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CPA BOARD EXAM

QUIZZER VOL. 2
Contains 15 random questions on the various subjects covered in
the CPA Board Exams, plus supplementary discussions. Based on
lectures and materials from the CPA Review School of the
Philippines (2016). Questions rated PG

questions
TAX
#1

Salvador rendered service as IT technician for IBM during


January. During this time, the company experienced a
sudden drop in its stock valuation due to discovered
defects in its i7 motherboard units. Each stock was priced
at Php 12.00 during the month. Salvador received his
compensation in the form of stock options (for 5,000
stocks) for January services the following month, when the
stocks were priced Php 20.00 each. How much is the tax
base in computing his income tax?
a. Php 60,000
b. Php 50,000
c. None, since stock options are not monetary
d. None, since as a general rule, taxes are paid in cash

RFBT
#2 Ang Pa-Ngit, the oldest board member at Samsung, has

been removed from her post as director for reasons of


adverse interest towards a competing company. The
remaining directors immediately convene for the election
of a new director, ignoring the ongoing legal issues of
Samsungs heir apparent back at South Korea. However,
their number failed to form the necessary quorum. Still, the
directors proceeded with the elections. Ang Gan-Da, the
newest registered shareholder, was elected. Is her election
valid?
a. No, since a quorum is always necessary for the
Board to function
b. No, since Ang Gan-Da just became a shareholder,
thus she lacks the necessary attributes to become
a board member
c. No, since the shareholders must vote for the new
board member themselves
d. Yes, since Ang Pa-Ngits removal was the decision
of the other directors, and thus the directors could
only vote for a replacement

FAR
#3 Panda purchased a new ink-filling machine for their

ballpoint pen factory, costing them a total of Php


2,080,000, the whole of which was capitalized into the
account machineries. The breakdown of the cost is as
follows: invoice price Php 1,680,000; VAT Php 180,000;
estimated dismantling cost Php 150,000; costs of testing
Php 50,000; training costs Php 100,000; consultation costs
Php 70,000; proceeds from sale of units from testing
phase Php 20,000; transportation costs Php 20,000;
construction of rails and platform around machine Php
30,000 How much the new machine should be capitalized?
a. Php 2,260,000
b. Php 1,800,000
c. Php 2,080,000
d. Php 1,900,000

FAR
#4 MDFKING Enterprises sold its outstanding receivables to

PTNGNAM to finance its quickly sinking operations. The


financing company did not accept the risks and rewards
associated with the receivables, but still paid MDFKING for
the receivables out of pity. Still, they have to pay them
after a couple of weeks
a. This is an example of a factoring transaction, thus
the sold receivables need not be recorded by
MDFKING anymore
b. This is not a factoring transaction, since PTNGNAM
did not agree to shoulder the risks and rewards of
the receivables. So there was no transfer of title
c. This is an example of a factoring and a loan
transaction, which requires disclosure in the notes
d. This is an example of a factoring transaction, but
since PTNGNAM did not shoulder the risks and
rewards of the receivables, MDFKING still need to
record the receivables in their books

RFBT
#5 Lucy Nia granted PDF Partnership Ltd. a Php 900,000 loan

for the latters expansion project. P is the general partner,


D is the limited partner, while F is the capitalist-industrial
partner. Their respective capital balances are Php 300,000,

Php 100,000 and Php 90,000. It has been stipulated


among the partners that D and F cannot be made liable for
outside debts. When the due date arrives, the partnership
has no cash to pay for the loan, so Lucy chases after the
partners personal effects. As far as Lucy is concerned, for
how much could D be made liable?
a. None, given his stipulated immunity over external
debts of the partnership
b. Php 300,000, given the prorata nature of
partnership liability over personal assets
c. Php 100,000, since being a limited partner, he
could only be made liable up to the extent of his
capital contribution
d. Php 100,000, since being a limited partner, he
could only be made, liable up to the extent of his
capital contribution. Plus he could ask for
reimbursement from the general partner
amounting to Php 100,000

FAR
#6 Islamic State has a 30% stake in Taliban, accounted using

the equity method. Over the years, due to continued


bombardment of U.S. forces over Taliban territory, they
have continually reported losses. The investment balance
of Islamic State in 2014 is 20,000. In 2015, Taliban once
again reported losses of 100,000. The following year,
after finding out that a key general escaped Guantanamo
Bay, Taliban finally reports profits of 50,000. How much is
the balance of IS investment in 2016?
a. (5,000)
b. 5,000
c. Zero
d. 10,000

MAS
#7 There are several kinds of financing policies relating to

working capital. Which among those emphasizes


profitability wherein the least possible working capital is
used?
a. Matching policy
b. Conservative policy

c.
d.

Relaxed policy
Aggressive policy

AUDITING THEORY
#8 Abdul Jakul, in the course of his audit of MDFKING

Enterprises, has determined that almost Php 20,000 worth


of condom inventory are damaged and obsolete.
Apparently, rats have nibbled on the cheese-flavored
condoms, tearing holes on all of them. Abdul has found
that the inventory is reported on the accounts. What
assertion is Abdul checking?
a. Valuation
b. Fitness of use
c. Presentation and disclosure
d. Rights and obligations

MAS
#9 TILF uses linear programming to determine the maximum

number of practice dolls (x) and vibrators (y) that can be


produced under their constrained production. Their inhouse calculus experts have determined two constraint
functions as follows: 2x + 3y = 16, and 2x + y = 10. The head
wants to know how many dolls could be produced under
the constraints
a. 5 units
b. 8 units
c. 10 units
d. 2 units

AFAR
#10 In 2015, Hong Enterprises investment account for its

Yashano Mall branch (Hong 5) amounted to Php 65,000.


Hong 5s home office account, however, was Php 70,000.
Which of the following is true?
a. A cash remittance from the branch is not yet
recorded by the home office
b. A cash transfer from the home office is not yet
reported by the branch
c. A cash collection by the home office is not yet
reported by the branch
d. None of the above

AUDITING THEORY
#11 Last year, NWA spent Php 580,000 total in securing a

patent claim over an invention that, when inserted inside a


womans privates, would prolong the climactic sensation.
The amount includes all related legal and regulatory costs
related to its issuance. A few months later, another
company filed a suit against NWA claiming that they
copied their product. After a long litigation process, which
cost NWA a total of Php 100,000, the patent remained
theirs. NWA decided to capitalize the legal costs since it
thinks that if not for the legal costs, the patent wouldve
been lost. To be sure, they also hired a retainer for Php
50,000, also capitalized. What items should be capitalized
into the patent account?
a. Issuance costs only
b. Issuance costs and legal suit costs
c. Issuance costs, legal suit costs, and the retainers
fee
d. The patent is worthless

TAXATION
#12 Michael purchased an automated cupcake-making machine

for his VAT-registered cupcake business. The machine had


an invoice price of Php 560,000, gross of VAT. Two days
later, seeing that the machine fails to deliver on his high
cupcake demand, he bought another one costing Php
600,000, net of VAT. The machines both have an
estimated useful life of 8 years. How much could Michael
use as input VAT credit from the machines for the month?
a. Php 2,000
b. Php 2,200
c. Php 3,000
d. Php 3,200

AUDITING PROBLEMS / FAR


#13 PornHub grants 15000 share options for its 500

hardworking employees (mostly coders and wenches) in


2014 when the valuation of its shares were at Php 2.50
each. It estimates that the employees will exercise the
options in three years time. The exercise price for the
options was Php 1.75, while their fair valuation was Php
2.00 upon grant. In 2015, 200 employees left the company

due to a pandemic of AIDS. PornHub temporarily halts its


tapings to curb the spread, but it still estimates departure
of 100 more employees next year. In 2016, much to the
companys surprise, no employee left. Which is true?
a. PornHub is an illegal enterprise, promoting
prostitution and promiscuous behavior. It must be
taken down from the web
b. Salaries expense in 2015 related to the share
options is Php 8,000
c. The cumulative balance of share options
outstanding in 2014 was Php 10,000
d. Without PornHub, the internet would never be the
same

AUDITING THEORY
#14 Among the financial statements, which of the following is

usually the first audited?


a. Statement of Comprehensive Income
b. Statement of Financial Position
c. Statement of Cash Flows
d. Notes to the Financial Statements

AFAR
#15 Pat Focker borrowed $15,000 from the U.S. Treasury at a

10% per annum rate to finance his nude night club in


December 3, 2016, legalized under a recent new decree
from President Duterte, due in three months. During this
date, the exchange rate was Php 1.00 = $0.25. At the end
of the year, the exchange rate became Php 1.00 = $0.20. In
February, Focker was amazed by how much patrons were
shaking his motel beds. He decided to borrow another Php
15,000, this time from a local bank, due in another three
months, to accommodate the increased fornication. The
bank gave him a 12% per annum rate. When the first loan
was due, the exchange rate was Php 1.00 = $0.23. When
the second loan was due, the exchange rate was Php 1.00
= $0.19. What is the net effect on earnings from the two
loan transactions in 2017?
a. 12,450
b. (11,400.34)
c. (12,460.62)
d. (11,450.5)

answers
#1

(a) PHP 60,000


In case of nonmonetary compensation such as stock
options, the tax base shall be the fair value of the options
when service was rendered. This base shall be used in
computing Salvadors tax due using the progressive tax
table

#2

(c) NO, SINCE THE SHAREHOLDERS MUST VOTE FOR THE NEW
BOARD MEMBER THEMSELVES

Board members may be removed from their office for a


variety of reasons, but the manner of replacing them
depends on how such members were removed. If the
director was ejected due to term expiration, removal (such
as in this case) and an increase in the number of
shareholders, only a shareholder could fill the vacant
position. However, it must be the shareholders who must
vote for the replacement, not the remaining directors
If the removal was due to other reasons, the remaining
directors may vote for the replacement, provided they still
form a quorum (generally half of the number of the
directors plus one). Otherwise, the shareholders shall vote
for the replacement

#3

(b) PHP 1,800,000


The capitalizable cost of machines usually consists of the
following: invoice price (net of VAT), estimated
dismantling costs, testing costs (net of any related
proceeds), costs of constructing rails and platform around
the machine, installation costs, transportation costs, and
consultation costs. As per taxation rules, given invoice

prices are assumed to be inclusive of VAT. Training costs


are expensed

#4

(d) THIS IS AN EXAMPLE OF A FACTORING TRANSACTION, BUT


SINCE PTNGNAM DID NOT SHOULDER THE RISKS AND
REWARDS OF THE RECEIVABLES, MDFKING STILL NEED TO
RECORD THE RECEIVABLES IN THEIR BOOKS

Factoring is a receivable financing transaction wherein an


entitys outstanding receivables are sold to financing
entities for immediate liquidation. Generally, once factored,
receivables are no longer recorded in the books. In this
case, the entity retains the risks and rewards over them,
thus they still need to be recorded

#5

(c) PHP 100,000, SINCE BEING A LIMITED PARTNER, HE COULD


ONLY BE MADE LIABLE UP TO THE EXTENT OF HIS CAPITAL
CONTRIBUTION

Stipulations of immunity over partnership debts are only


valid between the partners. Thus, as to third persons, all of
them are liable prorata if the assets are insufficient. Those
immune, however, could be reimbursed for amounts they
paid beyond their contributions. Limited partners, as a rule,
could only be made liable up to the extent of their capital
contribution

#6

(b) 5,000
Once the share in the losses of the investee (Taliban)
exceeds the balance of the investment in associate, the
balance becomes zero. The excess over the balance is
reported in the notes to the financial statements (in 2015, it
was 10,000). Once this excess is exhausted, the
investment in associate can once again report a positive
balance. The share in the 2016 profit is 15,000 (50,000 x
.30), well over the negative balance of 10,000

#7

(d) AGGRESSIVE POLICY


Matching/self-liquidating policy, as its name implies,
matches the kind of financing (short- or long-term) over
the useful life of the related asset. Conservative/relaxed
policy uses long-term capital to finance all assets
regardless of expected life

#8

(a) VALUATION
The obsolescence of inventory may also relate to the
presentation and disclosure assertion, but this most likely is
toward the valuation assertion

#9

(a) 5 UNITS
In such scenario, one technique to determine the number
of dolls (x) is to substitute zero for y in both equations,
then solve for the value of x in both equations. The lower
figure between the values of x in the two equations should
be the answer the number of units that can only be
produced under the constraint

#10

(c) A CASH COLLECTION BY THE HOME OFFICE IS NOT YET


REPORTED BY THE BRANCH

The journal entry of the branch would be (dr.) Cash and


(cr.) Home Office for Php 5,000. Assume that this amount
is a receivable of the home office that the branch collected.
Failure by the home office to journalize this entry would
understate their Investment in Branch-Hong 5 account. The
entry for the home office would have been (dr.) Investment
in Branch-Hong 5 and (cr.) Accounts Receivable

#11

(a) ISSUANCE COSTS ONLY


In general, additional costs are capitalized if they increase
the useful life or the utility of the related asset. However,
additional costs in patents and other intangibles are
generally not capitalized since they only serve to maintain
rights of the entity to the intangible asset, not improve it or
increase its useful life. Patents have a useful life of 20 years

#12

(b) PHP 2,200


As per VAT rules, purchases by VAT-registered entities
from VAT-registered sellers can avail of input VAT credits
against the output VAT from their sales. Among the
sources of input VAT is purchase of capital goods such as
equipment. However, this abides with certain rules: (a) if in
a single month, one capital good was purchased costing in
excess Php 1,000,000 (net of VAT), the input VAT shall be
spread monthly over its useful life; (b) if more than one is
purchased with an aggregate cost in excess of Php
1,000,000 (net of VAT), they shall be amortized
respectively. Note that if the assets useful life is five years
or more, the input VAT can only be amortized for 60
months. Of course, input VAT is calculated by multiplying
.12 to the price, net of VAT
If the asset is sold as its input VAT is being apportioned,
the whole remaining input VAT balance can be used for the
month

#13

(c) THE CUMULATIVE BALANCE OF SHARE OPTIONS


OUTSTANDING IN 2014 WAS PHP 10,000

While (A) and (D) are also true, the following solution
derives the more proper answer:
Total share options
MULTIPLY: Fair value of options
Total fair value
MULTIPLY: Fraction of expected vesting period

15,000
2.00
30000
1/3

Share options outstanding, 2014 (also salaries expense for 2014)

10,000

Remaining share options (30 each for the 100 employees who left)
MULTIPLY: Fair value of options
Total fair value
MULTIPLY: Fraction of expected vesting period
Share options outstanding, 2015
Salaries expense, 2015

12,000
2.00
24,000
2/3
16,000
6,000

Total fair value


MULTIPLY: Fraction of expected vesting period
Share options outstanding, 2016
Salaries expense, 2016

24,000
3/3
24,000
8,000

#14

(b) STATEMENT OF FINANCIAL POSITION


This is followed by the statement of comprehensive
income and the cash flow statement

#15

(d) (11,450.50)
As to loan transactions denominated in foreign currency,
three items affect earnings interest expense, forex
gains/losses on the principal, and forex gains/losses on the
interest. Computing interest expense on the local loan
should be straight forward. However, as to the foreign loan,
interest is computed on the principal at its current
exchange/spot rate. Of course, to ease computations, the
exchange rate must first be expressed in direct quotation
by dividing 1 with the foreign currency equivalent of Php 1
Principal (nominal amount), first loan
MULTIPLY: Exchange rate at March 3, 2017 (1 0.23)
MULTIPLY: Interest rate at 2/12
Interest expense, 2017 first loan
ADD: Interest expense, second loan (15,000 x .12 x 3/12)
Total interest expense

15,000
4.35
65,250
0.01667
1,088
450
1,538

The forex gains/losses on the principal amount is


computed as follows, considering only the rates (at direct
quotation) in 2017 for the first loan:
Principal, first loan

15,000

MULTIPLY: Exchange rate difference (5 4.35)


Forex loss on principal

0.65
9,750

Lastly, the forex gains/losses on the interest is computed


on the forex gains/losses on the principal amount, thus:
Forex loss on principal
MULTIPLY: Interest rate at 2/12
Forex loss on interest

9,750
0.01667
162.5

Add all these amounts and the answer should be derived

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