CPA Board Exam Quizzer vol. 2

CPA BOARD EXAM QUIZZER VOL. 2 Contains 15 random questions on the various subjects covered in the CPA Board Exams, plus supplementary discussions. Based on lectures and materials from the CPA Review School of the Philippines (2016). Questions rated PG

questions TAX #1

Salvador rendered service as IT technician for IBM during January. During this time, the company experienced a sudden drop in its stock valuation due to discovered defects in its i7 motherboard units. Each stock was priced at Php 12.00 during the month. Salvador received his compensation in the form of stock options (for 5,000 stocks) for January services the following month, when the stocks were priced Php 20.00 each. How much is the tax base in computing his income tax? a. Php 60,000 b. Php 50,000 c. None, since stock options are not monetary d. None, since as a general rule, taxes are paid in cash

RFBT #2 Ang Pa-Ngit, the oldest board member at Samsung, has

been removed from her post as director for reasons of adverse interest towards a competing company. The remaining directors immediately convene for the election of a new director, ignoring the ongoing legal issues of Samsung’s heir apparent back at South Korea. However, their number failed to form the necessary quorum. Still, the directors proceeded with the elections. Ang Gan-Da, the newest registered shareholder, was elected. Is her election valid? a. No, since a quorum is always necessary for the Board to function b. No, since Ang Gan-Da just became a shareholder, thus she lacks the necessary attributes to become a board member c. No, since the shareholders must vote for the new board member themselves d. Yes, since Ang Pa-Ngit’s removal was the decision of the other directors, and thus the directors could only vote for a replacement

FAR #3 Panda purchased a new ink-filling machine for their

ballpoint pen factory, costing them a total of Php 2,080,000, the whole of which was capitalized into the account ‘machineries’. The breakdown of the cost is as follows: invoice price Php 1,680,000; VAT Php 180,000; estimated dismantling cost Php 150,000; costs of testing Php 50,000; training costs Php 100,000; consultation costs Php 70,000; proceeds from sale of units from testing phase Php 20,000; transportation costs Php 20,000; construction of rails and platform around machine Php 30,000 How much the new machine should be capitalized? a. Php 2,260,000 b. Php 1,800,000 c. Php 2,080,000 d. Php 1,900,000

FAR #4 MDFKING Enterprises sold its outstanding receivables to

PTNGNAM to finance its quickly sinking operations. The financing company did not accept the risks and rewards associated with the receivables, but still paid MDFKING for the receivables out of pity. Still, they have to pay them after a couple of weeks a. This is an example of a factoring transaction, thus the sold receivables need not be recorded by MDFKING anymore b. This is not a factoring transaction, since PTNGNAM did not agree to shoulder the risks and rewards of the receivables. So there was no transfer of title c. This is an example of a factoring and a loan transaction, which requires disclosure in the notes d. This is an example of a factoring transaction, but since PTNGNAM did not shoulder the risks and rewards of the receivables, MDFKING still need to record the receivables in their books

RFBT #5 Lucy Nia granted PDF Partnership Ltd. a Php 900,000 loan

for the latter’s expansion project. P is the general partner, D is the limited partner, while F is the capitalist-industrial partner. Their respective capital balances are Php 300,000,

Php 100,000 and Php 90,000. It has been stipulated among the partners that D and F cannot be made liable for outside debts. When the due date arrives, the partnership has no cash to pay for the loan, so Lucy chases after the partners’ personal effects. As far as Lucy is concerned, for how much could D be made liable? a. None, given his stipulated immunity over external debts of the partnership b. Php 300,000, given the prorata nature of partnership liability over personal assets c. Php 100,000, since being a limited partner, he could only be made liable up to the extent of his capital contribution d. Php 100,000, since being a limited partner, he could only be made, liable up to the extent of his capital contribution. Plus he could ask for reimbursement from the general partner amounting to Php 100,000

FAR #6 Islamic State has a 30% stake in Taliban, accounted using

the equity method. Over the years, due to continued bombardment of U.S. forces over Taliban territory, they have continually reported losses. The investment balance of Islamic State in 2014 is ₴20,000. In 2015, Taliban once again reported losses of ₴100,000. The following year, after finding out that a key general escaped Guantanamo Bay, Taliban finally reports profits of ₴50,000. How much is the balance of IS’ investment in 2016? a. (₴5,000) b. ₴5,000 c. Zero d. ₴10,000

MAS #7 There are several kinds of financing policies relating to

working capital. Which among those emphasizes profitability wherein the least possible working capital is used? a. Matching policy b. Conservative policy

c. d.

Relaxed policy Aggressive policy

AUDITING THEORY #8 Abdul Jakul, in the course of his audit of MDFKING

Enterprises, has determined that almost Php 20,000 worth of condom inventory are damaged and obsolete. Apparently, rats have nibbled on the cheese-flavored condoms, tearing holes on all of them. Abdul has found that the inventory is reported on the accounts. What assertion is Abdul checking? a. Valuation b. Fitness of use c. Presentation and disclosure d. Rights and obligations

MAS #9 TILF uses linear programming to determine the maximum

number of practice dolls (x) and vibrators (y) that can be produced under their constrained production. Their inhouse calculus experts have determined two constraint functions as follows: 2x + 3y = 16, and 2x + y = 10. The head wants to know how many dolls could be produced under the constraints a. 5 units b. 8 units c. 10 units d. 2 units

AFAR #10 In 2015, Hong Enterprises’ investment account for its

Yashano Mall branch (Hong 5) amounted to Php 65,000. Hong 5’s home office account, however, was Php 70,000. Which of the following is true? a. A cash remittance from the branch is not yet recorded by the home office b. A cash transfer from the home office is not yet reported by the branch c. A cash collection by the home office is not yet reported by the branch d. None of the above

AUDITING THEORY #11 Last year, NWA spent Php 580,000 total in securing a

patent claim over an invention that, when inserted inside a woman’s privates, would prolong the climactic sensation. The amount includes all related legal and regulatory costs related to its issuance. A few months later, another company filed a suit against NWA claiming that they copied their product. After a long litigation process, which cost NWA a total of Php 100,000, the patent remained theirs. NWA decided to capitalize the legal costs since it thinks that if not for the legal costs, the patent would’ve been lost. To be sure, they also hired a retainer for Php 50,000, also capitalized. What items should be capitalized into the patent account? a. Issuance costs only b. Issuance costs and legal suit costs c. Issuance costs, legal suit costs, and the retainers fee d. The patent is worthless

TAXATION #12 Michael purchased an automated cupcake-making machine

for his VAT-registered cupcake business. The machine had an invoice price of Php 560,000, gross of VAT. Two days later, seeing that the machine fails to deliver on his high cupcake demand, he bought another one costing Php 600,000, net of VAT. The machines both have an estimated useful life of 8 years. How much could Michael use as input VAT credit from the machines for the month? a. Php 2,000 b. Php 2,200 c. Php 3,000 d. Php 3,200

AUDITING PROBLEMS / FAR #13 PornHub grants 15000 share options for its 500

hardworking employees (mostly coders and wenches) in 2014 when the valuation of its shares were at Php 2.50 each. It estimates that the employees will exercise the options in three years’ time. The exercise price for the options was Php 1.75, while their fair valuation was Php 2.00 upon grant. In 2015, 200 employees left the company

due to a pandemic of AIDS. PornHub temporarily halts its tapings to curb the spread, but it still estimates departure of 100 more employees next year. In 2016, much to the company’s surprise, no employee left. Which is true? a. PornHub is an illegal enterprise, promoting prostitution and promiscuous behavior. It must be taken down from the web b. Salaries expense in 2015 related to the share options is Php 8,000 c. The cumulative balance of share options outstanding in 2014 was Php 10,000 d. Without PornHub, the internet would never be the same

AUDITING THEORY #14 Among the financial statements, which of the following is

usually the first audited? a. Statement of Comprehensive Income b. Statement of Financial Position c. Statement of Cash Flows d. Notes to the Financial Statements

AFAR #15 Pat Focker borrowed $15,000 from the U.S. Treasury at a

10% per annum rate to finance his nude night club in December 3, 2016, legalized under a recent new decree from President Duterte, due in three months. During this date, the exchange rate was Php 1.00 = $0.25. At the end of the year, the exchange rate became Php 1.00 = $0.20. In February, Focker was amazed by how much patrons were shaking his motel beds. He decided to borrow another Php 15,000, this time from a local bank, due in another three months, to accommodate the increased fornication. The bank gave him a 12% per annum rate. When the first loan was due, the exchange rate was Php 1.00 = $0.23. When the second loan was due, the exchange rate was Php 1.00 = $0.19. What is the net effect on earnings from the two loan transactions in 2017? a. 12,450 b. (11,400.34) c. (12,460.62) d. (11,450.5)

answers #1

(a) PHP 60,000 In case of nonmonetary compensation such as stock options, the tax base shall be the fair value of the options when service was rendered. This base shall be used in computing Salvador’s tax due using the progressive tax table

#2

(c) NO, SINCE THE SHAREHOLDERS MUST VOTE FOR THE NEW BOARD MEMBER THEMSELVES

Board members may be removed from their office for a variety of reasons, but the manner of replacing them depends on how such members were removed. If the director was ejected due to term expiration, removal (such as in this case) and an increase in the number of shareholders, only a shareholder could fill the vacant position. However, it must be the shareholders who must vote for the replacement, not the remaining directors If the removal was due to other reasons, the remaining directors may vote for the replacement, provided they still form a quorum (generally half of the number of the directors plus one). Otherwise, the shareholders shall vote for the replacement

#3

(b) PHP 1,800,000 The capitalizable cost of machines usually consists of the following: invoice price (net of VAT), estimated dismantling costs, testing costs (net of any related proceeds), costs of constructing rails and platform around the machine, installation costs, transportation costs, and consultation costs. As per taxation rules, given invoice

prices are assumed to be inclusive of VAT. Training costs are expensed

#4

(d) THIS IS AN EXAMPLE OF A FACTORING TRANSACTION, BUT SINCE PTNGNAM DID NOT SHOULDER THE RISKS AND REWARDS OF THE RECEIVABLES, MDFKING STILL NEED TO RECORD THE RECEIVABLES IN THEIR BOOKS

Factoring is a receivable financing transaction wherein an entity’s outstanding receivables are sold to financing entities for immediate liquidation. Generally, once factored, receivables are no longer recorded in the books. In this case, the entity retains the risks and rewards over them, thus they still need to be recorded

#5

(c) PHP 100,000, SINCE BEING A LIMITED PARTNER, HE COULD ONLY BE MADE LIABLE UP TO THE EXTENT OF HIS CAPITAL CONTRIBUTION

Stipulations of immunity over partnership debts are only valid between the partners. Thus, as to third persons, all of them are liable prorata if the assets are insufficient. Those immune, however, could be reimbursed for amounts they paid beyond their contributions. Limited partners, as a rule, could only be made liable up to the extent of their capital contribution

#6

(b) ₴5,000 Once the share in the losses of the investee (Taliban) exceeds the balance of the investment in associate, the balance becomes zero. The excess over the balance is reported in the notes to the financial statements (in 2015, it was ₴10,000). Once this excess is exhausted, the investment in associate can once again report a positive balance. The share in the 2016 profit is ₴15,000 (₴50,000 x .30), well over the negative balance of ₴10,000

#7

(d) AGGRESSIVE POLICY Matching/self-liquidating policy, as its name implies, matches the kind of financing (short- or long-term) over the useful life of the related asset. Conservative/relaxed policy uses long-term capital to finance all assets regardless of expected life

#8

(a) VALUATION The obsolescence of inventory may also relate to the presentation and disclosure assertion, but this most likely is toward the valuation assertion

#9

(a) 5 UNITS In such scenario, one technique to determine the number of dolls (x) is to substitute zero for y in both equations, then solve for the value of x in both equations. The lower figure between the values of x in the two equations should be the answer – the number of units that can only be produced under the constraint

#10

(c) A CASH COLLECTION BY THE HOME OFFICE IS NOT YET REPORTED BY THE BRANCH

The journal entry of the branch would be (dr.) Cash and (cr.) Home Office for Php 5,000. Assume that this amount is a receivable of the home office that the branch collected. Failure by the home office to journalize this entry would understate their Investment in Branch-Hong 5 account. The entry for the home office would have been (dr.) Investment in Branch-Hong 5 and (cr.) Accounts Receivable

#11

(a) ISSUANCE COSTS ONLY In general, additional costs are capitalized if they increase the useful life or the utility of the related asset. However, additional costs in patents and other intangibles are generally not capitalized since they only serve to maintain rights of the entity to the intangible asset, not improve it or increase its useful life. Patents have a useful life of 20 years

#12

(b) PHP 2,200 As per VAT rules, purchases by VAT-registered entities from VAT-registered sellers can avail of input VAT credits against the output VAT from their sales. Among the sources of input VAT is purchase of capital goods such as equipment. However, this abides with certain rules: (a) if in a single month, one capital good was purchased costing in excess Php 1,000,000 (net of VAT), the input VAT shall be spread monthly over its useful life; (b) if more than one is purchased with an aggregate cost in excess of Php 1,000,000 (net of VAT), they shall be amortized respectively. Note that if the asset’s useful life is five years or more, the input VAT can only be amortized for 60 months. Of course, input VAT is calculated by multiplying .12 to the price, net of VAT If the asset is sold as its input VAT is being apportioned, the whole remaining input VAT balance can be used for the month

#13

(c) THE CUMULATIVE BALANCE OF SHARE OPTIONS OUTSTANDING IN 2014 WAS PHP 10,000

While (A) and (D) are also true, the following solution derives the more proper answer: Total share options MULTIPLY: Fair value of options Total fair value MULTIPLY: Fraction of expected vesting period

15,000 2.00 30000 1/3

Share options outstanding, 2014 (also salaries expense for 2014)

10,000

Remaining share options (30 each for the 100 employees who left) MULTIPLY: Fair value of options Total fair value MULTIPLY: Fraction of expected vesting period Share options outstanding, 2015 Salaries expense, 2015

12,000 2.00 24,000 2/3 16,000 6,000

Total fair value MULTIPLY: Fraction of expected vesting period Share options outstanding, 2016 Salaries expense, 2016

24,000 3/3 24,000 8,000

#14

(b) STATEMENT OF FINANCIAL POSITION This is followed by the statement of comprehensive income and the cash flow statement

#15

(d) (11,450.50) As to loan transactions denominated in foreign currency, three items affect earnings – interest expense, forex gains/losses on the principal, and forex gains/losses on the interest. Computing interest expense on the local loan should be straight forward. However, as to the foreign loan, interest is computed on the principal at its current exchange/spot rate. Of course, to ease computations, the exchange rate must first be expressed in direct quotation by dividing 1 with the foreign currency equivalent of Php 1 Principal (nominal amount), first loan MULTIPLY: Exchange rate at March 3, 2017 (1 ÷ 0.23) MULTIPLY: Interest rate at 2/12 Interest expense, 2017 first loan ADD: Interest expense, second loan (15,000 x .12 x 3/12) Total interest expense

15,000 4.35 65,250 0.01667 1,088 450 1,538

The forex gains/losses on the principal amount is computed as follows, considering only the rates (at direct quotation) in 2017 for the first loan: Principal, first loan

15,000

MULTIPLY: Exchange rate difference (5 – 4.35) Forex loss on principal

0.65 9,750

Lastly, the forex gains/losses on the interest is computed on the forex gains/losses on the principal amount, thus: Forex loss on principal MULTIPLY: Interest rate at 2/12 Forex loss on interest

9,750 0.01667 162.5

Add all these amounts and the answer should be derived

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