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: _____________________________ Signature: __________________

1. Which of the following is not an essential characteristic of a liability?

a. A liability is a present obligation of an enterprise
b. A liability is payable to a specific party
c. A liability arises from past transaction or event
d. 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 of the following is a current liability?

a. Preferred dividends in arrears
b. A cash dividend payable to preferred stockholders
c. A dividend payable in the form of additional shares of company’s own stock
d. 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 advances from
customers of ₱500,000 ₱2,500,000
Notes payable, including note payable to bank due on
December 31, 2016 for ₱1,000,000 3,000,000
Share dividends payable 800,000
Credit balance in customers’ accounts 400,000
Serial bonds, payable in semiannual installments of
₱1,000,000 10,000,000
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

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5. The balance in Dowarc Company’s 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 400,000
Premiums purchased 30,000
Coupons redeemed 100,000
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 ₱ 800,000 ₱20,000
2015 1,000,000 70,000
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 Scruicer’s plants exploded on July 20, 2014. Scruicer’s legal 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

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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 Placper’s 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 bank’s 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.
 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

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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

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 Ganer’s unamortized bond
discount?
a. ₱192,364 c. ₱228,400
b. ₱211,240 d. ₱244,000

31. When an entity issued bonds payable that can be converted into ordinary shares, what will be the effect on liabilities and
equity, respectively?
a. Increase and No effect c. No effect and Increase
b. 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 ex-warrants

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 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 Loyar’s ordinary shares was attached to each bond. Shortly after
issuance, the bonds are selling at 10% ex-warrant, and each warrant was quoted at ₱60. What amount, if any, of the
proceeds from the bond issuance should be recorded as part of Loyar’s 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
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 lessor’s 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

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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 Peat’s 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 employer’s 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 Company’s employees are entitled to two weeks of paid vacation for each full year in Dlog’s 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
Sliver’s salary was ₱5,000 per week, Sliver had used 10 weeks of her accumulated vacation time. In December 2014, Sliver
notified Dlog of Sliver’s 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 Sliver’s 2014 income
tax return.
How much Dlog report as a liability at December 31, 2014 for Sliver’s accumulated vacation time.
a. None c. ₱10,000
b. ₱5,000 d. ₱20,000

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 Kreab’s 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 Kreab’s 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 Vernance’s preliminary (pre-
bonus, pretax) income reduced by the income tax (computed on the preliminary income less the bonus itself). Vernance’s
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

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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 c. Accounting income subject to income tax
b. Total pre-tax financial 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 will give rise to a deferred tax asset?

a. Dividend received
b. Tax depreciation is more than financial depreciation
c. 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 Yglor’s 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 Yglor’s December 31, 2014 statement of
financial position, what amount related to the insurance should be reported as deferred liability?
a. None c. ₱121,600
b. ₱60,800 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. Lumb’s 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

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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 ₱10,000,000
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, Wallhay’s 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 Sool’s 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?
a. No effect. c. Increased by ₱320,000.
b. Increased by ₱80,000. 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 ABC’s balance sheet, respectively?
a. Decrease; Decrease c. No effect; Decrease
b. Decrease; No effect d. No effect; No effect

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70. Which of the following actions or events does not result in an addition to retained earnings?
a. A quasi reorganization
b. Earnings of net income for the period
c. Correction of an error in which ending inventory was understated in a previous year
d. 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 Corporation’s 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 Company’s board of directors declared a 10% share dividend. The market price of Tabbery’s
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 of ₱600,000 to shareholders of record on January 19, 2014
and payable on February 14, 2015. The following data pertain to 2013:
Net income for the year ended December 31, 2013 ₱190,000
Shares premium, December 31, 2013 675,000
Retained earnings, December 31, 2013 425,000
The ₱600,000 dividend includes a liquidating dividend of
a. None c. ₱410,000
b. ₱175,000 d. ₱485,000

76. The Retained Earnings account of Lest Corp. for the year 2014 consists of the following items:
Debit Credit
Balance, January 1, 2014 ₱112,500
Write-off of organization costs ₱6,000
Excess of issuing price of share capital over par value 24,000
Loss on the sale of equipment 2,500
Gain on sale of treasury shares 3,500
Cash and share dividends 60,000
Net income for the year 58,500
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

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79. It is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s 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?
a. ₱400,000 c. ₱640,000
b. ₱560,000 d. ₱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

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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 Company’s capital structure at December 31, 2013 is shown below:
Shares issued and outstanding:
Ordinary share 200,000
Nonconvertible preference share 50,000
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 year’s EPS is not adjusted for the issue
b. The previous year’s EPS is adjusted for the issue
c. Only a note of the effect on the previous year’s EPS is made
d. Only the diluted EPS for the previous year is adjusted

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

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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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