NAQDOWN_FINAL QUESTIONS.docx

Easy Questions 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 Questions 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 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 Questions 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 =8,765,625 = P8,765,625 32% =9,728, P =9,728, 125 3,025, 000

2014 =7,700,000 P =7,700,000 30%

2013 =4,950,000 P =4,950,000 28%

=8,387,500 P =8,387,500 1,512,500

=4,812,500 P =4,812,500

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

P =1,012,000 1,608,750 423,500 =3,044,250 = P3,044,250

Easy Questions 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

Php947,800 12,500 51,000 26,000 Php1,037,300

Easy Questions 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 c onsumer acquires 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

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

P =1,012,000 1,608,750 423,500 =3,044,250 = P3,044,250

Easy Questions 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

Php947,800 12,500 51,000 26,000 Php1,037,300

Easy Questions 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 c onsumer acquires 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 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 Questions No. 6

(LW) Which of the followingterms is normally not associated with extinguishing an obligation through the process of novation? D a. Expromission b. Subrogation c. Delegacion d. Remission

Easy Questions 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 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 Questions 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 Questions No. 9

Minecraft Company Company quarries marble at two locations and sells it to be used in construction of buildings. The Company 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 Tons quarried through December 31, 2014 Tons quarried, 2014 Sales, 2014

Php60,000,000 4,000,000 1,600,000 1,200,000

How much would be the depletion for 2014 for financial reporting purposes?  ANSWER: P-0-

Since 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 Questions No. 10

AAB Construction Company uses the percentagepercentage-of -completion method of accounting. In 2014 AAB began work under contract #1348, which provided for a contract price of P =20,000,000. =20,000,000. 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 =3,000,000 P =3,000,000 12,000,000 3,600,000 2,500,000

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 costs co sts (3,000,000+12,000,000)  (3,000,000+12,000,000)  Percentage of completion Contract price Revenue in 2014

=3,000,000 = P3,000,000 15,000,000 20% 20,000,000 =4,000,000 P =4,000,000

2015 =15,750,000 P =15,750,000 -015,400,000 15,500,000

 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. 20 votes, distributed equally among 5 candidates that the stockholder wishes to elect b. 100 votes, distributed equally among 5 candidates that the stockholder wishes to elect c. 100 votes, all casted in favor of a single candidate that the stockholder wishes to elect d. 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 = Fixed cost = Fixed cost =

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

Fixed Cost (SP per unit - VC per unit) BEP in units * (SP per unit - VC per unit) 25,000 units * (P8 - P2) P150,000 CURRENT LAST YEAR YEAR P159,000 P189,000 Squeezed (150,000) (180,000) [P150,000 *120%] 9,000

9,000

(3,150) P5,850

(3,150) P5,850

P189,000 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.

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 A Php26 (3)

Market B Php25 (1)

Market C Php23 (1)

(2)

(2)

(2)

21

22

20

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 Corporation: 2014 P 1,572,500 P 425,000 2015 1,785,000 510,000 Income Dividends

Mimi Company:

2014 2015

P 340,000 569,500

P

55,000 127,500

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 d uring 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:

P5,000 3,000

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

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 su bstance 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. P720,000 b. P576,000 c. P144,000 d. 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) Parallel simulation of payroll calculations. b) Exception testing for payroll deductions. c) Recalculations of net pay. d) 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%) Php115,000

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 Business expenses Capital Gain (capital asset held for one(1) year) Capital Loss (capital asset held for 24 months)

P500,000 P200,000 P 50,000 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:

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

Shareholders’ equity

12/31/13 P 6,000,000 P 6,000,000

12/31/14 P1,200,000 6,000,000 P7,200,000

P 2,500,000 1,000,000 P 3,000,000

P2,500,000 1,200,000 1,000,000 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. b. Mora Accipendi d.

Negotiorum Gestio 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

SEMI-FINAL ROUND Question No. 1 (EASY)

1. Which of the following observations by an auditor is most likely to indicate the existence of control weaknesses over safeguarding of assets? I. II. III. IV.

a) b) c) d)

A service department's location is not well suited to allow adequate service to other units. Employees hired for sensitive positions are not subjected to background checks. Managers do not have access to reports that profile overall performance in relation to other benchmarked organizations. Management has not taken corrective action to resolve past engagement observations related to inventory controls. I and II only. I and IV only. II and III only. II and IV only.

Solution: D (II and IV only)

I. II. III. IV.

Incorrect. This is a symptom of weak controls for achieving organizational goals and objectives, but not for safeguarding of assets. Correct. This is a symptom of weak controls for safeguarding of assets. Incorrect. This is a symptom of weak controls for achieving organizational goals and objectives, but not for safeguarding of assets. Correct. Management's failure to take corrective action on past engagement observations, which related to safeguarding of assets, is a weakness related to safeguarding of assets.

Question No. 2

(LW) Ant (37 y/o), Bug (27 y/o), Cat (17 y/o) are indebted to Dog in the amount of P 27,000, jointly and severally. What is the maximum amount that Dog can collect from Ant?

Answer: P 18,000.00

Question No. 3 (AVERAGE)

Boyz Corporation developed the following income statement that shows the expected percentage results at a sales level of P1,400,000: Sales 100% Cost of sales 60%

Gross margin 40% Other expenses 30% Income 10% The cost of sales is all variable. Commissions is computed at 5% of sales, and are included in the ‘other expenses’ category. Compute for Boyz Corporation’s margin of safety. Answer: Php400,000 Margin of Safety

=

BEP

=

Sales - BEP Fixed cost CM [25% * P1,400,000] 35%

BEP

=

P1,000,000

= Margin of Safety Margin of Safety

=

P1,400,000 P1,000,000 P400,000

Question No. 4 (EASY)

(LW) Being made liable to a third person, a partner by estoppel may be considered a C a. Silent partner b. Secret partner c. Nominal partner d. Dormant partner

Question No. 5 (AVERAGE)

As of December 31, 2014, Passive company has the following deferred tax items in its accounting records: Deferred tax asset Deferred tax liability

Php443,800 1,092,000

At the beginning of January 2015, the government reduced the company tax rate from 35% to 32% effective January 2, 2015. The recorded tax balances represent the tax effect of future taxable amounts and future deductible amounts at 35%. What amount of tax expense or savings should Passive Company recognize as a result of the change in tax rates?  ANSWER: Php38,040

  Restated balance (P443,800/35% x 32%) Amount per books Overstatement

Restated Balance (P1,092,000/35% x 32%) Amount per books Overstatement

Deferred Tax Asset Php405,760 443,800 Php38,040 Deferred Tax Liability Php998,400

Overstatement of DTA Overstatement of DTL Tax savings

(1,092,000) Php93,600 Php38,040 (93,600) Php55,560

Question No. 6 (EASY)

If the ending inventory is understated, then? A. Current ratio is overstated and EPS is understated B. Current ratio is understated and EPS is overstated C. Current ratio is overstated and EPS is overstated D. Current ratio is understated and EPS is understated Answer: D Current Ratio= Current Assets/Current Liabilities = CA EPS = Net Income / Outstanding ordinary shares = NI

= lower Current Ratio = lower EPS

Question No. 7 (EASY)

In reconciling the Cash in bank of INA Company with the bank statement balance for the month of November 2015, the following data are summarized: Book debits for November, including October CM for note collected, Php60,000 Book credits for November, including NSF of Php20,000 and service charge of Php800 for October Bank credits for November including CM for November for bank loan of Php100,000 and October deposit in transit for Php80,000 Bank debits for November including October outstanding checks of Php170,800 and November service charge of Php200 What is the amount of outstanding checks for November?

Php800,000

620,000 700,000 600,000

 ANSWER: P170,200

October Outstanding Checks Book credits for November representing checks (620,000-20,000-800) Bank debits for November representing checks (600,000-200) November Outstanding Checks

Php170,800 599,200 (599,800) Php170,200

Question No. 8 (AVERAGE)

While testing a division’s compliance with company affirmative-action policies, an auditor found that: i. Five percent of the employees are from minority groups. ii. No one from a minority group has been hired in the past year. The most appropriate conclusion for the auditor to reach is that: a) b) c) d)

Insufficient evidence exists of compliance with affirmative-action policies. The division is violating the company’s policies. The company’s policies cannot be audited and hence cannot be enforced. With five percent of its employees from minority groups, the division is effectively complying.

Solution: A a) Correct. Without knowledge of guidelines for compliance, a reasonable conclusion cannot be reached. b) Incorrect. The fact that no minority has been hired this year is irrelevant without knowing the total hires for the period. c) Incorrect. An affirmative-action policy is clearly auditable. d) Incorrect. This conclusion cannot be reached without knowledge of the actual company policy.

Question No. 9 (EASY)

(LW) A constructive delivery of an immovable property subject to a sale and leaseback transaction. D a. Traditio brevi manu b. Traditio longa manu c. Traditio clavium simbolica d. Traditio constitutum possessorium

Question No. 10 (AVERAGE)

Management of Rapler Corporation is considering a lockbox system. The bank will charge P10,000 annually for the service, which will save the firm approximately P5,000 in processing costs. The lockbox system will reduce the float for cash receipts by three days. Assuming that the average daily receipts are equal to P100,000, and short-term interest costs are 5%, calculate the benefit or loss from adopting the lockbox system. (indicate if benefit or loss) Answer: Php10,000 benefit The firm saves money if the interest savings is greater than the increased cost of processing cash receipts. The increased cost of processing cash receipts is equal to P5,000 (P10,000 bank charge – P5,000 cost savings). The interest savings is measured by multiplying the increase in average funds by the short-term interest rate. The firm will have use of an additional P300,000 (P100,000 × 3 days) in average funds. Therefore, the interest savings is equal to P15,000 (P300,000 × 5%), and the overall benefit is equal to P10,000 (P15,000 – P5,000). Answer (a) is incorrect because it ignores the interest savings. Answer (b) is incorrect because it only considers the bank charge.

Question No. 11 (EASY)

Happy, Inc. opens a sales agency in Davao City, and a working fund for P =20,000 is established on an imprest basis. The first payment from the fund is P =3,000 for rent. Which of the following entry should the Happy Inc. record in its books for the payment of rent? a. No entry b. Dr. Rent 3,000 Cr. Cash 3,000 c.

Dr. Davao Agency 3,000 Cr. Cash 3,000

d. Dr. Davao Agency 3,000 Cr. Working Fund 3,000  Answer: A The expense incurred will be recorded on the agency’s books. Entries will be recorded only in the home office’s books upon establishment and replenishment of the agency’s working funds.

Question No. 12 (AVERAGE)

The memorandum records of Smile Inc. for its defined benefit plan show the following balances: Plant asset, 1/1/2015 Php5,000,000 Defined benefit obligation, 1/1/2015 5,200,000 2015 Information: Current service cost 750,000 Market yields on government bonds at year10%

end Contributions made Benefits paid Past service cost as a result of plan amendment Plan asset, 12/31/2015 Defined benefit obligation, 12/31/2015

Php1,800,000 480,000 2,300,000 8,000,000 8,350,000

The fair value of the plan asset at year-end includes the unpaid contributions due from Smile Inc., to the fund as well as the non-transferable FVPL issued by Smile Inc. and held by the fund amounting to Php700,000 and Php300,000 respectively. Determine the amount recognized in profit or loss in accordance with PAS 19  Employee Benefits.  ANSWER: Php3,070,000 Current service cost Net interest expense (P5,200,000-5,000,000) x 10% Past service cost as a result of plan amendment Total amount recognized in profit or loss

Php750,000 20,000 2,300,000 Php3,070,000

Question No. 13

(LW) Identify the term that does not belong to the group: prescription, performance, presentation, merger.

Answer: presentation

Question No. 14 (AVERAGE)

The following amounts were taken from the statement of affairs for Bagsik Company: Unsecured liabilities without priority Stockholders' equity Loss on realization of assets Estimated administrative expenses that have not been entered in the accounting records Unsecured liabilities with priority

Php90,000 36,000 45,000 4,500 10,000

How much is the estimated payment for the unsecured liabilities without priority?  Answer: P76,500

Total liabilities (90,000+10,000) Stockholders’ equity  Total assets Loss on realization of assets

= P100,000 36,000 126,000 (45,000)

Administrative expenses Payment to unsecured liabilities with priority New capital

(4,500) (10,000) = P76,500

Question No. 15 (DIFFICULT)

If everything else remains constant and a firm increases its cash conversion cycle, which of the following will most likely to happen to the firm’s profitability? A. Increase B. Increase if earnings are positive C. Decrease D. Not be affected. Answer: C Cash conversion cycle is the period from which inventory is received and processed (age of inventory, sold to outside party (age of receivable) and eventually paid (age of accounts payable). Answer (c) is correct because the longer the cash conversion cycle the greater the amount of time from when a `firm pays its s uppliers to the time it ultimately collects receivables. The greater the time frame the more likely the firm will have to borrow funds and incur interest expense which reduces profitability. Answers (a), (b), and (d) are incorrect because the incurrence of interest will reduce profitability.

Question No. 16 (AVERAGE)

An auditor is conducting a survey of perceptions and beliefs of employees concerning an organization’s health-care plan. The best approach to selecting a sample would be to: a) Focus on people who are likely to respond so that a larger sample can be obtained. b) Focus on managers and supervisors because they can also reflect the opinions of the people in their departments. c) Use stratified sampling where the strata are defined by marital and family status, age, and salaried or hourly status. d) Use monetary-unit sampling according to employee salaries. Solution: C

a) Incorrect. This convenience sample is likely to emphasize people with lots of available time at the expense of key employees who are too busy with company work to respond. b) Incorrect. Managers and supervisors often do not have the same needs and perceptions as their subordinates and also may misperceive their views. c) Correct. Because different employees probably have different situations, needs, and experiences, stratified sampling would best ensure that a representative sample would result. d) Incorrect. This approach would produce a disproportionate number of highly paid employees who may not have the same needs as lower-paid employees.

Question No. 17 (DIFFICULT)

A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable that there will be some claims under the warranties. Sales of Php10,000,000 were made evenly throughout 2015. At December 31, 2015 the expenditures for warranty repairs and replacements for the product sold in 2015 are expected to be made 50 percent in 2015 and 50 percent in 2016. Assume for simplicity that all the 2016 outflows of economic benefits related to the warranty repairs and replacements take place on June 30, 2016. Experience indicates that 95 percent of products require no warranty repairs, 3 percent of products sold require minor repairs costing 10 percent of sales price; and 2 percent of products sold require major repairs and replacement costing 90 percent of sales price. There is no reason to believe future warranty claims will be different from its experience. At December 31, 2015 the discount rate for expected cash flows is 10.25 percent for 2016. Furthermore, an appropriate risk adjustment factor to reflect uncertainties in the cash flow estimates is an increment of 6 percent. On December 31, 2015, the entity recognizes a warranty provision measured at:  ANSWER: Php106,000 Expected cash flow: Minor repairs P10,000,000 x (3% x 10%) Major repairs and replacement P10,000,000 x (2% x 90%) Total

To be paid in 2016 (210,000 x 50%) Risk adjusted amount (105,000 x 106%) PV factor [1/(1+0.1025)^(6/12)] Warranty Provision (111,300 x 0.9524)

Php30,000 180,000 210,000 105,000 111,300 0.9524 Php106,000

Question No. 18 (AVERAGE)

For Job Order No. 369, Escalera Company incurred the following costs for the manufacture of 200 units of a novelty gadget: Original cost accumulation: Direct materials Direct labor Factory overhead (150% of direct labor) Total

= P13,200 16,000 24,000 = P53,200

Direct costs of ten reworked units: Direct materials Direct labor Total

= P2,000 3,200 = P5,200

The rework cost was attributable to exacting specifications required by the job and was charged to the specific order. The units cost of Job Order No. 369 is:  Answer: P316 Total Cost before Rework Direct cost of Rework DM DL FOH (3,200x150%) Total Cost Divide by: Number of units Unit cost

= P53,200 2,000 3,200 4,800 63,200 200 = P316

Question No. 19 (DIFFICULT)

Caine, Osman, and Roberts formed a partnership on January 1, 2012, agreeing to distribute profits and losses in the ratio of original capitals. Original investments were P =625,000, P =250,000 and =125,000 respectively. Earnings of the firm and drawings by each partner for the period 2012-2014 P follows:

2012 2013 2014

Net income (loss) Php440,000 185,000 (105,000)

Caine Php150,000 150,000 100,000

Drawings Osman Php78,000 78,000 52,000

Roberts Php52,000 52,000 52,000

At the beginning of 2015, Caine and Osman agreed to permit Roberts to withdraw from the partnership. Since the books for the partnership had never been audited, the partners agreed to an audit in arriving at the settlement amount. In withdrawing, Roberts was allowed to take certain furniture and was charged P =15,000, although the book value was P = 45,000; the balance of Roberts’ interest was paid in cash.

The following items were revealed in the course of the audit.

Understatement of accrued expenses Understatement of accrued revenue Overstatement of inventories

End of 2012

End of 2013

End of 2014

Php4,000

Php5,000

Php6,500

2,500

1,000

1,500

15,000

20,000

20,000

Understatement of depreciation expense on assets still held

1,500

3,500

2,000

How much must Roberts received from the partnership?  Answer: P11,250 Total income (440,000+185,000-105,000) Adjustment (-6,500+1,500-20,000-1,500-3,500-2,000)  Adjusted total net income Multiplied by the P/L percentage Share in net income Original investment Total withdrawal (52,000 x 3) Share on the impairment of the furniture (45,000-15,000) x 12.50% Fair value of the furniture Cash received by Roberts from the partnership

= P520,000 (32,000) 488,000 12.50% 61,000 125,000 (156,000) (3,750) (15,000) = P11,250

Question No. 20 (AVERAGE)

A chief audit executive (CAE) suspects that several employees have used desktop computers for personal gain. In conducting an investigation, the primary reason that the CAE chose to engage a forensic information systems auditor rather than using the organization’s information systems auditor is that a forensic information systems auditor would possess: a) Knowledge of the computing system that would enable a more comprehensive assessment of the computer use and abuse. b) Knowledge of what constitutes evidence acceptable in a court of law. c) Superior analytical skills that would facilitate the identification of computer abuse. d) Superior documentation and organization skills that would facilitate in the presentation of findings to senior management and the board. Solution: B

a) Incorrect. The organization’s information systems auditor would probably have more knowledge of the organization’s computing systems. b) Correct. The distinguishing characteristic of forensic auditing is the knowledge needed to testify as an expert witness in a court of law. Although a forensic auditor may possess the other attributes listed, the organization’s information systems auditor may also possess these skills or knowledge elements. c) Incorrect. A forensic auditor would not necessarily have analytical or organizational skills that are superior to those of the organization’s auditor. d) Incorrect. See answer “c”.

Question No. 21 (EASY)

Which of the following is encouraged by PAS 41,  Agriculture to be separately disclosed when there is a production cycle of more than one year for a biological asset? A. B. C. D.

Physical change only Price change only Total change in value Physical change and price change  Answer: D

Paragraph 51 of PAS 41 Agriculture states that the fair value less costs to sell of a biological asset can change due to both physical change and price change in the market. Separate disclosure of physical and price changes is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year. In such cases, an entity is encouraged to disclose, by group or otherwise, the amount of change in fair value less costs to sell included in profit or loss due to physical changes and due to price changes. This information is generally less useful when the production cycle is less than one year (for example, when raising chickens or growing cereal crops).

Question No. 22 (EASY)

On estate taxation, a statement duly certified by a CPA is necessary if the estate tax return shows a gross value exceeding P__________

a. b. c. d.

P1,500,000 P2,000,000 P2,500,000 P3,000,000

 ANSWER: B BASIS: Section 90(A)(3) of the Tax Code, as amended

Question No. 23 (EASY)

WIGGLE Company reported current assets of P3,900,000 and current liabilities of P2,000,000 on its statement of financial position as of December 31, 2014. The following items may have been recorded incorrectly. The company uses the periodic inventory system.

a. Goods purchased costing P220,000 were shipped FOB shipping point by a vendor on December 26, 2014. WIGGLE received and recorded the invoice on December 29, 2014, but

the goods were not included in WIGGLE’s physical count of inventory because they were not received until January 4, 2015. b. On December 31, 2013, WIGGLE purchased and received goods for P750,000. Goods were shipped FOB seller. The invoice was recorded and paid January 2014. Goods are still unsold and were included in the physical count as of the reporting date. c.

Goods purchased costing P200,000 were shipped FOB destination by a supplier on December 28, 2014. WIGGLE received and recorded the invoice on December 31, 2014, but the goods were not included in WIGGLE’s 2014 physical count of inventory because they were not received until January 2, 2015.

d. Goods held on consignment from Jason Company were included in WIGGLE’s December 31, 2014, physical count of inventory at P130,000. What is the working capital based on WIGGLE’s statement of financial position?  Answer: P1,900,000

Question No. 24 (AVERAGE)

(LW) Determine the false statement. D a. Donations between spouses during marriage are void; this rule applies to persons “living-in” without the benefit of a legal marriage and persons guilty of adultery or concubinage. b. A conditional promise to pay renders an instrument to be non-negotiable while a negotiable instrument issued, accepted or endorsed when overdue is considered to be payable on demand. c. Consignment of goods is essentially an agency contract; insolvency of the consignor results in the extinguishment of the agency. d. A pledge must be in a public instrument showing a description of the thing pledged and the date of the pledge to bind third persons; a real mortgage must be registered and accompanied by an affidavit of good faith to take effect against third persons.

Question No. 25 (EASY)

A company has six million ordinary shares in issue at the beginning of Year 1. At the very end of the third quarter of Year 2 it announces a rights issue whereby all existing shareholders will be entitled to buy one share for every four they hold, at a price of 30. Immediately prior to the issue, the share price was 50. The profits for year 1, 2 and 3 were 225 million, 230 million and 245 million, respectively. The rights were exercised immediately upon issuance. What is the (restated) basic earnings per share for year 2?  Answer: P33.99

Question No. 26 (EASY)

PAS 24 requires disclosure of compensation of key management personnel. Which of the following would not be considered "compensation" for this purpose? A. B. C. D.

Short-term benefits Share-based payments Termination benefits Reimbursement of out-of-pocket expenses  Answer: D

As enumerated in PAS 24, Related Party Disclosures paragraph 9, compensation includes: a) short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for current employees; b) post-employment benefits such as pensions, other retirement benefits, postemployment life insurance and post-employment medical care; c) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing, bonuses and deferred compensation; d) termination benefits; and e) share-based payment. Reimbursement of out-of-pocket expenses is not included.

Question No. 27 (DIFFICULT)

What is the ceiling on entertainment, amusement and recreation (EAR) expense?

a. 0.50 percent (%) of net sales taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net revenue for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties. b. 1.00 percent (%) of net sales taxpayers engaged in sale of goods or properties; or 0.50 percent (%) of net revenue for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties. c. 0.50 percent (%) of net sales for taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net revenue for taxpayers engaged in sale of services, excluding exercise of profession and use or lease of properties. d. 0.50 percent (%) of net revenue for taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net sales for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

 Answer: A Section 5 of Revenue Regulations No. 10-2002 provides the ceiling on entertainment, amusement and recreation (EAR) expense: Ceiling on Entertainment, Amusement, and Recreation Expense. — There shall be “SECTION 5. allowed a deduction from gross income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent to the actual entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 percent (%) of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1.00  percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.” 

Question No. 28 (EASY)

The use of an analytical review to verify the correctness of various operating expenses would not be a preferred approach if: a) An auditor notes strong indicators of a specific fraud involving these accounts. b) Operations are relatively stable and have not changed much over the past year. c) An auditor would like to identify large, unusual, or non-recurring transactions during the year. d) Operating expenses vary in relation to other operating expenses, but not in relation to revenue. Solution: A a) Correct. If the auditor already suspects fraud, a more directed audit approach would be appropriate. b) Incorrect. Relatively stable operating data is a good scenario for using analytical review. c) Incorrect. Analytical review would be useful in identifying whether large, non-recurring, or unusual transactions occurred. d) Incorrect. Analytical review only needs to have accounts related to other accounts or other independent data. It does not require that they be related to revenue.

Question No. 29 (EASY)

On January 1, 2014, Applied Co. acquired 10%, P1M bonds for P951,963. The principal is due on January 1, 2017 but interest is due annually starting December 31, 2014. The yield rate on the bonds is 12%. The entity adopts the calendar year reporting. Applied Co. prepares and publishes quarterly reports in accordance with PAS 34 – Interim Financial Reporting as required by SEC. In August 1, 2015, ABC Co. changed its business model. It was ascertained that the investment in bonds at amortized cost should be reclassified to held for trading securities on reclassification date. On October 1 to December 31, 2015, the bonds were quoted at 103. On January 1, 2016, the bonds were quoted at 104.

Assume that Applied Co. early adopted PFRS 9 –  Financial Instruments   last 2013. Determine the reclassification date.  Answer: October 1, 2015

Question No. 30 (EASY)

In which of the following will an entity not record impairment loss? (choose one or more)

 Answer: Scenarios 1, 2 and 4 only

Question No. 31 (AVERAGE)

ABC Company has a building that it occupies as office space. During the year, ABC Company decided to lease out the building to third party. Consequently, the building is carried in ABC Company’s books from costs to fair value. How should ABC Company account for the resulting increase in carrying amount of the building? A. B. C. D.

The increase is recognized in other comprehensive income to the extent that the increase reverses a previous impairment loss. The increase is recognized as part of other comprehensive income or revaluation surplus within equity, if no previous impairment has been recorded. The increase is recognized directly to profit or loss. None of the above.

 Answer: B

Paragraph 62 of PAS 40, Investment Property  TRANSFERS Up to the date when an owner-occupied property becomes an investment property carried at fair value, an entity depreciates the property and recognizes any impairment losses that have occurred. The entity treats any difference at that date between the carrying amount of the property in accordance with PAS 16 and its fair value in the same way as a revaluation in accordance with PAS 16. In other words: (a) any resulting decrease in the carrying amount of the property is recognized in profit or loss. However, to the extent that an amount is included in revaluation surplus for that property, the decrease is recognised in other comprehensive income and reduces the revaluation surplus within equity. (b) any resulting increase in the carrying amount is treated as follows: (i) to the extent that the increase reverses a previous impairment loss for that property, the increase is recognized in profit or loss.  The amount recognized in profit or loss does not exceed the amount needed to restore the carrying amount to the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized. (ii) any remaining part of the increase is recognized in other comprehensive income and increases the revaluation surplus within equity.  On subsequent disposal of the investment property, the revaluation surplus included in equity may be transferred to retained earnings. The transfer from revaluation surplus to retained earnings is not made through profit or loss.

Question No. 32 (AVERAGE)

At the beginning of the year entity H invests P5 million to acquire a 30% equity interest in an associate, entity A. In addition, H lends P9 million to the associate, but does not provide any guarantees or commit itself to provide further funding. H's loan to A is considered part of the net investment in the associate. Assume the associate generated a P20 million loss during the year. Determine the equity interest in the associate and the loan carrying value.  Answer: P-0- ; P8million

Question No. 33 (DIFFICULT)

Summary adjusted trial balance for the home office and branch of TJ Corporation at December 31, 2014 are as follows: Home office Debits: Other assets Inventories, January 1, 2014 Branch Purchases

= P530,000 50,000 200,000 500,000

Branch P =165,000 45,000 -

Shipments from home office Expenses Dividends Total debits Credits: Other liabilities Capital stock Retained earnings Home office Unrealized profit in branch inventory / loading Sales Shipments to branch Branch profit Total credits

120,000 100,000 = P1,500,000

240,000 50,000 P = 500,000

= P

90,000 500,000 100,000 -

P = 25,000 175,000

10,000 537,500 200,000 62,500 = P1,500,000

300,000 _______ P = 500,000

Additional information: 1. The home office ships merchandise to its branch at 120% of home office cost. 2. Inventories at December 31, 2014 are P =70,000 for the home office and P =60,000 for the branch. The branch inventory is at transfer prices. How much is the net income of the home office and the branch (own books and in the home office’s books) for the year ended December 31, 2014?  Answer: P137,500; P62,500 Home office: Sales Cost of sales (50,000+500,000-200,000-70,000) Expenses Net income

P537,500 = (280,000) (120,000) P =137,500

Branch Sales Cost of sales (45,000+240,000-60,000) Expenses Net income, per branch’s books  Realized profit (225,000 x 20%/120%) Net income, per home office’s books

= P300,000 (225,000) (50,000) 25,000 37,500 = P62,500

Question No. 34 (DIFFICULT)

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.

Question No. 35 (AVERAGE)

Entity G acquires Entity H and as part of the arrangement, Entity G agrees to pay an additional amount of consideration to the seller in the future, as follows: if the 12 month earnings in two years' time (also referred to as the trailing 12 months) are P1 million or less – nothing will be paid. if the trailing 12 months' earnings in two years' time are between P1 million and P2 million – 2 × 12 month earnings will be paid. if the trailing 12 months' earnings in two years' time is greater than P2 million – 3 × 12 month earnings will be paid. 





At the date of acquisition, the possible twelve-month earnings of Entity H in two years' time are determined to be, as follows:   

P0.8 million – 40% P1.5 million – 40% P2.5 million – 20%

Applying IFRS 13 – Fair Value Measurement,  determine the amount to be discounted at the date of acquisition to determine its fair value.  Answer: P2.7 million

Question No. 36 (DIFFICULT)

Mr. Eddard Stark, a resident citizen, died during the year leaving the following: Gross estate Family home Funeral expenses Judicial expenses

P 5,000,000 1,500,000 300,000 500,000

Medical expenses Claims against the estate Taxes Losses Vanishing deduction Standard deduction Net share of the surviving spouse in the conjugal/community estate Amounts receivable under Republic Act 4917

600,000 200,000 25,000 15,000 30,000 1,000,000 800,000 20,000

How much are the ordinary and special deductions from the gross estate, respectively? a. b. c. d.

P940,000 and P2,550,000 P940,000 and P2,650,000 P990,000 and P2,550,000 P990,000 and P2,650,000

 ANSWER: A

Solution: Ordinary Family home (Maximum amount) Funeral (Maximum amount) P Judicial expenses Medical expenses (Maximum amount) Claims against the estate Taxes Losses Vanishing deduction Standard deduction Amounts receivable under Republic Act 4917 P Total

Special P 1,000,000

200,000 500,000 500,000 200,000 25,000 15,000

940,000

30,000 1,000,000 20,000 P 2,550,000

Question No. 37

(LW) A newly organized corporation issues 10,000 no-par shares with an issue price of P 50.00. How much is the required minimum paid-in capital?

Answer: P 125,000

Question No. 38 (DIFFICULT)

Grey Worm Company, a VAT registered entity, purchased in the beginning of CY 2014, a delivery from a VAT-registered dealer of automobiles. Due to recent flooding, the only record/document available related to the said purchase was an official receipt with an amount of P 1,145,520 (inclusive of VAT of P 123,840).

How much would be the depreciation expense that can be claimed as deductible expense in CY 2014 if the equipment has useful life of 4 years? a. P 288,960 b. P 259,000 c. P 286,380 d. P 317,340 e. P 255,420  ANSWER: A Amount of OR

1,145,520.00

VAT imposed by supplier of equipment

(123,840.00)

Net of VAT

1,021,680.00

Divided by: Gross-up rate (100% less 1% EWT rate imposed)

99%

Acquisition cost (net of VAT)

1,032,000.00

Add: Input VAT claimable as deductible expense Amount net of VAT Multiply by: VAT rate Depreciable cost Divided by: useful life Deductible depreciation

1,032,000.00 12%

123,840.00 1,155,840.00 4 288,960.00

Question No. 39 (DIFFICULT)

Riverlands Corporation, a VAT-registered entity, is engaged in the business of selling books, school supplies and novelty items. The following were taken from the records of the Company: Sale of school supplies – Domestic Sale of school supplies – Export (in USD 28,000) Sale of books – Domestic Sale of novelty items – Domestic Purchases of books Purchases of school supplies and novelty items Purchase of computer (used in all transactions) Compute for the VAT payable/(Overpayment). a. b. c. d.

(P68,160) (P60,858) P14,142 None of the above

P 560,000 1,120,000 520,000 160,000 400,000 1,150,000 180,000

 Answer: A. (P68,160)

Output tax on sale of school supplies - Domestic (560,000*12%) Output tax on sale of school supplies - Export (560,000*0%) Output tax on sale of novelty items (160,000*12%)

67,200 19,200

Total Less: Input taxes On purchases of school supplies and novelty items (1,150,000*12%)

(138,000)

On purchase of computer [180,000*12%*(1,840,000/2,400,000)]

(16,560)

VAT payable/(Overpayment)

(68,160)

Based on Section 109 (R) of the Tax Code, sale of books is a VAT exempt transaction. Hence, it is not subject to output VAT. Furthermore, the related input VAT on the purchases is not creditable.

Question No. 40 (DIFFICULT)

Storm’s End Corporation, organized in 2010, was engaged in a large-scale distribution of poultry products. For the taxable year 2015, the company reported the following result of operations:

Sales Sales discounts Beginning inventory Cost of goods available for sale Ending inventory Operating expenses General and administrative expenses

P3.2 million 0.2 million 1.8 million 3.0 million 1.0 million 0.7 million 0.3 million

The company opted to use optional standard deduction in filing its 1 st  quarter income tax return.

How much is the Company’s income tax?

 Answer: P20,000 Sales Less: Sales discounts

P3.2 million 0.2 million

Net sales Less: Cost of Sales Cost of goods available for sale Less: Ending inventory

P3.0 million P3.0 million 1.0 million

2.0 million

Gross income Less: OSD (40%)

P 1.0 million 0.40 million

Taxable income Tax rate Tax due (OSD) MCIT (2%)

P 0.60 million 30% P180,000 P20,000

Income tax due (lower)

P20,000

Question No. 41 (AVERAGE)

Candice Company reported net income of P34,000 for the year ended December 31, 2013 which included depreciation expense of P8,400 and a gain on sale of equipment of P1,700. The equipment had an historical cost of P40,000 and accumulated depreciation of P24,000. Each of the following accounts increased during 2013 (Assume that the increases in the following accounts are due to cash transactions only.): Patent P9,800 Prepaid rent* 4,500 Available for sale investment 8,000 Property and plant (vehicle held for rental)** 6,000 Bonds payable 5,000 *To be consumed within 12 months from the balance sheet date ** Will be subsequently held for sale What amount should be reported as net cash provided (used) by investing activities for the year ended December 31, 2013?  Answer: (P100)

Question No. 42 (AVERAGE)

On January 1, 2009 an entity invested P1 million in a loan with a par value of P1 million. The loan pays interest stated at 7.5% on December 31 annually in arrears and is to be redeemed at par on December 31, 2018. The entity accounts for the loan at amortised cost. On January 1, 2014 it unconditionally sells the right to receive the remaining five interest payments to a bank. The derecognition provisions of IAS 39 (IFRS 9) are applied to the interest payments as an identifiable part of the asset, leading to the conclusion that they are required to be derecognized. On the same date, the current market interest rate available to the borrower is 5%. Determine the gain (loss) on derecognition of part of a financial asset, if any.  Answer: P31,713

Question No. 43

(LW) A corporation organized for business or profit is called Civil Corporation while one which is organized for public charity is called ___________. Answer: Eleemosynary Corporation NOTE: incorrect spelling shall be considered wrong.

Question No. 44 (DIFFICULT)

An entity plans to dispose of a group of its assets (as an asset sale). The assets form a disposal group, and are measured as follows: Carrying amount before reclassification as held for sale Goodwill PPE (carried at revalued amount) PPE (carried at cost) Inventory Investment in equity securities Total

P 1,500,000 4,600,000 5,700,000 2,400,000 1,800,000 P16,000,000

Carrying amount as re-measured immediately before reclassification as held for sale P 1,500,000 4,000,000 5,700,000 2,200,000 1,500,000 P14,900,000

The entity measures the fair value less costs to sell of the disposal group as P13,000,000. Determine the carrying amount of the PPE (carried at revalued amount) after classifying the group as held for sale. (Round off amounts in nearest peso) a. P3,835,052 b. P3,880,597 c. P4,124,138 d. P --0--

Question No. 45 (DIFFICULT)

What is in the scope or affected by IFRS 15? I. Contracts with customers II. Sale of non-financial assets that are not an output of the entity’s ordinary activities (e.g., PPE, intangible assets) III. Leasing contracts IV. Insurance contracts V. Financial instruments and certain other contracts VI. Certain non-monetary exchanges VII. Certain put options on sale and repurchase agreement  Answer: I and II only

If with choices a. I only VII only

b. I and II only

c. I, III, IV and VI only d. I, V, VI and

Question No. 46 (DIFFICULT)

A lessee is required to pay a refundable deposit of P100,000 to the lessor at the inception of an operating lease for which no interest is receivable. The fixed lease term is 10 years. The market interest rate is 5% (i.e., that is the interest rate the lessor would have to pay if he borrowed P100,000 for a 10 year term from a third party). The date of inception is February 1, 2013. Assuming the annual lease payment is P60,000, determine the net amount recognized in lessee’s profit or loss as of December 31, 2014 applying PAS 17 –  Leases and  Financial instruments standards . (Round PV factors to 4 decimal places)  Answer: P60,651 decrease

Question No. 47 (DIFFICULT)

At the end of January 2013, the city government provided SUNJI Company a zero interest P30,000,000 3-year loan used by the Company in acquiring a building on the same date. The prevailing market rate of interest for this type of loan is 8%. The government imposes that the building must be used for social housing for ten years. The Company estimated that there is reasonable assurance that it will meet the terms of the grant. The Company will classify the building as owner occupied property after the socialized housing project. The Company opted to use the cost model of accounting the building with a 15-year life from the date of acquisition. Applying provisions of PAS 20 –  Accounting for Government Grants and Disclosures of Government Assistance, what is the amount recognized as income from the grant as of December 31, 2013? (Round PV factors to 4 decimal places)

 Answer: P567,050

Question No. 48

(LW) A written contract of sale of a lot is made between two parties for P 50,000. The lot is the only property of the seller who sold it to defraud a creditor. Assuming that the buyer is aware of the fraudulent intent of the seller, which term correctly describes that status of the contract of sale? Void, Voidable, Rescissible, Unenforceable.

Answer: Rescissible

Question No. 49 (DIFFICULT)

During 2014, a department’s 3-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances be affected?

A. B. C. D.

Spending Variance Increased Increased Unchanged Unchanged

Volume Variance Unchanged Increased Increased Unchaged

Answer: C The requirement is to determine how unfavorable spending and output level (volume) variances computed using the three-variance method would be affected if the estimated activity level were increased. An increase in the activity level used to allocate overhead to the product will lower the standard fixed application rate (SFR). The formula for computing the SFR is

If the denominator in this formula is raised, the SFR is lowered. However, an increase in activity level used to allocate overhead will not affect the standard variable application rate (SVR). This rate is computed using the high-low method or regression analysis. The diagram for the 3- variance method is