Naqdown Final Round 2013

NAQDOWN 2013 FINAL ROUND EASY EASY – THEORY OF ACCOUNTS 1. If an entity uses the calendar year changes its business model for managing financial assets on February 1, 2013, applying PFRS 9 – Financial Instruments, the reclassification date is on _________________________ Answer: January 1, 2014 EASY – PRACTICAL ACCOUNTING 1 2. Paolo Company holds an investment of 30% in the ordinary shares of Uneta Company, an associate that has a net assets of P4,000,000 for the year ended December 31, 2014 which includes the current year net profit of P490,000. The associate has issued 100,000 9% cumulative preference shares with a nominal value of P10. The preference shares are classified by the associate as equity instruments. The associate declared dividends on the cumulative preference shares amounting to P270,000 for dividends in arrears and current year’s dividend. How much is Paolo Company’s share in profit or loss of the associate for calendar year ended December 31, 2014? Answer: P120,000 EASY – PRACTICAL ACCOUNTING 2 3. Samsung Company consigned 10 refrigerators to Apple Sales Company. Each refrigerator cost P12,000. The freight on the shipment amounting to P500 each was paid by Samsung. Apple Sales Company returned 1 unit to Samsung in good condition. Apple Sales Company paid P200 for the shipment of the returned unit. Apple Sales Company reported that only 8 units were sold at a price that yield 25% gross profit rate. Apple Sales Company remitted the amount due to Samsung Company after deducting 20% commission and freight of the returned units. The net profit to be recognized by Samsung Company on the consignment amounted to: Answer: P1,700 EASY – BUSINESS LAW AND TAXATION 4. In 2010, Demi Corporation purchased a residential house and lot in installment at an installment contract price of P2,600,000. The corporation allowed its President and his family to use it as their residential house. The fair market value per BIR and per Assessor’s Office were P2,800,000 and P2,607,000 respectively. How much was monthly fringe benefits tax, if any? Answer: P2,549.02 EASY – AUDITING THEORY 5. This is an unauthorized program placed within an authorized one. Typically, these programs wait until a specific time, when they act and then erase all evidence of their existence. Answer: TROJAN HORSE EASY – MANAGEMENT ADVISORY SERVICES 6. Rhada Ornaments sells lawn ornaments for P15 each. Rhada's contribution margin ratio is 40%. Fixed costs are P32,000. Should fixed costs increase 30%, how many

additional units will Rhada have to produce and sell in order to generate the same net profit as under the current conditions? Answer: 1,600 EASY – AUDITING PROBLEMS 7. On January 1, 2009, Mitoy Company purchased an asset for P2,500,000 with an estimated economic life of ten years with no salvage value. Straight-line method of depreciation is to be used. On January 1, 2011, the Company has reliably determined that the recoverable amount is P1,600,000. On January 1, 2013, the asset has a recoverable amount of P1,860,000. If the Company uses revaluation model to measure long live assets, what is the amount reported in the shareholders’ equity as revaluation surplus on December 31, 2013? Answer: P300,000 AVERAGE AVERAGE – THEORY OF ACCOUNTS 1. Aria and Ezra entered into a joint arrangement to form “A” team Corporation which shall manufacture materials required by Aria and Ezra for their own, individual manufacturing processes. The arrangement ensures that the parties operate the facility that produces the materials to the quality specifications of the parties. Each party shall have 50% ownership interest in “A” team Corporation. “A” team Corporation shall have its own assets, incurs its own obligations, generate its own income, and incurs its own expenses. In addition to the facts stated above, it was agreed further that:  Aria and Ezra shall purchase all of the output produced by “A” team Corporation in a ration of 50:50. “A” team Corporation cannot sell any of its output to third parties, unless this is approved by Aria and Ezra.  The price of the output sold to the parties is set by both parties at a level that designed to cover the costs of production and administrative expenses incurred by “A” team Corporation. On the basis of this operating model, the arrangement is intended to operate at a break-even level. Which of the following statements is incorrect? a. The obligation of the parties to purchase all of the output produced by “A” team Corporation reflects the exclusive dependence of “A” team Corporation upon the parties for the generation of cash flows. Therefore, the parties have an obligation to fund the settlement of the liabilities of “A” team Corporation. b. The fact that the parties have rights to all the output produced by “A” team Corporation means that the parties are consuming, and therefore have rights to all the economic benefits of the assets of “A” team Corporation. c. The facts and circumstances indicate that the arrangement is a joint operation. d. The facts and circumstances indicate that the arrangement is a joint venture. Answer: D. The facts and circumstances indicate that the arrangement is a joint venture.

AVERAGE – PRACTICAL ACCOUNTING 1 2. Helping Hand Corporation has the following interests in associates Hi (25%) and Hello (30%). During 2013, Hi sold inventories costing P 1,000,000 to Hello at 20% mark-up on cost. As of December 31, 2013, if all of these inventories remain unsold, how much is the profit to be eliminated in the share of Helping Hand Corporation? Answer: P15,000. (The unrealized profit arising from the transaction between associates and/ or joint ventures is eliminated to the extent of the investor’s interests in the associates and/or joint venture.) AVERAGE – PRACTICAL ACCOUNTING 2 3. During 2013, goods were shipped to the branch at 120% above cost. The reciprocal account in the income statement of the home office amounted to P237,000. The balance of the contra branch current account reports a balance of P375,000 before adjustment. The beginning inventory of the branch from the home office at cost is P360,000 and from outsiders, P93,000. The branch purchased goods from outsiders during the year amounting to P125,200. The ending inventory of the branch as reported in the combined statement of financial position is P345,000. The branch net income as reported in the combined financial statements and as reported in the branch’s books are P201,125 and P120,750, respectively. How much is the cost of goods sold to be reported in the branch’s income statement for the year ended December 31, 2013? Answer: P551,075 AVERAGE – BUSINESS LAW AND TAXATION 4. The engineer or architect who drew up the plans and specifications for a building is liable for damages if within _________ years from completion of the structure, the same should collapse by reason of a defect in those plans and specification, or due to the defects in the ground. Answer: Fifteen (15). Based on Article 1723 of the Civil Code. AVERAGE – AUDITING THEORY 5. Which of the following procedures is/are appropriate to a review of interim financial information? I. Read minutes of meetings of stockholders, the board of directors, and committees of the board. II. Confirm cash balances with all banks and depositories. III. Make inquiries concerning the accounting system and any significant changes in the internal control system. IV. Perform analytical procedures to identify and provide a basis for inquiry about relationships and individual items that appear unusual. Answer: I, III and IV only. AVERAGE – MANAGEMENT ADVISORY SERVICES 6. “The Originals” Company has a signature scarf for ladies that is very popular. Certain production and marketing data are indicated below: Cost per yard of cloth Allowance for rejected scarf Yards of cloth needed per scarf

P40.00 5% of production 0.475 yard

Airfreight from supplier Motor freight to customers Purchase discounts from supplier Sales discount to customers

P1.00/yard P0.90 /scarf 3% 2%

The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf. Rejects have no market value. Materials are used at the start of production. Calculate the standard cost of cloth per scarf that “The Originals” Company should use in its cost sheets. Answer: P19.90 AVERAGE – AUDITING PROBLEMS 7. A car rental company acquired vehicles for a total cost of P15,000,000 with the intention of holding them as rental cars for a limited period and then selling them. The car rental company, in the ordinary course of business, routinely sells vehicles acquired for car rental. The estimated life of the vehicles acquired was 8 years and after 6 years, the said vehicles will be available for sale. The proceeds from the sale of the vehicles was P10,000,000 which happened at the end of the 7th year. What is the amount of cash outflow and inflow to be classified as investing activities from the initial expenditure on acquisition of the vehicles (PPE) and from subsequent sale, respectively? Answer: P -0-; P -0- (Paragraph 14 of PAS 7) DIFFICULT DIFFICULT – THEORY OF ACCOUNTS 1. What is the exact term used under PFRS 3 – Business Combinations, where all combining entities in a business combination transfer their net assets to a newly formed entity? Answer: Roll up transaction DIFFICULT – PRACTICAL ACCOUNTING 1 2. On April 1, 2013, Nina Company acquired 30% of the 100,000 outstanding shares of Jeremy Company for P3,000,000. This investment gave Nina the ability to exercise significant influence over Jeremy. The book value of the acquired shares was P2,400,000. The excess of cost over book value was attributed to an identifiable intangible asset which is undervalued on Jeremy’s statement of financial position and which had a remaining life of 20 years. For the year ended December 31, 2013, Jeremy reported a comprehensive income of P1,100,000 which includes a P300,000 revaluation reserve on its land and paid cash dividends of P200,000 on its ordinary share and thereafter issued 15% share dividend. Assuming the investment has a recoverable amount of P2,900,00, what is the amount of impairment loss applying equity method and PAS 36 – Impairment of Assets? Answer: P287,500 DIFFICULT – PRACTICAL ACCOUNTING 2 3. On June 1, 2013, Mike Inc. entered into a franchise agreement with Ross Co. to sell their products. The agreement provides for an initial franchise fee of P3M which is payable as follows: P1M cash to be paid upon signing the contract, and

the balance in four equal annual installments every December 1, starting in 2013 as evidenced by a noninterest bearing note for the said balance signed by Mike Inc. Prevailing market rate is 10% on June 1, 2013.The agreement further provides that Mike Inc. must pay a continuing franchise fee equal to 5% of its monthly gross sales. Ross Co. incurred direct cost of P930,564 and indirect costs of P167,400. Mike Inc. started operations on July 1, 2013 and was able to generate sales of P1,240,000 for 2013. The first installment payment was made in due date. Assuming collectability of the note is not reasonably assured and the franchisor used installment sales method, how much is the net income of the franchisor for the year ended December 31, 2013? (Round off PV factors to 4 decimal places and GP % to whole %) Answer: P909,019

DIFFICULT – BUSINESS LAW AND TAXATION 4. All taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records (e.g., corresponding invoices, receipts, vouchers and returns, among others), for a period of ________ years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts. Answer: Ten (10). Section 2 of Revenue Regulations No. 17 – 2013 DIFFICULT – AUDITING THEORY 5. The procedures applied in an engagement to perform agreed-upon procedures may include which of the following: I. Inspection. II. Inquiry and analysis. III. Recomputation, comparison and other clerical accuracy checks. IV. Observation. V. Obtaining confirmations. Answer: I, II, III, IV and V. (PSRE 4400 Paragraph 16) DIFFICULT – MANAGEMENT ADVISORY SERVICES 6. The following data is available for the variance analysis of Xerox Company for the month of August pertaining to its main product, Photon. Cost Standards Direct material Direct labor

2 pounds at P2.2 per pound 6 hours at P7.5 per hour

Actual results Units produced 7,800 units Direct material purchased32,000 pounds at P2.40 Direct material used UNKNOWN Direct Labor P362,670 Variances Materials Quantity Variance

P1,100 Favorable

Materials Price Variance Labor Rate Variance

P6,400 Unfavorable P9,420 Unfavorable

Based on the foregoing, what is the actual direct labor hours used and the materials used price variance (indicate if favorable or unfavorable)? Answer: Actual direct labor hours used of 47,100 and 3,020 favorable material used price variance

DIFFICULT – AUDITING PROBLEMS 7. Instagram Co. determined that one of its cash generating units is impaired. Information on the assets of the CGU is shown below: Assets Inventory (stated at NRV) Investment property (at cost model) Building Goodwill

 

Carrying Amount P 200,000 400,00 0 600,00 0 300,00 0 P 1,500,000

It was estimated that the value in use of the CGU is P800,000 and its fair value less costs to sell is P900,000. The building’s fair value less costs to sell is P510,000.

Determine the carrying value of the Investment property after impairment testing. Answer: P190,000 (Inventories not within the scope of PAS 36 and allocated impairment to the building is limited to P90,000) CLINCHER

DIFFICULT – PRACTICAL ACCOUNTING 2 1. Lea Products Corporation has two branches, Kalibo and Altavas, to which merchandise is billed at 20% above cost. Partial trial balance accounts of the three entities at December 31, 2013 are summarized as follows: Home Office

Kalibo Branch

Altavas Branch

Inventory

P 800,000

Investment in Kalibo Branch Investment in Altavas Branch Shipments from Home Office Purchases

P 180,000

P 240,000

450,0 00 420,0 00 600,0 00

360, 000

1,600,0 00

Expenses

900,0 00

250,0 00

Home Office

000 450,0

00 Loading Branch Loading Branch Sales

–

200,

Kalibo

300, 000

130,0 00

–

Altavas

120,0 00 1,950,0 00

Shipments to Kalibo Branch Shipments to Altavas Branch

900,0 00

750, 000

500,0 00 400,0 00

Additional Information: Physical inventories on hand as counted by the three entities at December 31, 2013 were as follows: Home Office P700,000 Kalibo Branch 210,000 Altavas Branch 150,000 Determine the combined net income of home office and branches for 2013. Answer: P600,000 DIFFICULT – PRACTICAL ACCOUNTING 2 2. X Builders, an operator, builds a road at a cost of P100 million, the fair value of the construction services is P110 million, the total operating costs of the road are P70 million and total cash inflows over the life of the concession are P200 million. Applying IFRIC 12 – Service Concession Arrangement, by how much is the total revenue under the intangible asset model higher or lower than the total revenue under the financial asset model over the life of the concession? Answer: P110,000,000 DIFFICULT – PRACTICAL ACCOUNTING 2 3. On July 1, 2013, Hot Company purchased 80% of the outstanding shares of Issue Company at a cost of P1,600,000. On that date, Issue had P1,000,000 of share capital and P1,400,000 of accumulated profits. For 2013, Hot had income of P560,000 from its separate operations and paid dividends of P300,000. For 2013, Issue reported income of P130,000 and paid dividends of P60,000. All the assets and liabilities of Issue have book values equal to their respective fair market values. Assume income was earned evenly throughout the year except for the intercompany transaction on October 1. On October 1, 2013, Hot purchased an

equipment from Issue for P200,000. The book value of the equipment on that date was P240,000. The loss of P40,000 is reflected in the income of Issue indicated above. The equipment is expected to have a useful life of 5 years from the date of sale. In the December 31, 2013 consolidated statement of financial statements, how much is the consolidated net income attributable to the parent? Answer: P946,400 DIFFICULT – THEORY OF ACCOUNTS 4. Build-operate-transfer (BOT) contracts in the Philippines are governed by The Philippine BOT Law or what RA? Answer: RA No. 7718