Review 105-----------Day 5

THEORY OF ACCOUNTS
1. Cash equivalents are
a. Short-term and highly liquid investments that are readily convertible into cash.
b. Short-term and highly liquid investments that are readily convertible into cash with
remaining maturity of three months.
c. Short-term and highly liquid investments that are readily convertible into cash and so
near their maturity that they represent insignificant risk of changes in value because of
changes in interest rates.
d. Short term and highly liquid marketable equity securities.
2. Which of the following statements is false?
a. Not all items included in cash constitute legal tender.
b. Cash may be offset against a liability if the deposit of funds in restricted account clearly
constitutes the legal discharge of the liability.
c. Legally restricted bank deposit held as compensating balances should be segregated
from the cash account and reported under a separate caption.
d. One-year BSP treasury bills with remaining maturity of three months on balance sheet
date may be shown as part of cash and cash equivalents provided this is disclosed.
3. All cash receipts are deposited intact and all cash disbursements are made by means of
check. This internal control is known as
a. Administrative control
b. Imprest system
c. Accounting control
d. Auditing control
4. Entries to record the replenishment of petty cash fund result in a debit to various expense
accounts and a credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system
b. Fluctuating petty cash system
c. Internal control
d. Administrative control
5. What is the major purpose of an imprest petty cash fund?
a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors
c. To determine the honesty of the employees
d. To effectively control cash disbursements
6. A cash over or short account
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short

d. Is a contra account to cash

7. The payments of accounts payable made subsequent to the close of the accounting period
are recorded as if they were made at the end of the current period.
a. Window dressing
b. Kiting
c. Lapping
d. Imprest system
8. Bank reconciliation
a. Is the process of transferring money in or out of a bank account.
b. Requires that every transaction which will result in a cash payment be verified,
approved and recorded before a bank check is prepared.
c. Is an analysis that reflects the bank transactions made by a depositor.
d. Explains the difference between the bank balance and the balance shown in the
depositors records.
9. If the cash balance shown in a companys accounting records is less than the correct cash
balance and neither the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company
10. Which of the following cash flows does not appear in a cash flow statement using indirect
method?
a. Net cash flow from operating activities
b. Cash received from customers
c. Cash inflow from sale of equipment
d. Cash outflow for dividend payment
11. In a cash flow statement using the indirect approach for operating activities, an increase
in inventory should be presented as
a. Outflow of cash
b. Addition to net income
c. Inflow and outflow of cash
d. Deduction from net income
12. Which should not be disclosed in the cash flow statement using the indirect method?
a. Interest paid, net of amounts capitalized
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preferred stock
13. How should a gain from the sale of used equipment for cash be reported in a cash flow
statement using the indirect method?

a. In investing activities as a reduction of the cash inflow from the sale

b. In investment activities as a cash outflow
a. In operating activities as a deduction from income
b. In operating activities as an addition to income
14. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash
flow from investing activities equals the carrying amount of the equipment
a. Plus the gain
b. Plus the gain and less the amount of tax attributable to the gain
c. Plus both the gain and the amount of tax attributable to the gain
d. With no addition or subtraction
15. If the cash balance in a companys bank statement is less than the correct cash balance
and neither the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Bank charges not yet recorded by the company
d. Deposits in transit
P1
1. On January 1, 2005, Corregidor Company is granted a large tract of land in the Cordillera
region by the Philippine government. The fair value of the land is P10 million. Corregidor
Company is required by the grant to construct chemical research facility and employ only
personnel residing in the Cordillera region. The estimated cost of the facility is P50 million
with useful life of 20 years. Corregidor Company should recognize in 2005 an income from
government grant at
a. 10,000,000
b. 2,500,000
c.
500,000
d.
0
2. On April 1, 2004, Batangas Company bought machinery under a contract that required a
down payment of P500,000 plus 24 monthly payments of P300,000 for total payments of
P7,700,000. The cash price of the machinery was P6,500,000. The machinery has an
estimated useful life of four years and estimated residual value of P500,000. Batangas uses
SYD method of depreciation. In its 2005 income statement, what amount should Batangas
report as depreciation for this machinery?
a. 2,400,000
b. 1,800,000
c. 1,950,000
d. 2,275,000
3. A schedule of plant assets owned by Bauan Company is presented below.

Depreciable
Cost

Scrap

cost

Life

Building

8,800,000

800,000

20 years

Machinery

3,200,000

320,000

15 years

Equipment

640,000

Annual dep

5 years

Bauan computes depreciation on the straight line method. The composite life of the
assets should be
a. 19.8
b. 13.3
c. 18.0
d. 16.0
4. Alitagtag Company purchased factory equipment which was installed and put into service
July 1, 2004 at a total cost of P9,000,000. Residual value was estimated at P1,000,000. The
equipment is being depreciated over 10 years by the double declining balance method. For
the year 2005 how much depreciation expense should Alitagtag record on this equipment?
a. 1,620,000
b. 1,440,000
c. 2,220,000
d. 1,280,000
5. On January 1, 2004, Taal Company acquired equipment to be used in its manufacturing
operations. The equipment has an estimated useful life of 5 years and residual value of
P3,000,000. The depreciation applicable to this equipment was P3,200,000 for 2005
computed under the sum of years digits method. What was the acquisition cost of the
equipment?
a. 12,000,000
b. 15,000,000
c. 12,600,000
d. 19,000,000
6. Lemery Company acquired property in 2005 which contains mineral deposit. The
acquisition cost of the property was P20,000,000. Geological estimates indicate that
5,000,000 tons of mineral may be extracted. It is further estimated that the property can be
sold for P5,000,000 following mineral extraction. For P2,000,000, Lemery is legally required
to restore the land to a condition appropriate for resale. After acquisition, the following costs
were incurred:
Exploration cost

13,000,000

Development cost related to drilling of wells

10,000,000

Development cost related to production equipment

15,000,000

The company extracted 600,000 tons of the mineral in 2005 and sold 450,000 tons. In
the 2005 income statement, what amount of depletion is included in cost of sales?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000
7. Calaca Company quaries limestone, crushes it and sells it to be used in road building.
Calaca paid P20,000,000 for a certain quarry on January 1, 2004. The property can be sold
for P4,000,000 after production ceases. The original total estimated reserves totaled
5,000,000 tons. Calaca quarried 500,000 tons in 2004 and 1,500,000 tons in 2005. An
engineering study performed in 2005 indicated that as of December 31, 2005, 4,500,000 tons
were available. Calaca Company should record 2005 depletion at
a. 3,600,000
b, 4,800,000
c. 6,000,000
d. 4,500,000
8. On July 1, 2005 Balayan Company purchased rights to a mine. The total purchase price
was P50,000,000 of which P5,000,000 was allocated to the land. Estimated reserves were
6,000,000. Balayan expects to extract and sell 100,000 tons per month. Balayan Company
purchased new equipment on July 1, 2005 for P21,000,000 with estimated life of 8 years.
However, after all the resource is removed, the equipment will be of no use and will be sold
for P3,000,000. What is the depreciation of the equipment for 2005?
a. 1,800,000
b. 2,100,000
c. 1,125,000
d. 3,600,000
9. Calatagan Company provides the following balances at the end of 2005:
Wasting asset, at cost

100,000,000

Accumulated depletion

30,000,000

Capital liquidated

10,000,000

Retained earnings

15,000,000

Depletion based on 250,000 units extracted at P50 per unit

12,500,000

Inventory of resource deposit (50,000 units)

Calatagan can declare maximum dividend on December 31, 2005 of

6,000,000

a. 32,500,000
b. 45,000,000
c. 29,000,000
d. 15,000,000
10. Lian Company acquired a building on January 1, 2001 at a cost of P50,000,000. The
building has an estimated life of 10 years and residual value of P5,000,000. The building was
revalued on January 1, 2005 and the revaluation revealed replacement cost of P80,000,000,
residual value of P2,000,000 and revised life of 12 years. What is the revaluation surplus on
December 31, 2005?
a. 30,000,000
b. 26,250,000
c. 16,800,000
d. 14,700,000
11. On January 1, 2005, the historical balances of the land and building of Lipa Company are:
Cost
Land
Building

Accumulated depreciation

50,000,000
300,000,000

90,000,000

The land and building were appraised on same date and the revaluation revealed the
following:
Sound value
80,000,000
350,000,000

Land
Building

There were no additions or disposals during 2005. Depreciation is computed on the

straight line. The estimated life of the building is 20 years. The depreciation of the
building for the year ended December 31, 2005 should be
a. 25,000,000
b. 10,000,000
c. 15,000,000
d. 17,500,000
Capiz Company has the following information on January 1, 2005 relating to its land and
building.
Land
Building
Accumulated depreciation

20,000,000
450,000,000
75,000,000

There were no additions or disposals during 2005. Depreciation is computed using

straight line over 15 years for building. On June 30, 2005, the land and building were
revalued as follows:
Replacement cost

Sound value

35,000,000

35,000,000

600,000,000

480,000,000

Land
Building

12. What is the depreciation of the building for 2005?

a. 30,000,000
b. 35,000,000
c. 40,000,000
d. 32,000,000

MAS
1. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for tax
purposes will be P100,000 annually for six years. The new machine is expected to
produce cash flow from operations, net of income taxes, of P150,000 a year in each of
the next six years. The accounting (book value) rate of return on the initial investment is
expected to be
A. 8.3%
B. 12.0%

2. Investors Inc. uses a 12% hurdle rate for all capital expenditures and has done the
following analysis for four projects for the upcoming year.
Project 1
Project 2
Project 3 Project 4
Initial cash outlay
P200,000
P298,000
P248,000 P272,000
Annual
net
cash
inflows
Year 1
P 65,000
P100,000
P 80,000 P 95,000
Year 2
70,000
135,000
95,000
125,000
Year 3
80,000
90,000
90,000
90,000
Year 4
40,000
65,000
80,000
60,000
Net present value
(
3,79
4,276
14,064
14,662
8)
Profitability index
98%
101%
106%
105%
Internal rate of return
11%
13%
14%
15%
Which project(s) should Investors, Inc. select during the upcoming year under each

13. What is the revaluation surplus on June 30, 2005?

a. 135,000,000
b. 125,000,000
c. 120,000,000
d. 160,000,000
14. What is the revaluation surplus on December 31, 2005?
a. 125,000,000
b. 130,000,000
c. 123,750,000
d. 115,000,000

budgeted amount of funds?

15. During December 2005, Talisay Company determined that there had been a significant
decrease in market value of its equipment. At December 31, 2005, Talisay compiled the
following information concerning the equipment:
Original cost
Accumulated depreciation
Expected undiscounted net future cash inflows from the
continued use and eventual disposal
Expected discounted net future cash inflows from the
continued use and eventual disposal
Fair value less cost to sell

C. 16.7%
D. 25.0%

20,000,000
12,000,000

A.
B.
C.
D.

7,000,000
5,000,000
6,500,000

What is the impairment loss that should be reported in the 2005 income statement?
a. 1,000,000
b. 2,000,000
c. 1,500,000
d.
0

3.

No Budget Restriction

P600,000
Funds

Available

Projects 2, 3 & 4
Projects 1, 2 & 3
Projects 1, 3 & 4
Projects 3 & 4

Projects 3 & 4
Projects 2, 3 & 4
Projects 2 & 3
Projects 2 & 4

P300,000Available
Funds
Project 3
Projects 3 & 4
Project 2
Projects 2 & 4

If the North Division of Alliance Products Company had an operating asset turnover of
4.2 and an operating income margin of 0.10, the return on investment would be
A. 23.8%
B. 420.0%

C. 42.0%
D. 4.2%

4. The sales director of Lloyd Company suggested that certain credit terms be modified. He
estimates the following effects:

 Sales will increase by at least 20%

Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
times
Bad debts, now at 1% of sales will increase to 1.5%
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the
desired rate of return is 20%. Fixed expenses amount to P150,000.

D. Earn maximum returns on investment assets.

10. Which of the following actions would not be consistent with good management?
a. Increased synchronization of cash flows.
b. Minimize the use of float.
c. Maintaining an average cash balance equal to that required as a compensating
balance or that which minimizes total cost.
d. Use of checks and drafts in disbursing funds.

Should the company allow revision of its credit terms?

A. Yes, because income will increase by P64,800
B. Yes, because losses will be reduced by P73,800
C. No, because income will be reduced by P13,000
D. No, because losses will be increased by P28,000
5. Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent
per annum. The bank requires 10 percent of loan as compensating balance in its new
checking account. The loan is payable at the end of 6 months. The effective interest rate
of this loan is
A. 28.21 percent
B. 14.29 percent

C. 27.27 percent
D. 15.38 percent

6. Which of the following is not a major function in cash management?

a. Cash flow control
b. Cash surplus investment

c. Maximizing sales
d. Obtaining financing services

7. A precautionary motive for holding excess cash is

a. To enable a company to meet the cash demands from the normal flow of business
activity.
b. To enable a company to avail itself of a special inventory purchase before prices rise
to higher levels.
c. To enable a company to have cash to meet emergencies that may arise periodically.
d. To avoid having to use the various types of lending arrangements available to cover
projected cash deficits.
8. The amount of cash that a firm keeps on hand in order to take advantage of any bargain
purchases that may arise is referred to as its
A. Transactions balance.
C. Precautionary balance.
B. Compensating balance.
D. Speculative balance.
9. All of the following are valid reasons for a business to hold cash and marketable
securities except to
A. Satisfy compensating balance requirements.
B. Maintain adequate cash needed for transactions.
C. Meet future needs.

11. When managing cash and short-term investments, a corporate treasurer is primarily
concerned with
A. Maximizing rate of return.
B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
D. Liquidity and safety.
12. The economic order quantity (EOQ) formula can be adapted in order for a firm to
determine the optimal mix between cash and marketable securities. The EOQ model
assumes all of the following except
a. The cost of a transaction is independent of the dollar amount of the transaction and
interest rates are constant over the short run.
b. An opportunity cost is associated with holding cash, beginning with the first dollar.
c. The total demand for cash is known with certainty.
d. Cash flow requirements are random.
13. The following are desirable in cash management except:
a.
b.
c.
d.

Cash is collected at the earliest time possible.

Most sales are on cash basis and receivables are aged current
Post-dated checks are not deposited on time upon maturity.
All sales are properly receipted and promptly deposited intact.

14. The one item listed below that would warrant the least amount of consideration in credit
and collection policy decisions is the
A. Quality of accounts accepted.
C. Cash discount given.
B. Quantity discount given.
D. Level of collection expenditures.
15. Which of the following investments is not likely to be a proper investment for temporary
idle cash?
a. Initial public offering of an established profitable conglomerate.
b. Commercial paper.
c. Treasury bills.
d. Treasury bonds due within one year.

P2
1. In an 80% purchase accounted for as a tax-free exchange, the excess of
cost over book value is 200,000. The equipment's book value for tax
purposes is 100,000 and its fair value is 150,000. All other
identifiable assets and liabilities have fair values equal to their book
values. The tax rate is 30%. What is the total deferred tax liability
that should be recognized on the consolidated balance sheet on the date
of purchase?
a. 12,000
b. 60,000
c. 72,857
d. 85,714
2. Paro Company purchased 80% of the voting common stock of Sabon Company
for 900,000. There are no liabilities. The following book and fair
values are available:
Book Value
Fair Value
Current assets...................... 100,000
200,000
Land and building................... 200,000
200,000
Machinery........................... 300,000
600,000
Goodwill............................ 100,000
?
Using the parent company concept, the machinery will appear on the
consolidated balance sheet at __________.
a. 600,000
b. 540,000
c. 480,000
d. 300,000
3. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s 10 par
common stock for 975,000. On this date, the carrying amount of Sunny's
net assets was 1,000,000. The fair values of Sunny's identifiable
assets and liabilities were the same as their carrying amounts except
for plant assets (net), which were 100,000 in excess of the carrying
amount.
In the January 1, 20X1, consolidated balance sheet, goodwill should be
reported at _______.
a. 0
b. 75,000
c. 95,000
d. 175,000
4. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are
included in its consolidated financial statements. In its 12/31/X1
separate balance sheet, Patti had the following intercompany balances
before eliminations:

Debit Credit
Current Receivable due from Aeta..... 40,000
Noncurrent Receivable due from Beta... 100,000
Cash Advance to Beta.................. 26,000
Cash Advance from Gaeta............... 75,000
Intercompany Payable to Gaeta......... 40,000
In its 12/31/X1 consolidated balance sheet, what amount should Patti
report as intercompany receivables?
a. 166,000
b. 51,000
c. 26,000
d. 0
5. Pease Corporation owns 100% of Sade Corporation common stock. On January
2, 20X6, Pease sold machinery with a carrying amount of 30,000 to Sade
for 50,000. Sade is depreciating the acquired machinery over a 5-year
life using the straight-line method. The net adjustments to compute the
20X6 and 20X7 consolidated income before income tax would be an increase
(decrease) of
20X6 20X7
a. (16,000) 4,000
b. (16,000) 0
c. (20,000) 4,000
d. (20,000) 0
6. Ponti Company purchased the net assets of the Sorri Company for
800,000. The net assets of Sorri Company were recorded as follows on
the acquisition date:
Cash............................................. 50,000
Inventory........................................ 150,000
Land............................................. 150,000
Building (net)................................... 400,000
Liabilities...................................... (200,000)
Net assets..................................... 550,000
=========
The market values were as follows: Inventory, 160,000; Land, 170,000;
Building, 450,000. The excess purchase price is allocated to goodwill.
What is the amount that will appear as cash applied to investing as a
result of this purchase?
a. 800,000
b. 720,000
c. 750,000
d. 670,000
7. Company P purchased an 80% interest in Company S on January 1, 20X3, for

700,000. On the purchase date, Company S stockholders' equity was

800,000. Any excess of cost over book value was attributed to a patent
with a 15-year life. In 20X3, Company P reported internally generated
net income before taxes of 80,000. Company S reported a net income
before taxes of 40,000. The firms file separate tax returns at a 30%
tax rate. Assume an 80% dividend exclusion rate on intercompany
dividends. The controlling share of consolidated net income is
__________.
a. 81,200
b. 79,280
c. 78,480
d. 74,256
8. Company P owns a 30% interest in Company S and accounts for the
investment under the sophisticated equity method. The investment was
purchased at underlying book value, and there is no excess of cost or
book value. Company S sells merchandise to Company P at cost plus 25%.
Intercompany sales during 20X1 were 100,000. There were 20,000 worth
of such goods in Company P's beginning inventory and 30,000 worth of
such goods in Company P's ending inventory. Company S's reported income
for 20X1 is 40,000, and no dividends were paid. What amount will
Company P record as investment income in 20X1?
a. 12,000
b. 11,400
c. 9,750
d. 4,500
9. Pine Company purchased a 55% interest in the Sent Company on January 1,
20X1 for 350,000. On that date, the stockholders' equity of Sent
Company was 450,000. Any excess cost was attributable to the fair value
increase of equipment with a 10-year life. Pine purchased another 20%
interest on January 1, 20X5 for 200,000. On January 1, 20X5, Sent
Company's stockholders' equity was 700,000, the entire increase due to
retained earnings. Any excess cost was again attributed to the fair
value increase of equipment with a 6-year life. The additional expense
on the December 31, 20X5, income statement is __________.
a. 10,250
b. 20,250
c. 10,000
d. 16,250
10. Prior to January 1, 20X4, Parts Inc. owned a 60% controlling interest in
Sorter Company. On July 1, 20X4, Parts Inc. purchased an additional 20%
interest in Sorter for 150,000. Sorter's stockholders' equity was

600,000 on January 1, 20X4. Any excess was attributed to goodwill. On

July 1, 20X4, there was intercompany inventory owned by Parts Inc. that
had been purchased from Sorter. Sorter's profit on the inventory was
5,000. Parts Inc. sold the inventory during the latter half of 20X4.
Sorter's net income for 20X4 was 60,000, earned evenly during the year.
Goodwill arising from the second acquisition is __________.
a. 30,000
b. 29,500
c. 25,000
d. 23,500
11. Palto Inc. purchased a 10% interest in the Sauer Company for 50,000 on
January 1, 20X1. On that date, Sauer's stockholders' equity was
400,000. Any excess would have been attributed to a patent with a 10year life. On January 1, 20X3, Palto purchased another 60% interest for
500,000 when Sauer's stockholders' equity was 700,000. Again, any
excess was attributed to the patent with an 8-year life. The Sauer
Company earned $50,000 during 20X3. The patent on the December 31, 20X3,
consolidated balance sheet will be __________.
a. 90,000
b. 77,000
c. 80,000
d. 10,000
12. Company P purchased the outstanding common stock of Company S as
follows:
15%, January 1, 20X1
20%, June 1, 20X1
30%, August 1, 20X1
35%, September 30, 20X1
The fiscal year of both firms ends on December 31. S's stock was
acquired by P at book value. The controlling interest in consolidated
net earnings for the fiscal year ended December 31, 20X1, would include
which of the following earnings of the subsidiary?
a. 100%, January-December 20X1
b. 15%, January-May 20X1; 20%, June-July 20X1; and 30%, AugustSeptember 20X1
c. 15%, January-May 20X1; 35%, June-July 20X1; 65%, August-October
20X1; and 100%, September - December
d. 15%, January-May 20X1; 35%, June-July 20X1; 65%, August-September
20X1; and 100%, November December
13. Paris LTD. owned a 75% interest in Scott Company prior to January 1,
20X3. On January 1, 20X1, Paris LTD. paid 600,000 for its interest when

Scott Company had total equity of 550,000. On January 1, 20X3, Scott

Company had the following stockholders' equity:
Common stock, 10 par............... 100,000
Other paid-in capital............... 200,000
Retained earnings................... 350,000
On January 2, 20X3, Scott Company sold 2,500 additional shares of stock
for 35 each in a public offering to noncontrolling shareholders. As a
result of this sale, which of the following changes would appear in the
20X3 consolidated statements?
a. 45,000 loss
b. 21,875 loss
c. 45,000 decrease in controlling paid-in capital
d. 21,875 decrease in controlling paid-in capita

2. What is the interest expense to be reported on Kung Fu Kids Corp.s income

statement for the year ended December 31, 2008?
a. 303,113
b. 332,662
c. 341,002
d. 350,092

14.Apple Inc. owns a 90% interest in Banana Company. Banana Company, in

turn, owns a 80% interest in Carrot Company. During 20X4, Carrot Company
sold $50,000 of merchandise to Apple Inc. at cost plus 25%. Of this
merchandise, $10,000 was still unsold by Apple Inc. at year end. The
adjustment to the controlling interest in consolidated net income for
20X4 is __________.
a. 560
b. 1,440
c. 1,600
d. 1,800

5. Using the assumption in number 34, and assuming all the 4,000 bonds were retired
on January 1, 2009 when the prevailing yield rate on the bonds was at 9%, at
P4,000,000, what is the loss to be reported in the income statement?
a. 0
b. 52,804
c. 162,895
d. 330,275

15. A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A.
Which interest will not be included in the consolidated balance sheet?
a. 10% of A
b. 100% of C
c. 10% of A and 48% of C
d. 20% of B and 48% of C

AP
On January 1, 2007 KUNG FU KIDS CORP. issued 3-year, 4,000 convertible bonds at face
value of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate
of 6%. Each bond is convertible, at the holders option, into 40 P10 par value ordinary shares
at any time up to maturity. On the date of issuance, the prevailing market interest rate for
similar debt without the conversion privilege was 9%. On the same date, the market price of
one common share was P12.
1. What is the equity component of the compound instrument?
a. 110,091
b. 211,093
c. 303,755
d. 388,766

3. What is the credit to share premium account assuming that 3,000 of the bonds were
converted on January 1, 2009?
a. 1,717,432 b. 1,928,525
c. 2,017,432
d. 2,289,908
4. Assuming that on the issuance date, the company paid transactions costs totaling to
P151,469, and as a result the yield rate increased by 1.5%, what is the equity
component of the compound instrument?
a. 292,253
b. 303,755
c. 443,722
d. 315,257

The long-lived assets and related accounts of BANDILA INC. had the following balances as of
January 1, 2007:
PPE

Cost

Accumulated Depreciation

Land

700,000

Land Improvements, straight line, 15yrs.

360,000

120,000

Building, 150%declining balance, 20yrs.

9,000,000

2,905,316

Machinery and equipment, SYD, 10yrs.

2,320,000

1,434,182

Automobiles, 150% declining balance, 3yrs. 1,800,000

900,000

INTANGIBLES
Patent

Cost

Accumulated Depreciation
960,000

Review of transactions during the period revealed the following information:

120,000

a. The patent was purchased for 960,000 on January 1, 2005, incurring additional
license-transfer processing fees charged to operations amounting to 40,000. On the
acquisition date the remaining legal life was 16 years. On January 1, 2007, the
company determined that the useful life of the patent was only ten years from the
date of acquisition.
b. On January 5, 2007, Bandila acquired a tract of land with an existing building in
exchange for 50,000 shares of Bandilas P10 par value share capital that had a
market price of P18 per share on this date and a 5 year, P500,000, 10% face value
bonds which currently yields 12% in the market. Shortly after the acquisition, the
building was razed at a cost of 45,000 in anticipation of new building construction
within the year. The property was appraised by an independent appraiser at
1,200,000.
c. On April 5, 2007, a machine purchased for 520,000 on January 1, 2003, was sold for
120,000.
d. On June 2, 2007, the company purchased a new automobile for 920,000 cash and
trade-in of an automobile purchased for 1,080,000 on January 1, 2006. The old
automobile has a trade in value of 220,000.
e. An extensive work was done to the five-year old building during the year end was
completed by the end of August. The total cost of the work done amounted to
500,000 which consisted the following:
Repainting of ceilings and walls
50,000
Routinary repairs
150,000
Major electrical work
300,000
Audit note: It is the companys policy to provide full years depreciation on the year of
acquisition/addition and no depreciation on the year of disposal.
6. What is the credit to the share premium account related to the acquisition of land on
January 5?
a. 191,048
b. 236,048
c. 281,048
d. 400,000
7. What is the gain or loss on disposal of machinery and equipment on April 5?
a. 64, 363
b. 78, 545
c. 201,455
d. 215,636
8. How much is the carrying value of the Automobiles as of 2007?
a. 180,000
b. 360,000
c. 640,000
d. 750,000
9. What is the depreciation expense on the buildings for 2007?
a. 457,100
b. 469,101
c. 487,101
d. 492,101
10. What is the total amortization expense on the patent for the year?
a. 87,500
b. 105,000
c. 109,375
d. 102,735

You were assigned to audit the financial statements of NORTHERN LUZON MINING CORP.
for the year ended December 31, 2007. The company started its operation in 2005 when it
acquired an undeveloped mine property at a total acquisition price of P15,000,000,
P1,500,000 of which was attributed to the land. The company incurred exploration and
evaluation costs necessary to prove technical feasibility and viability of commercially
extracting and producing minerals totaling to 4,800,000. Technical feasibility of the operations
was established midyear of 2005, thus the company started developing the property and
preparing it for mine extraction. The company incurred the following development costs which
were accounted for as separate depreciable property and equipment:
Buildings

4,500,000

Developmental excavation

1,200,000

Mining equipment

6,000,000

It was estimated that the property contains 10M tons of mineral reserves after which
P800,000 is expected to be incurred to restore the land to a sellable condition (it is the
companys practice to deduct this amount from the residual value of the mine property in
computing for the depletion).
The company reported the following information in its 2006 financial statements after 1 year
of mine operations:
Mine inventory, 200,000 tons

1,916,667

Mine property

19,800,000

Accumulated depletion

1,719,000

Property and equipment

11,700,000

Accumulated depreciation- building

300,000

Accumulated depreciation- developmental excavation

120,000

Accumulated depreciation- mining equipment

1,000,000

Accumulated profits

4,256,667

The company carries its inventories on a first in-first out basis. Depletion on the mine property
was made under the output method while depreciation was made based on the assumed

useful lives of the property and equipment. The depreciation on the building is allocated 60:40
to production and other operations, respectively, while depreciation on the other properties
are entirely charged to production. The company is yet to declare or distribute any dividends
to shareholders.
The operations of the company for the current year are summarized as follows:
Tons mined

940,000 tons

Tons sold

952,000 tons

Selling price per ton

P15.00/ton

Direct labor

P3,675,000

Overhead costs, excluding depreciation

P3,150,000

Other operating expenses, excluding depreciation

P1,575,000

d
2

Statements:
If one of the parties at the time of making the offer or
acceptance was already was already insane the contract is
voidable.
If before the acceptance is conveyed to the offerer, either of the
parties becomes insane, the contract is void, that is, the offer is
noneffective.
a Both statements are incorrect.
b Both are correct.
c First is correct, second is incorrect.
d Second is correct, first is incorrect.

A, a minor sold to B a parcel of land registered in his name

misrepresenting to the latter that he is of legal age. Having been
misled as to the true age of A, B entered into the contract. Is the
contract voidable?
a It is voidable because the seller is a person incapable of giving
consent to a contract being a minor.
b It is voidable because of mistake on the part of B when he
thought that A was of legal age.
c It is not voidable but rather void because of lack of consent of A
who is onli a minor without capacity to enter into contracts.
d It is not voidable because of the fraud committed by the minor
seller and the buyer being in good faith.

A, a director of X corporation , through an agent bought the shares

of stocks of another stockholder without revealing to the seller
stockholder that negotiations were in progress to enhance the value
of the shares. The sale is defective contract being:
a Void, because of fraud committed by A against the other
stockholder.
b Voidable because the mistake on the part of the sellerstockholder.
c Rescissible because of the damage suffered by the seller.
d Voidable due to the fraud concealment by A against a fellow
stockholder.

Using the information above and as a result of your audit, answer the following:
11. What is the correct depletion on 2006?
a. 1,719,000 b. 1,827,000
c. 1,910,000

d. 2,100,000

12. What is the correct net income in 2006?

a. 4,136,000 b. 4,152,667
c. 4,175,000

d. 4,210,667

13. What is the correct inventory at the beginning of 2007?

a. 1,950,667 b. 1,936,667
c. 1,928,000
d. 1,924,000
14. What is the correct net income in 2007?
a. 4,261,400 b. 4,092,200
c. 3,718,800

d. 2,618,200

15. What is the maximum dividends the company can distribute in 2007?
a. 11,620,760 b. 11,247,360 c. 10,456,500 d. 10,146,760
BLT

A offered 20 Tamiya cars to B for P1,000.00 each. B answered by

letter that he was willing to purchase not 20 but 30 pieces at said
price of P1,000.00 each. Is the contract perfected?
a No, because there is qualified acceptance which constitutes an
offer by the buyer.
b Yes, there is perfected sale because the number of pieces is only
incidental matter in the sale.

Yes, because the letter of acceptance was already sent by the

offeree.
No, because there is no offer yet of A that is certain.

While his father was still alive, A sold to B the property he (A)
expected to receive from his father. Is the contract defective?
a It is completely valid contract because the seller is compulsory
heir.
b It is valid for there can be sale of future things and what A sold is
future property.
c It is voidable sale if he fails to receive the property he expected
to receive from his father.
d It is void for future inheritance cannot be sold.

b. The first statement is false while the second statement is true:

c. Both statements are true;
d. Both statements are false.

A promised to give B a car reward after B has killed C. later, after

the killing, the contract was changed to a lease of a big house for a
certain period.
The contract of lease is:
a Void
b Unenforceable
c Voidable
d Rescissible

11 Exemption from tax is a privilege, which is being looked upon by law with disfavor
because everyone should be sharing the burden of taxation. On account of this view,
exemption from tax is construed strictly against the taxpayer, except in certain
situation like:
a Exemption is granted to the impoverished sector in certain situation like;
b Exemption relates to a public officials;
c Exemption refers to a public property;
d All of the above.

S orally sold to B a parcel of land for which the latter paid P1M. B
now wants to register the sale so that he can have a Transfer
Certificate of Title in his name. Decide.
a S cannot be compelled to execute the public document of sale
b S can be compelled to execute the public the public document of
sale because the sale is enforceable.
c The sale is void and therefore cannot be registered.
d S cannot be compelled to execute the public document of sale
because the sale is voidable.

S orally leased to R his parcel of land for a term of two years. The
contract is:
a Rescissible
b Voidable
c Unenforceable
d Void

Statement 1. A person , refuse to pay on the ground that he will not receive a
benefit from the tax.

Statement 2. A person may not refuse to pay a tax on the ground that it is confiscatory
of his property.
a. The first statement is true while the second statement is false;

10
a.
b.
c.
d.

Taxes must be for public purpose means that:

Taxes must be raised from the public;
Taxes should be used for recognized public needs benefiting a community;
Power of taxation should government be exercised by the legislature;
Relationship of the government and the governed must be transparent and
democratic.

12 First Statement: A mere request by the taxpayer for reinvestigation without the
corresponding action of the part of the Bureau of Internal Revenue Commissioner
does not interrupt the running of the prescriptive period;
Second Statement: A warrant of distraint and levy which is merely issued does not
suspend the running of the prescriptive period for collection unless said warrant is duly
served.
a.
Both statements are false;
b.
First statement is true, second statement is false;
c.
First statement is false, second statement is true;
d.
Both statements are true.
13 Penalties imposed under the Tax Code for failure of a taxpayer to file or pay taxes, except
one:
a. Interest on deficiency tax or on delinquency;
b. Civil penalties in the form of surcharges;
c. Fine and/or imprisonment;
d. Subsidiary imprisonment in case of failure to pay fines.
14 Bogok, Manager of Tongek Co., receives a monthly salary of P120,000. On January 15,
2008, Bogok received a bonus for services rendered in 2007 in the form of 200 shares of
stock of Tongek Co. Said shares have a par value of P120 per share and a fair market
value of P240 per share at the time of receipt on January 15, 2008. Its fair market value
in 2007 was P210 per share.
Bogok shall report income from bonus in the amount of:
a. P48,000
b. P42,000
c. P24,000
d. None of the above

From the garage

15 Mabagal Transportation Company is a holder of a franchise to operate twelve (12) units
of buses in the Ilocos Region. It also owns a gas station, which is used exclusively to load
its own buses although in very rare instances it is accepting repair jobs from outsiders.
During the month of December 2008, it had the following gross receipts.
From the buses
P280,000
From the gas station
300,000

12,000

How much is the common carriers tax payable?

a. 17, 760

b. P 8,400

c. P8,760

d. P17,400