FINANCIAL ACCOUNTING 2

Qualifying Examination
October 2014
Instructions:
This exam is a multiple choice type consists of 100 items and composed of 50% theory of accounts and
50% practical accounting problems 1 covering only the topics based on the syllabi of Accounting 3B:
Financial Accounting, Part 2 subject. Select the correct answer for each of the following questions. Mark
only the answer for each item by shading the box corresponding to the letter of your choice on the
provided official answer sheet. You have 240 minutes to complete the exam. This exam has 100 points.
Note that your exam will be graded solely with what is on your official answer sheet. Any scratch paper or
notes written on this test paper will not be included in determining the scores. Strictly no erasures
allowed. Any erasures will render you examination sheet invalid.
Please refrain from opening your mouth or your cell phones. For any queries, ask directly the assigned
proctor. Please fill up and sign the pledge.
Pledge: I promise to look up for inspiration, down in desperation, but not the side for information.
Name: _____________________________

1. Which
a.
b.
c.
d.

Signature: __________________

of the following is not an essential characteristic of a liability?

A liability is a present obligation of an enterprise
A liability is payable to a specific party
A liability arises from past transaction or event
The settlement of a liability will result to outflow of enterprise resources embodying
economic benefits

2. Current liabilities include all of the following, except

a. Trade payables and accruals for employee and other operating costs
b. Financial liabilities held for trading
c. Bank overdraft
d. Deferred tax liability
3. Which
a.
b.
c.
d.

of the following is a current liability?

Preferred dividends in arrears
A cash dividend payable to preferred stockholders
A dividend payable in the form of additional shares of companys own stock
All of these are current liabilities

4. On December 31, 2014, the bookkeeper of Drang Company provided the following information:
Accounts payable, including deposits and
2,500,00
advances from customers of 500,000
0
Notes payable, including note payable to bank
3,000,000
due on December 31, 2016 for 1,000,000
Share dividends payable
800,000
Credit balance in customers accounts
400,000
Serial
bonds,
payable
in
semiannual
10,000,00
installments of 1,000,000
0
Accrued interest on bonds payable
300,000
Contested BIR tax assessment
600,000
Unearned rent income
100,000
In the December 31, 2014 statement of financial position, how much current liabilities should be
reported?
a. 6,800,000
c. 7,900,000
b. 7,300,000
d. 8,700,000

Page 1 of 12

5. The balance in Dowarc Companys accounts payable account at December 31, 2014 was
1,170,000 before any year-end adjustments relating to the following:
Goods in transit from a vendor to Dowarc on December 31, 2014. The invoice cost was
65,000 and the goods were shipped FOB shipping point on December 29, 2014. The goods
were received on January 2, 2015.
Goods shipped FOB shipping point on December 20, 2014 from a vendor to Dowarc, were
lost in transit. The invoice cost was 32,500. On January 5, 2015, Dowarc filed a 32,500
claim against the common carrier.
Goods shipped FOB destination on December 21, 2014, from a vendor to Dowarc, were
received on January 6, 2015. The invoice cost was 19,500.
What amount should Dowarc report as accounts payable on its December 31, 2014 statement of
financial position?
a. 1,202,500
c. 1,235,000
b. 1,222,000
d. 1,267,500
6. In November and December 2014, Avdent Company received 792,000 for 1,000, 3-year
subscriptions at 264 per issue per year, starting with the January 2015 issue. Avdent elected to
include the entire 792,000 in its 2014 income statement for tax purposes.
What amount should Avdent report in its 2014 statement of financial position as unearned
subscription revenue?
a. None
c. 264,000
b. 44,000
d. 792,000
7. A provision is a liability that is
a. Uncertain as to existence, timing or amount
b. Uncertain as to timing or amount
c. Uncertain as to existence or amount
d. Uncertain as to existence but certain as to timing or amount
8. An obligation that is contingent on the occurrence of a future event should be reported in the
balance sheet as a liability if
a. The future event is likely to occur
b. The amount of the obligation can be reasonably estimated
c. The occurrence of the future event is at least reasonably possible and the amount is known
d. The occurrence of the future event is probable and the amount can be reasonably
estimated
9. Bonk Company inaugurated a sales promotion campaign on May 31, 2014, whereby Bonk placed a
coupon in each package of chocolate sold, the coupons being redeemable for a premium. Each
premium costs Bonk 50 and a customer to receive a coupon must present five coupons. Bonk
estimated that only 60% of the coupon issued would be redeemed. For the seven months ended
December 31, 2014, the following information is available:
Packages of chocolates sold
400,00
0
Premiums purchased
30,000
Coupons redeemed
100,00
0
How much is the estimated liability for premium claims outstanding at December 31, 2014?
a. 100,000
c. 180,000
b. 140,000
d. 240,000
10. A new product introduced by Eaut Promotions carries a two-year warranty against defects. The
estimated warranty costs related to sales are as follows:
Year of sale
3%
Year after sale
5%
Sales and actual warranty expenditures for the years ended December 31, 2014 and 2015 are as
follows:
Sales
Actual Warranty
Expenditures
2014

20,000
800,000
2015
1,000,00
70,000
0
What amount should Eaut report as its estimated liability as of December 31, 2014?
a. 4,000
c. 54,000
b. 24,000
d. 74,000
11. On December 2, 2014, an employee filed a 3,000,000 lawsuit against Scruicer Company for
damages suffered when one of the Scruicers plants exploded on July 20, 2014. Scruicers legal
Page 2 of 12

counsel expects the company will lose the lawsuit and estimates the loss to be between 500,000
and 1,000,000. The employee has offered to settle the lawsuit out of court for 900,000, but
Scruicer will not agree to the settlement.
In its December 31, 2014 statement of financial position, what amount should Scruicer Company
report as provision from lawsuit?
a. 500,000
c. 1,000,000
b. 750,000
d. 3,000,000
12. An entity shall measure initially a note payable not designated at fair value through profit or loss at
a. Face amount
c. Fair value plus transaction cost
b. Fair value
d. Fair value minus transaction cost
13. Which of the following statements concerning discount on note payable is incorrect?
a. Discount on note payable may be credited when an entity discounts its own note with the
bank.
b. The discount on note payable is a contra liability account which is shown as a
deduction from note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discounts on note payable causes the carrying amount of the liability to
gradually increase over the life of the note.
14. An entity borrowed cash from a bank and issued to the bank a short-term noninterest-bearing note
payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The
effective interest rate paid by the entity in this transaction would be
a. Equal to the stated discount rate of 10%
c.
Less than the stated discount rate of
10%
b. More than the stated discount rate of 10%
d.
Independent of the stated
discount rate of 10%
15. On July 1, 2014, Placper Corporaton issued a five-year note payable with a face value of 250,000
and a 10% interest rate. The terms of the note require Placper to make five annual payments of
50,000 plus accrued interest, with the first payment due on June 30, 2015.
With respect to the note, how much would be included in the current liabilities section of Placpers
December 31, 2014 statement of financial position?
a. 12,500
c. 62,500
b. 50,000
d. 75,000
16. On September 1, 2013, Kraccers Company issued a note payable to PNB in the amount of
2,400,000, with the stated rate of 12% and payable in 3 equal annual installments. On this date,
the banks prime rate is 11%. The first interest and principal payment was made on September 1,
2014.
How much should Kraccers record as accrued interest payable at December 31, 2014?
a. 58,667
c. 88,000
b. 64,000
d. 96,000
17. In debt restructuring that is considered an asset swap, the gain on extinguishment is equal to the
a. Excess of the fair value of the asset over its carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset
c. Excess of the fair value of the asset over the carrying amount of the debt
d. Excess of the carrying amount of the debt over the carrying amount of the asset
18. The gain or loss from extinguishment of a financial liability by issuing equity instruments shall be
presented in the statement of comprehensive income as
a. Other income or other expense
c.
Component of other comprehensive
income
b. Separate line item in profit or loss
d. Component of finance cost
Use the following information to answer Items No. 19 & 20:
On December 31, 2014, Betd Company was indebted to Rece Co. on a 2,000,000, 10% note. Only
interest had been paid to date. Due to its financial difficulties Betd Company has negotiated a
restructuring of its note payable. The parties agreed that Betd Company would settle the debt on
the following terms:
Settle one-half of the note by transferring land with a recorded value of 800,000 and a fair
value of 900,000.
Settle one-fourth of the note by transferring 200,000 shares of 1 par ordinary shares with a
fair market value of 15 per share.
Page 3 of 12

Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5%,
extend the due date three years from the date of restructuring and reducing the principal to
300,000.

19. How much is the total gain on extinguishment of debt

a. None
c. 337,306
b. 437,306
d. 550,006
20. How much is the carrying amount of the note payable as of December 31, 2015?
a. 142,494
c.
262,694
b. 273,963
d.
300,000
21. They are high-risk, high-yield bonds issued by companies that are heavily in debt or otherwise in
weak financial condition
a. Zero-interest bonds
c. Junk bonds
b. Unsecured bonds
d. Bearer bonds
22. For a bond issue that sells for more than its par or face value, the market rate of interest is
a. Dependent on the rate stated on the bond
c.
Less than the rate stated on the
bond
b. Equal to the rate stated on the bond
d.
Higher than the rate stated on the
bond
23. Which of the following is true when the effective interest method of amortizing bond discount is
used?
a. The interest rate decreases each period
c. Interest expense remains constant for
each period
b. Interest expense increases each period
d.
Interest expense varies from
period to period
24. If bonds are issued between interest payment dates, the entry on the books of the issuing
corporation could include a
a. Debit to Interest Payable
c. Credit to Interest Expense
b. Credit to Interest Receivable
d. Credit to Unearned Interest
25. On April 1, 2014, Tregel Corp. issued at 99, 2,000 of its 8%, 1,000 bonds. The bonds are dated
April 1, 2014, to mature on April 1, 2024, and pay interest on April 1 and November 1. Tregel paid
transaction cost of 20,000. From the issuance, how much net cash did Tregel received?
a. 1,960,000
c. 2,000,000
b. 1,980,000
d. 2,020,000
26. On October 1, 2014, Inst Corporation issued, at 99 excluding accrued interest, 2,000 of its 8%
1,000 bonds. The bonds are dated January 1, 2014, mature on January 1, 2024, and pay interest
on July 1 and January 1. Inst paid transaction costs of 70,000. From the bond issuance, Inst receive
net cash of
a. 1,910,000
c. 1,980,000
b. 1,950,000
d. 2,020,000
Use the following information to answer Item No. 27 & 28:
On January 1, 2014, Anst Corporation issued 3,000 of its 9%, 1,000 bonds when the prevailing rate
of interest was 8%. Interest is payable annually every January 1. The bonds mature on January 1,
2019. Anst paid transaction costs of 24,460 in relation to the issue of the debt instruments and in
effect the yield rate is 8.2%. Anst uses the effective method of amortization.
27. On December 31, 2015 balance sheet, how much would be shown as the carrying amount of the
bonds payable? Note: Carry present value factors to five decimal places
a. 3,022,181
c. 3,061,631
b. 3,042,681
d. 3,077,314
28. What is the balance of the unamortized transaction cost or bond issue cost as of December 31,
2015?
a. 5,598
c. 15,676
b. 10,818
d. 20,226
29. On January 2, 2014, Stea Co. issued 9% bonds in the amount of 1,000,000, which mature on
January 2, 2024. The bonds were issued for 939,000 to yield 10%. Interest is payable annually on
December 31. Stea uses the interest method of amortizing bond discount. In its December 31, 2014
statement of financial position, what amount should Stea report as bonds payable?
a. 939,000
c. 947,000
b. 942,900
d. 1,000,000
Page 4 of 12

30. On January 2, 2014, Ganer Company issued its 9% bonds in the face amount of 4,000,000 which
mature on January 1, 2024. The bonds were issued for 3,756,000 to yield 10%. Ganer uses the
interest method of amortizing bond discount. Interest is payable annually on December 31. At
December 31, 2015, how much should be Ganers unamortized bond discount?
a. 192,364
c. 228,400
b. 211,240
d. 244,000
31. When
effect
a.
b.

an entity issued bonds payable that can be converted into ordinary shares, what will be the
on liabilities and equity, respectively?
Increase and No effect
c. No effect and Increase
Increase and Increase
d. Decrease and Increase

32. An entity issued bonds payable with nondetachable share warrants. In computing interest expense
for the first year, the effective interest rate is multiplied by the
a. Proceeds received from the sale of the bonds
c.
Fair value of the bonds exwarrants
b. Face value of the bonds
d. Share warrants outstanding
33. The proceeds from bonds issued with nondetachable share warrants shall be accounted for
a. Entirely as bonds payable
c. Partly as unearned revenue and partly
as bonds payable
b. Entirely as shareholders equity
d.Partly as bonds payable and partly
as shareholders equity
34. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the
entity is
a. A compound financial instrument
c.
A derivative financial
instrument
b. A primary financial instrument
d. An equity instrument
35. During 2014, Loyar Corporation issued at 95, one thousand of its 8%, 5,000 bonds due in ten
years. One detachable stock purchase warrants entitling the holder to buy 20 shares of Loyars
ordinary shares was attached to each bond. Shortly after issuance, the bonds are selling at 10% exwarrant, and each warrant was quoted at 60. What amount, if any, of the proceeds from the bond
issuance should be recorded as part of Loyars shareholders equity? Note: Round off your present
value factors to three decimal places.
a. None
c. 250,000
b. 225,000
d. 367,000
Use the following information to answer items No. 36 & 37:
On January 1, 2014, Trud Company issued its 10%, 5-year convertible debt instrument with a face
amount of 10,000,000 for 10,000,000. Interest is payable every December 31 of each year. The
debt instrument is convertible into 90,000 ordinary shares with a par value of 100. When the debt
instruments were issued, they were selling at 97% without conversion option. Trud Company
incurred 80,000 transaction costs on the issue of the debt instruments.
36. How much of the net proceeds represent the equity component?
a. 297,600
c. 9,920,000
b. 9,622,400
d. 10,000,000
37. How much of the net proceeds represent the debt component?
a. 297,600
c. 9,920,000
b. 9,622,400
d. 10,000,000
38. When substantially all of the risks and rewards incident to ownership remain with the lessor, the
arrangement is treated as:
a. An operating lease
c. A sale and leaseback
b. A finance lease
d. A non-lease, rental arrangement
39. As an inducement to enter a lease, Athe, a lessor, grants Eus Corp., a lessee, months of free rent
under a 5-year operating lease. The lease is effective July 1, 2014 and provides for a monthly rental
of 20,000 to begin April 1, 2015. In Eus income statement for the year ended June 30, 2015, how
much should be reported as rent expense?
a. 51,000
c. 180,000
b. 60,000
d. 204,000
40. In computing the present value of the minimum lease payments, the lessee should
a. Use its incremental borrowing rate
b. Use either the incremental borrowing rate or the implicit rate of the lessor whichever is
higher, assuming that the implicit rate is known to the lessee
c. Use either the incremental borrowing rate or the implicit rate of the lessor whichever is
lower, assuming that the implicit rate is known to the lessee
Page 5 of 12

d. Use the interest rate implicit in the lease, if known to the lessee
41. On January 2, 2014, Ell, Inc. entered into a ten-year non-cancelable lease requiring year-end
payments of 1,000,000. Ell incremental borrowing rate is 12%, while the lessors implicit interest
rate, known to Ell, is 10%. There is not bargain purchase option. The leased property has an
estimated useful life of 12 years. What amount should Ell capitalize for this leased property on
January 2, 2014?
a. None
c. 6,145,000
b. 5,560,000
d. 10,000,000
42. For a sales-type lease,
a. The sales price includes the present value of the unguaranteed residual value
b. The present value of the guaranteed residual value is deducted to determine the cost of
goods sold
c. The gross profit will be the same whether the residual value is guaranteed or unguaranteed
d. None of these

43. Czin Co. leased equipment from Peat Corp. on July 1, 2014 for an 8-year period expiring June 30,
2022. Equal payments under the lease are 600,000 and are due on July 1 of each year. The first
payment was made on July 1, 2014. The rate of interest contemplated by Czin and Peat is 10%. The
cash selling price of the equipment is 3,520,000 and the cost of the equipment on Peats
accounting records is 2,800,000. The lease is appropriately recorded as sales-type lease.
What is the amount of profit on the sale and interest revenue that Peat should record for the year
ended December 31, 2014, respectively?
a. 45,000; 146,000
c. 720,000; 146,000
b. 45,000; 176,000
d. 720,000; 146,000
44. When a company sells property and then leases it back, any gain on the sale under operating lease
should be
a. Recognized in the current year
b. Recognized as a prior period adjustment
c. Recognized at the end of the lease
d. Deferred and recognized as income over the term of the lease
45. Short-term employee benefits include all of the following, except
a. Wages, salaries and social security contributions
b. Short-term compensated absences
c. Profit-sharing and bonuses payable in more than twelve months after the end of
the period in which the employees render the related service
d. Nonmonetary benefits for current employees, such as medical care, housing, car and free
and subsidized goods
46. It is the increase in the present value of the defined benefit obligation resulting from employee
service in the current period.
a. Current service cost
c. Past service cost
b. Interest cost
d. Unrecognized actuarial loss
47. The vested benefits
a. Are employee benefits that are not conditional on future employment
b. Are benefits to be paid to the retired employees in the current period
c. Are benefits to be paid to the retired employees in the subsequent year
d. Are benefits accumulated in the hands of the trustee
48. An employers obligation for postretirement health benefits that are expected to be provided to an
employee must be fully accrued by the date the
a. Employee is fully eligible for benefits
c. Benefits are utilized
b. Employee retires
d. Benefits are paid
49. All of Dlog Companys employees are entitled to two weeks of paid vacation for each full year in
Dlogs employ. Unused vacation time can be accumulated and carried forward to succeeding years
and will be compensated at the salary in effect when the vacation is taken. Sliver started her
employment with Dlog on January 1, 2008. As of December 31, 2014, when Slivers salary was
5,000 per week, Sliver had used 10 weeks of her accumulated vacation time. In December 2014,
Sliver notified Dlog of Slivers intention to use her accumulated vacation weeks in June 2015. Dlog
regularly scheduled salary adjustments in July of each year. Dlog properly did no deduct
compensation for unused vacations in Slivers 2014 income tax return.
How much Dlog report as a liability at December 31, 2014 for Slivers accumulated vacation time.
a. None
c. 10,000
b. 5,000
d. 20,000
Page 6 of 12

50. On January 1, 2014, Kreab Company agreed to grant its employees ten vested vacation days each
year, with the provision that vacation days earned in a particular yea could not be taken until the
following year. For the year ended December 31, 2014, all ten of Kreabs employees earned 300
per day each and earned ten vacation days each. These vacation days were taken during the first
half of 2015. Wage rates remained the same for 2015.
In Kreabs 2014 profit or loss, how much expense should be reported for compensated absences?
a. None
c. 15,000
b. 3,000
d. 30,000
51. Vernance, Inc. has a bonus plan covering all employees. The total bonus is equal to 10% of
Vernances preliminary (pre-bonus, pretax) income reduced by the income tax (computed on the
preliminary income less the bonus itself). Vernances preliminary income for 2014 is 1,000,000
and the income tax rate is 32%.
How much is the bonus for 2014?
a. 61,200
c. 70,248
b. 68,000
d. 100,000
52. On January 2, 2012, Roo Company provides for a lump sum benefit payable upon termination of
service that is equal to 10% of final salary for each year of service. The salary in 2012 is 400,000
and is assumed to increase at 5% compounded each year. The discount rate to be used is 10% per
annum. What is the amount of current service cost Roo Company should include in its pension
expense in year 2014?
a. 34,789
c. 42,095
b. 38,268
d. 46,305
53. Income tax expense current is computed based on
a. Taxable income
tax
b. Total pre-tax financial income

c.

Accounting income subject to income

d.

The temporary difference

54. It is the deferred tax consequence attributable to a deductible temporary difference

a. Deferred tax liability
c. Current tax liability
b. Deferred tax asset
d. Noncurrent tax liability
55. Which of the following creates a permanent difference between financial income and taxable
income?
a. Interest received on bank deposits
b. Completed contract method of recognizing construction revenue
c. Unearned rent revenue
d. Accelerated cost recovery on plant and equipment
56. Which
a.
b.
c.

will give rise to a deferred tax asset?

Dividend received
Tax depreciation is more than financial depreciation
An installment sale is included in financial income at the time of sale and included in taxable
income when cash is collected in future period
d. Estimated warranty cost accrued for financial accounting at the time of sale but deductible
for tax purposes only when actually incurred

57. For the year ended December 31, 2014, Mothy Corporation reported pretax financial income of
6,000,000. Its taxable income was 8,000,000. The difference is due to rental received in advance.
Rental income is taxable when received. The income tax rate is 32% for all years and Mothy made
estimated tax payment of 1,000,000. What should Mothy report as 2014 total income tax
expense?
a. 1,000,000
c. 1,920,000
b. 1,560,000
d. 2,560,000
58. Armk Company leased a facility and received 600,000 annual rental payment on June 16, 2014.
The beginning of the lease was July 1, 2014. Rental income is taxable when received. The income
tax rate is 32%. Armk had no other permanent or temporary differences. Armk determined that no
valuation is needed. What amount of deferred tax asset should Armk report in its December 31,
2014 statement of financial position?
a. None
c. 192,000
b. 96,000
d. 204,000
59. On June 30, 2014, Yglor Corporation prepaid a 380,000 premium on an insurance policy. The
premium payment was a tax-deductible expense in Yglors 2014 cash basis tax return. The accrual
basis income statement will report a 190,000 insurance expense in 2014 and 2015. Assume the
income tax rate is 32%. In Yglors December 31, 2014 statement of financial position, what amount
related to the insurance should be reported as deferred liability?
Page 7 of 12

a. None
b. 60,800

c.

121,600
d. 182,400

60. Lumb Corporation has one temporary difference at the end of 2014 that will reverse and cause
deductible amounts of 100,000 in 2015, 130,000 in 2016 and 80,000 in 2017. Lumbs pretax
financial income for 2014 is 400,000 and tax rate is 32% for all years. There are no deferred taxes
at the beginning of 2014. What is the amount of current tax expense to be reported for 2014?
a. 128,000
c. 201,600
b. 195,200
d. 227,200
61. Which of the following is not considered a type of preference shares?
a. Cumulative preference share
c. Redeemable preference shares
b. Participating preference share
d. Premium preference shares

62. The par value of ordinary share represents

a. The liquidation value of the share
b. The book value of the share
c. The legal nominal value assigned to the share
d. The amount received by the corporation when the share was originally issued
63. On December 31, 2013, statement of financial position of Orm Inc., reported total assets of
1,050,000 and total liabilities of 680,000. The following information relates to the year 2014:
Orm Inc. issued an additional 5,000 ordinary shares at 25 per share on July 1.
Orm Inc. paid dividends totaling 80,000.
Net income for 2014 was 110,000.
No other changes occurred in stockholders equity during 2014.
The equity section of the December 31, 2014 statement financial position would report a balance of
a. 400,000
c. 685,000
b. 525,000
d. 835,000
64. The accounts shown below appear in the December 31, 2014 trial balance of Lohhow Corporation:
Preference share, authorized, 50 par
10,000,0
00
Unissued preference share
3,600,000
Ordinary share, authorized, 20 par
4,000,000
Unissued ordinary share
2,000,000
Subscription receivable, preference share
380,000
Subscription receivable, ordinary share
360,000
Subscribed preference share
600,000
Subscribed ordinary share
440,000
Treasury share, preference, at cost
1,360,000
Share premium
1,700,000
Accumulated profits and losses
2,000,000
All subscription receivables are due in year 2015.
How much is the total shareholders equity of Lohhow Corporation?
a. 11,040,000
c. 12,400,000
b. 11,780,000
d. 13,760,000
65. Wallhay Company issued 20,000 shares of its 10 par value ordinary shares of its 10 par value
ordinary share and 40,000 shares of its 10 par value convertible preference share for a total
amount of 1,800,000. At this date, Wallhays ordinary share was selling 20 per share and the
convertible preference share was selling for 30 per share. What amount of the proceeds should be
allocated to the ordinary share?
a. 400,000
c. 600,000
b. 450,000
d. 1,350,000
66. On July 1, 2014, Sool Company has 200,000 shares of 10 par ordinary share outstanding and the
market price of the share is 12 per share. On the same date, Sool declared a 1 for 2 reverse share
split. The par of the share was increased from 10 to 20. Immediately before the split, the total
Share Premium was 900,000. What should be the balance in Sools Share Premium account after
the reverse stock/share split is effected?
a. None
c. 1,300,000
b. 900,000
d. 1,700,000
67. The total shareholders equity of Duige Corporation as of December 31, 2013 is 3,680,000
including 2,000 treasury shares at cost totaled 320,000. On January 2, 2014, Duige sold the
treasury shares on the open market at 200 per share. What is the effect on the shareholders
equity as a result of the sale of treasury shares?
Page 8 of 12

a. No effect.
b. Increased by 80,000.

c.

Increased by 320,000.
d. Increased by 400,000.

68. Select the statements that is incorrect concerning the appropriations of retained earnings:
a. Appropriations of retained earnings do not change the total amount of shareholders equity
b. Appropriations of retained earnings reflect funds set aside for a designated
purpose, such as plant expansion
c. Appropriations of retained earnings can be made as a result of contractual requirements
d. Appropriations of retained earnings can be made at the discretion of the board of directors
69. How would the declaration of a 20% stock dividend by ABC Corporation affect retained earnings and
total shareholders equity on ABCs balance sheet, respectively?
a. Decrease; Decrease
c. No effect; Decrease
b. Decrease; No effect
d. No effect; No effect
70. Which
a.
b.
c.
d.

of the following actions or events does not result in an addition to retained earnings?
A quasi reorganization
Earnings of net income for the period
Correction of an error in which ending inventory was understated in a previous year
Issuance of a 3-for-1 share split

71. A restriction of retained earnings is most likely to be required by

a. Incurring a net loss in the current year
c. Purchasing treasury share
b. Incurring a net loss in the prior year
d. Reissuing treasure share
72. Reens Corporations Retained Earnings at December 31, 2014 amounted to 2,000,000. On that
date, Reens declared and distributed its investment property, that was carried under fair value
model, as property dividend. The investment property which was acquired at a historical cost of
300,000 has a fair value of 450,000 on December 31, 2014. On the date of declaration and
distribution, by what amount should Retained Earnings be charged?
a. None
c. 300,000
b. 150,000
d. 450,000
73. On July 1, 2014, Tabbery Companys board of directors declared a 10% share dividend. The market
price of Tabberys 400,000 outstanding ordinary shares, 50 par value, was 80 per share on the
date of declaration. The share dividend was distributed on September 1, 2014, when the market
price of the shares was 100 per share. What amount should be charged to the Retained Earnings
account as a result of the share dividend?
a. None
c. 3,200,000
b. 2,000,000
d. 4,000,000
74. On December 31, 2014, Racen Corporation reported a 3,500,000 of appropriated accumulated
profits for the construction of a new building, which was completed in 2015 at a total cost of
3,000,000. In 2015, the company appropriated 2,400,000 of accumulated profits for the
construction of a new plant. The company also restricted 4,000,000 of cash for the retirement of
bonds due in 2017. In its 2015 statement of financial position, what amount of appropriated
retained earnings should Racen Company report?
a. 2,400,000
c. 5,900,000
b. 2,900,000
d. 6,400,000
75. On January 2, 2014, Kicp Corporation declared a cash dividend
record on January 19, 2014 and payable on February 14, 2015. The
Net income for the year ended December 31,
2013
Shares premium, December 31, 2013
Retained earnings, December 31, 2013
The 600,000 dividend includes a liquidating dividend of
a. None
c. 410,000
b. 175,000
d. 485,000

of 600,000 to shareholders of
following data pertain to 2013:
190,00
0
675,000
425,000

76. The Retained Earnings account of Lest Corp. for the year 2014 consists of the following items:
Debit
Credit
Balance, January 1, 2014
112,50
0
Write-off of organization costs
6,000
Excess of issuing price of share capital over
24,0
par value
00
Loss on the sale of equipment
2,500
Gain on sale of treasury shares
3,5
00
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Cash and share dividends

Net income for the year

60,000
58,5
00

Balance, December 31, 2014

119,500
The correct balance of retained earnings on December 31, 2014 is
a. 92,000
c. 100,500
b. 94,500
d. 119,500
77. These are transactions in which the entity receives goods or services as consideration for equity
instruments of the entity, including shares and share options.
a. Equity settled share-based payment transactions c. Equity payment transactions
b. Cash settled share-based payment transactions d. Cash payment transactions
78. It is the difference between the fair value of the shares to which the counterparty has the right to
subscribe and the price of the counterparty is required to pay for those shares.
a. Fair value
c. Intrinsic value
b. Market value
d. Book value
79. It is a contract that gives the holder the right, but not the obligation, to subscribe to the entitys
shares at a fixed or determinable price for a specified period of time.
a. Share option
c. Share appreciation right
b. Share warrant
d. Share split
80. On January 1, 2013, Puc Company granted Tlape, its president, compensatory share options to buy
10,000 ordinary shares of 10 par value. The options call for a price of 20 per share and are
exercisable in 3 years following the grant date. Tlape exercised the options on December 31, 2013.
The market price of the share was 60 on January 1, 2013 and 70 on December 31, 2013. The fair
value of the share option is 30 on the date of grant. What is the net increase in shareholders
equity as a result of the grant and exercise of the options?
a. 200,000
c. 300,000
b. 500,000
d. 700,000
81. Poons Company has granted share options to its employees with a fair value of 6,000,000. The
options vest in three years. The Monte-Carlo model was used to value the options. On January 1,
2011, which is the date of grant, the estimate of employees leaving the entity during the vesting
period is 5%. On December 31, 2012, the estimate of employees leaving before vesting date is
revised to 6%. On December 31, 2013, only 5% of the employees actually left the entity. What is
the compensation expense for 2013?
a. 1,880,000
c. 1,900,000
b. 1,940,000
d. 2,000,000
82. What is the measurement date for a share-based payment to employees that is classified as
liability?
a. The service inception date
c. The settlement date
b. The grant date
d. The end of reporting period
83. How should an entity recognize the change in the fair value of the liability in respect of a cash
settled share-based payment transaction?
a. Should not recognize in the financial statement but disclose in the notes
b. Should recognize in the statement of changes in equity
c. Should recognize in other comprehensive income
d. Should recognize in profit or loss
84. A cash settled share-based payment transaction will increase which of the following?
a. A current asset
c. Equity
b. A noncurrent asset
d. A liability
Use the following information to answer Items 85 & 86:
On January 1, 2014, Flowd, Inc. granted 80,000 cash shares appreciation rights to the executives on
condition that the executives remain in its employ for the next three years. The entity estimates
that the fair value of the share appreciation rights at the end of the year in which a liability exists
are as follows: 2014-15; 2015-18; 2016-20. Compensation expense relating to the plan is to be
recorded over a three-year period beginning January 1, 2014.
85. What amount of compensation expense should Flowd recognize for the year ended December 31,
2014?
a. 240,000
c. 400,000
b. 300,000
d. 1,440,000
86. What amount of compensation expense should Flowd recognize for the year ended December 31,
2016?
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a. 400,000
b. 560,000

c.
d.

640,000
960,000

87. PAS No. 33 requires disclosure on the face of statement of comprehensive income of
a. Basic earnings per share only
c. Neither basic nor diluted earnings per
share
b. Diluted earnings per share only
d.
Both basic and diluted earnings
per share
88. In computing basic EPS, the full amount of the required preference dividends on cumulative
preference shares for the period should be
a. Ignored
c.
Deducted from profit whether
declared or not
b. Deducted from profit only when declared
d.
Added to net profit whether declared
or not
89. In computing basic earnings per share, dividends on cumulative preference shares are
a. Added to net income because they represent earnings to the preferred stockholders
b. Reported separately on the income statement
c. Subtracted from net income because they represent earnings to the preferred
stockholders
d. Ignored because they do not pertain to the common stock
90. Earnings per share is calculated before accounting for which of the following items?
a. Preference dividend for the period
c. Ordinary dividend
b. Taxation
d. Minority interest
91. On January 1, 2014, Orious Corporation, whose shares are publicly traded, has 100,000 shares of
ordinary shares issued and outstanding. On April 1, 2014, the company issued 10% share dividends.
On September 1, 2014, additional 9,000 shares were issued for cash and on November 1, 2014, the
shares were split on a 2 for 1 basis. What is the number of shares to be used in computing earnings
per share on December 31, 2014?
a. 119,000
c. 226,000
b. 220,000
d. 230,500
92. Mitati Companys capital structure at December 31, 2013 is shown below:
Shares
issued
and
outstanding:
Ordinary share
200,00
0
Nonconvertible preference 50,000
share
On October 1, 2014, Mitati issued a 10% share dividend on its ordinary shares, and paid 200,000
cash dividends on the preference shares. Net income for the year ended December 31, 2014 was
1,920,000. How much should be the 2014 earnings per share of Mitati Company?
a. 7.82
c. 8.72
b. 8.20
d. 9.36
93. Notimor Company had 120,000 ordinary shares issued and outstanding at January 1, 2014. On
January 2 of the same year, the company issued 80,000 preference shares. During the year, the
company declared and paid 420,000 cash dividend on the ordinary shares and 240,000 on the
preference shares. Net income for the year was 1,500,000. What should be the basic earnings per
share on 2014?
a. 9.00
c. 12.50
b. 10.50
d. 15.75
94. When computing diluted earnings per share, potential ordinary shares are
a. Ignored
c.
Recognized only if they are
antidilutive
b. Recognized whether they are dilutive or antidilutive
d. Recognized only if they are
dilutive
95. In computing diluted EPS, interest expense on convertible bonds should be
a. Added back to profit at gross
c. Deducted from profit net of tax
b. Added back to profit net of tax
d. Ignored
96. When the enterprise makes a bonus issue/stock split/stock dividend or a right issue, then
a. The previous years EPS is not adjusted for the issue
b. The previous years EPS is adjusted for the issue
c. Only a note of the effect on the previous years EPS is made
d. Only the diluted EPS for the previous year is adjusted
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97. If a new issue of shares for cash is made between the year-end and the date the financial
statements are authorized, then
a. EPS for both the current and the previous year are adjusted
b. EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted
98. At December 31, 2013, Banicet Company had 2,000,000 shares of ordinary shares outstanding. On
January 1, 2014, Banicet issued 500,000 shares of preference, which were convertible into
1,000,000 shares of ordinary shares. During 2014, Banicet declared and paid 1,500,000 cash
dividends on the ordinary shares and 500,000 cash dividends on the preference shares. Net
income for the year ended December 31, 2014 was 5,000,000. Assuming an income tax rate of
32%, how much is the diluted earnings per share for the year ended December 31, 2014?
a. 1.50
c. 2.08
b. 1.67
d. 2.50

99. On December 31, 2013, Leroad Company had 200,000 ordinary shares outstanding with a par value
of 100 per share. In addition, the company had 40,000 shares of 10% convertible preference
shares with a par value of 50 per share. The preference shares are convertible into 40,000
ordinary shares. On December 31, 2014, Leroad Company reported an after tax income of 800,000
and paid 200,000 and 250,000 dividends to preference and ordinary, respectively. What amounts
of earnings per share Leroad Company should report in its December 31, 2014 financial
statements?
a. Basic Earnings per Share of 3.00 only
b. Basic Earnings per Share of 4.00 only
c. Basic Earnings per Share of 3.00 & Diluted Earnings per Share of 3.33
d. Basic Earnings per Share of 4.00 & Diluted Earnings per Share of 3.33
100.
On December 31, 2014, Varen Company has 200,000 ordinary shares outstanding with a par
value of 100 per share. Information revealed that Varen had a 9% convertible debenture,
1,000,000 face value bonds. The bond has a carrying value of 1,067,830 as of January 2, 2014
based on a prevailing rate of 7%. Each 1,000 bond is convertible into 20 ordinary shares. The bonds
were dated January 1, 2014. Net income after tax of 32% for 2014 was 418,000. How much should
Varen Company report as earnings per share in its December 31, 2014 financial statements?
a. 1.90
c. 2.13
b. 2.09
d. 2.89
-end-

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