CLINCHER QUESTION No.

1
The following T-account summarizes the transactions affecting the accounts
receivable of FLASH Company for 2014:
Beginning balance after deducting credit
balances of P9,000
106,000
Charge
1,250,000
Charge to goods out on consignment
Shareholders subscriptions
Accounts written-off but recovered
Cash paid to customer for Jan. 1 credit
5,000
Deposit
on
50,000
Claim against common carrier for shipping

Accounts Receivable
Collections from customers, including
P
Overpayment
of
P10,000
P1,240,000
Write
sales
offs
7,000
25,000
Merchandise
returns
5,500
60,000
Allowance to customers for shipping damages
3,000
5,000
Collections
on
carrier
claims
2,000
Collection
on
subscription
Balance
45,000
contract
damages

5,000
IOUs
1,000
Cash
50,000
Advances
10,000

from

employees

advance

to
to

affiliate
supplier

Audit notes:
a. It was ascertained that half of the adjusted outstanding accounts
receivable-trade balance are still currently collectible. The term of sale is
5/30, n/60. Based on past experience, a 25% of customers whose accounts
are still current normally pay within the discount period.
b. 30% of the adjusted accounts receivable-trade is 60 days past due and is
expected to be only 90% collectible.
c. 20% of the adjusted accounts receivable-trade balance is more than 120
days past due and is expected to be 50% collectible.
Determine the amortized cost of the accounts receivable trade.
Answer: P107,537
CLINCHER QUESTION No. 2
As part of a preliminary survey of the purchasing function, an auditor read
the department's policies and procedures manual. The auditor concluded
that the manual described the processing steps well and contained an
appropriate internal control design. The next engagement objective was to
determine the operating effectiveness of internal controls. Which procedure
would be most appropriate in meeting this objective?

a)
b)
c)
d)

Prepare a flowchart.
Prepare a system narrative.
Perform a test of controls.
Perform a substantive test.

Solution: C
a) Incorrect. Flowcharts are most appropriate for studying internal control
design. The audit objective is whether the controls are in place and
effective, which indicates the need for a test of controls.
b) Incorrect. System narratives are most appropriate for studying internal
control design. The audit objective is whether the controls are in place
and effective, which indicates the need for a test of controls.
c) Correct. Tests of controls, also known as compliance tests, help
an auditor determine whether controls are being followed and
are effective. For instance, a policy may require that all large
transactions be approved by a manager. As a test of controls,
the auditor may sample large transactions and review whether
manager approval was obtained and whether the proposed
transaction meets all the criteria that the manager was
supposed to verify.
d) Incorrect. Substantive tests are tests to determine whether an
objective has been achieved and do not necessarily test internal
controls.
CLINCHER QUESTION No. 3 (Easy)
Which of the following is not a function of financial management?
A. Financing
B. Risk-management
C. Internal control
D. Capital budgeting
Answer: C
The correct answer is (c) because internal control is a function of the
controllers office. Answers (a), (b), and (d) are incorrect because the
functions of financial management include: financing, capital, budgeting,
financial management, corporate governance, and risk management.
CLINCHER QUESTION No. 4

Bankrupt Bank has a 5-year loan receivable with face value of Php2,000,000 dated
January 1, 2014 from a borrower that is due on December 31, 2018. Interest on the
loan is payable at 10% every December 31. The borrower paid the interest that was
due on December 31, 2014 but informed Bankrupt on December 31, 2015 that
interest accrued in 2015 and the interest for 2016 will be paid on maturity date. The
borrower will also probably miss the last two years for interest payments because of

financial difficulty. After that, the borrower will also probably be expected to pay the
loan and accrued interest in 2015 and 2016 on December 31, 2018. What is the
loan impairment loss to be recognized on December 31, 2015? (Round off the
present value factor to three decimal places)?
ANSWER: Php397,600
Carrying amount (2,000,000 +
200,000)
Present value of remaining cash
flows
[2,000,000 +(200,000 x 2)] x
0.751
Impairment loss

Php2,200,
000
1,802,400
Php397,60
0

CLINCHER QUESTION No. 5

Sharon Company uses the installment sales method in accounting for its
installment sales. On January 1, 2014, Sharon Company had an installment
account receivable from Rowena with a balance of P18,000. During 2014,
P4,000 was collected from Rowena. When no further collection could be
made, the merchandise sold to Rowena was repossessed. The merchandise
had a fair market value of P6,500 after the company spent for P600 for
reconditioning of the merchandise. The merchandise was originally sold with
a gross profit rate of 40%.
Determine the gain or loss on repossession and Cost of Repossessed
Merchandise to be presented in the Income Statement, respectively:
Answer: P2,500 loss; P6,500 (Average)
FMV after reconditioning cost
Less: Reconditioning cost
FMV before reconditioning cost
Less: Unrecovered cost (18,000-4,000)=14,000 x 60%
Loss

P6,500
600
5,900
8,400
(P2,500)

CLINCHER QUESTION No. 6

Which of the following is not part of the powers of the Commissioner of Internal
Revenue (CIR)?
a. To interpret tax laws and decide on tax cases
b. To give effect to and administer the supervisory and police powers
conferred to it by National Internal Revenue Code (NIRC) and other tax
laws

c. To obtain information, and to summon, examine, and take testimony of

persons
d. To make assessments and prescribe additional requirements for tax
administration and enforcement
ANSWER: B
The CIR has the power to interpret tax laws and decide on tax cases (Sec. 4),
to obtain information, and to summon, examine, and take testimony of
persons (Sec. 5), and to make assessments and prescribe additional
requirements for tax administration and enforcement (Sec. 6).

CLINCHER QUESTION No. 7

Based on the information as follows, for what taxable year will a corporation
become liable for MCIT?
SEC Registration
May 29, 2009
BIR Registration
June 19, 2010
Start of commercial operations
October 14, 2010
a.
b.
c.
d.

2012
2013
2014
2015

Answer: C. MCIT is imposed upon any domestic corporation beginning

the fourth taxable year in which such corporation commenced its
business operations. For purposes of MCIT, the taxable year in which
the business commenced shall be the year in which the domestic
corporation registered with the Bureau of Internal Revenue.
CLINCHER QUESTION No. 8
Which of the following statements would the hedging relationship qualify for
hedge accounting?
I. At the inception of the hedge there is formal designation and
documentation of the hedging relationship and the entity's risk
management objective and strategy for undertaking the hedge.
II.
The hedge is assessed on an ongoing basis and determined actually
to have been highly effective throughout the financial reporting
periods for which the hedge was designated.
III. The effectiveness of the hedge can be reliably measured
IV.
The hedge is expected to be highly effective.
Answer: I, II, III and IV
Paragraph 88 of IAS 39 Financial Instruments: Recognition and
Measurement
A hedging relationship qualifies for hedge accounting under paragraphs
89102 if, and only if, all of the following conditions are met.
a) At the inception of the hedge there is formal designation and
documentation of the hedging relationship and the entity's
risk management objective and strategy for undertaking the
hedge. That documentation shall include identification of the hedging
instrument, the hedged item or transaction, the nature of the risk
being hedged and how the entity will assess the hedging instrument's
effectiveness in offsetting the exposure to changes in the hedged
item's fair value or cash flows attributable to the hedged risk.

b) The hedge is expected to be highly effective (see Appendix A

paragraphs AG105AG113A) in achieving offsetting changes in fair
value or cash flows attributable to the hedged risk, consistently with
the originally documented risk management strategy for that
particular hedging relationship.
For cash flow hedges, a forecast transaction that is the subject of the hedge
must be highly probable and must present an exposure to variations in cash
flows that could ultimately affect profit or loss.
CLINCHER QUESTION No. 9
Questions used to interrogate individuals suspected of fraud should:
a) Adhere to a predetermined order.
b) Cover more than one subject or topic.
c) Move from the general to the specific.
d) Direct the individual to a desired answer.
Solution: C
a) Incorrect. The interviewee's answer may suggest a follow-up question
that should be asked before asking the next planned question.
b) Incorrect. This may be confusing for the respondent.
c) Correct. General information should be obtained first before
details are sought.
d) Incorrect. The interrogator should avoid leading questions, that is,
questions that suggest an answer.
CLINCHER QUESTION No. 10
(Average) Assume that Stripler Industries is considering investing in a
project with the following characteristics:
Initial investment
Additional investment in working capital
Cash flows before income taxes for years 1 to
5
Yearly tax depreciation
Terminal value of investment
Cost of capital
Present value of P1 received after 5 years
discounted at 10%
Present value of an ordinary annuity of P1 for
5 years at 10%
Marginal tax rate
Investment life

P500
,000
10,
000
140,
000
90,
000
50,
000
10%
0.621
3.791
30%
5 years

Assume that all cash flows come at the end of the year.
What is the amount of the after-tax cash flows in year 2?
Answer: Php125,000
Answer (b) is correct. The after-tax cash flows are calculated by
deducting tax expense from the before-tax cash flows. Since
depreciation is deductible for tax purposes it provides a tax shield.
Therefore, income taxes for year 2 are equal to P15,000 [(P140,000
P90,000) 30%], and after-tax cash flows are P125,000 (P140,000
P15,000). Answer (a) is incorrect because P140,000 is the before-tax
cash flows. Answer (c) is incorrect because this solution fails to
consider the deductibility of depreciation.
CLINCHER QUESTION No. 11
The JPIA Co. operations resulted to regular corporate income tax (RCIT)
amounting to Php25,000 with the minimum corporate income tax (MCIT)
computed at Php100,000. It is the first time that JPIA will be paying MCIT
after operating for 7 years. The RCIT rate is 30% while MCIT rate is 2%. If JPIA
expects that the Company will still be liable to MCIT for the next periods,
deferred tax asset to be recognized on the balance sheet for the year will be:
ANSWER: Php-0PAS 12, Income Taxes provides that deferred tax assets shall be
recognized for the carryforward of unused tax losses and unused tax
credits to the extent that it is probable that future taxable profit will be
available against which the unused tax losses and unused tax credits
can be utilized.
Since the Company expects to still be liable to MCIT for the next
periods, the tax credit from paying MCIT during the year may not be
utilized and therefore should be recognized as zero.
CLINCHER QUESTION No. 12
1. Crenshaw and Durkee formed a partnership on January 1, 2014.
Crenshaw invested P60,000, Durkee P40,000. Each withdrew P5,000 on
each of the following dates during 2014: March 1, July 1, and
November 1. These capital withdrawals in total were equal to salaries
for the year. Interest of 9 percent was to be paid to partners on the
basis of their average capital balances excluding net income.
Additionally Crenshaw was to get a 20 percent bonus based on
partnership net income after the bonus, but before the salaries and
interest.

Any remaining profit (or loss) was to be allocated equally among the
partners.
If partnership net income was P100,000, how much will be allocated to
Crenshaw?
Answer:P59,233.50 (Average)
Salaries

Total

P15,000.0

P15,000.0

P30,000.0

0
4,725.00
16,667.00
22,841.50
P59,233.5
0

Interest (9% x Average)

Bonus *
Balance (equally)

Average Capital
C: 60,000
55,000
50,000
45,000

x
x
x
x

(Use Calculator)
2 = M+
4 = M+
4 = M+
2 = M+ MR/12 = 52,500

D: 40,000
35,000
30,000
25,000

x
x
x
x

2
4
4
2

*Bonus
=
=
=
B=

=
=
=
=

0
2,925.00
0.00
22,841.50
P40,766.5
0

0
7,650.00
16,667.00
45,683.00
P100,000.
00

M+
M+
M+
M+ MR/12 = 32,500

.20 (NI-B)
.20 (100,000-B)
20,000-.20B
16,667

CLINCHER QUESTION No. 13

Which of the following is subject to fringe benefits tax?
a.
b.
c.
d.
e.

Compensation of rank and file employees

Compensation of supervisory and managerial employees
Fringe benefit of rank and file employees
Fringe benefit of supervisory and managerial employees
C and D

ANSWER: D
BASIS: Compensation of both rank and file and supervisory and
managerial employees are subject to WTW. Fringe benefits of rank and file
employees are also subject to WTW. Section 33 of the Tax Code:

Imposition of Tax. A final tax of thirty-four percent (34%) effective

January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and
thirty-two percent (32%) effective January 1, 2000 and thereafter, is
hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as
defined herein) by the employer, whether an individual or a corporation
(unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit
is for the convenience or advantage of the employer).

CLINCHER QUESTION No. 14

Which of the following correctly describes prior period errors?
A
.
B
.
C
.
D
.

Errors committed and discovered in prior periods

Errors committed and discovered in the current period

Errors committed and discovered in current and prior periods
Errors committed in prior periods but are discovered only in the current period

Answer: D
Paragraph 5 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors states that Prior period errors are omissions from,
and misstatements in, the entity's financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable
information that:
a) was available when financial statements for those periods were
authorised for issue; and
b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.
CLINCHER QUESTION No. 15
Effective January 2015, benefits received by an employee by virtue of a
Collective Bargaining Agreement (CBA) and productivity incentive schemes
combined are tax exempt, provided that it does not exceed P___________ per
employee per taxable year.
a. P 5,000

b. P 10,000
c. P 30,000
d. P 82,000
ANSWER: B
BASIS: Revenue Regulations (RR) 1-2015
Benefits received by an employee by virtue of a collective bargaining
agreement (CBA) and productivity incentive schemes provided that the
total annual monetary value received from both CBA and productivity
incentive schemes combined do not exceed ten thousand pesos (Php
10,000.00) per employee per taxable year.

CLINCHER QUESTION No. 16

Chris Products uses a process cost system and sells a variety of ready-tocook meat products. Four joint products were recovered during May 2015 as
follows:
Ham
Bacon
Salami
Sausag
e

1,000
kilos
9,000
kilos
500 kilos
5,000
kilos

Costs incurred up to the split-off point were: P20,000 for direct

materials, P15,000 for direct labor, and P7,000 for factory overhead
applied. Using the physical output method, how much joint cost would
product Ham absorb?
Answer: P2,710 (Average)
Total cost (20,000+15,000+7,000)
Divided by total output
(1,000+9,000+500+5,000)
Cost per unit
Ham
Joint cost Ham

CLINCHER QUESTION No. 17

P42,000
15,500
P2.71
1,000
P2,710

An audit of an organizations claims department determined that a large

number of duplicate payments had been issued due to problems in the
claims processing system. During the exit conference, the vice president of
the claims department informed the auditors that attempts to recover the
duplicate payments would be initiated immediately and that the claims
processing system would be enhanced within six months to correct the
problems. Based on this response, the chief audit executive should:
a) Adjust the scope of the next regularly scheduled audit of the claims
department to assess controls within the claims processing system.
b) Monitor the status of corrective action and schedule a follow-up
engagement when appropriate.
c) Schedule a follow-up engagement within six months to assess the
status of corrective action.
d) Discuss the findings with the audit committee and ask the committee
to determine the appropriate follow-up action.
Solution: B
a) Incorrect. Because the finding is significant, the internal audit activity
should not wait until the next regularly scheduled audit to assess the
status of corrective action.
b) Correct. The internal audit activity should monitor the status
of the corrective action. A follow-up engagement should be
scheduled when changes to the claims processing system have
been sufficiently completed to allow for testing of adequacy
and effectiveness.
c) Incorrect. Although management indicated that the corrections should
be completed within six months, this may not be the case. As a result,
the internal audit activity should monitor the status of corrective action
and schedule a follow-up engagement when it is appropriate.
d) Incorrect. Although the findings should be discussed with the audit
committee because of their significance, the scope and timing of a
follow-up engagement should be determined by the chief audit
executive based on available information.

CLINCHER QUESTION No. 18

(Average) Assume that demand for a particular product changed as shown
below from D1 to D2.

Which of the following could cause the change shown in the graph?
A. A decrease in the price of the product
B. An increase in supply of the product
C. A change in consumer tastes
D. A decrease in the price of a substitute for the product
Answer: C
The correct answer is (c) because a shift demand could result from a
change in consumer tastes. Answer (a) is incorrect because this would
result in movement along the existing demand curve. Answer (b) is
incorrect because a change in supply would not affect the demand
function. Answer (d) is incorrect because a decrease in price of a
substitute would result in a shift of the curve to the left.

CLINCHER QUESTION No. 19

Titan Company issued a convertible bond on January 1, 2014, that matures in five
years. The bond can be converted into ordinary shares at any time. Titan has
calculated that the liability and the equity components of the bond are
Php3,000,000 for the liability component and Php1,000,000 for the equity
component, giving a total amount of the bond of Php4,000,000. The interest rate of
the bond is 6% and local tax legislation allows a tax deduction for the interest paid
in cash. What is the deferred tax liability arising on the bond as at the year ending
December 31, 2014 if the tax rate is 32%?
ANSWER: Php320,000
Bonds payable
Future taxable amount
Multiply by tax rate
Deferred tax liability

Financi
al
3,000,0
00

Tax
base
4,000,0
00

Temporary
difference
Php1,000,
000
1,000,000
32%
Php320,00