thery of accounts

Review 105-----------Day 1 THEORY OF ACCOUNTS 1. The ASC framework (Choose the incorrect one) a. Sets out the concepts that underlie the preparation and presentation of financial statements for external users. b. Is not a Statement of Financial Accounting Standards and hence does not define standards for any particular measurement or disclosure issue. c. Is concerned with special purpose reports, for example, prospectuses and computations prepared for taxation purposes. d. Applies to the financial statements of all commercial, industrial and business reporting enterprises, whether in the public or private sector. 2. Accounting is I. A service activity and its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. II. The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof. III. The process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. a. I, II and III b. I only c. II only d. III only 3. Financial accounting 1. Is the examination of financial statements by an independent CPA for the purpose of expressing an opinion as to the fairness of the financial statements. 2. Focuses on the preparation and presentation of general purpose reports known as financial statements. 3. Has no precise coverage but is used generally to refer to services to clients on matters of accounting, finance, business policies, organization procedures, product costs, distribution and many other phases of business conduct and operations. 4. Is the preparation of annual income tax returns and determination of tax consequences of certain proposed business venture. 4. Categories of hedges include a. Fair value hedge c. Cash flow hedge b. Hedge of a net investment in a foreign operation d. All of these

5. Characteristic(s) common to all joint ventures include a. One or more venturers are bound by a contractual arrangement. b. The contractual arrangement establishes joint control. c. The use of proportionate consolidation. d. Both a and b. 6. A party to a joint venture and has joint control over that joint venture a. Venturer b. Investor c. Operator d. Manager 7. A method of accounting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements a. Equity method c. Proportionate consolidation method b. Cost method d. Combination method 8. This form of joint venture maintains own records and prepares and presents financial statements in accordance with GAAP. a. Jointly controlled operations c. Jointly controlled entities b. Jointly controlled assets d. All of the above 9. This form of joint venture involves the use of assets and other resources of the venturers rather than the establishment of a separate entity a. Jointly controlled operations c. Jointly controlled entities b. Jointly controlled assets d. All of the above 10. Separate financial statements include financial statements a. In which the investments are accounted for on the basis of the direct equity interest. b. In which the investments are accounted for on the basis of the reported results and net assets of the investees. c. In which proportionate consolidation is applied. d. Of an entity that does not have a subsidiary, associate or venturer’s interest in a jointly controlled entity. 11. Allowed accounting treatment for interests in jointly controlled entity include a. Proportionate consolidation c. Either a or b b. Equity method of accounting d. None of the above 12. Investment property excludes a. Land held for long-term capital appreciation. b. Building leased out under an operating lease. c. Property held for future use for administrative purposes. d. None of the above.

13. Investment property includes a. Property being constructed or developed on behalf of third parties. b. Property that is being constructed or developed for use as an investment property. c. Property leased to another entity under a finance lease. d. Property that is being redeveloped for continuing use as investment property.

14. Which is not a purpose of the ASC framework? a. To assist the ASC in developing accounting standards that represent generally accepted accounting principles in the Philippines. b. To assist the ASC in its review and adoption of existing International Accounting Standards. c. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP. d. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in the Philippines.

P 1,500,000 A further analysis of the “Trade Creditors” debit balances indicates: Date

Items Miscellaneous debit balances prior to 2007. No information available due to loss of records in a fire.

03/03/07

Manila Co. –Merchandise returned for credit, but the company is now out of business

06/10/09

Cebu Corp. – Merchandise returned but Cebu says “never received” Jolo Distributors – Allowance granted on defective merchandise after the invoice was paid

07/10/10

10/10/10

15. The ASC framework deals with (choose the incorrect one) 12/05/10 a. Objective of financial statements b. Qualitative characteristics c. Definition, recognition and measurement of the basic elements of financial 12/05/10 statements d. Generally accepted accounting principles AUDITING PROBLEMS In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following: Trade creditors, credit balances Trade creditors, debit balances Net Estimated warranty on products sold Customer’s deposits Due to officers and shareholders for advances Goods received on consignment at selling price (offsetting debit made to Purchases)

P 1,363,000 63,000 P 1,300,000 100,000 9,000 50,000 41,000

Bulacan Co – Overpayment of invoice Advance to Zambales Co. This company agrees to supply certain articles on a cost –plus basis

Amount P 3,000 8,000 7,000 5,000 12,000 24,000

Goods returned for credit and adjustments on price after the invoices were paid; credit memos from supplier not yet received 4,000 63,000

Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received. In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011. The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010. These goods are included in your adjusted inventory. 1. The Accounts payable – Trade balance at December 31, 2010 should be A. P 1,471,000

B. P 1,614,000

C. P 1,214,000

D. P 1,477,000

Bonds Payable

2,000,000

2. The net adjustment to Purchases should include a A. Net debit of P 51,000 B. Net credit of P 41,000 C. Net debit of P 10,000 D. Net debit of P 73,000 3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. P 18,000 C. P 35,000

B. P 23,000 D. P 39,000

4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to A. Miscellaneous losses if P 23,000 B. Advances to suppliers of P 24,000 C. Suppliers to debit balances of P 18,000 D. Purchases of P 21,000 5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because A. There is likely to be other reliable external evidence to support the balances B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment C. This is a duplication of cutoff test D. Accounts payable at the end of reporting period may not be paid before the audit is completed. Problem 2 You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12%

P 650,000 190,000 800,000 15,000 ? 600,000 1,500,000

The following additional information pertains to these liabilities: a. All trade notes payable are due within six months of the balance sheet date. b. Bank notes payable include two separate notes payable Allied Bank. (1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months. (2) A 1-year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011. The interest was paid on December 31, 2010 c. The 10% mortgage note was issued October 1, 2007. With a term of 10 years. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2010, Mavericks is three months behind in paying its required interest payment. d. The 12% mortgage note was issued may 1, 2001, with a term of 20 years. The current principal amount due is P 1,500,000. Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011. The payment includes interest of P 180,000. e. The bonds payable is 10-year, 8% binds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. Based on the above and the result of your audit, answer the following: 6. Interest payable as of December 31, 2010 is a. P155,000 b. 143,000 c. 203,000 d. 215,000 7.The portion of the Notes payable – bank to be reported under current liabilities as of December 31, 2010 is a. P 300,000 b. 500,000 c.800,000 d. 0 8. Total current liabilities as of December 31, 2010 is b. P 3,950,000 b. 4,138,000 c. 3,938,000 d. 3,998,000 9. BTotal noncurrent liabilities as of December 31, 2010 is c. P1,760,000 b. 2,560,000 c. 3,960,000 d. 1,960,000 FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of March 31, 2010. BONDS PAYABLE

Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount NOTES PAYABLE Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010 Due Date April 1, 2010 July 1, 2010 October 1, 2010 April 1 2011 - March 31, 2012 April 1, 2012 – March 31, 2013 April 1, 2013 – March 31, 2014 April 1, 2014 – March 31, 2015 April 1, 2015 – March 31, 2016 ESTIMATED WARRANTIES

Amount Due P 400,000 600,000 300,000 300,000 1,200.000 1,000,000 800,000 1,000,000 P 7,000,000

Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows: Warranty claims honored on 2008-2009 sales P 180,000 Warranty claims honored on 2009-2010 sales 178,000 Total warranty claims honored P 358,000 OTHER INFORMATION 1. TRADE PAYABLES Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010 2. PAYROLL RELATED ITEMS Merchandise, shipped FOB destination, 12.24.10; received 01.02.11 Accrued Salaries and wages P 300,000 Withholding taxes payable 94,000 Other payroll deductions 10,000

3. MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150,000 as of March 31, 2010 4. DIVIDENDS On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding Feel Na Feel common stock are as follows: Per Value P 5.00 per share Number of shares issued and outstanding 6,000,000 shares Market Values of Common Stock: March 15, 2010 March 31, 2010 April 12, 2010 per share

P 22.00 per share 21.50 per share 22.50

10 How much was received by Feel Na Feel from the bonds issued on July 1, 2008? a. P8,852,960 b. 10,000,000 c. 10,500,000 d. 10,647,040 11 On March 31, 2010, Feel Na Feel’s statements of financial position would report total current liabilities of a. P5,286,000 5,642,000

b. 4,386,000

c. 5,336,000

d.

12. On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent liabilities of a. P14,389.350 14,252,960

b. 14,352,217

c. 14,370,783

d.

13 In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of. a. Existence c. Completeness b. Presentation and disclosure d. Valuation and allocation

14An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consist of all a. Merchandiser received c. Canceled checks b. Vendor’s invoices d. receiving reports 15. The primary audit test to determine if accounts payable are valued properly is a. Confirmation of accounts payable b. Vouching accounts payable to supporting documentation c. An analytical procedure d. Verification that accounts payable was reported as a current liability in the balance sheet. BUSINESS LAW AND TAXATION 1. The following are the requisites of an obligation, except: a. Passive subject, debtor or obligor b. Active subject, creditor or oblige c. Efficient cause d. Presentation 2. Obligations may arise from any of the following, except: a. Contracts b. Quasi-contracts c. Law d. Negligence 3. It is the voluntary administration of the property of another without his consent. a. Negotiorumgestio b. Solution indebiti c. Quasi-delict

d. Contract 4. It is a wrong committed without any pre-existing relations between the parties. a. Natural obligation b. Quasi-delict c. Quasi-contract d. Culpa contractual 5. Unless the law or stipulation of the parties requires another standard of care, every person obliged to give something is also obliges to take care of it with. a. Extra-ordinary diligence b. Diligence of a father of a good family c. Diligence of a good father of a family d. Good diligence of a father of a family 6. Which of the following can be considered as a feature of a void contract? a. Subject to ratification b. It exist c. Action or defence of nullity is subject to prescription d. Novation cannot apply 7. D entered into a contract of mortgage with X, T, the clerk of L, typed the document. Due to T’s negligence, the document made was that of sale instead of mortgage. a. The remedy is annulment b. Parties may go to court for interpretation c. Parties may enforce their right because it is enforceable D.Reformation of instrument is proper 8. There persons bound by contracts, except: a. Third persons b. Assigns c. Heirs d. Parties

9. Liable for the loss of the subject matter by fortuitous event. a. Creditor b. Debtor c. Both creditor and debtor d. None of them 10. S offers to sell his house to B for P100,000. B asks him if he would accept P80,000. Which of the following is correct? a. Because of ambiguity, both offers are terminated by operation of law. b. B’s response is a counter-offer effectively terminating the P100,000 offer and instigating an offer for P80,000. c. B’s response is a rejection of the P100,000 offer, and there is no offer for P80,000 because it is too indefinite to be an offer d. B’s response is a mere inquiry, the P100,000 offer by S is still in force. 11. Example no. 1: G, guardian of W, sold W’s house valued P50,000 for P37,500 or a lesion by ¼ of the value. Example no. 2: S sold his house valued P50,000 for only P10,000 because S did not know the true value of the house. a. Both contracts are rescissible. b. Only no. 1 is rescissible c. No. 2 is voidable because there is an error or mistake. d. Both contracts are valid and enforceable. 12. B Company bought out a competitor. C Corporation, with a stipulation that C Corporation should not thereafter engage in any business in the Philippines unless consented to and approved by B Company. a. The stipulation is defective but subject to ratification. b. The stipulation is valid because the parties are free to enter into any stipulation, terms and conditions such as this one. c. The stipulation is unenforceable as there was no showing that the sale was done in writing. d. The stipulation is void because it is contrary to public policy. 13. Which of the following is not valid? a. Mutual promise to marry entered into orally b. Sale of immovable property orally entered into. c. One of the parties in a contract is incapable of giving consent d. Mortgagor of an immovable cannot alienate it without the mortgagee’s consent. 14. D forced C to execute a promissory note. a. Contract is rescissble because the contract is fraudlert b. The contract is void

c. C cannot demand payment unenforceable d. Contract remains valid

from

D

because

the

contract

is

15. Example 1 – S sold to B in private instrument his land. Later, B wanted to have the sale registered, but registration requires a public instrument: in here, B may compel S to execute the needed public instrument. Example 2 – S sold orally to B his land. After B paid S the price he wants to register the land in his name but he needed a public instrument of sale. In here, B may compel S to execute the needed public instrument. a. Both examples are false b. Only the first is true c. Only the second is true d. Bothe examples are true MANAGEMENT ADVISORY SERVICES 1. The following characterize management advisory services except A. involve decision for the future B. broader in scope and varied in nature C. utilize more junior staff than senior members of the firm D. relate to specific problems where expert help is required 2. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted output and P280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for P50,000 units. How much is Carera’s budgeted variable cost per unit of output? A. P1.60 C. P3.00 B. P1.67 D. P5.00 3. Short-term creditors are usually most interested in assessing a. solvency. b. liquidity. c. marketability. d. profitability. 4. Long-term creditors are usually most interested in evaluating a. liquidity. b. marketability. c. profitability. d. solvency. 5. Stockholders are most interested in evaluating a. liquidity. b. solvency.

c. d.

profitability. marketability.

c. A reduction in net income by P38,350. d. A reduction in net income by P35,400.

6. Madel Company manufactures a single electronic product called Walastik. Walastik sells for P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik device. Direct labor P180 Direct materials 240 Factory overhead 105 Selling costs 75 Total variable costs P600 Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last five years. In 2001, a significant change in Madel’s production technology caused a 10% increase in annual fixed costs and a 20% unit cost increase in the direct labor component as a result of higher skilled direct labor. However, this change permitted the replacement of a costly imported component with a local component. The effect was to reduce unit material costs by 25%. There has been no change in the Walastik selling price. The annual sales units required for Madel to breakeven are: A. B. C. D. 2000 22,000 22,000 14,000 14,000 2001 20,840 22,407 22,407 20,840 7. Derby Co. uses a standard costing system in connection with the manufacture of a line of T-shirts. Each unit of finished product contains 2 yards of direct material. However, a 20 percent direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct materials is P120 per yard. The standard direct material cost per unit of finished product is A. P192 C. P288 B. P240

D. P300

8. Wasting Resource Co. has annual credit sales of P4 million. Its average collection period is 40 days and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually. Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be a. Zero as the positive and negative effects offset each other. b. A reduction in net income by P70,000.

Use the following information for questions 9-10. Terry Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2002. The weighted average number of shares outstanding in 2002 was 50,000 shares. Terry Corporation's common stock is selling for $60 per share on the New York Stock Exchange. 9. Terry Corporation's price-earnings ratio is a. 3.8 times. b. 15 times. c. 18.8 times. d. 6 times. 10. Terry Corporation's payout ratio for 2002 is a. $4 per share. b. 25%. c. 20%. d. 12.5%. 11. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40. Phranklin Pharms has gross purchases of $800,000 per year. What is the maximum amount of costly trade credit Phranklin could get, assuming they abide by the suppliers credit terms? (Assume a 360-day year.) a. $87,111.20 b. $32,666.70 c. $54,444.50 d. $52,266.67 12. Crest Co. has the opportunity to increase annual sales by P1 million by selling to new riskier customers. It has been estimated that uncollectible expenses would be 15% and collection costs 5%. The manufacturing and selling costs are 70% of sales and corporate tax is 35%. If it pursues this opportunity, the after tax profit will a. Increase by P35,000. c. Increase by P65,000. b. Increase by P97,500. d. Remain the same. 13. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative policies are available. Policy A would increase sales by $500,000, but bad debt losses on additional sales would be 8%. Policy B would increase sales by an additional $120,000 over Policy A and bad debt losses on the additional $120,000 of sales would be 15%. The average collection period will remain at 60 days (6 turns per year) no matter the decision made. The profit

margin will be 20% of sales and no other expenses will increase. Assume an opportunity cost of 20%. What should the firm do? A. Make no policy change. B. Change to only Policy A. C. Change to Policy B (means also taking Policy A first). D. All policies lead to the same total firm profit, thus all policies are equal. 14. The NPV and IRR methods give A. the same decision (accept or reject) for any single investment B. the same choice from among mutually exclusive investments C. different rankings of projects with unequal lives D. the same rankings of projects with different required investments 15. What is the proper preparation sequencing of the following budgets?

a. b. c. d.

1, 2, 2, 2,

10,000,000 10,000,000

Differences between cost and market value are considered temporary. The income statement for 2005 should report unrealized gain on these securities at a. 1,500,000 b. 1,000,000 c. 500,000 d. 0 3. Data regarding Lamut Company’s available for sale securities follow:

1. Budgeted Balance Sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted Income Statement 2, 3, 4 3, 1, 4 3, 4, 1 4, 1, 3

Cost Market_ December 31, 2004 8,500,000 December 31, 2005 11,000,000

P1 1. Mankayan Company uses the first-in, first-out retail method of inventory valuation. The following information is available: Beginning inventory Purchases Net markups Net markdowns Sales

December 31, 2004 8,500,000 December 31, 2005 9,500,000

Cost P 2,500,000 13,500,000

What would be the estimated cost of the ending inventory? a. P7,000,000 c. P5,110,000 b. P5,250,000 d. P4,750,000 2. Data regarding Kiangan Company’s trading securities follow: Cost Market_

Retail 4,000,000 16,000,000 3,000,000 1,000,000 15,000,000

10,000,000 10,000,000

Differences between cost and market value are considered temporary. The 2005 statement of stockholders’ equity should report unrealized gain on these securities at a. 2,500,000 b. 1,000,000 c. 1,500,000 d. 0 4. Hungduan Company had acquired investments in available for sale securities for P15,000,000 on January 1, 2004. On December 31, 2005, Hungduan decided to reclassify the available for sale securities as trading securities. The market value of the securities was P13,000,000 on December 31, 2004 and P12,000,000 on December 31, 2005. In its 2005 income statement, Hungduan should report unrealized loss on the transfer of AFS securities at a. 2,000,000 b. 3,000,000 c. 1,000,000 d. 0 5. Hingyon Company had investments in marketable debt securities costing P10,000,000 which were acquired on January 1, 2004 and classified as “available for sale”. On December 31, 2005, the company decided to hold the investments to maturity and accordingly reclassified them as “held to maturity” on that date.

The investments’ market value was P9,000,000 at December 31, 2004, and P7,500,000 on December 31, 2005. What amount should Hingyon Company report as unrealized loss on these securities in its 2005 statement of stockholders’ equity? a. 2,500,000 b. 1,000,000 c. 1,500,000 d. 0 6. On December 31, 2004, Mayayao Company purchased trading securities. Pertinent data on December 31, 2005 are as follows: Security Market_value X 3,500,000 Y 7,500,000 Z 6,000,000

Cost 4,000,000 6,000,000

holds originally 100,000 shares of D Company common stock. Ilocos owns 5% interest in D Company. What amount of dividend revenue should Ilocos report in its 2005 income statement? a. 3,300,000 b. 5,300,000 c. 3,500,000 d. 2,500,000 8. Data pertaining to dividends from Vigan Company’s common stock investments for the year 2005 follow: 

On October 1, 2005, Vigan received P2,000,000 liquidating dividend from X Company. Vigan owns a 5% interest in X Company.



Vigan owns a 10% interest in Y Company which declared a P30,000,000 cash dividend on November 15, 2005 to stockholders of record on December 15, 2005 payable on January 15, 2006.



On December 1, 2005, Vigan received from Z Company a dividend in kind of one share of V Company common stock for every 5 Z Company common shares held. Vigan holds 200,000 Z Company shares which have a market price of P50 per share on December 1, 2005. The market price of V Company common is P30 per share.

8,000,000

On December 31, 2005, Mayayao reclassified its investment in security Z from trading to available for sale. What amount of unrealized loss on the transfer of trading securities should be shown in the 2004 income statement? a. 2,000,000 b. 1,000,000 c. 3,000,000 d. 0 7. Ilocos Company received dividends from its common stock investments during the year 2005 as follows: 

A stock dividend of 20,000 shares from A Company when the market price of A’s shares was P30 per share.



A cash dividend of P2,000,000 from B Company in which Ilocos owns a 20% interest.



A cash dividend of P1,500,000 from C Company in which Ilocos owns a 10% interest.



10,000 shares of common stock of D Company in lieu of cash dividend of P20 per share. The market price of D Company’s shares was P180. Ilocos

What amount should Vigan report as dividend income in its 2005 income statement? a. 6,200,000 b. 4,200,000 c. 3,000,000 d. 5,000,000 9. Caoayan Company owns 1,000,000 shares of Suyo Company’s 5,000,000 shares of P50 par, 10% cumulative, nonparticipating preferred stock and 500,000 shares (2%) of Suyo’s common stock. During 2005 Suyo declared and paid dividends of P40,000,000 on preferred stock. No dividends had been declared or paid during 2004. In addition, Caoayan received a 15% common stock dividend from Suyo when the quoted market price of common stock was P100. What amount should Caoayan report as dividend income in its 2005 income statement? a. 15,500,000

b. 20,000,000 c. 10,000,000 d. 8,000,000

b. 2,170,000 c. 2,310,000 d. 2,100,000

10. On January 2, 2005, Narvacan Company acquired 100,000 shares of ABC Company common stock for a total consideration of P6,000,000. On October 1, 2005, Narvacan received from ABC a preferred stock dividend of one share for every 10 common shares held. On this date, the market price of ABC common is P75 per share and the ABC preferred, P50 per share. Narvacan Company should report its investment in ABC Company preferred stock at a. 500,000 b. 750,000 c. 375,000 d. 0

13. Nagbukel Company issued rights to subscribe to its stock, the ownership of 4 shares entitling the stockholders to subscribe for 1 share at P100. Sinait Company owns 200,000 shares of Nagbukel Company with total cost of P15,000,000. The stock is quoted right-on at 125. What is the theoretical value of the stock rights? a. 1,000,000 b. 1,250,000 c. 1,500,000 d. 0

11. Candon Company owns 100,000 shares of the outstanding common stock of Bantay Company which has several hundred thousand shares publicly traded. These 100,000 shares were purchased in 2002 for P100 per share. On December 1, 2005, Bantay Company distributed 100,000 rights to Candon. Candon was entitled to buy one new share of Bantay common stock for P100 and five of these rights. On December 1, 2005, each share of stock had a market value of P135 exright and each right had market value of P15. On December 31, 2005, Candon exercised all rights. What cost should be recorded for each new share that Candon acquired by exercising the rights? a. 150 b. 100 c. 135 d. 15

14. On January 1, 2004, Laoag Company purchased 15% of Vintar Company’s common stock for P20,000,000. The following data concerning Vintar Company are available: 2004 Net income 7,000,000 Cash dividend paid 15,000,000

2005_

_ 6,000,000 None

In its income statement for the year ended December 31, 2005, how much should Laoag report as income from this investment?

12. Tagudin Company invested in stocks of Kaunlaran Company as follows: 2003 2004

a. 2,250,000 b. 1,950,000 c. 700,000 d. 600,000

4,000,000 7,000,000 15. In January 2005 Paoay Company acquired 25% of the outstanding common stock of Bangui Company for P25,000,000. The book value of the acquired shares In 2005, Tagudin received 150,000 rights to purchase Kanluran stock at P80 was P21,000,000. The excess of cost over book value was attributable to an per share plus five rights. At issue date, rights had a market value of P5 each identifiable intangible asset which was undervalued on Bangui’s balance sheet and stock was selling at P95 ex-right. Tagudin used rights to purchase 22,000 and which had an indefinite life. For the year ended December 31, 2005, Bangui additional shares of Kanluran stock and allowed the remaining rights to lapse. reported net income of P20,000,000 and paid cash dividends of P6,000,000 on its The FIFO mathod is used in determining the stock rights exercised. What is common stock and thereafter issued 10% stock dividend. What is the proper the cost of the new investment? carrying value of investment in associate at December 31, 2005? a. 1,760,000

50,000 shares at P80 100,000 shares at P70

a. 28,300,000

b. 28,500,000 c. 20,400,000 d. 28,700,000 P2

1. Which of the following observations concerning interfund transfers is true? A. They are expected to be repaid. B. They are classified as fund revenues or expenditures. C. The receiving fund recognizes these transfers as revenue. D. These transfers are classified under "Other Financing Sources or Uses." 2. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of 100,000 during 2008. During 2008, Shue withdrew 240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 2008? A. 633,334 B. 466,666 C. 300,000 D. 190,000 3. The JPB partnership reported net income of 160,000 for the year ended December 31, 2008. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 2008 be allocated to J, P, and B?

A. Option A B. Option B C. Option C D. Option D

4.

Refer to the above information. What is each partner's tax basis in the Jones and Smith partnership?

A. Option A B. Option B C. Option C D. Option D 5. Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock. Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the dividends paid by Windsor is reported as dividends declared in the consolidated retained earnings statement? A. None B. 100 percent C. 85 percent D. 75 percent 6.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 2008, Parent sold inventory purchased in 2007 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 2008, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 2008.

Based on the information given above, what amount should be reported in the 2008 consolidated income statement as cost of goods sold? A. $36,000 B. $12,000 C. $48,000 D. $45,000

7. Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income: A. plus the unrealized profit on upstream intercompany sales of inventory made during the current year. B. plus the profit realized this year from upstream intercompany sales of inventory made last year. C. plus unrealized profit on downstream intercompany sales of inventory made during the current year. D. minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year. 8. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 2009 consolidated income statement. What amount of net income did Adams Corporation report for the year? A. $150,000 B. $96,000 C. $120,000 D. $30,000 9. On January 1, 2008, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest? A. Nil B. 15 % C. 100 % D. Cannot be determined

10. On September 30, 2008, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

Based on the preceding information, at what dollar amount is the ending inventory shown in the trial balance of the consolidated workpaper? A. $45,000 B. $50,000 C. $40,000 D. $35,000 11. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit.

Based on the preceding information, in the entry in August to record the sale of the 2,000 units: A. Cost of Goods Sold will be debited for $70,000. B. Inventory will be credited for $85,000. C. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $15,000. D. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $67,000.

12. On December 31, 2009, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? A. $550,000 B. $590,000 C. $700,000 D. $860,000

13. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2009. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? A. $650,000 B. $500,000 C. $550,000 D. $375,000 14. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate? A. Cost method B. Consolidation C. Equity method D. Merger method 15. Goodwill under the parent theory: A. exceeds goodwill under the proprietary theory. B. exceeds goodwill under the entity theory. C. is less than goodwill under the entity theory. D. is less than goodwill under the proprietary theory.