REVIEW 105 – DAY 20
Under a sales type lease, what is the meaning of “gross investment in
TOA
1. The minimum lease payments under a finance lease include all of the following,
except
a. Contingent rent and executory costs
b. Periodic rentals over the lease term
c. Any amount guaranteed by the lessee or by a party related to the lessee.
d. Payment required to exercise an option on the part of the lessee to purchase
the asset at a price which is expected to be sufficiently lower than its fair value at
the option exercise date.
2. A lease contains a bargain purchase option. In determining the capitalized cost at
the beginning of the lease term, the payment called for by the bargain option would
a. Not be capitalized c. Be subtracted at its present
value
b. Be added at its exercise value d. Be added at its present value
3. At the inception of a capital lease, the guaranteed residual value should be
a. Included as part of minimum lease payments at present value
b. Included as part of minimum lease payments at future value
c. Excluded from minimum lease payments
d. Included as part of minimum lease payments to the extent that the guaranteed
residual value is expected to exceed estimated residual value
4. The lessee’s balance sheet liability for a capital lease would be periodically
reduced by the
a. Minimum lease payment plus the amortization of the related asset
b. Minimum lease payment less the amortization of the related asset
a. Minimum lease payment
b. Minimum lease payment less the portion allocable to interest
5. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the
a. Useful life of the asset
b. Lease term
c. Useful life of the asset if there is reasonable certainty that the lessee will obtain
ownership by the end of the lease term.
d. Lease term or useful life of the asset, whichever is shorter
6.
the lease” on the part of the lessor?
a. Present value of minimum lease payments
b. Present value of minimum lease payments and present value of unguaranteed
residual value.
c. Absolute amount of the minimum lease payments
d. Aggregate of minimum lease payments and unguaranteed residual value
7. Net investment in the lease is equal to the
a. Gross investment in the lease less unearned finance income
b. Gross investment in the lease less dealer’s profit
c. Minimum lease payments
d. Minimum lease payments less unguaranteed residual value.
8. What is the treatment of unguaranteed residual value in determining the cost
of sales under a sales type lease?
a. Ignored
b. Added to the cost of the leased asset
c. Deducted from the cost of the leased asset at absolute amount
d. Deducted from the cost of the leased asset at present value
9. Initial direct costs incurred by the lessee in connection with a finance lease
are
a. Included as part of the amount recognized as an asset under the lease
b. Expensed immediately
c. Deferred and amortized over the lease term on a straight line basis.
d. Included in the minimum lease payments at present value.
10. Which statement is correct concerning a finance lease on the part of the
lessor?
I. Initial direct costs should be recognized as expense in the income
statement at the inception of a sales type lease.
II. Initial direct costs incurred by the lessor in a direct financing lease are
included in the net investment in the lease and will have the effect of
reducing the interest income from the finance lease.
a. I only b. II only c. Both I and II d. Neither
I nor II
11. If the sale and leaseback transaction results in a finance lease, any gain from
the sale and leaseback should
a. Not be recognized
b. Be recognized as income immediately.
c. Be deferred and amortized over the lease term.
 d. Be deferred and amortized over the useful life of the asset. The following information relates to Danaya Company’s obligations as of December
31, 2005. For each of the numbered items, determine the amount if any, that should
12. ABC Company sold its headquarters building at a gain and simultaneously be reported as current liability in Danaya’s December 31, 2005 balance sheet.
leased back the building. The lease was reported as a finance lease. At the time
of sale, the gain should be reported as 1. Accounts payable:
a. Operating income
b. An extraordinary item Accounts payable per general ledger control amounted to P3,400,000, net
c. A separate component of stockholders’ equity of P150,000 debit balances in suppliers’ accounts. The unpaid voucher
d. As asset valuation allowance file included the following items that not had been recorded as of
13. Under PAS 12, which enterprises are required to report deferred tax asset or December 31, 2005:
liability?
I. Public enterprises II. Nonpublic enterprises a) Earth Company – P140,000 merchandise shipped on December 31,
a. I only b. II only c. Both I and II d. 2005, FOB destination; received on January 10, 2006.
Neither I nor II b) Gemstone, Inc. – P120,000 merchandise shipped on December 26,
2005, FOB shipping point; received on January 16, 2006.
14. Temporary difference is the
I. Difference between the tax basis of an asset or liability and its reported On December 28, 2005, a supplier authorized Danaya to return goods
amount that will result in taxable or deductible amounts in future years billed at P100,000 and shipped on December 20, 2005. The goods were
when the reported amount of the asset or liability is recovered or settled returned by Danaya on December 28, 2005, but the P100,000 credit
respectively. memo was not received until January 6, 2006.
II. Item of income or expense which is included in either financial income
or taxable income but will never be included in the other. a. P3,670,000 b. P3,520,000 c. P3,570,000 d.
a. I only b. II only c. Both I and II d. P3,420,000
Neither I nor II
2. Payroll:
15. Taxable temporary difference is the
I. Temporary difference that will result in taxable amount in determining taxable Items related to Danaya’s payroll as of December 31, 2005 are:
income of future periods when the carrying amount of the asset or liability is
recovered or settled. Accrued salaries and wages P485,000
II. Temporary difference that will result in deductible amount in determining Payroll deductions for:
taxable income of future periods when the carrying amount of the asset or liability Income taxes withheld 35,000
is recovered or settled. SSS contributions 40,000
a. I only b. II only c. Both I and II d. Neither I nor II Philhealth contributions 10,000
Advances to employees 50,000
P1
a. P485,000 b. P620,000
c. P570,000
Questions 1 to 10 are based on the following information: d. P520,000
3. Litigation: 7. Deferred taxes:

In May, 2005, Danaya became involved in a litigation. The suit being On December 31, 2005, Danaya’s deferred income tax account has a
contested, but Danaya’s lawyer believes there is reasonable possibility 2005 ending credit balance of P483,000, consisting of the following items:
that Danaya may be held liable for damages estimated in the range
between P2,000,000 and P3,000,000, and no amount is a better estimate Caused by temporary differences in accounting Deferred tax
of potential liability than any other amount. For gross profit on installment sales P235,000 Cr.
For depreciation on property and equipment 360,000 Cr
a. P2,000,000 b. P2,500,000 c. P3,000,000 d. P0 For product warranty expense 112,000 Dr
P483,000 Cr.
4. Bonus obligation:
a. P483,000 b. P595,000
Danaya Company’s president gets an annual bonus of 10% of net income c. P123,000
after bonus and income tax. Assume the tax rate of 30% and the correct d. P0
income before bonus and tax is P6,000,000. (Ignore the effects of other
given items on net income.) 8. Product warranty:

a. P451,600 b. P392,500 c. P247,000 d. Danaya has a one year product warranty on selected items in its product
P1,400,000 line. The estimated warranty liability on sales made during 2004, which
was outstanding as of December 31, 2004, amounted to P260,000. The
5. Note payable:
warranty costs on sales made in 2005 are estimated at P940,000. Actual
A note payable to the Bank of the Philippine Islands for P1,500,000 is warranty costs incurred during the current 2005 fiscal year are as follows:
outstanding on December 31, 2005. The note is dated October 1, 2004,
bears interest at 18%, and is payable in three equal annual installment of Warranty claims honored on 2004 sales P260,000
P500,000. The first interest and principal payment was made on October Warranty claims honored on 2005 sales 620,000
1, 2005. Total warranty claims honored P880,000

a. P940,000 b. P60,000
a. P67,500 b. P567,500 c. P545,000 d. P45,000
c. P320,000
d. P0
6. Purchase commitment:
9. Premiums:
During 2005, Danaya entered in a noncancellable commitment to
purchase 200,000 units of inventory at fixed price of P5 per unit, delivery To increase sales, Danaya Company inaugurated a promotional campaign
to be made in 2006. On December 31, 2005, the purchase price of this on June 30, 2005. Danaya placed a coupon redeemable for a premium in
inventory item had fallen to P4.40 per unit. The goods covered by the each package of product sold. Each premium costs P100. A premium is
purchase contract were delivered on January 28, 2006. offered to customers who send in 5 coupons and a remittance of P30.
The distribution cost per premium is P20. Danaya estimated that only
a. P120,000 b. P1,000,000 c. P880,000 d. P0
60% of the coupons issued will be redeemed. For the six months ended
December 31, 2005, the following is available:
 Regal’s experience indicates that 10% of gift certificates sold will not be
Packages of product sold 100,000 redeemed. In its December 31, 2003 balance sheet, what amount should
Premiums purchased 10,000 Regal report as unearned
Coupons redeemed 40,000 revenue?
a. $125,000
a. P1,080,000 b. P360,000 c. P720,000 d. P1,000,000 b. $112,500
c. $100,000
1. Due to Lireo Finance company: d. $ 50,000

Danaya’s accounting records show that as of December 31, 2005,
P800,000 was due to Lireo Finance Company for advances made against
P1,000,000 of trade accounts receivable assigned to the finance company
with recourse.
a. P1,000,000 b. P200,000 c. P800,000 d. P0
11. Lin Co., a distributor of machinery, bought a machine from the
manufacturer in November 2003 for $10,000. On December 30, 2003, Lin
sold this machine to Zee Hardware for $15,000, under the following terms:
2% discount if paid within thirty days, 1% discount if paid after thirty days
but within sixty days, or payable in full within ninety days if not paid
within the discount periods. However, Zee had the right to return this
machine to Lin if Zee was unable to resell the machine before expiration
of the ninety-day payment period, in which case Zee’s obligation to Lin
would be canceled.
In Lin’s net sales for the year ended December 31, 2003, how much
should be included for the sale of this machine to Zee?
a. $0
b. $14,700
c. $14,850
d. $15,000
13. In 2002, Super Comics Corp. sold a comic strip to Fantasy, Inc. and will
receive royalties of 20% of future revenues associated with the comic
strip. At December 31,
2003, Super reported royalties receivable of $75,000 from Fantasy. During
2004, Super received royalty payments of $200,000. Fantasy reported
revenues of $1,500,000 in 2004 from the comic strip. In its 2004 income
statement, what amount should Super report as royalty revenue?
a. $125,000
b. $175,000
c. $200,000
d. $300,000
14. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty
payments on January 31 for the oil sold between the previous June 1 and
November 30, and on
July 31 for oil sold between December 1 and May 31. Production reports
show the following oil sales:
June 1, 2002 - November 30, 2002 $300,000
December 1, 2002 - December 31, 2002 50,000
December 1, 2002 - May 31, 2003 400,000
June 1, 2003 - November 30, 2003 325,000
December 1, 2003 - December 31, 2003 70,000

What amount should Rill report as royalty revenue for 2003?

12. Regal Department Store sells gift certificates, redeemable for store a. $140,000
merchandise, that expire one year after their issuance. Regal has the b. $144,000
following information pertaining to its gift certificates sales and c. $149,000
redemptions: d. $159,000
Unredeemed at 12/31/02 $ 75,000
2003 sales 250,000 15. Luge Co., which began operations on January 2, 2003, appropriately
2003 redemptions of prior year sales 25,000 uses the installment sales method of accounting.
2003 redemptions of current year sales 175,000 The following information is available for 2003:
Installment accounts receivable, December 31, 2003 $800,000 4. A company with $4.8 million in credit sales per year plans to relax its credit standards,
Deferred gross profit, December 31, 2003 (before projecting that this will increase credit sales by $720,000. The company’s average collection
recognition of realized gross profit for 2003) 560,000 period for new customers is expected to be 75 days, and the payment behavior of the
Gross profit on sales 40% existing customers is not expected to change. Variable costs are 80% of sales. The firm’s
For the year ended December 31, 2003, cash collections and opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s
realized gross profit on sales should be benefit (loss) from
Cash collections Realized gross profit the planned change in credit terms?
a. $400,000 $320,000 a. $0
b. $400,000 $240,000
b. $ 28,800
c. $600,000 $320,000
c. $144,000
d. $600,000 $240,000
d. $120,000

MAS 5. Gild Company has been offered credit terms of 3/10, net 30. Using a 365-day year, what is
the nominal cost of not taking advantage of the discount if the firm pays on the 35th day
after the purchase?
1. What is the main factor that differentiates the short-run cost function from the long-run
a. 14.2%
cost function?
b. 32.2%
a. Nothing, the two functions are identical.
c. 37.6%
b. The level of technology.
d. 45.2%
c. Changes in government subsidies.
d. The nature of the costs.
6. Newton Corporation is offered trade credit terms of 3/15, net 45. The firm does not take
advantage of the discount, and it pays the account after 67 days. Using a 365- day year, what
2. If consumer confidence falls, the impact upon the economy is
is the nominal annual cost of not taking the discount?
a. A downturn.
a. 18.2%
b. An upturn.
b. 21.71%
c. No change.
c. 23.48%
d. Consumer confidence does not have an impact upon the economy.
d. 26.45%
3. A company enters into an agreement with a firm who will factor the company’s accounts
7. Which of the following is a strength of the payback method?
receivable. The factor agrees to buy the company’s receivables, which average $100,000 per
a. It considers cash flows for all years of the project.
month and have an average collection period of 30 days. The factor will advance up to 80%
b. It distinguishes the source of cash inflows.
of the face value of receivables at an annual rate of 10% and charge a fee of 2% on all
c. It considers the time value of money.
receivables purchased. The controller of the company estimates that the company would
d. It is easy to understand.
save $18,000 in collection expenses over the year. Fees and interest are not deducted in
advance. Assuming a 360-day year, what is the annual cost of financing?
8. Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the
a. 10.0%
expectation that $20,000 per year could be saved in after-tax cash costs if the equipment
b. 14.0%
were acquired. The equipment’s estimated useful life is ten years, with no residual value,
c. 16.0%
and would be depreciated by the straight-line method. The payback period is
d. 17.5%
a. 4.0 years.
b. 4.4 years.
c. 4.5 years. c. I and III only.
d. 5.0 years. d. I, II, and III.

9. All of the following capital budgeting analysis techniques use cash flows as the primary 14. A tool which indicates how frequently each type of defect occurs is a
basis for the calculation except for the a. Control chart.
a. Net present value. b. Pareto diagram.
b. Payback period. c. Cause-and-effect diagram.
c. Discounted payback period. d. Fishbone diagram.
d. Accounting rate of return.
15. A tool which identifies potential causes for failures or defects is
a. Control chart.
10. If a firm is offered credit terms of 2/10, net 30 on its purchases. Sound cash management b. Pareto diagram.
practices would mean that the firm would pay the account on which of the following days? c. Cause-and-effect diagram.
a. Day 2 and 30. d. Strategy map.
b. Day 2 and 10. AP
c. Day 10. You are now in the completion stage of your audit of the Merly Company’s financial
d. Day 30. statements for the year ended December 31, 2010.

The next 5 items represent various commitment and contingencies of Merly at December 31,
11. What factor explains the difference between real and nominal interest rates? 2010, and events subsequent to December 31, 2010, but prior to the authorization for issue
a. Inflation risk. of the 2010 financial statements. For each item, select from the ff list the reporting
b. Credit risk. requirement.
c. Default risk.
d. Market risk.
1. At December 31, 2010. Merly had outstanding purchase orders in the ordinary course
12. Southwest Airlines benchmarked the process of turning around an airplane with the pit of business for purchase of a raw material to be used in its manufacturing process.
stop process for formula racecars. This is an example of The market price is currently higher than the purchase price and is not anticipated to
a. Internal benchmarking. change within the next year.
b. Generic benchmarking. a. Disclosure only
b. Accrual only
c. Competitor benchmarking.
c. Both accrual and disclosure
d. Functional benchmarking.
d. Neither accrual nor disclosure
13. Which measures would be useful in evaluating the performance of a manufacturing
2. A government contract completed during 2010 is subject to renegotiation. Although
system? Merly estimates that it is reasonably possible that a refund of approximately P200,00-
I. Throughput time. P300,000 may be required by the government, it does not wish to publicize this
II. Total setup time for machines/Total production time. possibility.
III. Number of rework units/Total number of units completed. a. Disclosure only
a. I and II only. b. Accrual only
b. II and III only. c. Both accrual and disclosure
 d. Neither accrual nor disclosure

3. Merly has been notified by a governmental agency that it will be held responsible for
the cleanup of toxic materials at a site where Merly formerly conducted operations.
Merly estimates that it is probable that its share of remedial action will be
approximately P500,000
a. Disclosure only
b. Accrual only
c. Both accrual and disclosure
d. Neither accrual nor disclosure