Review 105-----------Day 5 d.

Is a contra account to cash

THEORY OF ACCOUNTS 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.
1. Cash equivalents are a. Window dressing
a. Short-term and highly liquid investments that are readily convertible into cash. b. Kiting
b. Short-term and highly liquid investments that are readily convertible into cash with c. Lapping
remaining maturity of three months. d. Imprest system
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 8. Bank reconciliation
changes in interest rates. a. Is the process of transferring money in or out of a bank account.
d. Short term and highly liquid marketable equity securities. b. Requires that every transaction which will result in a cash payment be verified,
approved and recorded before a bank check is prepared.
2. Which of the following statements is false? c. Is an analysis that reflects the bank transactions made by a depositor.
a. Not all items included in cash constitute legal tender. d. Explains the difference between the bank balance and the balance shown in the
b. Cash may be offset against a liability if the deposit of funds in restricted account clearly depositor’s records.
constitutes the legal discharge of the liability.
c. Legally restricted bank deposit held as compensating balances should be segregated 9. If the cash balance shown in a company’s accounting records is less than the correct cash
from the cash account and reported under a separate caption. balance and neither the company nor the bank has made any errors, there must be
d. One-year BSP treasury bills with remaining maturity of three months on balance sheet a. Deposits credited by the bank but not yet recorded by the company
date may be shown as part of “cash and cash equivalents” provided this is disclosed. b. Deposits in transit
c. Outstanding checks
3. All cash receipts are deposited intact and all cash disbursements are made by means of d. Bank charges not yet recorded by the company
check. This internal control is known as
a. Administrative control 10. Which of the following cash flows does not appear in a cash flow statement using indirect
b. Imprest system method?
c. Accounting control a. Net cash flow from operating activities
d. Auditing control b. Cash received from customers
c. Cash inflow from sale of equipment
4. Entries to record the replenishment of petty cash fund result in a debit to various expense d. Cash outflow for dividend payment
accounts and a credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system 11. In a cash flow statement using the indirect approach for operating activities, an increase
b. Fluctuating petty cash system in inventory should be presented as
c. Internal control a. Outflow of cash
d. Administrative control b. Addition to net income
c. Inflow and outflow of cash
5. What is the major purpose of an imprest petty cash fund? d. Deduction from net income
a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors 12. Which should not be disclosed in the cash flow statement using the indirect method?
c. To determine the honesty of the employees a. Interest paid, net of amounts capitalized
d. To effectively control cash disbursements b. Income taxes paid
c. Cash flow per share
6. A cash over or short account d. Dividends paid on preferred stock
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over 13. How should a gain from the sale of used equipment for cash be reported in a cash flow
c. Is debited when the petty cash fund proves out short statement using the indirect method?
 a. In investing activities as a reduction of the cash inflow from the sale Depreciable
b. In investment activities as a cash outflow
a. In operating activities as a deduction from income Cost Scrap cost Life Annual dep
b. In operating activities as an addition to income
Building 8,800,000 800,000 20 years
14. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash Machinery 3,200,000 320,000 15 years
flow from investing activities equals the carrying amount of the equipment
a. Plus the gain Equipment 640,000 5 years
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 Bauan computes depreciation on the straight line method. The composite life of the
assets should be
15. If the cash balance in a company’s bank statement is less than the correct cash balance
and neither the company nor the bank has made any errors, there must be a. 19.8
a. Deposits credited by the bank but not yet recorded by the company b. 13.3
b. Outstanding checks c. 18.0
c. Bank charges not yet recorded by the company d. 16.0
d. Deposits in transit
P1 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
1. On January 1, 2005, Corregidor Company is granted a large tract of land in the Cordillera equipment is being depreciated over 10 years by the double declining balance method. For
region by the Philippine government. The fair value of the land is P10 million. Corregidor the year 2005 how much depreciation expense should Alitagtag record on this equipment?
Company is required by the grant to construct chemical research facility and employ only a. 1,620,000
personnel residing in the Cordillera region. The estimated cost of the facility is P50 million b. 1,440,000
with useful life of 20 years. Corregidor Company should recognize in 2005 an income from c. 2,220,000
government grant at d. 1,280,000
a. 10,000,000
b. 2,500,000
c. 500,000 5. On January 1, 2004, Taal Company acquired equipment to be used in its manufacturing
d. 0 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
2. On April 1, 2004, Batangas Company bought machinery under a contract that required a computed under the sum of year’s digits method. What was the acquisition cost of the
down payment of P500,000 plus 24 monthly payments of P300,000 for total payments of equipment?
P7,700,000. The cash price of the machinery was P6,500,000. The machinery has an a. 12,000,000
estimated useful life of four years and estimated residual value of P500,000. Batangas uses b. 15,000,000
SYD method of depreciation. In its 2005 income statement, what amount should Batangas c. 12,600,000
report as depreciation for this machinery? d. 19,000,000
a. 2,400,000
b. 1,800,000 6. Lemery Company acquired property in 2005 which contains mineral deposit. The
c. 1,950,000 acquisition cost of the property was P20,000,000. Geological estimates indicate that
d. 2,275,000 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
3. A schedule of plant assets owned by Bauan Company is presented below. 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 a. 32,500,000
b. 45,000,000
Development cost related to production equipment 15,000,000
c. 29,000,000
d. 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? 10. Lian Company acquired a building on January 1, 2001 at a cost of P50,000,000. The
a. 4,800,000 building has an estimated life of 10 years and residual value of P5,000,000. The building was
b. 3,600,000 revalued on January 1, 2005 and the revaluation revealed replacement cost of P80,000,000,
c. 5,400,000 residual value of P2,000,000 and revised life of 12 years. What is the revaluation surplus on
d. 4,050,000 December 31, 2005?
a. 30,000,000
7. Calaca Company quaries limestone, crushes it and sells it to be used in road building. b. 26,250,000
Calaca paid P20,000,000 for a certain quarry on January 1, 2004. The property can be sold c. 16,800,000
for P4,000,000 after production ceases. The original total estimated reserves totaled d. 14,700,000
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 11. On January 1, 2005, the historical balances of the land and building of Lipa Company are:
were available. Calaca Company should record 2005 depletion at
a. 3,600,000 Cost Accumulated depreciation
b, 4,800,000 Land 50,000,000
c. 6,000,000
d. 4,500,000 Building 300,000,000 90,000,000

8. On July 1, 2005 Balayan Company purchased rights to a mine. The total purchase price The land and building were appraised on same date and the revaluation revealed the
was P50,000,000 of which P5,000,000 was allocated to the land. Estimated reserves were following:
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. Sound value
However, after all the resource is removed, the equipment will be of no use and will be sold Land 80,000,000
for P3,000,000. What is the depreciation of the equipment for 2005? Building 350,000,000
a. 1,800,000
b. 2,100,000 There were no additions or disposals during 2005. Depreciation is computed on the
c. 1,125,000 straight line. The estimated life of the building is 20 years. The depreciation of the
d. 3,600,000 building for the year ended December 31, 2005 should be
a. 25,000,000
9. Calatagan Company provides the following balances at the end of 2005: b. 10,000,000
c. 15,000,000
Wasting asset, at cost 100,000,000 d. 17,500,000
Accumulated depletion 30,000,000 Capiz Company has the following information on January 1, 2005 relating to its land and
Capital liquidated 10,000,000 building.
Retained earnings 15,000,000
Land 20,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Building 450,000,000
Inventory of resource deposit (50,000 units) 6,000,000
Accumulated depreciation 75,000,000

Calatagan can declare maximum dividend on December 31, 2005 of

 There were no additions or disposals during 2005. Depreciation is computed using MAS
straight line over 15 years for building. On June 30, 2005, the land and building were
revalued as follows: 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
Replacement cost Sound value produce cash flow from operations, net of income taxes, of P150,000 a year in each of
Land 35,000,000 35,000,000 the next six years. The accounting (book value) rate of return on the initial investment is
expected to be
Building 600,000,000 480,000,000
A. 8.3% C. 16.7%
B. 12.0% D. 25.0%
12. What is the depreciation of the building for 2005?
a. 30,000,000 2. Investor’s Inc. uses a 12% hurdle rate for all capital expenditures and has done the
b. 35,000,000 following analysis for four projects for the upcoming year.
c. 40,000,000 Project 1 Project 2 Project 3 Project 4
d. 32,000,000
Initial cash outlay P200,000 P298,000 P248,000 P272,000
13. What is the revaluation surplus on June 30, 2005? Annual net cash
a. 135,000,000 inflows
b. 125,000,000 Year 1 P 65,000 P100,000 P 80,000 P 95,000
c. 120,000,000 Year 2 70,000 135,000 95,000 125,000
d. 160,000,000 Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
14. What is the revaluation surplus on December 31, 2005? Net present value ( 3,79 4,276 14,064 14,662
a. 125,000,000 8)
b. 130,000,000 Profitability index 98% 101% 106% 105%
c. 123,750,000
Internal rate of return 11% 13% 14% 15%
d. 115,000,000
Which project(s) should Investors, Inc. select during the upcoming year under each
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 budgeted amount of funds?
following information concerning the equipment:
No Budget Restriction P600,000 Available P300,000Available
Original cost 20,000,000 Funds Funds
Accumulated depreciation 12,000,000
Expected undiscounted net future cash inflows from the A. Projects 2, 3 & 4 Projects 3 & 4 Project 3
continued use and eventual disposal 7,000,000 B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4
Expected discounted net future cash inflows from the C. Projects 1, 3 & 4 Projects 2 & 3 Project 2
continued use and eventual disposal 5,000,000 D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
Fair value less cost to sell 6,500,000

What is the impairment loss that should be reported in the 2005 income statement? 3. If the North Division of Alliance Products Company had an operating asset turnover of
a. 1,000,000 4.2 and an operating income margin of 0.10, the return on investment would be
b. 2,000,000
A. 23.8% C. 42.0%
c. 1,500,000
B. 420.0% D. 4.2%
d. 0
 4. The sales director of Lloyd Company suggested that certain credit terms be modified. He B. Maintain adequate cash needed for transactions.
estimates the following effects: C. Meet future needs.
D. Earn maximum returns on investment assets.
Sales will increase by at least 20%
Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
10. Which of the following actions would not be consistent with good management?
times
a. Increased synchronization of cash flows.
Bad debts, now at 1% of sales will increase to 1.5%
b. Minimize the use of float.
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the
c. Maintaining an average cash balance equal to that required as a compensating
balance or that which minimizes total cost.
desired rate of return is 20%. Fixed expenses amount to P150,000.
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 11. When managing cash and short-term investments, a corporate treasurer is primarily
B. Yes, because losses will be reduced by P73,800 concerned with
C. No, because income will be reduced by P13,000 A. Maximizing rate of return.
D. No, because losses will be increased by P28,000 B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
5. Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent D. Liquidity and safety.
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 12. The economic order quantity (EOQ) formula can be adapted in order for a firm to
of this loan is determine the optimal mix between cash and marketable securities. The EOQ model
assumes all of the following except
A. 28.21 percent C. 27.27 percent
a. The cost of a transaction is independent of the dollar amount of the transaction and
B. 14.29 percent D. 15.38 percent
interest rates are constant over the short run.
b. An opportunity cost is associated with holding cash, beginning with the first dollar.
6. Which of the following is not a major function in cash management?
c. The total demand for cash is known with certainty.
a. Cash flow control c. Maximizing sales d. Cash flow requirements are random.
b. Cash surplus investment d. Obtaining financing services
13. The following are desirable in cash management except:
7. A precautionary motive for holding excess cash is a. Cash is collected at the earliest time possible.
a. To enable a company to meet the cash demands from the normal flow of business b. Most sales are on cash basis and receivables are aged “current”
activity. c. Post-dated checks are not deposited on time upon maturity.
b. To enable a company to avail itself of a special inventory purchase before prices rise d. All sales are properly receipted and promptly deposited intact.
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 14. The one item listed below that would warrant the least amount of consideration in credit
projected cash deficits. and collection policy decisions is the
A. Quality of accounts accepted. C. Cash discount given.
8. The amount of cash that a firm keeps on hand in order to take advantage of any bargain B. Quantity discount given. D. Level of collection expenditures.
purchases that may arise is referred to as its
A. Transactions balance. C. Precautionary balance. 15. Which of the following investments is not likely to be a proper investment for temporary
B. Compensating balance. D. Speculative balance. idle cash?
a. Initial public offering of an established profitable conglomerate.
b. Commercial paper.
9. All of the following are valid reasons for a business to hold cash and marketable c. Treasury bills.
securities except to d. Treasury bonds due within one year.
A. Satisfy compensating balance requirements.
 separate balance sheet, Patti had the following intercompany balances
before eliminations:
Debit Credit
P2 Current Receivable due from Aeta..... 40,000
Noncurrent Receivable due from Beta... 100,000
1. In an 80% purchase accounted for as a tax-free exchange, the excess of Cash Advance to Beta.................. 26,000
cost over book value is 200,000. The equipment's book value for tax Cash Advance from Gaeta............... 75,000
purposes is 100,000 and its fair value is 150,000. All other Intercompany Payable to Gaeta......... 40,000
identifiable assets and liabilities have fair values equal to their book In its 12/31/X1 consolidated balance sheet, what amount should Patti
values. The tax rate is 30%. What is the total deferred tax liability report as intercompany receivables?
that should be recognized on the consolidated balance sheet on the date a. 166,000
of purchase? b. 51,000
a. 12,000 c. 26,000
b. 60,000 d. 0
c. 72,857
d. 85,714 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
2. Paro Company purchased 80% of the voting common stock of Sabon Company for 50,000. Sade is depreciating the acquired machinery over a 5-year
for 900,000. There are no liabilities. The following book and fair life using the straight-line method. The net adjustments to compute the
values are available: 20X6 and 20X7 consolidated income before income tax would be an increase
Book Value Fair Value (decrease) of
Current assets...................... 100,000 200,000 20X6 20X7
Land and building................... 200,000 200,000 a. (16,000) 4,000
Machinery........................... 300,000 600,000 b. (16,000) 0
Goodwill............................ 100,000 ? c. (20,000) 4,000
Using the parent company concept, the machinery will appear on the d. (20,000) 0
consolidated balance sheet at __________.
a. 600,000
b. 540,000 6. Ponti Company purchased the net assets of the Sorri Company for
c. 480,000 800,000. The net assets of Sorri Company were recorded as follows on
d. 300,000 the acquisition date:
Cash............................................. 50,000
3. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s 10 par Inventory........................................ 150,000
common stock for 975,000. On this date, the carrying amount of Sunny's Land............................................. 150,000
net assets was 1,000,000. The fair values of Sunny's identifiable Building (net)................................... 400,000
assets and liabilities were the same as their carrying amounts except Liabilities...................................... (200,000)
for plant assets (net), which were 100,000 in excess of the carrying Net assets..................................... 550,000
amount. =========
In the January 1, 20X1, consolidated balance sheet, goodwill should be The market values were as follows: Inventory, 160,000; Land, 170,000;
reported at _______. Building, 450,000. The excess purchase price is allocated to goodwill.
a. 0 What is the amount that will appear as cash applied to investing as a
b. 75,000 result of this purchase?
c. 95,000 a. 800,000
d. 175,000 b. 720,000
c. 750,000
4. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are d. 670,000
included in its consolidated financial statements. In its 12/31/X1
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 10-
year 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%, August-
September 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 a. 110,091 b. 211,093 c. 303,755 d. 388,766
Scott Company had total equity of 550,000. On January 1, 20X3, Scott
Company had the following stockholders' equity: 2. What is the interest expense to be reported on Kung Fu Kids Corp.’s income
Common stock, 10 par............... 100,000 statement for the year ended December 31, 2008?
Other paid-in capital............... 200,000
Retained earnings................... 350,000 a. 303,113 b. 332,662 c. 341,002 d. 350,092
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? 3. What is the credit to share premium account assuming that 3,000 of the bonds were
a. 45,000 loss converted on January 1, 2009?
b. 21,875 loss
c. 45,000 decrease in controlling paid-in capital a. 1,717,432 b. 1,928,525 c. 2,017,432 d. 2,289,908
d. 21,875 decrease in controlling paid-in capita

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 4. Assuming that on the issuance date, the company paid transactions costs totaling to
sold $50,000 of merchandise to Apple Inc. at cost plus 25%. Of this
P151,469, and as a result the yield rate increased by 1.5%, what is the equity
merchandise, $10,000 was still unsold by Apple Inc. at year end. The
adjustment to the controlling interest in consolidated net income for component of the compound instrument?
20X4 is __________.
a. 560 a. 292,253 b. 303,755 c. 443,722 d. 315,257
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
15. A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A. on January 1, 2009 when the prevailing yield rate on the bonds was at 9%, at
Which interest will not be included in the consolidated balance sheet? P4,000,000, what is the loss to be reported in the income statement?
a. 10% of A
b. 100% of C a. 0 b. 52,804 c. 162,895 d. 330,275
c. 10% of A and 48% of C
d. 20% of B and 48% of C

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

On January 1, 2007 KUNG FU KIDS CORP. issued 3-year, 4,000 convertible bonds at face PPE Cost Accumulated Depreciation
value of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate
Land 700,000
of 6%. Each bond is convertible, at the holder’s 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 Land Improvements, straight line, 15yrs. 360,000 120,000
similar debt without the conversion privilege was 9%. On the same date, the market price of
one common share was P12. Building, 150%declining balance, 20yrs. 9,000,000 2,905,316

1. What is the equity component of the compound instrument? Machinery and equipment, SYD, 10yrs. 2,320,000 1,434,182
 Automobiles, 150% declining balance, 3yrs. 1,800,000 900,000 Audit note: It is the company’s policy to provide full year’s 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
INTANGIBLES Cost Accumulated Depreciation January 5?

Patent 960,000 120,000 a. 191,048 b. 236,048 c. 281,048 d. 400,000

Review of transactions during the period revealed the following information: 7. What is the gain or loss on disposal of machinery and equipment on April 5?

a. The patent was purchased for 960,000 on January 1, 2005, incurring additional a. 64, 363 b. 78, 545 c. 201,455 d. 215,636
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. 8. How much is the carrying value of the Automobiles as of 2007?

b. On January 5, 2007, Bandila acquired a tract of land with an existing building in a. 180,000 b. 360,000 c. 640,000 d. 750,000
exchange for 50,000 shares of Bandila’s 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 9. What is the depreciation expense on the buildings for 2007?
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 a. 457,100 b. 469,101 c. 487,101 d. 492,101
1,200,000.

c. On April 5, 2007, a machine purchased for 520,000 on January 1, 2003, was sold for
120,000. 10. What is the total amortization expense on the patent for the year?

d. On June 2, 2007, the company purchased a new automobile for 920,000 cash and a. 87,500 b. 105,000 c. 109,375 d. 102,735
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.
You were assigned to audit the financial statements of NORTHERN LUZON MINING CORP.
e. An extensive work was done to the five-year old building during the year end was
for the year ended December 31, 2007. The company started its operation in 2005 when it
completed by the end of August. The total cost of the work done amounted to
acquired an undeveloped mine property at a total acquisition price of P15,000,000,
500,000 which consisted the following:
P1,500,000 of which was attributed to the land. The company incurred exploration and
Repainting of ceilings and walls 50,000 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
Routinary repairs 150,000 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
Major electrical work 300,000 were accounted for as separate depreciable property and equipment:

Buildings 4,500,000
 Developmental excavation 1,200,000 Direct labor P3,675,000

Mining equipment 6,000,000 Overhead costs, excluding depreciation P3,150,000

It was estimated that the property contains 10M tons of mineral reserves after which Other operating expenses, excluding depreciation P1,575,000
P800,000 is expected to be incurred to restore the land to a sellable condition (it is the
company’s practice to deduct this amount from the residual value of the mine property in Using the information above and as a result of your audit, answer the following:
computing for the depletion).
11. What is the correct depletion on 2006?
The company reported the following information in its 2006 financial statements after 1 year
a. 1,719,000 b. 1,827,000 c. 1,910,000 d. 2,100,000
of mine operations:

Mine inventory, 200,000 tons 1,916,667

12. What is the correct net income in 2006?
Mine property 19,800,000
a. 4,136,000 b. 4,152,667 c. 4,175,000 d. 4,210,667
Accumulated depletion 1,719,000

Property and equipment 11,700,000

13. What is the correct inventory at the beginning of 2007?
Accumulated depreciation- building 300,000
a. 1,950,667 b. 1,936,667 c. 1,928,000 d. 1,924,000
Accumulated depreciation- developmental excavation 120,000

Accumulated depreciation- mining equipment 1,000,000

14. What is the correct net income in 2007?
Accumulated profits 4,256,667
a. 4,261,400 b. 4,092,200 c. 3,718,800 d. 2,618,200

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 15. What is the maximum dividends the company can distribute in 2007?
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 a. 11,620,760 b. 11,247,360 c. 10,456,500 d. 10,146,760
are entirely charged to production. The company is yet to declare or distribute any dividends
to shareholders. BLT

The operations of the company for the current year are summarized as follows: 1. 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
Tons mined 940,000 tons contract perfected?
a. No, because there is qualified acceptance which constitutes an offer by the
Tons sold 952,000 tons
buyer.
Selling price per ton P15.00/ton b. Yes, there is perfected sale because the number of pieces is only incidental
matter in the sale.
 c. Yes, because the letter of acceptance was already sent by the offeree. c. It is voidable sale if he fails to receive the property he expected to receive from
d. No, because there is no offer yet of A that is certain. his father.
d. It is void for future inheritance cannot be sold.
2. Statements:
If one of the parties at the time of making the offer or acceptance was already 6. A promised to give B a car reward after B has killed C. later, after the killing, the
was already insane the contract is voidable. contract was changed to a lease of a big house for a certain period.
If before the acceptance is conveyed to the offerer, either of the parties The contract of lease is:
becomes insane, the contract is void, that is, the offer is noneffective. a. Void
a. Both statements are incorrect. b. Unenforceable
b. Both are correct. c. Voidable
c. First is correct, second is incorrect. d. Rescissible
d. Second is correct, first is incorrect.
7. S orally sold to B a parcel of land for which the latter paid P1M. B now wants to
3. A, a minor sold to B a parcel of land registered in his name misrepresenting to the register the sale so that he can have a Transfer Certificate of Title in his name.
latter that he is of legal age. Having been misled as to the true age of A, B entered Decide.
into the contract. Is the contract voidable? a. S cannot be compelled to execute the public document of sale
a. It is voidable because the seller is a person incapable of giving consent to a b. S can be compelled to execute the public the public document of sale because
contract being a minor. the sale is enforceable.
b. It is voidable because of mistake on the part of B when he thought that A was of c. The sale is void and therefore cannot be registered.
legal age. d. S cannot be compelled to execute the public document of sale because the sale
c. It is not voidable but rather void because of lack of consent of A who is onli a is voidable.
minor without capacity to enter into contracts.
d. It is not voidable because of the fraud committed by the minor seller and the 8. S orally leased to R his parcel of land for a term of two years. The contract is:
buyer being in good faith. a. Rescissible
b. Voidable
4. A, a director of X corporation , through an agent bought the shares of stocks of c. Unenforceable
another stockholder without revealing to the seller stockholder that negotiations d. Void
were in progress to enhance the value of the shares. The sale is defective contract
being: 9. Statement 1. A person , refuse to pay on the ground that he will not receive a
a. Void, because of fraud committed by A against the other stockholder. benefit from the tax.
b. Voidable because the mistake on the part of the seller-stockholder.
Statement 2. A person may not refuse to pay a tax on the ground that it is confiscatory of
c. Rescissible because of the damage suffered by the seller. his property.
d. Voidable due to the fraud concealment by A against a fellow stockholder. a. The first statement is true while the second statement is false;
b. The first statement is false while the second statement is true:
5. While his father was still alive, A sold to B the property he (A) expected to receive c. Both statements are true;
from his father. Is the contract defective? d. Both statements are false.
a. It is completely valid contract because the seller is compulsory heir.
10. Taxes must be for public purpose means that:
b. It is valid for there can be sale of future things and what A sold is future a. Taxes must be raised from the public;
property. b. Taxes should be used for recognized public needs benefiting a community;
c. Power of taxation should government be exercised by the legislature;
d. Relationship of the government and the governed must be transparent and
democratic. How much is the common carrier’s tax payable?
a. 17, 760 b. P 8,400 c. P8,760 d.
11. Exemption from tax is a privilege, which is being looked upon by law with disfavor P17,400
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.

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

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
From the garage 12,000