DIFFICULT QUESTIONS

1. In January 2017, Raquintan Corp. acquired 20% of the outstanding common stock of Sarmiento Co. for
P8,000,000. This investment gave Raquintan the ability to exercise significant influence over Sarmiento.
The book value of the acquired shares was P6,000,000. The excess of cost over book value was attributed
to a depreciable asset which was undervalued on Sarmiento’s balance sheet and which had a remaining
useful life of ten years.
For the year ended December 31, 2017, the investee reported net income of P1,800,000 and paid cash
dividends of P400,000 and thereafter issued 5% stock dividend.
What is the proper carrying value of the investment in associate on December 31, 2017?

ANSWER: 8,080,000
Original investment 8,000,000
Share in net income (20% x 1,800,000) 360,000
Share in cash dividends (20% x 400,000) (80,000)
Amortization of excess cost (2,000,000/10) (200,000)
Carrying amount of investment – 12/31/17 8,080,000

Acquisition cost 8,000,000

Carrying amount of interest acquired (6,000,000)
Excess of cost over carrying amount 2,000,000

Reference: 2016, Valix Prac-Acc, Volume 1, p.442

2. STATEMENT 1: PAS 40 is applied to agricultural produce at the point of harvest.

STATEMENT 2: PAS 2 shall be applied to agricultural produce after harvest.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

ANSWER: B. Statement 1 should be PAS 41.

Reference: Battery exam reviewer by Valderama: Theories 2nd set, no. 5

3. Babagsak Ka Company has a herd of 10 2-year old animals on January 1, 2017. One animal aged 2.5
years was purchased on July 1, 2017 for P108, and one animal was born on July 1, 2017.
No animals were sold or disposed of during the year. The fair value less cost of disposal per unit is as
follows:
2 -year old animal on January 1 100
2.5 – year old animal on July 1 108
New born animal on July 1 70
2 – year old animal on December 31 105
2.5 – year old animal on December 31 111
Newborn animal on December 31 72
3 – year old animal on December 31 120
0.5 – year old animal on December 31 80
What is the fair value of the biological assets on December 31?

ANSWER: 1,400

Fair value of 3 – year old animals on December 31 (11 x P120) 1,320

Fair value of 0.5 – year old animal on December 31, the newborn (1 x P80) 80
Total fair value – December 31 1,400

Reference: 2016, Valix Prac-Acc, Volume 1, p.411

4. Trabuco Company assigned P4,000,000 of accounts receivable as collateral for a P2,000,000 6% loan
with a bank. The entity also paid a finance fee of 5% on the transaction upfront.

What amount should be recorded as a gain or loss on the transfer of accounts receivable?

ANSWER: 0

No gain or loss is recognized because assignment of accounts receivable is a secured borrowing and not
a sale.

Reference: 2016, Valix Prac-Acc, Volume 1, p.247

5. STATEMENT 1: The amount of any inventory write-sown to net realizable value and all losses on
inventory shall be included in cost of goods sold.
STATEMENT 2: The amount of any reversal of inventory write-down shall be deducted from cost of
goods sold.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect

ANSWER: C

Reference: Battery exam reviewer by Valderama: Theories 2nd set, no. 3

6. On December 31, 2017, Castillo Company provided the following information:

COST RETAIL
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional Markups ------- 210,000
Available for sale 4,900,000 7,000,000

Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate lower
of average cost or market retail method, what is the inventory on December 31, 2017?

ANSWER: 980,000
 COST RETAIL
Available for sales 4,900,000 7,000,000
Markdowns (70,000)
Sales (5,530,000)
Inventory – December 31 1,400,000
Conservative cost ratio (4,900,000/7,000,000) 70%
Inventory – December 31 at cost 980,000
The approximate lower of average cost or market retail method is the same as the conservative or
conventional retail approach.
Reference: 2016, Valix Prac-Acc, Volume 1, p.396

7. Which statement is correct concerning amortization of intangible assets?

I. Intangible assets with limited or finite life are amortized over their useful life
II. Intangible assets with indefinite life are not amortized but are tested for impairment at least weekly.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER: A. Statement 2 should be at least annually.

Reference: Battery exam reviewer by Valderama: Theories 2nd set, no. 24

8. Susuko Ka Na Company sold goods on account for P50,000, credit terms 2/10, n/30. What will be the
effect in net income if the customer paid beyond the discount period under the allowance method?
a. Increase
b. Decrease
c. No effect
d. Not possible

ANSWER: C
Reference: Quiz prepared by Sir Edward, AR & EDA, no. 11

9. On January 1, 2016, Kapit Lang Company acquired an equipment with useful life of 8 years and
residual value of P300,000. The depreciation applicable to this equipment was P900,000 for 2017 using
the double declining balance method.

What was the acquisition cost of the equipment?

ANSWER: 4,800,000

Fixed rate (100%/8 years equals 12.5% x 2) 25%

Carrying amount – 1/1/2017 (900,000/25%) 3,600,000
Carrying amount – 1/1/2016 (3,600,000/75%) 4,800,000
Reference: 2016, Valix Prac-Acc, Volume 1, p.654
10. Konti Na Lang Company incurred the following costs during the current year in relation to property,
plant, and equipment:

Cash paid for purchase of land 2,500,000

Mortgage assumed on the land purchased, including interest accrued 1,000,000
Realtor commission 300,000
Legal fees, realty taxes and documentation expenses 50,000
Amount paid to relocate persons squatting on the property 100,000
Cost of tearing down an old building on the land to make room for construction
of new building 200,000
Salvage value of the old building demolished 50,000
Cost of fencing the property 110,000
Amount paid to the contractor for the building constructed 5,000,000
Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
Interest that would have been earned had the money used during the period of
construction been invested 150,000
Invoice cost of machine acquired 2,000,000
Freight, unloading and delivery charges 60,000
Custom duties and other charges 140,000
Allowances and hotel accommodation, paid to foreign technicians during
installation and test run of machine 400,000

What amount should be capitalized as cost of building?

ANSWER: 5,450,000

Cost of tearing down old building 200,000

Salvage value of old building (50,000)
Amount paid to contractor 5,000,000
Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
Cost of building 5,450,000
Reference: 2016, Valix Prac-Acc, Volume 1, p.604