7th PYLON CUP

1. (MAS) The expected annual dividend one year from today is P2.50 for a share of stock priced at
P25. What is the cost of equity if the constant long-term growth in dividends is projected to be
8%?

ANSWER: 18%

2. (BLT) On May 1, 2014, Sweden sold to Brazil through a private instrument 20 sacks of corn stored
in Swedens only warehouse. On May 10, Sweden delivered the keys to the warehouse to Brazil.
The delivery of Sweden to Brazil is known as

a. traditiobrevimanu
b. traditio longa manu
c. traditiosymbolica
d. no delivery yet

3. (AT) This procedure for obtaining audit evidence consists of checking the arithmetical accuracy of
source documents and accounting records or of performing independent calculations.

Recalculation

4. (P2) On January 7, 2013, Rey Co acquired a 40% interest in Joanne Co. for P4,800,000. Rey
already held a 25% interest which had been acquired for P1,600,000 but which was valued at
P1,920,000 at January 7, 2013. The fair value of non-controlling interest at January 7, 2013 was
P2,400,000, and the fair value of the identifiable net assets of Joanne Co. was P8,400,000. How
much is the goodwill to be recognized as a result of business combination?

a. P1,260,000
b. P720,000
c. P240,000
d. P0

5. (AP) On November 5, 2014, a Wichita Company truck was in an accident with an auto driven by
Tallahassee. Wichita received notice on January 15, 2015 of a lawsuit for P700,000 damages for
personal injuries by Tallahassee. Wichitas counsel believed it is probable that Tallahassee will be
awarded an estimated amount in the range between P200,000 and P450,000, and no amount is
better estimate of potential liability. The 2014 financial statements were issued on March 11,
2015. What amount of loss should Wichita accrue on December 31, 2014?

ANSWER: P325,000

6. (P1) If the revaluation surplus is P234,000 carrying amount is P1,560,000 on 12/31/13, annual
depreciation P75,000, residual value P360,000. Bought on 10/31/09 available for use on
12/31/09, and has 249.6 months remaining life as of 2014. How much is the current purchase
price on 12/31/13?

ANSWER: P2,139,000
 7. (AP) On January 1, 2015, Lithuania Inc. issued P100,000, 10% 10-year bonds when the market
rate of interest is 8%. The interest is payable on June 30 and December 31. The following
financial information is available:

Sales P300,000
Cost of sales 60% of net
sales
Gross profit ?
Interest expense ?
Depreciation expense 14,500
Other expenses 82,500
Net income ?

What is the gross profit, interest expense and net income, respectively in 2015?

ANSWER: P120,000; P9,069; P13,931

8. (TOA) In presenting an interim statement of financial position as of the first quarter ended March
31, 2015, which of the following statements of financial position should be presented, in
accordance with IAS 34?

a. As of March 31, 2015 only

b. As of March 31, 2015 and December 31, 2014
c. As of March 31, 2015 and March 31, 2014
d. As of March 31, 2015, December 31, 2014 and March 31, 2014
e. Depends on the companys accounting policy

9. (P1) On January 1, 2012, Mat and Ging Company acquired a machine by signing a four-year
lease. The present value of MLP approximates the FV of asset. Mat and Ging Co. is given the
option to buy the machine for P365,000 on December 31, 2015 when the assets market value is
expected to be P1,365,000. The assets useful life is 6 years, at the end of which the assets
residual value is expected to be P95,000. Mat and Ging uses the straight-line method to
depreciate this asset. On Dec. 31, 2015 Mat and Ging failed to exercise the purchase option and
realized a BPO loss of P2,375,000. Find the depreciable cost.

ANSWER:
Loss 2,375,000.00
Option 365,000.00
CV 2,740,000.00
Residual Value (95,000.00)
Remaining Depreciable Cost 2,645,000.00
UL/LT (6 years over 4 years) 1 1/2
Depreciable Cost 3,967,500.00

10. (TOA) A government official disburses government funds beyond the approved budget. The
official may be charged with
 a. Technical malversation
b. Graft and corruption
c. An administrative case
d. Estafa

11. (BLT) A non-voting stock may vote in the following corporate acts, except in the case of

a. Appointing board of directors

b. Merger or consolidation
c. Increasing indebtedness
d. Correct answer not given

12. (P2) Parent A holds stakes in subsidiaries S1 and S2 which both operate in the same industry
sector. Parent A holds a controlling interest in S1 and a 35% interest in in S2. The remaining 65 %
interest in S2 is held by Parent B. S1 is much larger than S2 in terms of market share. Its products
account for a market share of 40% whereas S2 only accounts for 15%. Parent A also holds
options to acquire a further 40% interest in S2 from Parent B. The options are in the money but
the competition authority has stated that it would only permit A to acquire the additional 40%
share in S2 if A disposes of its controlling interest in S1. Who has control over S2? Why?

a. Parent B, because the option of Parent A to purchase additional 40% interest over S2 is not
substantial.
b. Parent A, because the option of Parent A to purchase additional 40% interest over S2 is
substantial.
c. Parent B, because Parent A holds only a protective right and not a substantial right.
d. Parent A, because the option of Parent A to purchase additional 40% interest over S2 in the
money.

13. (P2) Apostolic Realty had a six 1,000-square meter land valued at P3,600 per square meter. The
company incurs land improvements of P1,400,000 in subdividing the land into residential lots.
The land is subdivided into four (4) lots with a total sales price of P6,250,000. For the year 2014,
the following data are available: (Note: Apostolic Realty is a Real Estate Dealer and uses the
Installment Sales Method)

Cost of Sales during the year P4,000,000

Collections during the year including interest of P75,000 3,500,000

The unrealized gross profit at the end of 2014 is __________.

ANSWER: P315,000

14. (MAS) Wein Company is contemplating to acquire Orpilla, Inc. on February 16, 2015. The
information on Orpillas profit and net assets for the last five years is as follows:

Year Profit Net Assets

2014 P4,000,000 P20,200,000
2013 3,200,000 20,000,000
2012 3,800,000 18,500,000
2011 3,000,000 17,900,000
2010 2,500,000 15,600,000

It is agreed that Wein is willing to pay for goodwill measured by capitalizing at 40% excess of the
average profits over normal return on net assets. The normal return on average assets for the
industry to which Orpilla belongs is 10%. The normal return on average assets for Wein is
determined to be 11%. How much should Wein pay to Orpilla in the acquisition of the latters
net assets?

a. P20,200,000
b. P22,080,000
c. P23,379,000
d. P23,840,000
e. P46,100,000

Profit Net Assets

4,000,000.00 20,200,000.00
3,200,000.00 20,000,000.00
3,800,000.00 18,500,000.00
3,000,000.00 17,900,000.00
2,500,000.00 15,600,000.00
Average 3,300,000.00 18,440,000.00
Average profit 3,300,000.00
Normal return (18,440,000 x 10%) (1,844,000.00)
Excess 1,456,000.00
Capitalization rate 0.40
Goodwill 3,640,000.00
Net Assets 20,200,000.00
Total 23,840,000.00

15. (BLT) Who among the following may become an incorporator of a corporation in accordance
with Section 10 of the Corporation Code?

I. Ms. Jessica, 25 years old, a German citizen residing in the Philippines for the past 15 years
but has not been naturalized
II. Mr. Patrick, 19 years old, a Filipino-American living in Vietnam
III. Ms. Daphne, 17 years old, Filipino resident citizen
IV. Finest Corp., a domestic corporation duly registered with SEC
V. Mr. Jansen, 31, a Chinese national living in the Philippines
VI. Mr. Edward, 21, an ethnic Chinese but a Filipino citizen living in the Philippines

16. (P2) Makati Builders, Inc. uses the percentage of completion method of accounting. During 2014,
Makati Builders contracted to build a low-rise building for Nancy Brown Company for P20M. The
 initial estimate of the project costs is P16M. In 2014, Makati Builders incurred P4M and billed
the customer an amount corresponding to the projects percentage of completion.

In 2015, due to increasing prices of construction materials resulting to increase in the estimated
costs to complete the project of P5M.

The amount of inventory to be presented in 2014 Statement of Financial Position in relation to

the foregoing transactions is
a. Zero, since no item above qualifies to be reported as inventory.
b. None, since the net amount of construction in progress and progress billings (5M less 5M) is
zero.
c. P5,000,000
d. P1,000,000

17. (BLT) Determine the correct disposition of the following statements:

I. Azerbaijan Transit, a taxi operator transporting passengers from Manila to any point in
Luzon, is NOT subject to VAT.
II. In a sale of real property on a deferred payment basis, the output VAT is equal to the
proportion of collections (collections/gross selling price) multiplied by the higher of the
gross selling price, fair market value or zonal value multiplied by 12%.

a. I and II True
b. I and II False
c. I True, II False
d. I False, II True

18. (MAS) Regina Company, a merchandising firm, is preparing its master budget and has gathered
the following data to help budget cash disbursements

Budgeted data:
Cost of goods sold P1,660,000
Desired decrease in inventories 70,000
Desired decrease in Accounts Payable 150,000

All of the accounts payable are for inventory purchases and all inventory items are purchased on
account. What are the estimated cash disbursements for inventories for the budget period?

a. P1,400,000
b. P1,600,000
c. P1,740,000
d. P1,900,000
e. Some other amount

19. (P1) Joshua Co. has an equipment costing P700,000 with an estimated residual value 10% of cost
and an estimated useful life of six years. After using and depreciating the asset for two years, the
company upgraded the machine parts. The cost of upgrading amounted to P120,000. Assuming
that the upgrading costs improved the product quality of the assets output, what is the revised
 depreciation expense for the third year using the straight-line method and sum-of-the-years
digits method, respectively?

a. P135,000; P168,000
b. P135,000; P196,000
c. P152,500; P196,000
d. P152,500; P168,000
e. Correct answer not given

20. (AP) The year-end audit of the records of Stamina Farms disclosed a shortage in cash amounting
to P600,000. The treasurer had concealed the fraud by increasing inventories by P300,000, land
by P100,000 and accounts receivable by P200,000.

Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares owned
by him. The board of directors accepted the offer, with the agreement that the treasurer would
pay any deficiency between the shortage and the book value of the shares, after adjusting for
the fraud. The corporation would in turn pay the excess, if any, of the book value over the
shortage.

As of December 31, 2015, there were 40,000 common shares issued and outstanding with a par
value of P100; Retained earnings as of January 1, 2015 was P1,600,000 and net income from
2015 operation was P1,400,000.

What would be the book value per share for purposes of the agreement?

a. P150
b. P175
c. P206
d. None of the above

21. (BLT) For the proceeds of life insurance not to constitute a part of the gross estate

a. Must have been taken out by the decedent upon his life.
b. Must have designated the estate of the decedent as irrevocable beneficiary.
c. Must have designated a third person as, the decedents executor or administrator as the
irrevocable beneficiary.
d. Must have designated a third person other than the estate, the decedents executor or
administrator as irrevocable beneficiary.

22. (TOA) Conceptually, liabilities must be initially measured at __________ and subsequently at
__________.

a. Present value; amortized cost

b. Settlement value; fair value
c. Amortized cost; present value
d. Fair value; settlement value
 23. (MAS) Sparkle Company calculates its contribution margin to be less than zero. Which statement
is true?

a. Its fixed costs are less than the variable costs per unit.
b. Its profits are greater than its total costs.
c. Its selling price is less than its variable costs.
d. The company should sell more units.

24. (P2) During 2013, goods were shipped to the branch at 120% above cost. The reciprocal account
in the income statement of the home office amounted to P237,500. The balance of the contra
branch account reports a balance of P375,000 before adjustment. The beginning inventory of
the branch from the home office at cost is P360,000 and from outsiders, P93,000. The branch
purchased goods from outsiders during the year amounting to P125,200. The ending inventory
of the branch as reported in the combined statement of financial position is P345,000. The
branch income as reported in the combined financial statements and as reported in the branchs
income statement are P201,125 and P120,750 respectively. How much is the cost of goods sold
to be reported in the branchs income statement for the year ended December 31,2013?

ANSWER: P551,075

25. (AP) You are the auditor of Stevenson Company. Based on your substantive testing of equity
accounts, you have obtained the following data:

Accounts Amount
Preference Share Capital, P100 par, 2,300 shares outstanding P2,300,000
Preference Share Premium 805,000
Ordinary Share Capital, P10 par, 525,000 shares outstanding 5,250,000
Ordinary Share Premium 2,750,000
Subscribed Ordinary Share Capital 50,000
Retained Earnings 1,950,000
Advances from Shareholders 4,000,000
Subscription receivable ordinary share, to be collected May 2015 40,000

How much is the total legal capital of Stevenson Co.?

a. P3,600,000
b. P3,560,000
c. P7,550,000
d. P7,600,000

26. (P1) Consignment Company, a distributor of machinery, bought a machine from the
manufacturer in November 2014 for P20,000. On December 29, 2014, the entity sold this
machine for P30,000 under the following terms: 2% discount if paid within 30 days, 1% discount
if paid after 30 days but within 60 days, or payable in full within 90 days if not paid within the
discount periods. However, the customer had the right to return this machine if it was unable to
 resell the machine before expiration of the 90-day payment period, in which case the obligation
would be cancelled. In the net sales for the year ended December 31, 2014, what amount should
be included for the sale of this machine?

a. P30,000
b. P29,400
c. P29,700
d. P0

27. (TOA) An equipment leased out to a lessee on an operating lease should be accounted for by the
lessor as

a. Investment property
b. Property, plant and equipment
c. Other investments
d. Not accounted by the lessor

28. (AT) Upon discovery of irregularities in the tax return of Cai, the client, that Cai refuses to
correct, Maria, the present auditor, withdraws from the engagement. How should Maria respond
if asked by Alea, the successor CPA, why the relationship was terminated?

a. I suggest you ask the client.

b. It was a misunderstanding.
c. I suggest you get the clients permission for us to discuss all matters freely.
d. I found irregularities in the tax return which the client would not correct.

29. (BLT) Ben Tong, a married Philippine citizen but a Chinese resident, died leaving the following
properties (in Peso equivalent)
Receivable, including P500,000 claim against an insolvent person P2,000,000
Shares of stock, HongKong and Shanghai Banking Corp., a corporation
organized under HK laws, fair value 4,000,000
Rest house in Oslob, Cebu, fair market value 20,000,000
Condominium, Cebu City 3,000,000
Car, China 1,000,000
Business, China 30,000,000

How much is Ben Tongs gross estate?

ANSWER: P60,000,000