Practical Accounting 1 First Pre-board Examination

CPA Review School of the Philippines Manila Practical Accounting Problems 1 First Pre-board Examination Multiple choices: mark fully with pencil no. 2 the letter of your choice on the answer sheet provided. Make the mark Dark but do not use too much pressure. Erasures are strictly not allowed. 1. On December 31, 2011, the current receivables of Marty company consisted of the following: Trade accounts receivable Allowance for uncollectible accounts Claim against shipper for goods lost in transit (November 2011) Selling price of unsold goods sent by Marty on Consignment at 125% Of cost (not included in Marty’s ending inventory) Security deposit on lease of warehouse used for storing some inventories

1, 200,000 (100, 000) 50, 000 300, 000 200, 000

What is the correct total of current net receivables on December 31, 2011? a. 1, 150, 000 b. 1, 390, 000 c. 1, 350, 000 d. 1, 650, 000 2. Farmville company had sales of P2, 500, 000 during December 2011. Experience has shown that merchandise equalling 6% of sales will be returned within thirty days and an additional 4% will be returned within ninety days. Returned merchandise is readily resalable in addition merchandise equalling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Farmville report for net sales in its statements of comprehensive income for the month of December 2011? a. 2, 125, 000 b. 1, 875, 000 c. 2, 250, 000 d. 2, 025, 000 3. On December 1, 2011, Mandela company gave Mosgov company a P2, 000, 000, 12% loan Mosgov received proceeds of P1, 940, 000 after the deduction of a P60, 000 non-refundable loan origination fee. Principal and interest are due in sixty monthly instalments of P44, 500 beginning January 1, 2012. The payment yield an effective interest rate of 12% at a present value of P2, 000, 000 and 13.4% at a present value of P1, 940, 000. What amount of accrued interest receivables should Mandela report on December 31, 2011? a. 20, 000 b. 21, 663 c. 22, 333

d. 19, 400 4. Rogers Company factored P3, 000, 000 of accounts receivable to Musburger company on August 1, 2011. Control was surrendered by Rogers. Musburger accepted the receivables subject to recourse for non-payment. Musburger assessed a fee of 2% and retains a holdback equal to 5% of the accounts receivable. In addition. Musburger charged 15% interest computed on a weighted average time to maturity of the receivables of forty days. The fair value of the recourse obligation is P300, 000. Assuming all receivables are collected what is the cost of factoring the receivables? a. 110, 000 b. 260, 000 c. 259, 315 d. 109, 315 5. Indira Company offers a three year warranty on its product. Indira previously estimated Warranty cost to the 5% of sales. Due to a technological advancement in production at the beginning of 2011, Indira now believed 4% of sales to be a better estimate of warranty costs warranty costs of P300, 000 and P400, 000 were reported n 2009 and 2010 respectively. Sales for 2011 were P9, 000, 000. What should be reported as warranty expenses for 2011? a. 360, 000 b. 500, 000 c. 220, 000 d. 450, 000 6. Fidel Company began operations on January 1, 2010 and used the FIFO method of inventory costing. Management is contemplating a change to the average method to be consistent with Fidel’s parent company. The following information has been developed 2010 2011 Ending inventory: FIFO 150, 000 400, 000 Average 300, 000 200, 000 Income under FIFO 2, 500, 000 3, 000, 000 What is the income after a change to the average method? a. 3, 200, 000 b. 2, 950, 000 c. 2, 650, 000 d. 3, 050, 000 7. Adolph company provided the following information for 2011: Gross profit Cost of goods manufactured

500, 000 2,800, 000

Beginning inventories: Goods in process

350, 000

Finished goods 520, 000 Ending inventories: Goods in process 230, 000 Finished goods 150, 000 How much was the amount of sales for 2011? a. 3, 050, 000 b. 3, 670, 000 c. 3, 790, 000 d. 2, 810, 000 8. Marilyn Company regularly buys sweaters from Marcus Company and is allowed trade discount of 20% and 10% from the list price. Marilyn made a purchase on March 20 and received an invoice with a list price of P1, 200, 000 under terms of 2/10, n/30 and a freight charge of P50, 000. Marilyn uses the net method of recording purchases. What is the amount of inventory from his purchases assuming payment was made on April 1, 2011? a. P914, 000 b. 890, 000 c. 896, 720 d. 873, 200 9. Ronald Company specializes in the sale of apple accessories and software packages. Ronald had the following transaction with one of its suppliers: Purchases of accessories 3, 000, 000 Purchases of software packages 2, 500, 000 Returns and allowances 200, 000 Purchase discounts taken 160, 000 Purchases were made throughout the year on terms 5/10, n/30 all returns and allowances took place within 5 days of purchases and prior to any payment on the account. What is the amount of discounts lost for the purchases? a. 115, 000 b. 105, 000 c. 120, 000 d. 100, 000 10. Edison Company began the year with 500 units of its inventory. The sale price of each unit varied throughout the month of January. During January, Edison completed the following inventory transactions:

January

3 purchases 10 sales 14 sales 20 purchase 22 Sale

Unit 200 400 100 400 500

unit cost P3, 000

unit sale price P4, 000 4, 200

3, 200 4, 500

30 purchase 200 3, 300 Edison used the periodic average method of inventory costing. What is the total cost of the beginning inventory if the gross profit in the month of January was P1, 470, 000? a. P1, 100, 000 b. P1, 210, 000 c. P1, 400, 000 d. P1, 300, 000 11. The following information pertains to Lech company for the current year: Cash sales 750, 000 Cash collected on accounts receivable 4, 800, 000 Accounts receivables, January 1 400, 000 Accounts receivable, December 31 850, 000 Bad debts written off 100, 000 Purchases 4, 000, 000 Inventory, December 31 620, 000 Gross profit on sales 30% What was the cost of goods sold for the current year? a. 3, 640, 000 b. 3, 745, 000 c. 4, 200, 000 d. 4, 270, 000 12. Evington Company sells new equipment with P880, 000 list prices at a mark-up of 20% on selling price. A dissatisfied customer returned a piece of equipment. Evington Company determined that the returned equipment can be sold if it is reconditioned. The estimated sales price of the reconditioned equipment is P800, 000. The reconditions cost is estimated to be P50, 000 and estimated cost to sell is 10% of the selling price. What is the equipment net realizable value? a. 742, 000 b. 670, 000 c. 510, 000 d. 566, 000 13. The records for Thurgood’s discount store are summarized below for the month of July Inventory. July 1 at retail P450, 000; at cost P300, 000 Purchases in July-at retail P5, 400; at cost P3, 500, 000; freight in P75, 000 Purchase return-at retail P225, 000; at cost P125, 000; purchase allowance P25, 000 transfers in from suburb branch-at retail P300, 000; at cost P235, 000 Net mark-ups P675, 000; net markdowns P600, 000 Inventory losses due to normal breakage-at retail P150, 000 Employee discounts-P100, 000 sales P5, 000, 000 sales returns P250, 000; sales Allowance P50, 000; sales discounts P25, 000

Using the average retail inventory method, what is the estimated cost of sales? a. 3, 250, 500 b. 3, 151, 500 c. 3, 400, 000 d. 3, 300, 000 14. Information regarding marshal company portfolio of available for sale securities is as follows: Aggregate cost on December 31, 2011 1, 500, 000 Unrealized gains on December 31, 2011 50, 000 Unrealized losses on December 31, 2011 200, 000 Net realized gains during 2011 70, 000 On December 31, 2010, marshal reported an unrealized loss of P60, 000 in other comprehensive income to reduce these securities to market value. What amount of unrealized loss on available for sale securities should be reported as other comprehensive income in the shareholders equity on December 31, 2011? a. 200, 000 b. 150, 000 c. 90, 000 d. 80, 000 15. Guevara company statements of comprehensive income for the year ended December 31, 2011 reported income before taxes of P3, 000, 000. The auditor questioned the following amounts that had been included in income: Unrealized gain on available for sale investment Equity in earnings of James Company Dividends received from James

250, 000 400, 000 150, 000

Guevara owns 30% of James preferences shares but has no interest in ordinary shares, what should be reported as income before taxes? a. 2, 750, 000 b. 2,600, 000 c. 2, 350, 000 d. 2, 050, 000 16. On January 1, 2011, Stallone company purchased held to maturity bonds with face value of P5, 000, 000 for P4, 682, 600 including transactions cost of P82, 600 the bonds are purchased to yield 10% interest. The nominal interest rate on the bonds is 8% payable annually every December 31. Stallone appropriately used the effective interest method of amortization. The market value of the bonds on December 31, 2011 is 105. What is the carrying amount of the investment on December 31, 2011? a. 4, 750, 860 b. 4, 682, 600 c. 5, 250, 000

d. 4, 614, 340 17. On December 31, 2011. Siefert Company purchased 12, 000 ordinary shares of Alexander Company with P100 par value for P1, 650, 000 to be held as available for sale. On March 1, 212. Seifert received a 10% stock dividend from Alexander company. On this date: Alexander’s ordinary share is selling for P140. On June 1, 2012, Seifert sold all the stock dividends that were received on March 1, 2012 at P150 per share. What is the total amount of income to be recorded by Seifert in 2012 from its investment in Alexander? a. 198, 000 b. 183, 000 c. 30, 000 d. 15, 000 18. On July 1, 2011 Aguilera Company purchased bonds with face value of P5, 000, 000 to be held a available for sale. The entity paid P4, 600, 000 plus transactions cost of P142, 000 and accrued interest of P150, 000. The bonds pay 6% interest annually on December 31 of each year with an 8% effective yield. The transaction cost was appropriately included in the carrying amount of the investment while payment for the interest was recorded as interest receivable. The bonds are quoted at 105 on December 31, 2011. What is the amount of interest that was received on December 31, 2011? a. 184, 000 b. 150, 000 c. 300, 900 d. 189, 680 19. Winston Company has seven operating segments, five of which are reportable. A reconciliation prepared by the chief financial officer with regards to the reportable and not reportable operating segments is as follows Reportable operating segments Sales from external customers Intersegment sales Intersegment transfers Total segment expenses Total segment asset Total segment liability All other segments Sales from external customers Intersegment sales Intersegment transfers Total segments expenses Total segment asset Total segment liabilities

25, 000, 000 5, 000, 000 3, 000, 000 10, 000, 000 75, 000, 000 18, 000, 000

3, 000, 000 500, 000 200, 000 700, 000 5, 000, 000 1, 200, 000

What is the minimum revenue from a customer to qualify as a major customer? a. 2, 500, 000 b. 2, 800, 000 c. 3, 300, 000 d. 3, 670, 000 20. Benazir Company prepares quarterly interim financial reports, the entity sells it products through agents who are paid a fixed monthly salary and a commission of 5% that is paid at year end. Sales for the first quarter were P10, 000, 000.however, in the second quarter the employees union negotiated that agents commission should be increased to 8% and to be applied as of the beginning o the current year. Sales in the second quarter were P15, 000, 000. What would be the sale commission expense charged in the second quarter’s interim financial statements? a. 1, 500, 000 b. 1, 200, 000 c. 1, 700, 000 d. 2, 000, 000 21. On January 1, 2011, Wallace Company acquired 100, 000 ordinary shares of milestones company for P5, 000, 000 at the time of purchase milestones company had 500, 000 outstanding shares with a fair value and book value of P25 million for the year ended December 31, 2011. The following events took place:  Milestone reported net income of P1, 800, 000 for the calendar year 2011  Wallace received from Milestone a dividend of P2.50 per ordinary share  Milestone recognized unrealized gains of P600, 000 on its investment on available for sale securities as other comprehensive income Wallace does have significant influence over Milestone. What is the carrying amount of the investment on December 31, 2011? a. 4, 500, 000 b. 5, 230, 000 c. 5, 110, 000 d. 5, 000, 000 22. The audit of Benoit Company for the year ended December 31, 2011 was completed on March 1, 2012. The financial statements were signed by the managing director on March 15, 2012 and approved by the shareholders on March 31, 2012. The following events have occurred before march 31, 2012:  On January 14, 2012 a customer owing P900, 000 to Benoit Field for Bankruptcy. The financial statements include an allowance for doubtful debts pertaining to this customer of P100, 000.  An asset acquired in December 2011 was recorded at a cost of P600, 000. It was determined on February 15, 2012 that the total cost of asset is P1, 600, 000

 

Benoit company discovered errors on march 10, 2012 that showed that the correct cash balance should be P1, 200, 000 instead of the previous balance of P1, 000, 000 A noncurrent asset with a carrying amount of P2, 000, 000 was classified as held for sale on March 13, 2012. The recoverable amount of the noncurrent asset was determined to be P1, 500, 000.

What is the net increase or net decrease in the total asset to be reported by Benoit Company on December 31, 2011 as a result of events after the reporting period? a. 100, 000 decrease b. 400, 000 increase c. 1, 100, 000 decrease d. 300, 000 decrease 23. On December 1, 2011, Landsman Company purchased for P3, 000, 000 a tract of land as a factory site. Landsman razed an old building on the property and used the materials it salvaged from the demolition for the new factory. Landsman incurred additional costs and realized salvage proceeds during December 2011 as follows: Demolition of old building Legal fees for purchase contract and recording ownership Filling, grading and levelling Title guarantee insurance Salvaged materials

300, 000 20, 000 50, 000 30, 000 100, 000

What is the total cost of the land? a. 3, 300, 000 b. 3, 250, 000 c. 3, 400, 000 d. 3, 350, 000 24. Kennedy Company reported an impairment loss of P200, 000 in its statements of comprehensive income for the year ended December 31, 2010. This loss was related to noncurrent asset which Kennedy currently used in its operations on the December 31, 2010. Kennedy reported the noncurrent asset after impairment at P1, 000, 000 and estimated that the noncurrent asset would be used for another five years regardless whether the impairment was recognized or not. Kennedy used the straight line depreciation with no residual value. On December 31, 2011. Kennedy used the straight line depreciation with no impaired noncurrent asset had increase by P50, 000 over its fair value on December 31, 2010. In the 2011 statements of comprehensive income. What amount should be reported as gain on the reserve of the impairment loss/ a. 250, 000 b. 160, 000 c. 50, 000 d. 0

25. Mikhail Company started construction of a building on January 1, 2011 and completed construction on December 31, 2012. Mikhail had two interest bearing notes outstanding during both years and all of the notes were outstanding for all 12 months of each year. The following information is available: 8% note (specifically for the project) 2, 000, 000 10% long term note 8, 000, 000 2010 average accumulated expenditures 2010 ending balance in construction in progress Before capitalization of interest 2010 expenditures which were incurred evenly

2, 800, 000 3, 600, 000 2, 000, 000

What is the total cost of the building on December 31, 2012? a. 6, 282, 000 b. 5, 600, 000 c. 5, 920, 000 d. 7, 520, 000 26. On January 1, 2011. Truman Company acquired equipment to be used in its manufacturing operations. The equipment has an estimated useful life of 8 years and an estimated residual value of P300, 000. The depreciation applicable to his equipment was P900, 000 for 2012 computed under the 200% double declining balance method. What was the acquisition cost of the equipment? a. 3, 600, 000 b. 4, 500, 000 c. 4, 800, 000 d. 5, 100, 000 27. Luther Company has recently acquired a computer system for its central office in Makati Luther provided the following information for the new computer List price Trade discount Removal of old computer Concrete slab poured as a base for the new computer Insurance taken during delivery Repairs incurred while in transit Transportation cost Purchase discount available on purchase (not Taken) Computer software that is an integral part of the system

1, 000, 000 10% 20, 000 30, 000 20, 000 10, 000 50, 000 5% 95, 000

What is the total amount to be capitalized as cost of the computer system? a. 1, 050, 000 b. 1, 070, 000

c. 1, 060, 000 d. 955, 000 28. Emmeline Company’s check book balance on December 31, 2011 was P1, 500, 000. In addition, Emmeline held the following items in its safe on December 31, 2011?  A post-dated check for P300, 000 from Lydia Company received December 1, 0211 and dated December 30, 2011 which was not included in the check book balance  An NSF check from Steve Company in the amount of P100, 000 that had been deposited at the bank on December 15, 2011 but was retuned for lack of sufficient fund on December 28, 2011. The check was redeposited on January 3, 2012. The original deposit has been included in the December 31 check book balance  Coin and currency on hand amounted to P250, 000 What is the correct amount of cash to be reported on December 31, 2011? a. 1, 650, 000 b. 2, 050, 000 c. 1, 700, 000 d. 1,950, 000 29. On march 1, 2011, Daniela Company classified anon current asset as held for sale that had a carrying amount of P1, 500, 000. On this date, the noncurrent asset has a fair value of P1, 400, 000. Estimated disposal cost to be incurred for sale was P50, 000. By December 31, 2011. The asset had not been sold but the sale is still considered to be highly probable and management intention to sell has not changed. At the same time. Daniela managers estimated that because of recent changes for the demand of the noncurrent asset and price increases the noncurrent asset was now expected to be selling for P1, 600, 000 with the related disposal cost unchanged at P50, 000. Depreciation from March 1, 2011 to December 31, 2011 was computed at P80, 000. How much gain from the increase in fair value less cost to sell should be reported in 2011? a. 150, 000 b. 250, 000 c. 230, 000 d. 200, 000 30. Carson corporation purchased a new machine on January 1, 2012 A P500, 000 down payments was made and three quarterly instalments of P200, 000 each are to be made beginning on April 1, 2011 the cash price of the new machine would have been P1, 000, 000 if paid in full. Carson paid no installation charges under the quarterly instalments plan but a P20, 000 installation charge would have been incurred with a cash purchase. Delivery of P30, 000 was also incurred with the purchase what is the amount to be capitalized as the cost of the new machine? a. 1, 030, 000 b. 1, 100, 000 c. 1, 050, 000 d. 1, 150, 000 31. On January 1, 2011, Altidor Company received a 4 year variable interest rate loan of P4, 000, 000 with principal payment at maturity and annual interest payment at the end of each year. The

interest rate of fro 2011 is 10% and the rate in each succeeding year is equal to market interest rate on January 1 of that year. In connection with the loan. Altidor company entered into an interest rate swap agreement with another financial institution to the effect that altidor will receive a swap payment i the interest rate on January 1 is more than 10% will make a swap payment if the interest rate is less than 10%. The swap payments are made at the end of the year on December 31. On January 1, 2012, the market rate of interest is 12% and on January 1, 2013, the market rate of interest is 14%. What is the derivative or liability under the interest swap agreement on December 31, 2012? (Round off PV factor to two decimal places) a. 264, 000 asset b. 264, 000 liability c. 192, 000 asset d. 192, 000 liability 32. The total debits and credits in selected accounts of Condor Company after closing entries were posted on December 31, 2011 are given below: Debits credits Materials 200, 000 800, 000 Goods in process 500, 000 700, 000 Material purchases 2, 000, 000 2, 000, 000 Purchases discount 80, 000 80, 000 Transportation in 150, 000 150, 000 Direct labor 1, 000, 000 1, 000, 000 Manufacturing overhead 500, 000 500, 000 Finished goods 250, 000 700, 000 What was the cost of goods sold for 2011? a. 4, 820, 000 b. 4, 750, 000 c. 4, 520, 000 d. 4, 450, 000 33. The general ledger trial balance of Armani Company included the following accounts on December 31, 2011: Inventory including inventory expected in the ordinary course of Operations to be sold beyond 12 months amounting to P700, 000 Trade receivables Prepayments Listed investment at fair value through profit or loss Available for sale securities Cash and cash equivalents Deferred tax asset

1, 000, 000 1, 200, 000 50, 000 200, 000 800, 000 300, 000 150, 000

Asset of a disposal group

250, 000

What amount should be reported as total current asset on December 31, 2011? a. 3, 000, 000 b. 2, 750, 000 c. 3, 550, 000 d. 2, 500, 000 34. Bankrupt bank has a 5 year loan receivable with a face value of P2, 000, 000 dated January 1, 2010 from a borrower that is due on December 31, 2014. Interest on the loan is payable at 10% every December 31. The borrower paid the interest that was due on December 31, 2010 but informed bankrupt on December 31, 2011 that interest accrued in 2011 and the interest for 2012 will be paid at maturity date. The borrower will also probably miss the two years for interest payments because of financial difficulty. After that the borrower is expected to pay the loan and accrued interest in 2011 and 2012 on December 31, 2014.what is the loan impairment loss to be recognized on December 31, 2011? (round off present value factor to three decimal places) a. 97, 200 b. 397, 600 c. 597, 600 d. 197, 600 35. Blake Company used the composite method of depreciation based on a composite rate of 10% at the beginning of 2011, the total cost of Blake’s’ depreciable asset was P2, 500, 000 with a total residual value of P300, 000. Accumulated depreciation was P750, 000 on the same date. During 2011. Blake sold asset with an original cost of P500, 000 an d a residual value of P60, 000 for P150, 000 no gain or loss was recognized on the sale. Asset costing P1, 000, 000 with a residual value of P120, 000 were also acquired during 2011 to replace asset sold within a year. What is the balance of the accumulated depreciation on December 31, 2011? a. 1, 050, 000 b. 664, 000 c. 700, 000 d. 850, 000 36. For the year ended December 31, 2011, Greenberg Company estimated its allowance for uncollectible accounts using the year end aging of accounts receivable. The following data for 2011 are available: Allowance for uncollectible accounts 1/1/11 Provision for uncollectible accounts during 2011 (2% on credit sales Of P25, 000, 000) Uncollectible accounts written off Recovery accounts writeen off Estimated uncollectible accounts per aging 12/13/11

How much doubtful accounts expenses should be reported for 2011? a. 880, 000 b. 380, 000 c. 180, 000 d. 500, 000 37. Precious Company purchased 10% of an investee 100, 000 outstanding ordinary shares on January 1, 2011 for P500, 000. On December 31, 2011. Precious purchased an additional 20, 000 shares of the investee for P1, 500,000. There was no goodwill as a result of either acquisition and the investee had not issued any additional shares during 2011. The investee reported earnings of P3, 000, 000 for 2011 what is the carrying amount of the investment on December 31, 2011? a. 1, 700, 000 b. 2, 000, 000 c. 2, 300, 000 d. 2, 900, 000 38. During the current year. Aura Company incurred the following costs: Research and development services performed by Amor Company for Aura Design, construction and testing of preproduction prototypes and models Testing in search for new product or process alternatives

150, 000 200, 000 175, 000

What should be reported as research and development expense? a. 150, 000 b. 200, 000 c. 350, 000 d. 525, 000 39. Mariel Company acquired a trademark relating to the introduction of a new manufacturing process. The cost incurred were as follows: Cost of trademark Expenditure on promoting the new product Employee benefits relating to the testing of the proper functioning of the new Process

3, 500, 000 50, 000 200, 000

What is the total cost that should be capitalized as intangible noncurrent asset in respect of the new process? a. 3, 750, 000 b. 3, 700, 000 c. 3, 500, 000 d. 3, 550, 000 40. In 2010, Vanna Company paid P1, 000, 000 to purchase land containing total estimated 160, 000 tons of extractable mineral deposits. The estimated value of the property after the mineral has

been removed is P200, 000. Extraction activities began in 2011 and by the end of the year, 20, 000 tons had been recovered and sold in 2012, geological studies indicated that the total estimated tons extricable mineral deposits had been underestimated by 60, 000 tons. During 2012, 50, 000 tons were extracted and 48, 000 tons were sold. What is the depletion included in cost of sales for 2012? a. 175, 000 b. 168, 000 c. 200, 000 d. 192, 000