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CEBU CPAR CENTER

FIIRST COMPREHENSIVE EXAMINATION
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THEORY
Select the best answer from the choices given.
1. The ASC framework
a. Sets out the concepts that underlie the preparation and presentation of financial statements
for internal users.
b. Is a Philippine Accounting Standard that defines standards for a particular measurement or
disclosure issue.
c. Is concerned with special purpose reports, for example, prospectuses and computations
prepared for taxation purposes.
d. Applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public or private sector.
2. Which statement is incorrect concerning the recognition principles?
a. An asset is recognized when it is probable that future economic benefits will flow to the
enterprise and the asset has a cost or value that can be measured reliably.
b. A liability is recognized when it is possible that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation that can measured
reliably.
c. Income is recognized when an increase in future economic benefits related to an increase
in asset or a decrease in liability has arisen that can be measured reliably.
d. Expenses are recognized when a decrease in future economic benefits related to an
decrease in asset or an increase in liability has arisen that can be measured reliably.
3. Information about economic resources controlled by the enterprise and its capacity to modify
these resources is useful in predicting the
a. Ability of the enterprise to meet its financial commitments in the near term.
b. Ability of the enterprise to generate cash and cash equivalents in the future.
c. Ability of the enterprise to meet its financial commitments over a longer term.
d. Future borrowing needs and how future profits and cash flows will be distributed among
interested users.
4. Events after the balance sheet date are the events, both favorable and unfavorable, that occur
between the balance sheet date and the date
a. When the audit report is authorized for issue.
b. When financial statements are authorized for issue.
c. When financial statements are issued.
d. When the audit report is issued.
5. The following statements relate to cash. Which statement is true?
a. The term cash equivalent refers to demand credit instruments such as money order and
bank drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all
normal operating expenses for a period of time.
c. Restricted cash balance should be presented as noncurrent asset.
d. Compensating balances required by a bank may be included in cash and cash equivalent.
6. Lapping is
a. Making the financial statements indicate a more favorable position by giving effect to
transactions is a period other than that in which these actually occurred.
b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the
accounting period a check drawing on one bank account in another bank account without
making the necessary deduction in the balance of the first bank.
c. An irregularity that conceals cash shortages by a delay in recording cash collections,
retaining a customer's payment on credit sales and covering up the shortage with subsequent
cash receipts.
d. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts.

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7. 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. Outstanding checks
b. Bank charges not yet recorded by the company
c. Deposits in transit
d. Deposits credited by the bank but not yet recorded by the company
8. Which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of the
fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.
9. In the case of long-term installments receivable (real estate installment sales) where a major
portion of the receivables will be collected beyond the normal operating cycle
a. The entire receivables are classified as noncurrent
b. Only the portion currently due is classified as current and the balance as noncurrent
c. The entire receivables are classified as current with disclosure of the amount not currently
due
d. The entire receivables are classified as current without disclosure of the amount not
currently due
10. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as a
a. quantity discount.
b. cash discount.
c.
trade discount.
d. size discount.
11. When the allowance method of recognizing bad debt expense is used, the entry to record the
write-off of a specific uncollectible account would decrease
a. Allowance for doubtful accounts.
c. Net realizable value of accounts receivable.
b. Net income.
d. Working capital.
12. At the beginning of 2003, Finney Company received a three-year interest-bearing P1,000,000
trade note. Finney reported this note as a P1,000,000 trade note receivable on its 2003 yearend statement of financial position and P1,000,000 as sales revenue for 2003. What effect did
this accounting for the note have on Finney's net earnings for 2003, 2004, 2005, and its
retained earnings at the end of 2005, respectively?
a. Overstate, overstate, understate, no effect
b. Overstate, understate, understate, no effect
c. Overstate, understate, understate, understate
d. No effect, no effect, no effect, no effect
13. Which of the following items should be excluded from a companys inventory at the balance
sheet date?
a. Goods in transit which were sold FOB destination.
b. Goods delivered to another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the
customers convenience.
d. Goods in transit which were purchased FOB shipping point.
14. The original cost of an inventory item
value. The net realizable value less
inventory item should be valued at
a. Replacement cost
b. Net realizable value

is above both the replacement cost and net realizable

normal profit margin is below the original cost. The
c. Net realizable value less normal profit margin
d. Original cost

15. Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.
16. Which statement is false concerning merchandising operations?
a. Cash discounts are normally reflected in the financial records but trade discounts are not.

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b. A major difference between the financial statements of service firms and merchandising
firms is the inclusion of cost of goods sold in the income statement of a merchandising firm.
c. The terms freight prepaid and freight collect designate the party who is to bear the
transportation cost.
d. A firm using a periodic inventory system determines its inventory only at the end of the
period.
17. A financial instrument is any contract that gives rise to
a. A financial asset of one entity and a financial liability or equity instrument of another entity.
b. A financial asset only.
c. A financial liability only.
d. A financial asset of one entity and a financial liability of another entity only.
18. Which statement is incorrect regarding compound financial instruments
a. Compound instruments have both a liability and an equity component from the investors
perspective.
b. The component parts should be accounted for and presented separately according to their
form based on the definitions of liability and equity.
c. The split is made at issuance and not revised for subsequent changes in market interest
rates, share prices, or other event that changes the likelihood that the conversion option will
be exercised.
d. When the initial carrying amount of a compound financial instrument is required to be
allocated to its equity and liability components, the liability component is assigned the
residual amount after deducting from the fair value of the instrument as a whole the amount
separately determined for the equity component.
19. Characteristic(s) common to all joint ventures include
a. Two or more venturers are bound by a contractual arrangement.
b. The contractual arrangement establishes joint control.
c. The use of proportionate consolidation.
d. Both a and b.
20. Investment property excludes
a. Land held for long-term capital appreciation.
b. Building leased out under an operating lease.
c. Property that is being redeveloped for continuing use as investment property.
d. Property that is being constructed or developed for use as an investment property.
21. Which statement is correct regarding the application of the equity method of accounting for
investments in associates?
a. The equity investment is initially recorded at cost.
b. The equity investment is increased by the investor's share of the net loss of the associate.
c. Distributions received from the investee increase the carrying amount of the investment.
d. The investor's share of profit or loss of the investee and of changes in the investee's equity
is determined on the basis of total potential ownership interests.
22. Which is incorrect concerning depreciation of PPE?
a. The depreciation method used should reflect the pattern in which the asset's economic
benefits are consumed by the enterprise.
b. The depreciation method should be reviewed at least annually and, if the pattern of
consumption of benefits has changed, the depreciation method should be changed
currently and prospectively as a change in estimate.
c. Depreciation should be charged to the income statement, unless it is included in the
carrying amount of another asset.
d. Depreciation begins when the asset is available for use and continues until the asset is
derecognized and became idle.
23. Which is correct concerning residual value of PPE?
a. The carrying value of an asset is the estimated amount an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.
b. The residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, any change is
accounted for prospectively as a change in policy.

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c. Depreciation is not recognized if the fair value of the asset exceeds its carrying amount,
even if the assets residual value does not exceed its carrying amount.
d. The residual value of an asset may increase to an amount equal to or greater than the
assets carrying amount.
24. Which is incorrect concerning the revaluation model of measuring PPE subsequent to initial
recognition?
a. If a revaluation results in an increase in value, it should be credited to equity under the
heading "revaluation surplus".
b. If a revaluation results in an increase in value and it represents the reversal of a revaluation
decrease of the same asset previously recognized as an expense, it should be recognized
as income.
c. A decrease arising as a result of a revaluation should be recognized as an expense to the
extent that it exceeds any amount previously credited to the revaluation surplus relating to
the same asset.
d. When a revalued asset is disposed of, any revaluation surplus should be transferred
directly to retained earnings; it cannot be left in equity under the heading revaluation
surplus.
25. Borrowing cost does not include
a. Amortization of discount/premium on bonds payable.
b. Amortization of bond issue costs.
c. Actual cost of equity capital.
d. Foreign exchange differences that are regarded as an adjustment of interest cost.
26. Which statement is incorrect regarding accounting for government grants?
a. A government grant is recognized only when there is reasonable assurance that the
enterprise will comply with any conditions attached to the grant and the grant will be
received.
b. The grant is recognized as income over the period necessary to match them with the
related costs, for which they are intended to compensate, on a systematic basis, and
should not to be credited directly to equity.
c. Non-monetary grants, such as land or other resources, are usually accounted for at fair
value, although recording both the asset and the grant at a nominal amount is also
permitted.
d. If there are no conditions attached to the assistance specifically relating to the operating
activities of the enterprise (other than the requirement to operate in certain regions or
industry sectors), such grants should be credited to equity.
27. Which statement is correct concerning the reversal of an impairment loss?
a. The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognized.
b. Reversal of an impairment loss is not recognized.
c. Adjust depreciation retrospectively.
d. Reversal of an impairment loss for goodwill is recognized as income in the income
statement.
28. Which is correct concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price,
including import duties and taxes and any directly attributable expenditure of preparing the
asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is
based on its carrying value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the asset is
not recognized.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal
to the total payments over the credit period.
29. Which statement is incorrect regarding recognition of intangible assets?
a. An intangible asset should be recognized if, and only if, it is probable that the future
economic benefits that are attributable to the asset will flow to the enterprise; and the cost
of the asset can be measured reliably.
b. The recognition criteria apply only to intangible assets generated internally.

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c. The probability of future economic benefits must be based on reasonable and supportable
assumptions about conditions that will exist over the life of the asset.
d. The probability recognition criterion is always considered to be satisfied for intangible
assets that are acquired separately or in a business combination.
30. Which statement is incorrect concerning internally generated intangible asset?
a. To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into a research phase and a
development phase.
b. The cost of an internally generated asset comprises all expenditure that can be directly
attributed or allocated on a reasonable and consistent basis to creating, producing and
preparing the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.

PROBLEMS
1. The following data pertain to Encantadia Corporation on December 31, 2005:
Metrobank current account no. 1
Metrobank current account no. 2
Payroll account
Foreign bank account restricted (in equivalent pesos)
Postage stamps
Employees post dated check
IOU from controllers sister
Credit memo from a vendor for a purchase return
Travelers check
Not-sufficient-funds check
Money order
Petty cash fund (P4,000 in currency and expense receipts for
P6,000)
Treasury bills, due 3/31/06 (purchased 12/01/05)
Treasury bills, due 1/31/06 (purchased 1/1/05)

P1,000,000
(100,000)
500,000
1,000,000
1,000
4,000
10,000
20,000
50,000
15,000
30,000
10,000
200,000
300,000

Based on the above information, compute for the cash and cash equivalent that would
be reported on the December 31, 2005 balance sheet.
a. P1,784,000
c. P1,684,000
b. P1,484,000
d. P1,704,000
2. Adamya Corporations checkbook balance on December 31, 2005 was P8,000,000.
The same date Adamya held the following items in its safe:
A P150,000 check payable to Adamya, dated January 4, 2006, that was included in the
December 31, checkbook balance.
A P200,000 check payable to Adamya, deposited on December 10 and recorded on the
same date, that was returned by the bank on December 22 marked NSF. The check
was redeposited December 27, 2005, and cleared December 30, 2005. No entry has
been made by Adamya for the receipt and the redeposit.
A P500,000 check payable to a supplier and drawn on Adamyas account, that was
dated and recorded December 31, 2005 but not mailed until January 10, 2006
In its December 31, 2005 balance sheet, Adamya should report cash at
a. P8,700,000
c. P8,350,000
b. P8,550,000
d. P8,150,000
3. Sapiro Company provided the following data for the purpose of reconciling the cash
balance per book with the balance per bank statement on December 31, 2005:
Balance per bank statement
Outstanding checks (including certified checks of P100,000)

2,000,000
500,000

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Deposit in transit
December NSF checks
Proceeds of note collected by the bank for Sapiro,
net of service charge of P20,000
Erroneous bank debit to Sapiros account, representing
a withdrawal of Siparo Company

200,000
150,000
750,000
300,000

What was the cash balance per book on December 31, 2005?
a. P 900,000
c. P1,150,000
b. P1,500,000
d. P1,200,000
4. The LIREO Corporation started its business on January 1, 2005. After considering the
collections experience of other companies in the industry, LIREO Corporation
established an allowance for bad debts estimated to be 5% of credit sales.
Outstanding receivables recorded in the books of accounts on December 31, 2005
totaled P575,000, while the allowance for bad debts account had a credit balance of
P62,500 after recording estimated doubtful account expense for December and after
writing off P12,500 of uncollectible accounts.
Further analysis of the companys accounts showed that merchandise purchased in
2005 amounted to P2,250,000 and ending merchandise inventory was P375,000.
Goods were sold at 40% above cost.
80% of total sales were on account. Total collections from customers, on the other
hand, excluding proceeds from cash sales, amounted to P1,500,000.
The net realizable value of accounts receivable as of December 31, 2005 is
a. P495,000
c. P512,500
b. P993,750
d. P875,000
5. Hathoria Company began operations on January 1, 2004. On December 31, 2004,
Hathoria provided for uncollectible accounts based on 5% of annual credit sales. On
January 1, 2005, Hathoria changed its method of determining its allowance for
uncollectible accounts by applying certain percentages to the accounts aging as
follows:
Days past invoice date
0 30
31 90
91 -180
Over 180

Percent deemed to be
uncollectible
5%
10%
20%
50%

In addition, Hathoria wrote off all accounts receivable that were over 1 year old. The
following additional information relates to the years ended December 31, 2005 and
2004:
Credit sales
Collections (excluding collections on recovery)
Accounts written off
Recovery of accounts previously written off

2005
10,000,000
8,500,000
300,000
80,000

2004
8,000,000
6,000,000
200,000
50,000

Days past invoice date at December 31

0 to 30
31 to 90
91 to 180
Over 180

1,800,000
600,000
400,000
200,000

800,000
500,000
400,000
100,000

What is the provision for uncollectible accounts for the year ended December 31,
2005?
a. P250,000
c. P330,000
b. P300,000
d. P380,000

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6. On December 1, 2005 Pirena Company assigned on a nonnotification basis accounts

receivable of P10,000,000 to a bank in consideration for a loan of 90% of the
receivables less a 5% service fee on the accounts assigned. Pirena signed a note for
the bank loan. On December 31, 2005, Pirena collected assigned accounts of
P6,000,000 less discount of P400,000. Pirena remitted the collections to the bank in
partial payment for the loan. The bank applied first the collection to the interest and the
balance to the principal. The agreed interest is 1% per month on the loan balance. In
its December 31, 2005 balance sheet, Pirena should report note payable as a current
liability at
a. P4,500,000
c. P3,090,000
b. P3,400,000
d. P3,490,000

7. The following pertains to the notes receivable of Amihan Corporation for the calendar
year 2005:
Notes Receivable
Date
Particulars
Debit
Credit
Sept. 1
Michelle, 21%, due in 3 months
P320,000
1
Discounted Michelle note
P320,000
Oct. 1
Mabelle Co., 24%, due in 2 months
1,200,000
Nov. 1
Eleanor, 24%, due in 13 months
2,400,000
30
Rigby Co., no interest, due in one year
2,000,000
30
Discounted Rigby Co. note
2,000,000
Dec. 1 Sgt. Pepper, 18%, due in 5 months
3,600,000
1
Ms. Anna, President, 12%, due in 3 months
(For cash loan given to Ms. Anna)
4,800,000
All notes are trade notes receivable unless otherwise specified. The Michelle note was
paid on December 1 as per notification received from the bank. The Mabelle Co. note
was dishonored on the due date but the legal department has assured management of
its full collectibility.
At what amount on the current assets section of the balance sheet as of December 31,
2005 will Notes Receivable-trade be carried?
a. P3,600,000
c. P7,200,000
b. P6,000,000
d. P8,000,000
8. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, in
exchange for an P800,000 non-interest bearing note due on April 1, 2007. The note
had no ready market, and there was no established exchange price for the equipment.
The prevailing interest rate for a note of this type at April 1, 2005, was 12%. The
carrying value of the note receivable on December 31, 2005 is
a. P800,000
c. P694,984
b. P620,864
d. P714,112
9. On October 15, 2005, Danaya Company purchased goods costing P4,500,000. The
freight term is FOB Destination. Some of the costs incurred with the sale and delivery
of the goods were:
Packaging for shipment
Shipping
Special handling charges

200,000
200,000
100,000

These goods were received on October 17, 2005. What amount of cost for these
goods should be included in Danayas inventory?
a. P4,500,000
c. P4,700,000
b. P4,900,000
d. P5,000,000

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10. The physical count conducted in the warehouse of Imaw Company on December 31,
2005 revealed merchandise with a total cost of P3,600,000 was on hand on that date.
However the following items were excluded from the count:
Goods sold to a customer, which are being held for the customer to call for at the
customers convenience with a cost of P200,000.
A packing case containing a product costing P80,000 was standing in the shipping
room when the physical inventory was taken. It was not included in the inventory
because it was marked hold for shipping instructions. Your investigation revealed
that the customers order was dated December 20, 2005, but that the case was
shipped and the customer billed on January 10, 2006.
Merchandise held by Finishing Company costing P300,000 for further processing
and packaging.
The correct amount of inventory that should be reported in Imaw Companys balance
sheet at December 31, 2005 is
a. P4,180,000
c. P3,880,000
b. P3,980,000
d. P4,100,000
11. The records of Awoos Wholesale and Retail Store report the following data for the
month of January 2005:
Beginning inventory at cost
860,000
Net Additional mark up
425,000
Purchases at cost
6,550,000
Net Mark down
750,000
Freight on purchases
150,000
Sales
9,450,000
Purchase returns at cost
360,000
Sales discounts
400,000
Beginning inventory at sales price
1,200,000
Employee discounts
300,000
Purchase returns at sales price
525,000
Theft and breakage
150,000
Initial mark up on purchases
4,350,000
Using the average retail inventory method, Awoos cost of sales is
a. P6,390,000
c. P6,080,000
b. P6,150,000
d. P6,336,000
12. A physical inventory taken on December 31, 2005 resulted in an ending inventory of
P1,440,000. Banak Company suspects some inventory may have been taken by
employees. To estimate the cost of missing inventory, the following were gathered:
Inventory, Dec. 31, 2004
Purchases during 2005
Cash sales during 2005
Shipment received on December 26, 2005, included in physical
inventory, but not recorded as purchases
Deposits made with suppliers, entered as purchases. Goods
were not received in 2005
Collections on accounts receivable, 2005
Accounts receivable, January 1, 2005
Accounts receivable, December 31, 2005
Gross profit percentage on sales

P1,280,000
5,640,000
1,400,000
40,000
80,000
7,200,000
1,000,000
1,200,000
40%

At December 31, 2005 what is the estimated cost of missing inventory?

a. P200,000
c. P1,000,000
b. P160,000
d. P
0
13. Nakba Company installs replacement siding, windows, and louvered glass doors for
family homes. At December 31, 2005, the balance of raw materials inventory account
was P502,000, and the allowance for inventory writedown was P33,000. The inventory
cost and market data at December 31, 2005, are as follows:
Cost

Aluminum siding

Replacement
Cost

Sales
Price

Net
Realizable
value

Normal
Profit

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Mahogany siding
Louvered glass
door
Glass windows
Total

89,000
94,000

86,000
92,000

91,500
93,000

87,000
85,000

5,000
7,000

125,000
194,000
502,000

135,000
114,000
427,000

129,000
205,000
518,500

111,000
197,000
480,000

10,000
20,000
32,000

The loss on inventory write down is

a. P 8,000
b. P25,000

c. P11,000
d. P
0

14. Hagorn Company purchased 10,000 shares of Dinky Company P100 par value
common stock for P1,200,000 to be held as available for sale securities. On March 1,
2005, Hagorn received a 20% stock dividend. On June 1, 2005, Hagorn sold all the
stock dividends that were received on March 1 at P130 per share. The gain on sale of
investment be recorded by Hagorn is
a. P260,000
c. P200,000
b. P 20,000
d. P 60,000
15. On January 1, 2004, Agana Company acquired trading securities with the following
market value on December 31, 2004:
X
Y
Z
Total

Cost
4,000,000
2,000,000
5,000,000
11,000,000

Market Value
3,700,000
1,800,000
4,500,000
10,000,000

Agana sold Security Z Sept 15, 2005 for P4,800,000, while the remaining securities on
December 31, 2005 had market values of P4,200,000 for Security X and P2,300,000
for Security Y. The unrealized gain to be recognized Aganas income statement on
December 31, 2005 is
a. P300,000
c. P1,500,000
b. P500,000
d. P1,000,000
16. On July 1, 2005, Mila Company purchased as a long term investment 50,000 shares of
Lucky Corporation common stock for P80 per share. This purchase represents a 2%
interest in Lucky. On August 1, 2005, Lucky Corporation declared its annual dividend
on its common stock of P10 per share payable on September 10 to stockholders of
record at August 31, 2005. A retirement of an issue of Milas serial bonds payable on
August 25, 2005 required additional working capital and Mila sold all 50,000 shares of
Luckys stock for P5,200,000 including the accrued dividend. For the year ended
December 31, 2005, the gain on disposal to be reported by Mila on this transaction
should be
a. P 200,000
c. P500,000
b. P1,200,000
d. P700,000
17. Mira Company received dividends from its common stock investments during the year
2005 as follows:
a. A stock dividend of 20,000 shares from A Company when the market price of As
shares was P30 per share.
b. A cash dividend of P2,000,000 from B Company in which Mira owns a 20%
interest.
c. A cash dividend of P500,000 from C Company in which Mira owns a 10% interest.
d. 10,000 shares of common stock of D Company in lieu of cash dividend of P20 per
share. The market price of D Companys shares was P180. Mira holds originally
100,000 shares of D Company common stock. Mira owns 5% interest in D
Company.
What amount of dividend revenue should Mira report in its 2005 income statement?
a. P2,500,000
c. P2,300,000

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b. P4,300,000

d. P 500,000

18. On January 2, 2004, Aquil Company purchased 10,000 shares of P100 par value
common stock of Diwata Corporation at P110 per share. The Diwata Corporation was
expanding and on March 2, 2005 it issued stock rights to its stockholders. Each right
entitles Aquil to purchase one fourth () share of common stock at par. The market
value of the stock on that date was P140 per share. There was no quoted price for the
rights. On April 2, 2005, Aquil exercised all its stock rights. What is the total cost of the
shares acquired on April 2, 2005?
a. P323,333
c. P312,857
b. P250,000
d. P350,000
19. On January 1, 2004 Eugenie Company bought 15% of Celie Corporation common
stock for P5,000,000. During 2004, Celie reported net income of P3,000,000 and paid
no dividends on its common stock. In 2005 Celie reported net income of P5,000,000
and paid a total amount of P10,000,000 as dividends to common stockholders.
Changes in fair value of Celie were insignificant during both years. In its income
statement for the year ended December 31, 2005, how much should Eugenie report as
income from this investment?
a. P1,500,000
c. P750,000
b. P1,200,000
d. P450,000
20. On January 1, 2005 Maria Company purchased 30% interest in Venus Company for
P5,000,000. On this date Venus stockholders equity was P10,000,000. The carrying
amounts of Venus identifiable net assets approximated their fair values, except for land
whose fair value exceeded its carrying amount by P4,000,000. Any implied goodwill
has an indefinite life. Venus reported net income of P3,000,000 for 2005 and paid
dividends of P1,000,000. Maria accounts for this investment using the equity method.
In its December 31, 2005 balance sheet, what amount should Maria report as
investment in associate?
a. P5,560,000
c. P5,500,000
b. P5,600,000
d. P5,540,000
21. On December 31, 2005, Frankie Company purchased as a long-term investment
P10,000,000 face amount, 10% bonds of Love Joy Corporation to yield 8% per year.
The bonds mature on January 1, 2010 and pay interest semiannually on June 30 and
December 31. The relevant present value factors are as follows:
The carrying amount of this investment on December 31, 2005 is
a. P10,872,000
c. P9,189,000
b. P10,811,000
d. P9,128,000
22. The following accounts appear in the adjusted trial balance of Vicky Company on
December 31, 2005:
Petty cash fund
Change fund
Bond sinking fund securities
Preferred redemption fund securities
Dividend receivable-sinking fund securities
Plant expansion fund
Cash surrender value
Investment property
Advances to subsidiary
Held to maturity securities
Treasury notes purchased 1 year ago, maturing on May 1, 2006

20,000
150,000
1,000,000
1,500,000
100,000
400,000
120,000
1,200,000
600,000
2,100,000
750,000

How much should be reported as long term investments on December 31, 2005?
a. P6,920,000
c. P7,070,000
b. P7,020,000
d. P7,820,000

Page 11 of 14

23. Eternal Company acquired an equipment on January 1, 2005. The asset has an
estimate useful life of 5 years. An employee has prepared a depreciation schedule for
this equipment using two methods, sum-of-years digit method and double declining
balance method, as follows:
Sum-of-years digit
Double declining
2005
3,000,000
4,000,000
2006
2,400,000
2,400,000
2007
1,800,000
1,440,000
2008
1,200,000
864,000
2009
600,000
296,000
What is the acquisition cost of the equipment?
a. P9,500,000
b. P9,000,000

c. P10,000,000
d. 10,500,000

24. The following expenditures were incurred by Gina Company in 2005:

Purchase of land
Land survey
Fees for title search of title for land
Building permit
Temporary quarters for construction crew
Payments of tenants of old building for vacating the premises
Payment to demolition company to raze the old building and clean up
Excavating basement
Special assessment tax for street project
Salvage value of materials from old building retained
by the demolition company
Damages awarded for injuries sustained in construction
Costs of construction
Cost of paving parking lot adjoining the building
Cost of shrubs, trees and other landscaping
The total costs to be capitalized as land is
a. P11,610,000
b. 11,730,000

10,000,000
500,000
200,000
250,000
100,000
600,000
400,000
350,000
60,000
150,000
90,000
20,000,000
180,000
40,000

c. P11,800,000
d. P11,650,000

25. Joan Company acquired a machine on March 1, 2003 for P8,000,000. The machine
has a 10 year useful life and a P500,000 residual value, and was depreciated using the
straight-line method. Joan records a full years depreciation on the year of an assets
acquisition and no depreciation on the year an asset is disposed of. On December 31,
2004 the machine had a significant decline in its market value. A test for recoverability
revealed the expected net future undiscounted cash flows related to the continued use
and eventual disposal of the machine total P7,200,000. The machines fair value on
December 31, 2004 is P6,000,000 with no salvage value while the discounted future
cash flows amounts to P6,600,000. On December 31, 2005, the machine should have
a carrying value of
a. P5,687,500
c. P5,750,000
b. P5,775,000
d. P5,250,000
26. In 2004, The Young Mining Company purchased property with natural resources for
P29,000,000. The property was relatively close to a large city and had an expected
residual value of P4,000,000. However P2,000,000 will have to be spent to restore the
land for use. The following information relates to the use of the property:

In 2004,Young spent P3,000,000 in development costs and P1,500,000 in buildings

on the property. Young does not anticipate that the buildings will have any utility
after the natural resources are depleted. The original estimated output is 5,000,000
tons.

Page 12 of 14

In 2005 and additional P2,400,000 were spent for additional developments on the
mine.
The tonnage mined and estimated tons remaining for years 2004 and 2005 are as
follows:
Year
2004
2005

Tons extracted
1,500,000
1,200,000

Estimated tons
remaining
3,500,000
1,800,000

The depletion recorded by Young Company in 2005 is

a. P8,400,000
c. P9,360,000
b. P7,200,000
d. P5,616,000
27. Essel Company uses the composite method of depreciation and has a composite rate
of 20%. During 2005, it sold assets with an original cost of P500,000 and a residual
value of P100,000 for P300,000 and eventually acquired P400,000 of new assets with
a residual value of P40,000. Information regarding the original group of assets as of
January 1, 2005 is presented below:
Total cost
Total residual value
Accumulated depreciation

5,000,000
800,000
1,000,000

What was the depreciation expense recorded by Essel Company in 2005?

a. P1,000,000
c. P832,000
b. P 632,000
d. P980,000
28. On January 1, 2003, Tulsa Company purchased a machine for P10,560,000 and
depreciated it by the straight line method using an estimated life of ten years with no
residual value. On January 1, 2005, Tulsa determined that the machine had a useful
life of eight years from the date of acquisition and will have a residual value of
P450,000. An accounting change was made in 2005 to reflect this additional
information. The accumulated depreciation for this machine should have a balance at
December 31, 2005 of
a. P3,445,000
c. P3,055,000
b. P3,168,000
d. P3,033,000
29. Ursula Mathey Company incurred the following costs during 2005 in connection with its
research and development activities:
Cost of equipment acquired that will have alternative uses in future
research and development projects over the next five years
(straight-line depreciation)
Materials consumed in research and development projects
Consulting fees paid to outsiders for research and
development projects
Personnel costs of persons involved in research and
development projects
Indirect costs reasonably allocable to research and
development projects
Materials purchased for future research and development projects

600,000
150,000
250,000
80,000
220,000
300,000

The amount to be reported by Ursula as research and development expense on its

income statement for 2005 is
a. P720,000
c. P1,600,000
b. P820,000
d. P1,120,000
30. Kula Company has the following information as of January 1, 2005 on its property plant
and equipment account:
Land
Buildings and improvements

30,000,000
250,000,000

Page 13 of 14

Less: Accumulated depreciation

Net book value

. 62,500,000
217,500,000

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

on the straight-line method over 20 years for buildings and improvements. On January
1, 2005, all of Kulas property, plant and equipment were appraised as follows:
Replacement cost
Land
Buildings and improvements

50,000,000
400,000,000

As a result of the appraisal, the buildings and improvements were also determined to
have a revised useful life of 25 years. What is the revaluation surplus that will appear
in Kulas stockholders equity on December 31, 2005?
a. P132,500,000
c. P145,875,000
b. P125,000,000
d. P126,875,000
31. Lovable Corporation is considering the purchase of Adorable Company, whose balance
sheet as of December 31, 2005 is summarized as follows:
Current assets
Fixed assets (net)
Other assets
Total

800,000
1,100,000
700,000
.
.
2,600,000

Current liabilities
Long-term liabilities
Common stock
Retained earnings
Total

600,000
700,000
850,000
450,000
2,600,000

The fair market value of the current assets is P1,100,000 because of the
undervaluation of inventory. The normal rate of return on the net assets for the industry
is 15% and the average expected annual earnings for Adorable Company is P300,000.
Assuming that the excess earnings continue for the next five years and Lovable follows
the years multiple of excess earnings approach of computing goodwill, how much
would Lovable be willing to pay for the net assets of Adorable?
a. P1,900,000
c. P2,125,000
b. P2,000,000
d. P2,300,000
32. Arvak Company owns 50% of Sarrat Companys preferred stock and 30% of its
common stock. Sarrats stock outstanding at December 31, 2005 includes P20,000,000
of 10% cumulative preferred stock and P50,000,000 of common stock. Sarrat reported
net income of P10,000,000 for the year 2005. What amount should Arvak report as
investment income for the year 2005?
a. P3,000,000
b. P3,400,000

c. P2,400,000
d. 4,400,000

33. On January 1, 2005, Armeo Company purchased as a long-term investment

P5,000,000 face value of 8% bonds for P4,562,000. The bonds were purchased to
yield 10% interest. The bonds pay interest annually December 31. Armeo uses the
interest method of amortization. What amount (rounded to the nearest P100) should
Armeo report on its December 31, 2005 balance sheet for this long-term investment?
a. P4,680,000
c. P4,662,000
b. P4,618,000
d. 4,562,000
34. On January 1, 2001 Apitong Company purchased P8,000,000 ordinary life policy on its
president. Additional data for the year 2005 are:
Cash surrender value, January 1
Cash surrender value, December 31
Annual advance premium paid on January 1, 2005
Dividend received on July 1, 2005

200,000
240,000
400,000
20,000

Apitong Company is the beneficiary under the life insurance policy. Apitong should
report life insurance expense for 2005 at
a. P400,000
c. P360,000

Page 14 of 14

b. P340,000

d. P380,000

35. On January 1, 2005, Ynang Reyna Company received a grant of P50 million from the
British government in order to defray safety and environmental costs within the area
where the enterprise is located. The safety and environmental costs are expected to
be incurred over four years, respectively, P4 million, P8 million, P12 million and P16
million.
How much income from the government grant should be recognized in 2005?
a. P50,000,000
c. P12,500,000
b. P 5,000,000
d. P
0
- end of examination Good Luck