DySAS Center for CPA Review

2F & 3F Mitra Building, San Pedro Street, Davao City

Tel. No. (082) 224-43-20: E-mail Address – dysasrev@yahoo.com

Practical Accounting 1 John C. Frivaldo, CPA, MBA

FINAL PRE-BOARD EXAMINATION September 30, 2009 @ 1:00 – 4:00 pm
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INSTRUCTIONS: Mark the letter of your choice with a VERTICAL LINE on the answer sheet
provided. ERASURES NOT ALLOWED.

1. The following trial balance of Mint Corporation at December 31, 2009, has been adjusted
except for income tax expense:
Cash 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings
on long-term contracts 1,600,000
Billings in excess of cost on
long-term contracts 700,000
Prepaid taxes 480,000
Property, plant and equipment, net 1,480,000
Note payable – noncurrent 1,620,000
Common stock 750,000
Additional paid in capital 2,030,000
Retained earnings unappropriated 900,000
Retained earnings restricted for note payable 160,000
Earnings for long-term contracts 6,680,000
Costs and expenses 5,180,000 _________
12,840,000 12,840,000
- Mint uses the percentage of completion method to account for long-term construction
contracts for financial statement and income tax purposes. All receivables on these
contracts are considered to be collectible within 12 months.
- During 2009, estimated tax payments of P480,000 were charged to prepaid taxes. Mint
has not recorded income tax expense. There were no temporary or permanent
differences. The tax rate is assumed at 30%. In Mint’s December 31, 2009 balance
sheet, what amount should be reported as:

Total current assets?

(a) P5,000,000 (b) P5,450,000 (c) P5,700,000 (d) P6,150,000 C

Cash P 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings
on long-term contracts 1,600,000
Total current assets P5,700,000

2. The trial balance of Ruth Company, an investment entity, includes the following income and
expenses for the current year:
Dividend income from investments 9,200,000
Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
Unrealized gain on available for sale investments 400,000
Income from dealing in securities and derivatives
held for trading 600,000
Writedown of securities and derivatives held
for trading 150,000
Other income 250,000
Finance cost 300,000
Administrative staff costs 3,800,000
Sundry administrative costs 1,200,000
Income tax expense 1,700,000
 How much is the comprehensive income for the current year?
(a) P4,200,000 (b) P4,600,000 (c) P3,800,000 (d) P9,200,000 B

Dividend income from investments 9,200,000

Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
Unrealized gain on available for sale investments 400,000
Income from dealing in securities and derivatives
held for trading 600,000
Writedown of securities and derivatives held
for trading (150,000)
Other income 250,000
Finance cost ( 300,000)
Administrative staff costs (3,800,000)
Sundry administrative costs (1,200,000)
Income tax expense (1,700,000)
Comprehensive income 4,600,000

3. Presented below are the condensed income statement of Vital Corporation for the years
ended December 31, 2010 and 2009:
2010 2009
Sales 5,000,000 4,900,000
Cost of goods sold 3,350,000 3,300,000
Gross income 1,650,000 1,600,000
Operating expenses 675,000 650,000
Operating income 975,000 950,000
Gain on sale of division 200,000 0
Net income before income tax 1,175,000 950,000
Income tax expense (35%) 411,250 332,500
Net income 763,750 617,500
On October 10, 2010, Vital entered into an agreement to sell the assets of one of its
geographical segments. The geographical segment comprises operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes, from
the rest of the company. The segment was sold on December 31, 2010, for P1,750,000.
The book value of the segment’s assets was P1,550,000. The segment’s contribution to
Vital’s operating income before tax for each year was as follows:
2010 113,750 loss
2009 81,250 income
Assume that by December 31, 2010, the segment had not yet been sold but was considered
held for sale. The fair value of the segment’s assets on December 31 was P1,250,000. The
post-tax loss from discontinued operations for 2010, based on the above data, should be:
(a) P52,812 (b) P56,062 (c) P73,938 (d) P268,938 D

Post-tax loss from discontinued operations

(113,750 + 300,000 = 413,750 x 65%) P268,938
Fair value of assets P1,250,000
Carrying value (1,550,000)
Impairment loss P 300,000

4. Statement of financial position extracts for Anito Company show the following:
December 31, 2009 December 31, 2008
Development costs 8,160,000 5,840,000
Amortization (1,800,000) (1,200,000)
The capitalized development costs relate to a single project that commenced in 2006. It
has now been discovered that one of the criteria for capitalization has never been met.
What adjustment is required to restate retained earnings at December 31, 2008?
(a) P6,360,000 (b) P1,720,000 (c) P4,640,000 (d) P 0 C

Development costs – 12/31/2008 5,840,000

Amortization (1,200,000)
Carrying amount 4,640,000
5. Colt Company has four manufacturing divisions, each of which has been determined to be a
reportable segment. Common operating costs are appropriately allocated on the basis of
each division’s sales in relation to Colt’s aggregate sales. Colt’s Delta division accounted
for 40% of Colt’s total sales in 2009. For the year ended December 31, 2009, Delta had
sales of P2,000,000 and traceable operating costs of P1,200,000. In 2009, Colt incurred
operating costs of P200,000 that were not directly traceable to any of the divisions. In
addition, Colt incurred interest expense of P160,000 in 2009. In reporting supplementary
segment information, how much should be shown as Delta’s operating profit for 2009?
(a) P800,000 (b) P750,000 (c) P720,000 (d) P656,000 C

Sales – Delta division P2,000,000

Operating expenses:
Traceable operating expenses P1,200,000
Allocated indirect operating exp.
(40% x 200,000) 80,000 1,280,000
Operating profit P 720,000

6. Moon Company reports quarterly to its stockholders. Condensed financial information is

presented. Selected information for the year ended 2009 is shown below:
a. Machinery repairs of P100,000 incurred in the first quarter are expected to benefit
each quarter equally.
b. Advertising costs are allocated among the remaining quarters of the annual period,
including the quarter in which the costs are incurred on the basis of historical pattern
of sales: 20%, 30%, 15% and 35% in the first through fourth quarters respectively.
Advertising expense amounted to P120,000 and was incurred in the second quarter.
How much of the above expenses should be reported for the second quarter?
(a) P120,000 (b) P70,000 (c) P65,000 (d) P 0 B

Repairs (100,000/ 4) P25,000

Advertising 45,000
Total expenses for second quarter P70,000

Allocation of advertising
Percent Fraction Amount
Second 30 30/80 P 45,000
Third 15 15/80 22,500
Fourth 35 35/80 52,500
80 P120,000

7. A surprise count of the Pompy Company’s imprest petty cash fund, carried on its records at
P5,000 was made on November 10, 2009.
The company acts as agent for an express company in the issuance and sale of money
orders. Blank money orders are held by the cashier for the issuance upon payment of the
designated amounts by employees. Settlement with the express company is made weekly
with its representative, who calls at the Pompy Co. office. At that time, he collects for
orders issued, accounts for unissued orders, and leaves additional blank money orders,
serially numbered.
The count of the items presented by the cashier as composing the fund was as follows:
Currency (bills and coins) P 2,200
Cashed checks 500
Vouchers (made out in pencil and singed
by recipients) 740
NSF checks (dated June 10 and 15, 2004) 260
Copy of petty cash receipt vouchers:
Return of expense advance P200
Sale of money orders (No.123) 100 300
Blank money orders claimed to have been
purchased for P100 each from the
express company (No. 321) 600
At the time of the count, there were also on hand the following:
Unissued money orders, No. 213
Unclaimed wage employees (sealed and amounts not shown)
 The following day, the custodian of the fund produced vouchers aggregating P400 and
explained that these vouchers had been temporarily misplaced the previous day. They were
for wage advances to employees.
How much is the cash shortage/ overage, if any?
(a) P1,400 shortage (c) P1,600 shortage
(b) P1,500 overage (d) none C

Currency and coins P 2,200

Cashed checks 500
Vouchers 740
NSF checks 260
Total P 3,700
Petty cash receipt vouchers:
Return of expense advance ( 200)
Sale of money orders ( 100)
Balance of fund per count P 3,400
Balance of fund per records 5,000
Shortage (P1,600)

8. The accounting department supplied the following data in reconciling the September 30
bank statement for Reliable Auto Supply Company:
Ending cash balance per bank P 154,969.10
Ending cash balance per books 146,927.10
Deposit in transit 26,152.30
Bank service charges 250.00
Outstanding checks 30,795.10
Note collected by bank including P450
interest (Reliable not yet notified) 10,450.00
Error by bank – check drawn by Amiable
Corp. was charged to Reliable’s
account 6,170.80
Sales and deposit of P17,290 was entered
the sales journal and cash receipts
journal as P17,920.
What is Reliable Auto Supply Company’s correct cash balance at September 30?
(a) P156,247.10 (b) P156,877.10 (c) P156,497.10 (d) P150,326.30 C

Balance per bank P 154,969.10

Deposit in transit 26,152.30
Outstanding checks ( 30,795.10)
Error by bank 6,170.80
Adjusted cash balance, Sept. 30 P 156,497.10

9. You are to give the debit amount to bad debts expense using the given information. Bad
debts are estimated to be 1-1/2% of ending accounts receivable. Credit sales, P172,000,
collections on accounts receivable during the year, P170,000, cash sales, P810,000.
Unadjusted balance in allowance for bad debts, P50, credit balance, sales returns and
allowances, P4,000 and accounts receivable at the beginning of the year, P14,000.
(a) P130 (b) P230 (c) P190 (d) P180 A

Accounts receivable, end of year

(14,000 + 172,000 – 4,000 – 170,000) P12,000
Multiply by 1-1/2% .015
Required balance of allowance, end of year P 180
Balance of allowance account before adjustment ( 50)
Bad debts expense P 130

10. Rex Company accepted from a customer a P4,000,000, 90-day, 12% interest bearing note
dated August 31, 2009. On September 30, 2009, Rex discounted the note with recourse at
Big Bank at 15%. However, the proceeds were not received until October 1, 2009. The
discounting with recourse is accounted for as a conditional sale with recognition of a
contingent liability. What is the loss on note receivable discounting?
(a) P40,000 (b) P23,000 (c) P17,000 (d) P20,000 B
 Principal P4,000,000
Accrued interest receivable
(4,000,000 x 12% x 30/360) 40,000
Book value of note receivable P4,040,000
Net proceeds 4,017,000
Loss on note receivable discounting P 23,000

11. On January 1, 2007, Wild Company sells its equipment with a carrying amount of P160,000.
The company receives a non-interest bearing note due in 3 years with a face value of
P200,000. There is no established market value for the equipment. The prevailing interest
rate for a note of this type is 12%. The discount amortization at the end of the third year
using the effective interest method is:
(a) P13,333 (b) P19,215 (c) P21,428 (d) P 0 C

PV of note, Jan. 1, 2007 142,356

Interest income in 2007 (142,356 x 12%) 17,083
PV of note, Jan. 1, 2008 152,439
Interest income in 2008 (152,439 x 12%) 19,133
PV of note, Jan. 1, 2009 172,572
Face value of note 200,000
Discount amortization at the end of 3rd year 21,428

12. On December 1, Kit Company received layaway payments from two customers. Each
customer paid P100,000. On December 31, the layaway period expired. On that date, Kit
Company received P600,000 from the first customer and delivered the promised
merchandise costing P400,000. The second customer did not return to make the final
payment and thus forfeited the initial layaway payment. How much sales revenue should
be recognized by Kit Company from the layaway transaction?
(a) P650,000 (b) P600,000 (c) P700,000 (d) P750,000 C

Layaway payment from first customer 100,000

Full payment from first customer 600,000
Total sales revenue 700,000

13. X Company is considering the valuation of its harvested coffee beans. It is the practice to
value the beans at market value and uses as reference a local publication “accounting for
successful farms”. On December 31, 2009, the entity has harvested coffee beans costing
P3,000,000 and with fair value less cost to sell of P3,500,000 at the point of harvest.
Because of long aging and maturation process after harvest, the harvested coffee beans
were still on hand on December 31, 2010. On such date, the fair value less cost to sell is
P3,900,000 and the net realizable value is P3,200,000. The coffee beans inventory shall be
measured at:
(a) P3,000,000 (b) P3,500,000 (c) P3,200,000 (d) P3,900,000 C

14. Compute for the cost of inventory lost in fire using the data below:
Inventory, July 1, 2008 P51,600
Purchases, July 1, 2008 to Jan. 19, 2009 368,000
Sales, July 1, 2008 to Jan. 19, 2009 583,000
Purchase returns 11,200
Purchase discounts taken 5,800
Freight in 3,800
Sales returns 8,600
A fire destroyed the entire inventory except for purchases in transit, FOB shipping point, of
P2,000 and goods having a selling price of P4,700 that were salvaged from the fire. The
salvaged goods had an estimated value of P2,900. The average gross profit rate on net
sales is 40%.
(a) P59,760 (b) P56,940 (c) P62,660 (d) P56,860 B

Inventory, July 1, 2008 P 51,600

Purchases, July 1, 2008 to Jan. 19, 2009 368,000
Purchase returns ( 11,200)
Purchase discounts taken ( 5,800)
Freight in 3,800
 Available for sale P406,400
Cost of goods sold:
Net sales (583,000 – 8,600) P574,400
Multiply by cost percentage 60% (344,640)
Estimated ending inventory P 61,760
Goods in transit ( 2,000)
Salvage value of damaged goods ( 2,820)
Estimated inventory lost in fire P 56,940

15. Case Corporation had accounts payable of P1,000,000 recorded in the general ledger as of
December 31, 2008 before consideration of the following unrecorded transactions:
Invoice Date Date
date Amount shipped received FOB terms
1/3/09 P80,000 12/22/08 12/24/08 Destination
1/2/09 130,000 12/28/08 1/2/09 Shipping point
12/26/08 120,000 1/2/09 1/3/09 Shipping point
1/10/09 90,000 12/31/08 1/5/09 Destination
In the December 31, 2008 balance sheet, the accounts payable should be reported in the
amount of:
(a) P1,000,000 (b) P1,080,000 (c) P1,210,000 (d) P1,420,000 C

Accounts payable per ledger P1,000,000

Invoice date on 1/3/2009 80,000
Invoice date on 1/2/2009 130,000
Correct balance of accounts payable P1,210,000

16. Security Bank began operations on January 1, 2009. The following information pertains to
the bank’s December 31, 2009 portfolio of marketable securities:
Trading Available for sale
Aggregate cost 4,000,000 6,000,000
Aggregate market 3,700,000 5,500,000
Aggregate lower of cost or
market applied to each security 3,500,000 5,300,000
What amount should Security Bank report as loss on these securities in its 2009 income
statement?
Trading Available for sale Trading Available for sale
(a) 300,000 500,000 (c) 300,000 0
(b) 500,000 700,000 (d) 0 500,000 C

Trading Available for sale

Aggregate market value 3,700,000 5,500,000
Cost 4,000,000 6,000,000
Unrealized loss (300,000) (500,000)

The unrealized loss on the trading securities is shown in the income statement.
However, the unrealized loss on the available for sale securities is reported in the
stockholders' equity.

17. An investor who owns 100 shares of Waling-Waling Company common stock with a cost of
P120 a share received 100 stock rights entitling him to buy one new share at P100 for every
four held. At the date of the issuance of the rights, market values were: per share, ex-
rights, P140; and per right, P10. If the investor sells his rights at the market value of P10
each, how much gain per right will he make?
(a) 10 (b) 8 (c) 2 (d) 4 C

Proceeds from sale of each right 10

Less: Cost allocated to each right 8
Gain on sale of each right 2
18. On January 1, 2009, Star Company paid P1,200,000 for 40,000 shares of Comet
Corporation’s common stock which represents a 25% investment in the net assets of
Comet. Star has the ability to exercise significant influence over Comet.
Star received a dividend of P3 per share from Comet in 2009. Comet reported net
income of P640,000 for the year ended December 31, 2009.
The balance on Star’s balance sheet account investment in Comet Corporation at
December 31, 2009 should be:
(a) P1,200,000 (b) P1,240,000 (c) P1,360,000 (d) P1,480,000 B

Amount paid for 40,000 shares of Comet 1,200,000

Add: Share in the net income of Comet
for December 31, 2009 (640,000 x 25%) 160,000
Total 1,360,000
Less: Dividends received (40,000 x3) 120,000
Balance in Star’s account in Comet 1,240,000

19. On July 1, 2009, Pell Company purchased Lip Corp.’s ten-year, 8% bonds with a face
amount of P5,000,000 for P4,200,000. The bonds mature on June 30, 2017 and pay
interest semiannually on June 30 and December 31. Using the interest method, Pell
recorded bond discount amortization of P18,000 for the six months ended December 31,
2009. From this long-term investment, Pell should report 2009 revenue of:
(a) P168,000 (b) P182,000 (c) P200,000 (d) P218,000 D

Interest received (5,000,000 x 8% x 6/12) P200,000

Discount amortization 18,000
Interest income P218,000

20. Pine’s accounting policy with respect to investment properties is to measure them at fair
value at the end of each reporting period. One of its investment properties was measured
at P8,000,000 on December 31, 2009. The property had been acquired on January 1, 2009
for a total of P7,600,000, made up of P6,900,000 paid to the vendor, P300,000 paid to the
local authority as a property transfer tax and P400,000 paid to professional advisers. The
useful life of the property is 40 years. The amount of gain to be recognized in profit or loss
in the year ended December 31, 2009 in respect of the investment property is:
(a) P400,000 (b) P700,000 (c) P800,000 (d) P590,000 A

Fair value 8,000,000

Acquisition cost 7,600,000
Gain from change in fair value 400,000

21. On January 1, 2005, Mall Company purchased a P5,000,000 ordinary life insurance policy on
its president. The policy year and Mall’s accounting year coincide. Additional data are
available for the year ended December 31, 2009:
Cash surrender value, January 1, 2009 P245,000
Cash surrender value, December 31, 2009 270,000
Annual advance premium paid – January 1, 2009 100,000
Dividend received – July 1, 2009 15,000
Mall is the beneficiary under the life insurance policy. The insured died on January 2, 2010,
after the payment of annual premium of P100,000 on January 1, 2010. What is the life
insurance expense for the year 2009?
(a) P100,000 (b) P85,000 (c) P60,000 (d) P75,000 C

Premium paid P100,000

Increase in cash surrender value
(270,000 – 245,000) P25,000
Dividend received 15,000 ( 40,000)
Life insurance expense P 60,000
22. Fine Company uses approximately 300,000 units of raw material in its manufacturing
operations. On December 1, 2009, it purchased a call option to buy 300,000 units of the
raw material on March 1, 2010 at a price of P25 per unit. Fine paid P50,000 for the call
option and designated the call option as a cash flow hedge against price fluctuation for its
March purchase. On December 31, 2009, the market price of the raw material is P27 per
unit and on March 1, 2010, the market price is P28. What is the fair value of the call option
on December 31, 2009?
(a) P600,000 (b) P550,000 (c) P900,000 (d) P850,000 A

Derivative asset (27-25=2 x 300,000) 600,000

23. Precious Company had the following property acquisitions during 2009:
a. Acquired a tract of land with an existing building in exchange for 50,000 shares of
Precious Company’s P100 par value common stock that had a market price of P120 per
share on the date of acquisition. The last property tax bill indicated an assessed value
of P2,400,000 for the land and P600,000 for the building. Shortly after acquisition, the
building was razed at a cost of P100,000 in anticipation of a new building construction in
2009.
b. Received land from city government as an inducement to locate a plant in the city. No
payment was required but Precious paid P50,000 for legal expenses for land transfer.
The land was appraised at P1,000,000.
What is the total increase in land as a result of the acquisition?
(a) P7,000,000 (b) P6,100,000 (c) P7,150,000 (d) P7,100,000 D

First land (6,000,000 + 100,000) P6,100,000

Second land 1,000,000
Total costs P7,100,000

24. Quick purchased a jewel polishing machine for P3,600,000 on January 1, 2009 and received
a government grant of P500,000 toward the capital cost. The accounting policy is to treat
the grant as a reduction in the cost of the asset. The machine is to be depreciated on
straight line basis over 8 years and estimated to have a residual value of P50,000 at the
end of this period. What is the depreciation expense in respect of the machine for the year
ended December 31, 2009?
(a) P387,500 (b) P762,500 (c) P443,750 (d) P381,250 D

Cost 3,600,000
Government grant (500,000)
Net cost 3,100,000
Residual value ( 50,000)
Depreciable amount 3,050,000
Annual depreciation (3,050,000/8) 381,250

25. Anxious Company acquired two items of machinery as follows:

a. On December 30, 2008, Anxious purchased a machine in exchange for a non-interest
bearing note requiring ten payments of P500,000. The first payment was made on
December 30, 2009 and the others are due annually on December 30. The prevailing
rate of interest for this type of note at date of issuance was 12%.
b. On January 1, 2008, Anxious acquired used machinery by issuing the seller a two-year,
non-interest bearing note for P3,000,000. In recent borrowing, Anxious has paid a 12%
for this type of note.
What is the total cost of the machinery?
(a) P5,065,000 (b) P5,225,000 (c) P5,565,000 (d) P8,235,000 B

PV of first note payable (500,000 x 5.65) P2,825,000

PV of second note payable (3,000,000 x .80) 2,400,000
Total costs P5,225,000
26. Jiggs started construction on a building on January 1, of the current year and completed
construction on December 31 of the same year. Jiggs had only two interest notes
outstanding during the year, and both of these notes were outstanding for all 12 months of
the year. The following information is available:
Average accumulated expenditures 2,500,000
Ending balance in construction in progress
before capitalization of interest 3,600,000
6 percent note incurred specifically for the project 1,500,000
9 percent long-term note 5,000,000
What is the cost of the building on December 31?
(a) P3,780,000 (b) P2,680,000 (c) P3,750,000 (d) P3,825,000 A

Average expenditures 2,500,000

Specific borrowing (1,500,000)
General borrowing 1,000,000
Construction in progress 3,600,000
Capitalized interest:
Specific (6% x 1,500,000) 90,000
General (9% x 1,000,000) 90,000
Total cost of a building 3,780,000

27. On December 31, 2008, the machinery account of Art Corporation had the following
transactions:
Machinery P576,000
Accumulated depreciation 216,000
Additional information:
(a) The estimated useful life of machinery is 8 years with no salvage. Straight line method
is used.
(b) On July 10, 2009, a new machine was purchased at an invoice cost of P200,000.
Additional costs of P10,400 for freight and P20,000 for installation and testing were
incurred. After a testing and 2002 breaking-in period, the machine was ready for use in
July 26, 2009.
(c) On May 6, 2009, a machine purchased for P120,000 on January 1, 2006 was overhauled
at a cost of P20,000. As a result, the company estimated that its original estimated
useful life of 8 years would be extended by an additional 2 years.
How much is the depreciation for 2009?
(a) P15,000 (b) P29,000 (c) P69,000 (d) P83,000 D

Old machine overhauled P120,000

Accumulated depreciation:
2006 – 2008 (120,000 x 3/8) P45,000
2009 (15,000 x 4/12) 5,000
Total P50,000
Cost of overhaul (20,000) ( 30,000)
Book value – 5/1/2009 P 90,000
Original life ( 8 years x 12 ) 96 months
Expired life 40
Remaining 56
Extension (2 years x 12) 24
Extended period 32 months

Old machine:
1/1/2009 to 5/1/2009 P 5,000
5/1/2009 to 12/31/2009 (90,000 x 8/80) 9,000
P14,000
Remaining cost of old machine:
(576,000 – 120,000/ 8) 57,000
New machine (230,400/ 8 x 5/12) 12,000
Total depreciation P83,000
28. Sylvia Mining Company had the following transactions concerning its resource property:
a. It paid P5,400,000 in 2007 for property containing natural resources of 2,000,000 tons.
b. The estimated cost of restoring the land after the resources are exhausted is P450,000.
c. The land will have a value of P650,000 after it is restored for suitable use.
d. Development costs, such as drilling and road construction, amounted to P2,500,000.
e. Buildings, such as bunk houses and mess hall were constructed for P1,500,000.
f. Development costs and buildings should be included in the account Mine Improvements.
g. Operations began on January 1, 2008 and resources removed totaled 600,000 tons in
2008.
h. During 2009, a discovery was made indicating that available resources after 2009 will
total 1,875,000 tons.
i. Because of a strike, only 400,000 tons were mined in 2009.
How much is the depletion for 2008 and 2009?
(a) P1,560,000 P914,286 (c) P1,560,000 P640,000
(b) P1,755,000 P754,286 (d) P1,755,000 P914,286 C

Cost (5,400,000 + 450,000) P5,850,000

Salvage value 650,000
Depletable cost P5,200,000
Rate per ton (5,200,000/ 2,000,000) P2.60
Depletion for 2008 (600,000 x 2.60) P1,560,000
Production in 2009 400,000 tons
Estimate after 2009 1,875,000 tons
New estimate – 1/1/2009 2,275,000 tons
New rate per ton (5,200,000 – 1,560,000/
2,275,000) P1.60
Depletion for 2009 (400,000 x 1.60) P640,000

29. On January 1, 2009, Rebec Company acquired a building at a cost of P4,000,000. The
building has been depreciated on the basis of a 20-year life. On January 1, 2009, an
appraisal of the building set its replacement cost new at P8,000,000 with a total useful life
of 25 years. In recording the revaluation of the building, the amount that should be
credited to revaluation surplus is:
(a) P4,800,000 (b) P2,400,000 (c) P2,800,000 (d) P4,000,000 C

Cost P4,000,000
Accum. depn. (4,000,000 x 10/20) (2,000,000)
Book value P2,000,000
Appraised value P8,000,000
Accum. depn. (8,000,000 x 10/25) (3,200,000)
Sound value P4,800,000
Book value (2,000,000)
Revaluation increment P2,800,000

30. Big Company operates a production line which is treated as a cash generating unit for
impairment review purposes. At December 31, 2009, the carrying amounts of the
noncurrent assets allocated to this cash generating unit are as follows:
Intangibles – goodwill 1,100,000
Tangibles – plant and machinery 2,200,000
At December 31, 2009, the value in use of the production line is estimated at P2,700,000.
What are the revised carrying amounts of the intangible and tangible noncurrent assets
within this cash generating units?
(a) P500,000 P2,200,000 (c) P1,100,000 P1,600,000
(b) P900,000 P1,800,000 (d) P800,000 P1,900,000 A

Carrying amount of cash generating unit 3,300,000

Value in use (2,700,000)
Impairment loss 600,000
31. Cream purchased another entity for P5,000,000 cash. The following cost and fair value
were associated with the items acquired in this business combination:
Cost Fair value
Accounts receivable 2,000,000 2,000,000
Inventory 1,000,000 500,000
Government contract 0 1,000,000
Equipment 400,000 500,000
Short-term loan payable 2,000,000 2,000,000
The fair value associated with the acquired entity’s government contract is not based on any
legal or contractual relationship. In addition, there is no open market trading for an
intangible of this sort. What is the goodwill arising from the business combination?
(a) P3,000,000 (b) P3,600,000 (c) P4,000,000 (d) P 0 C

Acquisition cost 5,000,000

Net assets at fair value 1,000,000
Goodwill 4,000,000

32. Wayne, Inc. incurred the following costs during the year ended December 31, 2009:
Laboratory research aimed at discovery of new knowledge P150,000
Radical modification to the formulation of a chemical product 125,000
Research and development costs reimbursable under a contract 350,000
Testing for evaluation of new products 250,000
The total amount to be classified and expensed as research and development for 2009 is:
(a) P150,000 (b) P275,000 (c) P525,000 (d) P625,000 C

Laboratory research aimed P150,000

Radical modification 125,000
Testing for evaluation of new products 250,000
Total P525,000

33. In May 2009, Harp relocated an employee from the Manila head office to a branch in Davao
City. As of the end of the reporting period on June 30, 2009, the costs were estimated to
be P350,000 analyzed as follows:
Cost for shipping goods 30,000
Airfare 10,000
Temporary accommodation cost for May and June 80,000
Temporary accommodation cost for July and August 90,000
Reimbursement for lease break cost paid in July
(lease was terminated in May) 20,000
Reimbursement for cost of living increases for the
period May 1, 2009 to May 1, 2010 120,000
How much is the provision for relocation costs on June 30, 2009?
(a) P250,000 (b) P240,000 (c) P160,000 (d) P140,000 C

Cost for shipping goods 30,000

Airfare 10,000
Temporary accommodation cost for May and June 80,000
Reimbursement for lease break cost paid in July
(lease was terminated in May) 20,000
Reimbursement for cost of living increases for the
period May 1 to June 30, 2009 (120,000 x 2/12) 20,000
Total provision for relocation costs 160,000

34. Gen sells cellular phones. Each phone sells for P10,000 and carries a warranty against
defects of period of 1 year counting from the date of purchase. The firm sold 60,000 phones
in 2009. Past experience indicates that 10% of the phones will need some type of repair
during the warranty period. In the past, the firm has incurred expenditures at P400 on each
telephone needing repair due to manufacturing defects. At the beginning of the year, the
Estimate Liability for Warranties account had a credit of P59,400. Actual expenditures
during the year amounted to P1.5M. The balance of the Estimated Liability for Warranties
at year-end is:
(a) P1.5M (b) P.95M (c) P2.4 M (d) P.5M B
 Balance of estimated liability on warranty, Jan. 1, 2009 P 59,400
Warranty expense incurred from sales in 2009
(60,000 x .10 x P400) 2,400,000
Actual warranty expenditures during 2009 (1,500,000)
Balance of estimated liability on warranty, Dec. 31, 2009 P 959,400

NOTE: Answer (P950,000) is rounded.

35. Eliot Corporation’s liabilities at December 31, 2009 were as follows:

Accounts payable and accrued interest P200,000
12% note payable issued November 1, 2008
maturing July 1,2010 60,000
10% debentures payable, next annual principal
installment of P100,000 due February 1, 2010 700,000
On December 31, 2009, Eliot consummated a noncancelable agreement with the lender to
refinance the 12% note payable on a long-term basis. Eliot’s December 31, 2009 financial
statements were issued on March 31, 2010. In its December 31, 2009 balance sheet, Eliot
should report current liabilities at:
(a) P200,000 (b) P260,000 (c) P300,000 (d) P360,000 C

Accounts payable and accrued interest P200,000

Debentures payable 100,000
Total current liabilities P300,000

36. Colt, Inc. is indebted to Kine under an P8,000,000, 10%, four-year note dated December
31, 2006. Annual interest of P800,000 was paid on December 31, 2007 and 2008. During
2009, Colt experienced financial difficulties and is likely to default unless concessions are
made. On December 31, 2009, Kine agreed to restructure the debt as follows:
a. Interest of P800,000 for 2009, due December 31, 2009, was made payable
December 31, 2010.
b. Interest for 2010 was waived.
c. The principal amount was reduced to P7,000,000.
Assuming an income tax rate of 30%, how much should Colt report as gain in its income
statement for the year ended December 31, 2009, as a result of the debt restructuring
arrangement?
(a) P1,080,000 (b) P1,000,000 (c) P680,000 (d) P 0 B

Total liability (8,000,000 + 800,000) P8,800,000

Restructured liability (7,000,000 + 800,000) (7,800,000)
Gain on debt restructuring P1,000,000

37. On December 31, 2008, Dome Company issued P4,000,000, 8% serial bonds, to be repaid
in the amount of P800,000 each year. Interest is payable annually on December 31. The
bonds were issued to yield 10% a year. The bonds proceeds were P3,805,600 based on the
present value at December 31, 2008 of five annual payments as follows:
Amounts Due Present value
Due date Principal Interest at 12/31/2008
12/31/2009 800,000 320,000 1,018,000
12/31/2010 800,000 256,000 872,200
12/31/2011 800,000 192,000 745,000
12/31/2012 800,000 128,000 633,800
12/31/2013 800,000 64,000 536,600
3,805,600
Dome amortizes the bond discount by the interest method. In its December 31, 2009
balance sheet, at what amount should Dome report the carrying value of the bonds?
(a) P3,005,600 (b) P3,066,160 (c) P2,982,000 (d) P2,787,600 B

Interest expense for 2009 (3,805,600 x 10%) 380,560

Interest paid for 2009 320,000
Discount amortization 60,560
 Discount on bonds payable – 12/31/2008
(4,000,000 – 3,805,600) 194,400
Amortization for 2009 60,560
Balance – 12/31/2009 133,840
Balance – 12/31/2009 (4,000,000 – 800,000) 3,200,000
Discount on bonds payable ( 133,840)
Carrying value – 12/31/2009 3,066,160

38. Mart issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2009
maturing on January 1, 2014 and paying interest semiannually on January 1 and July 1. It
is estimated that the bonds would sell only at 103 without the conversion feature. Each
P1,000 bond is convertible into 10 ordinary shares with P100 par value. How much is the
increase in shareholders’ equity arising from the issuance of the convertible bonds on
January 1, 2009?
(a) P350,000 (b) P500,000 (c) P150,000 (d) P 0 A

Issue price of bonds with conversion privilege

(5,000,000 x 110) 5,500,000
Market value of bonds without conversion
(5,000,000 x 103) 5,150,000
Residual amount 350,000

39. On August 1, 2008, Metro Inc. leased a luxury apartment unit to Centro. The parties signed
a 1-year lease beginning September 1, 2008 for a P100,000 monthly rent payable on the
first day of the month. At the August 1 signing date, Metro collected P54,000 as a
nonrefundable fee for allowing Centro to sign a 1-year lease (the normal lease term is 3
years) and P100,000 rent for September. Centro has made timely payments each month,
but prepaid January’s rent on December 20. In Metro’s 2008 income statement, rent
revenue should be reported at:
(a) P400,000 (b) P418,000 (c) P454,000 (d) P518,000 B

Rent from Sept. 1 to Dec. 31, 2008 (100,000 x 4) P400,000

Amortization of nonrefundable fee (54,000 x 4/12) 18,000
Total rent revenue P418,000

40. Glade Company leases computer equipment to customers under direct financing leases. The
equipment has no residual value at the end of the lease and the leases do not contain
bargain purchase options. Glade wishes to earn 8% interest on a 5-year of equipment with
a fair value of P3,234,000. The present value of an annuity due of 1 at 8% for 5 years is
4.312. On January 1, 2009, Glade leased the equipment to Blaze Company. What is the
total amount of interest revenue that Glade will earn over the life of the lease?
(a) P1,293,600 (b) P1,394,500 (c) P516,000 (d) P750,000 C

Gross receivables (750,000 x 5) P3,750,000

Present value of rentals (fair value) 3,234,000
Total interest revenue P 516,000

41. On January 1, 2009, Hooks Oil Company sold equipment with a carrying amount of
P1,000,000, and a remaining useful life of 10 years, to Maco Drilling for P1,500,000. Hooks
immediately leased the equipment back under a 10 year capital lease with a present value
of P1,500,000 and will depreciate the equipment using the straight-line method. Hooks
made the first annual lease payment of P244,120 in December 2009. In Hooks’ December
31, 2009 balance sheet, the unearned gain on equipment sale should be
(a) P500,000 (b) P450,000 (c) 255,880 (d) 0 B

Sales price P1,500,000

Cost of equipment sold 1,000,000
Deferred gain on sale and leaseback P 500,000
Less: Realized gain in 2009 (500,000/10) 50,000
Deferred gain, December 31, 2009 P 450,000
42. Robin leased a machine from Ready. The lease qualifies as a capital lease and requires 10
annual payments of P10,000 beginning immediately. The lease specifies an interest rate of
12% and a purchase option of P10,000 at the end of the tenth year, even though the
machine’s estimated value on that date is P20,000. Robin’s incremental borrowing rate is
14%.
The present value of an annuity due of 1 at:
12% 6.328 14% 5.946
The present value of 1 at:
12% 0.322 14% 0.270
What amount should Robin record as lease liability at the beginning of the lease term?
(a) P62,160 (b) P64,860 (c) P66,500 (d) P69,720 C
PV of rentals (100,000 x 6.328) P632,800
PV of bargain purchase option (100,000 x 3.22) 32,200
Total lease liability P665,000
43. The following information relates to the defined benefit pension plan of Rex Company for the
year ended December 31, 2009:
Projected benefit obligation, January 1 4,600,000
Projected benefit obligation, December 31 4,730,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Expected return on plan assets 450,000
Amortization of deferred gain 20,000
Employer contribution 425,000
Benefits paid to retirees 390,000
Settlement rate 10%
The net periodic pension cost reported in the income statement for 2009 would be:
(a) P20,000 (b) P90,000 (c) P50,000 (d) P70,000 C
Current service cost (4,730,000 + 390,000 –
4,600,000 – 460,000) 60,000
Interest cost (4,600,000 x 10%) 460,000
Expected return on plan assets (450,000)
Amortization of deferred gain ( 20,000)
Net periodic pension cost 50,000
44. Bond Company started to manufacture in 2004 copy machines that are sold on the
installment basis. Bond recognizes revenue when equipment is sold for financial reporting
purposes, and when installment payments are received for tax purposes. In 2004, Bond
recognized gross profit of P6,000,000 for financial reporting purposes, and P1,500,000 for
tax purposes. The amounts of gross profit expected to be recognized for tax purposes in
2005 and 2006 are P2,500,000 and P2,000,000 respectively. Bond guarantees the copy
machines for two years. Warranty costs are recognized on the accrual basis for financial
accounting purposes and when paid for tax purposes. Warranty expense accrued in 2004 is
P2,500,000, but only P500,000 of warranty cost is paid in 2004. It is expected that in 2005
and 2006, P1,000,000 and P1,000,000 respectively of warranty costs will be paid. In
addition during 2004, P500,000 interest, net of 20% final income tax, was received and
earned, and P100,000 insurance premium on life insurance policies that covered the life of
Bond’s president was paid. Bond is the beneficiary for this policy. The tax rate is 32%.
Pretax accounting income in 2004 was P2,000,000. Assuming any 2004 net operating loss
will be carried to 2005, how much is the gross deferred tax asset and deferred tax liability in
2004 respectively?
(a) P928,000 and P1,440,000 (c) P928,000 and P 0
(b) P640,000 and P1,440,000 (d) P640,000 and P 0 A
Warranty liability (2,000,000 x 32%) P640,000
Net loss carryover (900,000 x 32%) 288,000
Gross deferred tax asset P928,000
Gross deferred tax liability (4,500,000 x 32%) P1,440,000
45. At the beginning of 2009, Wina’s retained earnings balance was P950,000. During the year,
the firm’s net income amounted to P132,000 and dividends of P30,000 were paid. During
the preparation of the firm’s 2009 financial statements, it was discovered that a piece of
equipment purchased at the beginning of 2008 at a cost of P80,000 had been expensed in
its entirely in that year. Management feels the equipment has an 8-year lie and should be
depreciated on a straight line basis with no salvage value. The retained earnings for the
year ended December 31, 2009 should have a balance of:
(a) P1,122,000 (b) P1,152,000 (c) P1,132,000 (d) P1,112,000 A
 Ret. earnings before adjustment, Jan. 1, 2009 P 950,000
Understatement of 2008 income by charging
to expense the total cost of equipment
with an 8-year useful life (80,000 – 10,000) 70,000
Ret. earnings after adjustment, Jan. 1, 2009 P1,020,000
Net income for 2009 132,000
Dividends paid in 2009 ( 30,000)
Ret. earnings balance, Dec. 31, 2009 P1,122,000

46. Bone, an unlisted entity, decided to issue 1,000 share options to an employee in lieu of
many years’ service. However, the fair value of the share options cannot be reliably
measured as the entity operates in a highly specialized market where there are no
comparable companies. The exercise price is P100 per share and the options were granted
on January 1, 2009 when the value of the shares was also estimated at P100 per share. At
the end of the financial year, December 31, 2009, the value of the shares was estimated at
P150 per share and the options vested on that date. What value should be placed on the
share options issued for the year ended December 31, 2009?
(a) P100,000 (b) P150,000 (c) P50,000 (d) P25,000 C

Intrinsic value of share options (150-100=50 x 1,000) P50,000

47. Georgina Company has two classes of share capital outstanding: 12%, P100 par preference
and P50 par ordinary.
Balances on December 31, 2008 were:
Preference share – 5,000 shares 500,000
Ordinary share – 50,000 shares 2,500,000
Share premium on preference share 200,000
Share premium on ordinary share 500,000
Accumulated profits 2,000,000
The following data summarize the transactions for 2009:
Number
Of Price per
Type of transaction Shares share
1. Issue of preference share 1,000 130
2. Issue of ordinary share 20,000 50
3. Purchase of treasury share ordinary 5,000 60
4. Share split-ordinary 2 for 1
5. Reissue of treasury share 3,000 40
6. Shareholders donated 15,000 ordinary shares to the corporation. Subsequently, 10,000
donated shares were reissued at P40 per share.
7. Dividends were paid on December 31, 2009 on the ordinary share at P2 per share, and on
preference share at the preference rate.
8. Net income for the year was P500,000.
9. Appropriated accumulated profits equal to the cost of treasury share.
What is the total shareholders’ equity on December 31, 2009?
(a) 7,222,000 (b) 6,822,000 (c) 7,234,000 (d) 7,012,000 A

Shareholders’ equity – 12/31/08 5,700,000

Issue of preference 130,000
Issue of ordinary 1,000,000
Treasury share ( 300,000)
Share split – no effect -
Reissue of treasury 120,000
Receipt of donated share -
Sale of donated share 400,000
Dividends:
Ordinary (128,000 x 2) ( 256,000)
Preference (12% x 600,000) ( 72,000)
Net income 500,000
Appropriation for treasury share ______-_
Shareholders’ equity – 12/31/08 7,222,000
Ordinary share before split 70,000 shares
Share split 2 for 1 2
 Ordinary share after split 140,000
Less: Treasury share 12,000
Outstanding 128,000 shares

48. Pam’s Company had one class of common stock outstanding and no other securities that are
potentially convertible into common stock. Pam’s 2008 audited financial statements
reported earnings per share of P4.95. On April 1, 2009, a 10% stock dividend was declared
which was issued on May 1, 2009. On September 1, 2009, 12,000 new shares were issued
for cash. Net income reported by Pam for 2008 and 2009 were P495,000 and P825,000.
What amount should Pam report as earnings per share in its 2009 and 2008 comparative
income statements?
2009 2008 2009 2008
(a) 7.24 4.95 (c) 6.76 4.50
(b) 7.24 4.50 (d) 6.76 4.95 A
2009 2008
Earnings per share = 825,000 495,000
114,000* 100,000
= P7.24 P4.95
* December 31, 2008 100,000
Stock dividend – 10% 10,000
110,000
Additional shares issued
(12,000 x 4/12) 4,000
Weighted average no. of shares 114,000

49. Jet uses the cash basis of accounting and reported income of P87,000 in 2009. The
following items were not considered in the computation of cash basis net income:
Inventory, beginning P12,000
Inventory, ending 18,000
Receivables, beginning 40,000
Receivables, ending 38,000
Payables, beginning 19,000
Payables, ending 25,000
The accrual basis income is:
(a) P97,000 (b) P89,000 (c) P77,000 (d) P85,000 D
Reported net income – cash basis P87,000
Increase in inventory (P18,000 – 12,000) 6,000
Decrease in accounts receivable (P40,000 – P38,000) ( 2,000)
Increase in accounts payable (P25,000 – P19,000) ( 6,000)
Adjusting income – accrual basis P 85,000

50. The following information is available for Trento Company for the current year:
December 31 January 1
Cash 1,500,000 1,000,000
Retained earnings 7,000,000 5,400,000
Cash flow from operating activities ?
Cash flow from investing activities (4,800,000)
Cash flow from financing activities 1,800,000
Dividends declared and paid 2,000,000
Net income 3,600,000
How much was the cash flow from operating activities?
(a) P3,500,000 (b) P2,500,000 (c) P4,500,000 (d) P3,600,000 A
Cash – January 1 1,000,000
Cash flow from operating activities 3,500,000
Cash flow from investing activities (4,800,000)
Cash flow from financing activities 1,800,000
Cash – December 31 1,500,000

* end of the examination – practical accounting 1*