Naqdown Final Questions

Easy Question No. 1 Under a royalty agreement with another company, W and Co. will pay royalties for the assignment of a patent for three years. When should the company recognize the royalty payment as an expense? A . B . C . D .

In the period paid.

In the period incurred. At the date the royalty agreement began. At the date the royalty agreement expired.

Easy Question No. 2 The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees, except: a. Monetized value of vacation and sick leave credits paid to government officials and employees b. Monetized unused sick leave credits of private employees not exceeding ten (10) days during the year c. Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; d. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;

ANSWER: B - Must be “vacation leave” instead of “sick leave” BASIS: Sec. 1 of RR No. 5-11 (Further amendments to RR Nos. 2-98 and 3-98, as last amended by RR No. 5-2008, with respect to "De Minimis Benefits". Easy Question No. 3

Diamante Motors sells locally manufactured jeeps on installments. Information presented below relates to Diamante’s operations for the last three calendar years. Cost of installment sales Gross profit on installment sales Outstanding installment rec’l, Dec. 31: From 2015 From 2014 From 2013

2015 P8,765,625 32% P9,728, 125 3,025, 000

2014 P7,700,000 30%

2013 P4,950,000 28%

P8,387,500 1,512,500

P4,812,500

Diamante Motors uses the installment method of accounting. How much is the total realized gross profit for calendar year 2015?

Answer: P3,044,250 From 2015 [(8,765,625/68%)9,728,125]*32% From 2014 (8,387,500-3,025,000)*30% From 2013 (1,512,500*28%) Total

P1,012,000 1,608,750 423,500 P3,044,250

Easy Question No. 4 The inventory on hand at December 31, 2015 for FLASH Company is valued at a cost of Php947,800. The following items were not included in the inventory amount: a. Purchased goods in transit, shipped FOB destination invoice price Php32,000 which included freight charges of Php1,600. b. Goods held on consignment by FLASH Company at a sales price of Php28,000, including sales commission of 20% of the sales price c. Goods sold to ARROW Company, under terms FOB destination, invoiced for Php18,500 which includes Php1,000 freight charges to deliver the goods. Goods are in transit. d. Purchased goods in transit, terms FOB shipping point, invoice price P48,000 freight cost Php3,000. e. Goods out on consignment to COCO Company, sales price hpP36,400. Assuming that the Company’s selling price is 140% of inventory cost, the adjusted cost of Arrow Company’s inventory at December 31, 2015 should be: ANSWER: Php1,037,500 Unadjusted balance a. Goods in transit (P18,500-1,000)/140% b. Purchased goods (P48,000+3,000) c. Goods on consignment (36,400)/140% Adjusted balance

Php947,80 0 12,500 51,000 26,000 Php1,037,3 00

Easy Question No. 5 Which of the following is true in relation to law of diminishing marginal utility? A. Marginal utility will decline as a consumer acquires additional units of a specific product. B. Total utility will decline as a consumer acquires additional units of a specific product. C. Declining utilities causes the demand curve to slope upward. D. Margin is excess of cost over sales.

Answer: A The law states that marginal utility declines as consumers acquire more of a good. Therefore, answer (a) is correct. Answer (b) is incorrect because total utility will not decline as more of a good is acquired. Answer (c) is incorrect because the demand curve slopes downward. Easy Question No. 6 (LW) Which of the followingterms is normally not associated extinguishing an obligation through the process of novation? D a Expromission . b Subrogation . c Delegacion . d Remission .

with

Easy Question No. 7 Which of the following situations is most likely to be the subject of a written interim report to the engagement client? a) Seventy percent of the planned audit work has been completed with no significant adverse observations. b) The auditors have decided to substitute survey procedures for some of the planned detailed review of certain records. c) The engagement program has been expanded because of indications of possible fraud. d) Open burning at a subsidiary plant poses a prospective violation of pollution regulations.

Solution: D

a) Incorrect. There is no need for earlier consideration in this situation. b) Incorrect. Changes in auditor methodology are not of particular importance to the engagement client. c) Incorrect. Indications of possible fraud would not be communicated to the engagement client. d) Correct. Such a situation would require immediate attention.

Easy Question No. 8 Which of the following is the most likely strategy to reduce the breakeven point? A. Increase both the fixed costs and the contribution margin. B. Decrease both the fixed costs and the contribution margin. C. Decrease the fixed costs and increase the contribution margin.

D. Increase the fixed costs and decrease the contribution margin.

Answer: C The short-cut breakeven point formula is calculated as follows:

Thus, by decreasing the numerator (fixed costs) and increasing the denominator (contribution margin), the breakeven point will be reduced. Easy Question No. 9 Minecraft Company quarries marble at two locations and sells it to be used in construction of buildings. The Company provides for a depletion rate of 5%. The quarry is leased on a year-to-year basis with the Company paying a royalty of Php0.05 per ton of marble quarried. Other data relevant to the requirements are: Estimated total reserves, tons Php60,000,000 Tons quarried through December 31, 2014 4,000,000 Tons quarried, 2014 1,600,000 Sales, 2014 1,200,000 How much would be the depletion for 2014 for financial reporting purposes? ANSWER: P-0Since the two quarries are merely leased and the Company pays a Php0.05 royalty for every ton of marble quarried, Minecraft will not recognize the quarries as assets in its books and will record only royalty expense for leasing them. Hence, there is no depletion expense. Easy Question No. 10

AAB Construction Company uses the percentage-of-completion method of accounting. In 2014 AAB began work under contract #1348, which provided for a contract price of P20,000,000. Other details follow: Cost incurred during the year Estimated costs to complete, as of December 31 Billing during the year Collections during the year

2014 P3,000,000 12,000,000

2015 P15,750,000 -0-

3,600,000 2,500,000

15,400,000 15,500,000

The portion of the total contract price to be recognized as revenue in 2014 is Answer: P4,000,000 Cost incurred during the year Total estimated (3,000,000+12,000,000) Percentage of completion Contract price Revenue in 2014

costs

P3,000,000

15,000,000

20% 20,000,000 P4,000,000

Average Question No. 1

1. The manager of a production line has the authority to order and receive replacement parts for all machinery that require periodic maintenance. The internal auditor received an anonymous tip that the manager ordered substantially more parts than were necessary from a family member in the parts supply business. The unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier, and the money was divided between the manager and the family member.

Which of the following tests would best assist the auditor in deciding whether to investigate this anonymous tip further?

a) Comparison of the current quarter’s maintenance expense with prior-period activity. b) Physical inventory testing of replacement parts for existence and valuation. c) Analysis of repair parts charged to maintenance to review the reasonableness of the number of items replaced. d) Review of a test sample of parts invoices for proper authorization and receipt.

Solution: C

a) Incorrect. The current quarter’s expense would equal the prior period’s activity unless the manager just started this fraud. The auditor has no information on how long this might have been occurring. b) Incorrect. Physical testing would not locate nonexistent parts that have already been charged to maintenance. c) Correct. An analysis of repair parts charged to maintenance would quantify the excessive number of items and detect that abuse may be occurring. d) Incorrect. Lack of segregation of duties allowed the fraud to occur. The manager was authorized to process both the purchase and receipt, so the test would only verify the fraudulent paperwork.

Average Question No. 2 (LW) Under the cumulative voting system of electing directors of a 5-member board of a duly organized corporation, a stockholder owning 100 shares is entitled to cast a total of

D

a. b. c. d.

20 votes, distributed equally among 5 candidates that the stockholder wishes to elect 100 votes, distributed equally among 5 candidates that the stockholder wishes to elect 100 votes, all casted in favor of a single candidate that the stockholder wishes to elect

500 votes, with majority of votes casted in favor a single candidate and remaining votes distributed equally among 4 other candidates that the stockholder wishes to elect

Average Question No. 3 The McGraw Company manufactures and sells Abriza handbags to assorted prints. Data for 2014 follows: Selling price per piece Variable cost per piece Number of handbags to breakeven Net post-tax income (35% tax rate)

P8.00 P2.00 25,000 P5,850

In 2015, the company estimates that the selling price will be P9.50 per piece, variable cost to manufacture will increase by 25%, and fixed costs will increase by 20%. Income tax rate of 35% will not change. How many units of handbags does McGraw Company must see in 2015 in order to maintain the same net income after tax as in 2014? Answer: 27,000 units BEP in units =

Fixed Cost (SP per unit - VC per unit)

Fixed cost = BEP in units * (SP per unit - VC per unit) Fixed cost = 25,000 units * (P8 - P2) P150,0 Fixed cost = 00 CURREN T YEAR P189,00 P159,000 0 Squeezed (150,000) (180,000)[P150,000 *120%]

LAST YEAR Contribution Margin Fixed cost Net income before tax [(NI after tax / 35%)]

9,000

9,000

Income tax [35% NI before tax] Net income after tax Contribution margin New CM Rate [(P9.5 - (P2 * 125%))] Sales to meet last year's net income

(3,150)

(3,150)

P5,850

P5,850

P189,0 00 P7 27,000 units

Average Question No. 4 An asset is sold in three different active markets at different prices. An entity enters into transactions in all markets and can access the price of those markets for the asset at the measurement date. Market A Price that would be received Transaction costs in that market Costs to transport the asset to the market Net amount that would be received

Market C

Php26 (3)

Market B Php25 (1)

(2)

(2)

(2)

21

22

20

Php23 (1)

Assuming none of these markets is the principal market, which of the three markets is the most advantageous market and what is the fair value of the asset? ANSWER: Market B and FV is Php23 Per PFRS 13, Fair Value Measurement, a fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market of the asset or liability or in the absence of a principal market, in the most advantageous market for the asset. The most advantageous market is the market that maximizes the amount that would be received to sell the asset or minimizes the amount paid to transfer the liability, after taking into account transaction costs and transport costs. Thus, Market B is the most

advantageous market as it has the largest net amount that would be received. Fair value then is equal to Php23 which is the price that would be received minus the costs to transport the asset to the market.

Average Question No. 5

On January 2, 2014, Keith Urban Corporation purchased 70% of the ordinary shares of Mimi Company for P 4,675,000. At that date, Mimi Company had P 4,887,500 of ordinary shares outstanding and accumulated profits of P 1,572,500. Mimi’s equipment with a remaining life of 5 years had a book value of P 2,380,000 and a fair value of P 2,550,000. Mimi’s remaining assets had a book value equal to their fair values. All intangible assets except goodwill are expected to have remaining lives of 10 years. Non-controlling interest shall be measured at fair value. The income and dividend figures for both Keith Urban and Mimi Company are as follows: Income Dividends Keith Urban 201 P P Corporation: 4 1,572,500 425,000 201 1,785,0 510,0 5 00 00 Income Dividends Mimi Company: 201 P P 4 340,000 55,000 201 569,5 127,5 5 00 00 Keith Urban’s income shown does not include any dividend income from Mimi. Keith Urban’s accumulated profits balance at the date of acquisition was P 5,958,500. Assume that Mimi has outstanding 6% P 100 par value cumulative preference shares with an aggregate value of P 1,000,000 that are classified as equity and are held by non-controlling interests. What is the income attributable to parent on December 31, 2014? Answer: P1,744,700

Average Question No. 6 King’s Landing Corporation has the following sales during the month: Sales: Sale to private entities subject to 12% P 50,000 Sale to private entities subject to 0% 150,000 Sale of exempt goods 200,000 Total sales for the month 400,000

The following input taxes were passed on by its VAT suppliers: Input tax: Input tax on taxable goods Input tax on zero-rated sales Input tax on sale of exempt goods Input tax on depreciable capital goods not attributable to any specific activity (pertains to monthly amortization for 60 months)

P5,000 3,000 2,000 20,000

How much is the creditable input tax for the month? a. b. c. d.

P21,750 P10,500 P32,000 P18,000

ANSWER: D SOLUTION: Input tax on sale subject to 12% Input tax on zero-rated sale Ratable portion of the input tax not directly attributable to any activity: Taxable sales (0% and 12%) X Amount of Total Sales input tax not directly attributable 200,000 X P20,000 400,000 Total creditable input tax for the month

P5,000 3,000

10,000 P18,000

BASIS: Section 4.110-4 of RR No. 16-05, as amended. Average Question No. 7 Which statement is incorrect? A .

B . C . D .

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into a research phase and a development phase. The cost of an internally generated asset comprises all directly attributable costs necessary to create, produce and prepare the asset for its intended use. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall be recognized as intangible assets. Internally generated goodwill shall not be recognized as an intangible asset.

Answer: C PAS 38, Intangible Assets paragraph 63 states that internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized as intangible assets. Average Question No. 8 Spouses Ramsay and Sansa sold their family home, a capital asset for P10,000,000. It was acquired in 1980 at P3,000,000. The fair market value as determined by the BIR is P12,000,000 but the fair market shown in the schedule of values of the City Assessor is P11,000,000. Later, the spouses utilized P8,000,000 for the acquisition of their new family home. The capital gains tax due is a. b. c. d.

P720,000 P576,000 P144,000 P120,000

ANSWER: C Solution: (12,000,000 x 6%) x (2,000,000/10,000,000) = P144,000

Average Question No. 9 The following are types of hedging relationships except? A . B . C . D .

Fair Value Hedge

Cash Flow Hedge Hedge of a Net Investment in a Foreign Operation Hedge of Foreign Currency Risk of a Firm Commitment

Answer: D PAS 39, Financial Instruments: Recognition and Measurement, paragraph 86 provides that hedging relationships are of three types a sfollows: a) fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. b) cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable

rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss. c) hedge of a net investment in a foreign operation as defined in PAS 21.

Average Question No. 10 A race track bettor won on the following bets: On double, a bet of P200 and dividend of P100 per P10 ticket On winner take all, a bet of P500 and a dividend of P700 per P50 ticket On forecast, a bet of P1,000 and dividend of P150 per P50 ticket The total percentage tax due from the winnings is a. P2,060 b. P1,030 c. P802 d. P412 ANSWER: C Solution: On double {[(200÷10)x100] – 200} x 4% On winner take all {[(500÷50)x700] – 500} x 10% On forecast {[(1,000÷50)x150] – 1,000} x 4% Total percentage tax due

P

72 650 80

P 802

Difficult Question No. 1 What computer-assisted audit technique would an auditor use to identify a fictitious or terminated employee? a) b) c) d)

Parallel simulation of payroll calculations. Exception testing for payroll deductions. Recalculations of net pay. Tagging and tracing of payroll tax-rate changes.

Solution: B

a) Incorrect. In a parallel simulation, data that were processed by the engagement client’s system are reprocessed through the auditor’s program to determine if the output obtained matches the output generated by the client’s system. This technique might identify problems with the client’s processing but would not identify a fictitious or terminated employee. b) Correct. This type of computer-assisted audit technique (CAAT) program can identify employees who have no deductions. This is important because fictitious or terminated employees will generally not have any deductions. c) Incorrect. A CAAT program can recalculate amounts such as gross pay, net pay, taxes and other deductions, and accumulated or used leave times. These recalculations can help determine if the payroll program is operating

correctly or if employee files have been altered, but would not identify a fictitious or terminated employee. d) Incorrect. In this type of CAAT program, certain actual transactions are “tagged,” and as they proceed through the system, a data file is created that traces the processing through the system and permits an auditor to subsequently review that processing. This would not, however, identify a fictitious or terminated employee.

Difficult Question No. 2 Statement I: A corporation may be a partner in a partnership. Statement II: A corporation may be a stockholder of another corporation. Statement III: A limited partner may contribute money to a partnership but not services. A a Only statement I is false c Only statement III is false . . b Only statement II is true d All of the statements are true . . Difficult Question No. 3 During 2014, Diana Corp. experienced the following power outages: Number of outages per month 0 1 2 3

Number of months 3 2 4 3 12

Each power outage results in an out-of-pocket costs of P400. For P500 per month, Diana can lease an auxiliary generator to provide power during outages. If Diana leases an auxiliary generator in 2015 the estimated savings (or additional expenditures) for 2015 would be?

Answer: Php1,600 or Php1,600 savings In 2014 Diana incurred the following costs due to power outages: Number of outages per month 0 1 2 3

x x x x

Number of months 3 2 4 3 12

Number of outages 0 2 8 9 19

19 outages x P 400/outage = P7,600 The cost of leasing an auxiliary generator is only P6,000 (12 mos. × P500/mo). Therefore, Diana would be expected to save P1,600 (P7,600 – P6,000) in 2015 by leasing the generator. Difficult Question No. 4 On December 31, 2015, an entity has an asset of Php4,000 for interest receivable that will be taxed when the cash is received in 2016. Tax is payable at 20 percent on the first Php500,000 of taxable profit earned and 30 percent on any remainder. In 2015, the entity earned taxable profit of Php450,000. In 2016, the entity expects to earn taxable profit of Php550,000. What amount should the entity recognize for the deferred tax liability relating to the interest receivable? ANSWER: Php836 PAS 12 Income Taxes provides that when different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse. Expected tax to be paid in 2016 (500,000 x 20% + 50,000 x 30%)

Php115,0 00

Expected average tax rate (115,000/550,000)

20.91%

Deferred tax liability (4,000 x 20.91%)

Php836

Difficult Question No. 5 Jon Snow Company had the following results of operations for the taxable year 2015: Gross Income P500,000 Business expenses P200,000 Capital Gain (capital asset held for one(1) year) P 50,000 Capital Loss (capital asset held for 24 months) P100,000 How much is the taxable income of John Snow Company for the year 2015? Answer: P300,000

Solution: Gross Income Business expenses Net Income from operations Capital Gain Capital Loss Net Capital Loss Taxable Income

P500,000 200,000 P300,000 P 50,000 (P100,000) (50,000)

P300,000

Section 39(C) of the NIRC states that losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. Difficult Question No. 6 Sarah Company, a manufacturing entity, owns 75% of the ordinary shares of Sandra Company, an investment entity. Sandra Company owns 60% of the ordinary shares of Vanessa Company, an insurance entity. Sandra Company has control over Vanessa Company. In Sarah Company’s consolidated financial statements, should consolidation accounting or equity method be used for Sandra Company and Vanessa Company? A . B . C . D .

Consolidation used for Sandra and equity method used for Vanessa. Consolidation used for both Sandra and Vanessa Equity method used for Sandra and consolidation used for Vanessa Equity method used for both Sandra and Vanessa

Answer: B Sarah should use consolidation for both Sandra and Vanessa. Sarah has a controlling financial interest in Sandra through a 75% direct ownership. The intercorporate stock ownership of Sarah with respect to Vanessa is 45%. Sandra owns 60% of Vanessa and Sarah owns 75% of Sandra. Thus, indirectly, Sarah owns 45% of Vanessa (75% x 60%). Further, Sandra controls Vanessa. Difficult Question No. 7 On April 1, 2014 a company engages in the development of a property, which is expected to take five years to complete, at a cost of P6M. the statements of financial position at December 31, 2013 and December 31, 2014, prior to capitalization of interest are as follows: 12/31/13

12/31/14

Development property Other assets Loans 5.5% debenture stock Bank loan at 6% per annum Bank loan at 7% per annum Shareholders’ equity

P

6,000,000 P 6,000,000

P1,200,000 6,000,000 P7,200,000

P 2,500,000 -

P2,500,000 1,200,000

1,000,000

1,000,000

P 3,000,000

P4,700,000

2,500,000

2,500,000

The bank loan with effective interest rate at 6% was drawn down to match the development expenditure on April 1, July 1, and October 1 2014. The 5.5% debenture stocks were irredeemable. Expenditure was incurred on the development as follows: April 1 – P600,000; July 1 – P400,000; October 1 – P200,000. If all the borrowing were general (i.e., the bank loan 6% was not specific to the development) and would have been avoided but for the development, then the amount of interest to be capitalized would be (Round-off to 2 decimal % for the general borrowing rate) Answer: P46,130

Difficult Question No. 8 Which of the following is not a source of obligation? B a Culpa Aquiliana c Negotiorum Gestio . . b Mora Accipendi d Solutio Indebeti . .

Difficult Question No. 9 An audit committee is concerned that management is not addressing all internal audit observations and recommendations. What should the audit committee do to address this situation?

a) Require managers to provide detailed action plans with specific dates for addressing audit observations and recommendations. b) Require all managers to confirm when they have taken action. c) Require the chief executive officer to report why action has not been taken. d) Require the chief audit executive to establish procedures to monitor progress.

Solution: D

a) Incorrect. Management are responsible for ensuring action on all internal audit observations and recommendations, but some actions may take time to

complete and it is not practical to expect that all will be resolved when an audit committee meets. b) Incorrect. See answer “a”. c) Incorrect. See answer “a”. d) Correct. The chief audit executive is responsible for establishing appropriate procedures for monitoring the progress by management on all internal audit observations and recommendations. This responsibility should be written into its charter by the audit committee, and progress should be reported at each audit committee meeting.

Difficult Question No. 10 Cersei owns shares of stocks of Castle Black Corporation which she purchased several years ago for P1 million. The stocks have a current fair market value of P10 million. She donates one-half of the stocks to her daughter Myrcella on December 31, 2014 and the remaining half to her daughter Myrcella again on January 2, 2015 when the fair market value of the stocks was P5 million. Assuming Myrcella subsequently sold all the shares of stocks to Ellaria Sand for P10 million, how much did Cersei gain on the sale? a. b. c. d.

P4 million P5 million P9 million P10 million

Answer: C. P9 million Solution: P10 million – P1 million = P9 million