp. would settle the debt on the following terms:  Settle one-half of the note by transferring land with a recorded value of P400,000 and a fair value of P450,000.  Settle one-fourth of the note by transferring 10,000, P1 par, ordinary shares with a fair market value of P15 per share.  Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5% for the remaining 2 years and reducing the principal to P150,000. What total gains should X Corp. record in 2012 from this troubled debt restructuring? a. P135,000 c. P313,024 b. P200,000 d. P213,024 BONDS PAYABLE Use the following information for the next two questions. On January 2, 2007, Picard Enterprises issued P2,400,000 of 8 percent, 15-year semiannual coupon bonds. Each bond is convertible into 40, P15 par, ordinary shares, which was trading at P20 per share on the date of the bond issue. The bonds were issued at 106. Without the conversion feature, the bonds would have been issued for 104.5.

Mindoro Company should report net rental income for 2012 at a. P820,000 c. P890,000 b. P908,000 d. P800,000 68. Bowtock has leased an item of plant under the following terms:  Commencement of the lease - January 1, 2011  Term of the lease - 5 years  Annual payments in advance - P12,000  Cash price and fair value of the asset – P52,000  Implicit interest rate – 8% per annum  Depreciation policy – 20% per annum The total lease related expenses for the fiscal year ended September 30, 2012 is a. P13,072 c. P12,272 b. P12,896 d. P10,200 Use the following information for the next two questions. Camarines Company is a dealer in machinery. On January 1, 2012, a machine was leased to another entity with the following provisions: Annual rental payable at the end of each year Lease term and useful life of machinery Cost of machinery Residual value-unguaranteed Implicit interest rate PV of an ordinary annuity of 1 for 5 periods at 10% PV of 1 for 5 periods at 10%

P2,000,000 5 years P5,000,000 P1,000,000 10% 3.79 0.62

At the end of the lease term, the machinery will revert to Camarines. The perpetual inventory system is used. Camarines incurred initial direct costs of P200,000 in finalizing the lease agreement. 69. How much is the total finance income from the lease to be recognized by Camarines over the lease term? a. P2,800,000 c. P2,420,000 b. P1,800,000 d. P2,600,000

On January 3, 2012, all of the bonds were converted into ordinary shares. The market price of the shares was P28 per share on the date of conversion. The issue premium is amortized using the straight-line method.

70. Camarines Company will recognize profit on the sale at a. P3,000,000 c. P5,800,000 b. P3,200,000 d. P6,000,000

65. The issuance of the bonds increased the entity’s equity by a. P144,000 c. P36,000 b. P108,000 d. Nil

Naga Company leases computer equipment to customers under direct financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Naga wishes to earn 14% interest on a 5-year lease of equipment with a cost of P1,955,000. The present value of an annuity due of 1 at 14% for 5 years is 3.91 Naga incurs initial direct cost of P65,000.

66. The conversion of the bonds increased the entity’s equity by a. P2,496,000 c. P1,068,000 b. P2,472,000 d. P1,032,000 LEASES 67. Mindoro Company purchased a new machine on January 1, 2012 at a cost of P2,000,000 for the purpose of leasing it. The machine is estimated to have a useful life of ten years with a residual value of P200,000. Depreciation is computed by Mindoro on a straight line basis. On January 2, 2012, Mindoro entered into a lease contract with Oriental Company for a term of up to four years until December 31, 2015. The lease fee is P1,000,000 per year and was paid in advance by Oriental. Mindoro paid P120,000 commissions associated with negotiating the lease and receive an additional P400,000 as lease bonus.

Use the following information for the next two questions.

71. What is the total amount of interest income that Naga will earn over the life of the lease? a. P480,000 c. P545,000 b. P500,000 d. P273,700 72. What is the interest income to be recognized in the first year of the lease? a. P242,400 c. P273,700 b. P182,400 d. P203,700 73. On December 31, 2012, Norhan Corp. sold Noel Co. two airplanes and simultaneously leased them back. Additional information pertaining to the saleleasebacks follows: Sales price

Page 9 of 16

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Plane #1 P600,000

Plane #2 P1,000,000

P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. Carrying amount, 12/31/12 P100,000 P550,000 Remaining useful life, 12/31/12 10 years 35 years Lease term 8 years 3 years Annual lease payments P100,000 P200,000 In its December 31, 2012 statement of financial position, what amount should Norhan report as deferred gain on these transactions? a. P950,000 c. P450,000 b. P500,000 d. P 0 EMPLOYEE BENEFITS Use the following for the next five questions: The following information relates to the defined benefit pension plan of the Shoot Company as of December 31, 2012: Projected benefit obligation (PBO) Fair value of plan assets

P17,700,000 14,500,000

Pension data for the year 2013 follows: Current service cost Past service cost Contributions to the plan Benefits paid to retirees Total return on plan assets Decrease in projected benefit obligation due to changes in actuarial assumptions

P

880,000 200,000 1,100,000 1,500,000 2,000,000 900,000

The average remaining service period of the covered employees is 5 years. Settlement interest rate and expected rate of return are 12% and 10%, respectively. 74. The amount to be recognized in 2013 profit or loss is a. P 304,000 c. P1,204,000 b. P1,464,000 d. P1,304,000 75. The amount to be recognized in 2013 other comprehensive income is a. P1,160,000 c. P900,000 b. P 640,000 d. P 0 76. The amount to be recognize d in the statement of financial position as of December 31, 2013. a. P3,564,000 c. P3,904,000 b. P2,404,000 d. P 904,000 77. Fair value of plan assets as of December 31, 2013. a. P15,840,000 c. P16,100,000 b. P15,000,000 d. P17,600,000 78. Projected benefit obligation as of December 31, 2013. a. P18,504,000 c. P20,004,000 b. P19,404,000 d. P18,304,000 SHARE-BASED PAYMENT TRANSACTIONS 79. An entity grants to an employee the right to choose either 1,000 phantom shares, ie a right to a cash payment equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’ service. If the employee chooses the share alternative, the shares must be held for three years after vesting date. At grant date, the entity’s share price is P50 per share. At the end of years 1, 2 and 3, the share price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date fair value of the share alternative is P48 per share.

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Compute for the amount to compensation expense in year 2. a. P21,867 b. P36,667

be

recognized

as

c. P19,334 d. P19,200

PROVISIONS AND CONTINGENCIES 80. Maybe Company is evaluating whether each of the following would be a liability, a provision or a contingent liability, or none of the above, in the financial statements of Maybe as at its balance date of 30 June 2012. Assume that Maybe’s financial statements are authorized for issue on 24 August 2012: a) An amount of P350,000 owing to Perhaps Company for services rendered during May 2012. b) Long-service leave, estimated to be P5,000,000, owing to employees in respect of past services. c) Costs of P260,000 estimated to be incurred for relocating employee D from Maybe’s head office location to another city. The staff member will physically relocate during July 2012. d) Provision of P500,000 for the overhaul of a machine. The overhaul is needed every 5 years and the machine was 5 years old as at 30 June 2012. e) Damages awarded against Maybe resulting from a court case decided on 26 June 2012. The judge has announced that the amount of damages will be set at a future date, expected to be in September 2012. Maybe has received advice from its lawyers that the amount of the damages could be anything between P50,000 and P8 million. How much should be reported as Provisions in Maybe Company’s statement of financial position as of 30 June 2012? a. P10,135,000 c. P5,350,000 b. P 6,110,000 d. P5,000,000 81. During January 2012, 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 2012 income statement, Tagkawayan should report what amount of pretax gain? a. P6,000,000 c. P2,000,000 b. P4,000,000 d. P3,000,000 INCOME TAXES 82. The following differences enter into the reconciliation of financial income and taxable income of Celtics Company for the year ended December 31, 2012, its first year of operations. Accounting profit Excess tax depreciation Litigation accrual Unearned rent income deferred on the books but appropriately recognized in taxable income Interest income from long-term certificate of deposit

P4,500,000 3,000,000 450,000 250,000 100,000

Additional information:  Excess tax depreciation will reverse equally over a four-year period, 2013-2016.  It is estimated that the litigation liability will be paid in 2016.

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC.   

Rent income will be recognized during the last year of the lease, 2016. Interest income from the from long-term certificate of deposit is expected to be P100,000 each year until their maturity at the end of 2016. Tax rate is 35%.

Compute for the current income tax expense for 2012. a. P735,000 c. P560,000 b. P647,500 d. P770,000 83. An entity has the following assets and liabilities in its statement of financial position at December 31, 2012: Property Plant and equipment Inventory Trade receivables Trade payables Cash

P10,000,00 0 5,000,000 4,000,000 3,000,000 6,000,000 2,000,000

The value for tax purposes of property and for plant and equipment are P7 million and P4 million respectively. The entity has made a provision for inventory obsolescence of P2 million, which is not allowable for tax purposes until the inventory is sold. Further, an impairment charge against trade receivables of P1 million has been made. This charge does not relate to any specific trade receivable but to the entity’s collective assessment of the overall collectibility of the amount. This charge will not be allowed in the current year for tax purposes but will be allowed in the future. Income tax paid is at 35%. The deferred tax provision at December 31, 2012 is a. P1,400,000 c. P2,100,000 b. P1,050,000 d. P 350,000 EQUITY TRANSACTIONS 84. Helu Corporation was organized on January 1, 2010, with an authorization of 1,000,000 ordinary shares with a par value of P5 per share. During 2010, the corporation had the following equity transactions: Jan. 4 April 8 June 9 July 29 Dec. 31

-

Issued 200,000 shares @ P5 per share. Issued 100,000 shares @ P7 per share. Issued 30,000 shares @ P10 per share Purchased 50,000 shares @ P4 per share. - Sold 50,000 shares held in treasury @ P8 per share.

What should be the total Share Premium as of December 31, 2010? a. P400,000 c. P500,000 b. P450,000 d. P550,000 85. The following balances are shown in the shareholders' equity of tamarind company on December 31, 2009: Preference share capital, P10 par, 100,000 shares Ordinary share capital, P10 par, 500,000 shares, Share premium - preference Share premium – ordinary Retained earnings

P1,000,000 5,000,000 50,000 200,000 100,000

During 2010, the following transactions pertaining to the shareholders' equity were completed:  Retirement of 5,000 preference shares at P11 per share.  Purchase of 5,000 ordinary shares at P12 per share.

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  

Share split, ordinary, 2 for 1. Reissue of 2,000 treasury shares at P8 per share. Profit for 2010, P300,000.

The total shareholders' equity on December 31, 2010 is a. P6,556,000 c. P6,350,000 b. P6,551,000 d. P6,251,000 86. Cerritos Corporation began operations on January 1, 2009. During its first three years of operations, Cerritos reported net income and declared dividends as follows: 2009 2010 2011

Net income P 80,000 250,000 300,000

Dividends declared P 0 100,000 100,000

The following information related to 2012: Income before income tax Prior period adjustment: understatement of 2010 depreciation expense (before taxes) Cumulative decrease in income from change in inventory methods (before taxes) Dividends declared (of this amount, P50,000 will be paid on January 15, 2013) Effective tax rate

P480,000 40,000 70,000 200,000 35%

As at December 31, 2012, the retained earnings of Cerritos Corporation is a. P520,500 c. P430,000 b. P484,500 d. P470,500 87. Leyte Corporation has incurred losses from operations for several years. At the recommendation of the newly hired president, the board of directors voted to implement a quasi-reorganization, subject to shareholder approval. Immediately prior to the restatement, on June 30, Leyte's balance sheet was as follows: Current assets Property, plant, and equipment (net) Other assets Total liabilities Share capital Share premium Retained earnings (deficit)

P 550,000 1,350,000 200,00 0 P2,100,000 P 600,000 1,600,000 300,000 (400,000) P2,100,000

The shareholders approved the quasi-reorganization effective July 1, to be accomplished by a reduction in other assets of P150,000; a reduction in property, plant, and equipment (net) of P350,000; and appropriate adjustment to the capital structure. To implement the quasi-reorganization, Leyte should reduce the share capital account in the amount of a. P 0 c. P400,000 b. P100,000 d. P600,000 EARNINGS PER SHARE 88. Maria Lourdes, controller at Garcia Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Garcia's external financial statements. Below is selected financial information for the year ended December 31, 2012. Long-term debt

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P1-203

PROFESSIONAL REVIEW and TRAINING CENTER, INC. Notes payable, 10% 7% convertible bonds payable 10% bonds payable Total long-term debt Shareholders' equity Preference share capital, 8.5% cumulative, P50 par value, 100,000 shares authorized, 25,000 shares issued and outstanding Ordinary share capital, P1 par, 2,000,000 shares authorized, 1,000,000 shares issued and outstanding Share premium Retained earnings Total shareholders' equity

P 1,000,000 5,000,000 6,000,000 P12,000,000

P 1,250,000

1,000,000 4,000,000 6,000,000 P12,250,000

The following transactions have also occurred at Garcia. a. Options were granted in 2010 to purchase 100,000 shares at P15 per share. Although no options were exercised during 2012, the average price per ordinary share during year 2012 was P20 per share. The market price per ordinary share on December 31, 2012 was P25. b. Each bond was issued at face value. The 7% convertible debenture will convert into 50 ordinary shares per P1,000 bond. It is exercisable after 5 years and was issued in 2011. c. The 8.5% preference shares were issued in 2010. d. No preference share dividends were declared in 2011 and 2012. e. The 1,000,000 ordinary shares were outstanding during 2012. f. Profit for the year 2012 was P1,500,000, and the average income tax rate is 40%. For the year ended December 31, 2012, calculate the diluted earnings per share for Garcia Pharmaceutical Industries. a. P1.37 c. P1.26 b. P1.32 d. P1.24 ACCOUNTING CHANGES AND ERRORS 89. On January 1, 2009, Cherry Bomb Co. purchased a machine for P528,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2012, Cherry Bomb determined that the machine had a useful life of six years from the date of acquisition and will have a residual value of P48,000. An accounting change was made in 2012 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2012, of a. P292,000 c. P320,000 b. P308,000 d. P352,000 90. Balungao Company changed its accounting policy in 2012 with respect to the valuation of inventories. Up to 2011, inventories were valued using weightedaverage cost (WAC) method. In 2012 the method was changed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and flow of inventories in the economic cycle. The impact on inventory valuation was determined to be At December 31, 2010: At December 31, 2011: At December 31, 2012:

An increase of P100,000 An increase of P150,000 An increase of P200,000

The change in accounting policy increased net profit for 2012 by a. P200,000 c. P450,000

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b.

P150,000

d.

P 50,000

91. Allspark showed income before income taxes of P250,000 on December 31, 2012. On your year-end verification of the transactions of the company, you discovered the following errors: a) P100,000 worth of merchandise was purchased in 2012 and included in the ending inventory. However, the purchase was recorded only in 2013. b) A merchandise shipment valued at P150,000 was properly recorded as purchases at year-end. Since the merchandise were still at the port area, they were inadvertently omitted from the inventory balance at December 31, 2012. c) Business taxes for the 4th quarter of 2012, amounting to P50,000, was recorded when payment was made by the firm in January, 2013. d) Rental of P30,000 on an equipment , applicable for six months, was received on November 1, 2012. The entire amount was reported as income upon receipt. e) Insurance premium covering the period from July 1, 2012 to July 1, 2013, amounting to P120,000, was paid and recorded as expense on July 31, 2012. The company did not make any adjustment at the end of the year. The corrected income before income taxes for 2012 should be a. P240,000 c. P280,000 b. P290,000 d. P340,000 STATEMENT OF FINANCIAL POSITION Use the following information for the next two questions. The following totals are taken from the December 31, 2012, statement of financial position of Streamer Company: Current assets Long-term assets Current liabilities Long-term liabilities

P350,000 800,000 240,000 270,000

Additional information: (a) Cash of P38,000 has been placed in a fund for the retirement of long-term debt. The cash and longterm debt have been offset and are not reflected in the financial statements. (b) Long-term assets include P50,000 in treasury shares. (c) Cash of P14,000 has been set aside to pay taxes due. The cash and taxes payable have been offset and do not appear in the financial statements. (d) Advances on salespersons' commissions in the amount of P21,000 have been made. Also, sales commissions payable total P24,000. The net liability of P3,000 is included in Current Liabilities. After making any necessary changes, compute for the totals of Streamer's: 92. Current assets a. P385,000 b. P423,000

c. P350,000 d. P364,000

93. Current liabilities a. P254,000 b. P240,000

c. P278,000 d. P275,000

STATEMENT OF COMPREHENSIVE INCOME 94. The following information was taken from Basilan Company’s accounting records for the year ended December 31, 2012: Sales Decrease in goods in process inventory

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P10,000,000 200,000

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. Decrease in raw materials inventory Increase in finished goods inventory Raw materials purchased Direct labor payroll Factory overhead Selling expenses Freight out General and administrative expenses

350,000 500,000 2,100,000 1,000,000 800,000 300,000 900,000 1,600,000

99. Changes in the statement of financial position account balances for the Peak Sales Co. during 2012 follow. Dividends declared during 2012 were P25,000.

Cash Accounts receivable, net Inventory Buildings and Equipment (net) Patents Accounts payable Bonds payable Share capital Share premium

Basilan Company’s profit before tax is a. P3,550,000 c. P3,250,000 b. P4,250,000 d. P4,150,000 Use the following information for the next two questions. Tawi2 Company’s income statement for the year ended December 31, 2012 reported net profit of P10,000,000. The auditor raised questions about the following amounts that had been included in the net profit: Unrealized loss on decline in value of available for sale securities Loss on write-off of inventory due to a government ban net of tax Adjustment of profit of prior year net-debit Loss from expropriation of property, net of tax Exchange differences gain on translating foreign operations Revaluation surplus realization

Calculate the net income for the year assuming that no transactions other than the dividends affected retained earnings. a. P117,500 c. P142,500 b. P267,500 d. P292,500

P 500,000 1,500,00 0 2,000,00 0 3,500,00 0 4,500,00 0 1,000,00 0

Increase (Decrease) P95,500 92,000 (30,000) 190,000 (5,000) (75,000) 150,000 100,000 50,000

STATEMENT OF CASH FLOWS Use the following information for the next five questions. The following is a list of the items to be included in the preparation of the 2012 statement of cash flows for the Norhan Company: a) Net income, P59,200 b) Payment for purchase of building, P98,000 c)

Increase in accounts receivable, P7,400

d) Proceeds from issuance of ordinary shares, P37,100

The loss from expropriation was unusual in occurrence in Tawi2’s line of business.

e) Increase in accounts payable, P4,500

95. Tawi2 Company’s 2012 statement of comprehensive income should report profit at a. P9,000,000 c. P7,000,000 b. P6,500,000 d. P8,500,000

g) Depreciation expense, P12,600

i)

Gain on sale of land, P5,300

96. Tawi2 Company’s 2012 statement of comprehensive income should total comprehensive income at a. P12,000,000 c. P5,000,000 b. P11,000,000 d. P4,000,000

j)

Decrease in inventory, P3,700

SINGLE ENTRY AND CASH-TO-ACCRUAL BASIS 97. The following relate to Panda Company’s patents assigned to other entities: 12/31/2011 12/31/2012 Royalties receivable 500,000 1,500,000 Unearned royalties P200,000 P 600,000 During 2012, Panda received royalty remittance of P5,000,000. In its income statement for the year 2010, Panda should report royalty income of a. P6,400,000 c. P4,400,000 b. P5,600,000 d. P3,600,000 98. Peak Company borrows money under various loan agreement involving notes discounted and notes requiring interest payments at maturity. During the year ended December 31, 2012, Peak paid interest totaling P5,000,000. The balance sheets included the following: 12/31/2012 12/31/2011 Interest payable 2,500,000 2,000,000 Prepaid interest P1,500,000 P 500,000 How much interest expense should Peak report for 2012? a. P4,500,000 c. P3,500,000 b. P6,500,000 d. P5,500,000

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f)

Proceeds from sale of land, P7,000

h) Payment of dividends, P36,000

k) Payment for purchase of long-term investments, P9,600 l)

Amortization of discount on bonds payable, P1,900

m) Proceeds from issuance of note, P18,000 n) Increase in deferred taxes payable, P5,000 o) Equipment acquired by finance lease, P19,500 p) Decrease in salaries payable, P2,300 q) Beginning cash balance, P20,300 Based of the foregoing information, compute for the following. 100. Cash provided by operating activities a. P68,100 c. P74,900 b. P89,900 d. P71,900 101. Cash used in investing activities a. P120,100 c. P100,600 b. P107,600 d. P 9,600 102. Cash provided by financing activities a. P19,100 c. P20,600 b. P38,600 d. P 1,100 103. Net decrease in cash a. P19,600 b. P 6,600

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c. P13,400 d. P 9,600

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. 104. Cash balance, ending a. P13,700 b. P10,700

(Assume that all changes in the general price-level index took place more or less evenly during the year.)

c. P 700 d. P6,900

HYPERINFLATIONARY ECONOMY 105. Entity Q operates in hyperinflationary economy. Its balance sheet on December 31, 2012, follows: Cash Inventory Property, plant and equipment Current liabilities Noncurrent liabilities Share capital Retained earnings

P 3,500,000 27,000,000 9,000,000 7,000,000 5,000,000 4,000,000 23,500,000

The general price index at December 31 had moved in this way: 2008 – 100; 2009 – 130; 2010 – 150; 2011 – 240; 2012 – 300. The property, plant and equipment was purchased on December 31, 2010, and there is six months’ inventory held. The noncurrent liabilities were a loan raised on March 31, 2012. What is the retained earnings balance on December 31, 2012 after adjusting for hyperinflation? a. P35,500,000 c. P31,250,000 b. P27,500,000 d. P23,500,000 106. The following information Company for the year 2012:

pertains

Monetary assets: January 1 December 31 Monetary liabilities: January 1 December 31 Increase in net monetary items as restated to constant peso Decrease in net monetary items as restated to constant peso General price index: January 1 December 31

to

Inflation

P250,000 700,000 100,000 300,000 2,000,000 1,500,000 125 150

107. The Richmond Corporation presented the following balances from the historical peso income statement for the year ended December 31, 2012: P350,000 218,000 34,000 23,000 48,000

Other information include:  Merchandise available for sale came from 2011 inventory of P28,750 and 2012 purchases of P220,000.  Building costing P850,000 was acquired at the end of 2007.  Equipment totalled P115,000, of which P85,000 was bought at the end of 2009 and P30,000 was bought at the end of 2011.  The company uses the FIFO method of inventory valuation; average indexes for the year are used in restating inventories.  General price indexes at year end are as follows: 2009 – 100 2011 – 106 2010 – 102 2012 – 112

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ACCOUNTING PROCESS 108. The account balances December 31, 2012 follow:

of

Seiko

Accounts payable Accounts receivable Building Share capital Cash Equipment Land Notes payable Retained earnings

Corp.

as

of

P100,000 120,000 400,000 760,000 60,000 160,000 50,000 280,000 100,000

In a trial balance prepared on December 31, 2012, the sum of the debit column is a. P 860,000 c. P 790,000 b. P1,440,000 d. P1,240,000 109. Remember Company’s Prepaid Insurance account has the following balances: Balance beginning of year Balance end of year

The loss on purchasing power for the year 2012 is a. P280,000 c. P250,000 b. P300,000 d. P100,000

Sales Cost of goods sold Depreciation - building Depreciation - equipment All other expenses

What should Richmond Corporation report as net income for the year ended December 31, 2012 restated for general price-level changes? a. P16,512 c. P22,016 b. P22,852 d. P21,431

P5,600 6,400

During the year, an additional business insurance policy was purchased. A 2-year premium of P2,500 was paid and charged to Prepaid Insurance. The adjusting entry that was made to arrive at the ending balance included a. A debit to Prepaid Insurance of P800 b. A debit to Insurance Expense of P1,700 c. A credit to Prepaid Insurance of P800 d. A credit to Insurance Expense of P1,700 110. The accountant of Mutya Company made the following adjusting entry on December 31, 2012. Rent Income Unearned Rent Income

P

900

P

900

If annual rent is received in advance every March 1. the original transaction entry made was a. Debit Cash and credit Unearned Rent Income, P900. b. Debit Cash and credit Rent Income, P1,080. c. Debit Cash and credit Rent Income, P5,400. d. Debit Rent Income and credit Cash, P5,400 111. A company receives interest on a P30,000, 8%, 5year note receivable each April 1. At December 31, 2011, the proper adjusting entry was made to accrue interest receivable. Assuming that the company does not use reversing entries, what entry should be made on April 1, 2012 when the annual interest payment is received? a. Cash P 600 Interest Income P 600 b. Cash P1,800 Interest Receivable P1,800 c. Cash P2,400 Interest Receivable P1,800 Interest Income 600 d. Cash P2,400 Interest Income P2,400

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. OPERATING SEGMENTS 112. Jolbon 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, 2012.

1 2 3 4 5 6

Total revenue P13,000,000 10,000,000 8,000,000 3,000,000 3,500,000 2,500,000 P40,000,000

Operating profit P4,000,000 2,000,000 1,500,000 1,000,000 800,000 700,000 P10,000,000

Identifiable assets P25,000,000 20,000,000 15,000,000 7,000,000 7,500,000 5,500,000 P80,000,000

d.

116. In 2012, Roy Industries decided to discontinue its Laminating Division, a separately identifiable component of Roy’s business. At December 31, 2012, the division has not been completely sold. However, negotiations for the final and complete sale are progressing in a positive manner, and it is probable that the disposal will be completed within a year. Analysis of the records for the year disclosed the following relative to the Laminating Division: Operating loss for the year Loss on disposal of some Laminating Division assets during 2012 Expected operating loss in 2013 preceding final disposal Expected gain in 2013 on disposal of division

In its segment information for 2012, how many reportable segments does Jolbon have? a. Three c. Five b. Four d. Six 113. Celine Corporation and its divisions are engaged solely in manufacturing. The following data pertain to the industries in which operations were conducted for the year ended December 31, 2012: Operating Profit (Loss) Division A P30,000,000 B 10,000,000 C ( 8,000,000) D ( 2,000,000) E 5,000,000 In its 2012 financial statements, Celine Corporation should disclose an operating segment if operating profit or loss is at least a. P1,000,000 c. P4,500,000 b. P3,500,000 d. P5,500,000 114. Norte 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 Norte’s aggregate sales. In 2012, Division I had sales of P6,000,000, which was 20% of Norte’s total sales, and had traceable operating costs of P3,800,000. In 2012, Norte incurred operating costs of P1,000,000 that were not directly traceable to any of the divisions. In addition, Norte incurred interest expense of P600,000 in 2012. In reporting segment information, what amount should be shown as operating profit of Division I for 2012? a. P2,000,000 c. P1,880,000 b. P1,400,000 d. P2,200,000 NON-CURRENT ASSETS HFS AND DISPOSAL GROUP 115. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal group. The carrying amount of these assets immediately before classification as held for sale was P20 million. Upon being classified as held for sale, the assets were revalued to P18 million. The entity feels that it would cost P1 million to sell the disposal group. How would the reduction in the value of the assets on classification as held for sale be treated in the financial statements? a. The entity recognizes a loss of P2 million immediately before classification as held for sale and them recognizes an impairment loss of P1 million. b. The entity recognizes an impairment loss of P3 million. c. The entity recognizes an impairment loss of P2 million.

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The entity recognizes a loss of P3 million immediately before classifying the disposal group as held for sale.

P899,000 50,000 450,000 200,000

Assuming a 35% tax rate, how much will be reported as loss from discontinued operations in Roy’s 2012 income statement? a. P949,000 c. P616,850 b. P909,350 d. P779,350 INTERIM FINANCIAL REPORTING 117. An entity operates in the travel industry and incurs cost unevenly through the financial year. Advertising costs of P2 million were incurred on March 1, 2012, and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to be around P20 million for the year; of that sum, P3 million would relate to the period ending March 31, 2012. What costs should be included in the entity’s quarterly financial report to March 31, 2012? a. Advertising costs P2 million; staff bonuses P5 million b. Advertising costs P0.5 million; staff bonuses P5 million c. Advertising costs P2 million; staff bonuses P3 million d. Advertising costs P0.5 million; staff bonuses P3 million 118. Occidental Company’s P10,000,000 net income for the quarter ended September 30, 2012, included the following after-tax items  

A P1,200,000 gain realized on April 30, 2012 was allocated equally to the second, third and fourth quarters of 2012. A P3,000,000 cumulative loss resulting from a change in inventory valuation method was recognized on August 2, 2012.

In addition, Occidental paid P600,000 on February 1, 2012, for 2012 calendar-year property tax. Of this amount, P150,000 was allocated to the third quarter of 2012. For the quarter ended September 30, 2012, Occidental should report net income of a. P12,600,000 c. P11,800,000 b. P12,750,000 d. P 9,600,000 PFRS FOR SMEs 119. The SME Company has a single investment property which had originally cost P580,000 on 1 January 2009. At 31 December 2011 its fair value was P600,000 and at 31 December 2012 it had a fair value of P590,000. On acquisition, the property had a useful life of 40 years. What should be the expense recognized in SME's profit or loss for the year ended 31 December 2012 assuming

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. that the fair value of the property can be measured reliably without undue cost or effort? a. P24,500 c. P14,500 b. P14,750 d. P10,000 120. On January 1, 2011, Magdalena, an SME, purchased Victoria Company at a cost that resulted in recognition of goodwill of P5,000,000. During January of 2012, Magdalena spent an additional P2,000,000 on expenditures designed to maintain goodwill. Due to these expenditures, at December 31, 2012, Magdalena estimated that the benefit period of goodwill was indefinite. In its December 31, 2012 statement of financial position, what amount should Magdalena report as goodwill? a. P7,000,000 c. P5,000,000 b. P5,600,000 d. P4,000,000 121. On 1 January 2012 an entity acquired a transferable nine-year taxi license by way of government grant when the fair value of the license was P90,000. The license is given, free of charge, to the entity on the basis of the entity’s performance and there are no future performance conditions attached to the grant. The entity shall account for the government grant as follows: a. recognise P90,000 in income on 1 January 2012. b. recognise P90,000 in income evenly over the nineyear period of the license, ie P10,000 per year. c. credit P90,000 directly to retained earnings on 1 January 2012. d. credit P90,000 directly to retained earnings evenly over the nine-year period of the license, ie P10,000 per year.

122. On 1 January 2012 an entity acquired, free of charge, a non-transferable nine-year taxi license by way of government grant when the fair value of the taxi license was P90,000. In accordance with the terms of the license the entity must operate at least 10 taxis in a deprived neighborhood of the capital city during that nine-year period. Failure to do so will result in the taxi license being revoked immediately. The entity shall account for the government grant as follows: a. recognise P90,000 in income on 1 January 2012. b. recognise P90,000 in income evenly over the nineyear period of the license (ie P10,000 per year when the performance condition of the government grant is met). c. credit P90,000 directly to retained earnings on 1 January 2012. d. recognise P90,000 in income on 31 December 2020. 123. The White Company, an SME, set up a defined benefit post-employment plan with effect from 1 January 2012. In the first year the expected return on plan assets was P5,000, the actual return on plan assets was P4,000, the current service cost was P12,000 and White's contributions paid into the plan were P7,500. What is the net expense to be recognized in profit or loss for the year ended 31 December 2012, according to section 28 of PFRS for SMEs? a. P8,000 c. P7,000 b. P3,500 d. P2,500

 - End - 

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