University of Makati SET A

Qualifying Examinations – Financial Accounting and Reporting Part 2

SECOND YEAR - BSA
NAME: __________________________________________________________ Date: ___________________________

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. There is substantial modification of terms of an old financial liability if the gain or loss on extinguishment is
a. Less than 10% of the carrying amount of the old liability
b. At least 10% of the new liability
c. Less than 10% of the new liability
d. At least 10% of the carrying amount of the old liability
____ 2. On January 1, 2019, PLUSLE Company entered into a two-year P3,000,000 variable interest rate
loan at the prevailing rate of 12%. In 2020, the interest rate is equal to the prevailing interest rate at
the beginning of the year.
The principal loan is payable on December 31, 2020 and the interest is payable on December 31 of
each year. On January 1, 2019, PLUSLE Company entered into a "receive variable, pay fixed"
interest swap agreement with a speculator bank designated as a cash flow hedge.
The prevailing interest rate on January 1, 2020 is 14% and the present value of 1 at 14% for one
period is .877. What amount should be reported as interest rate swap receivable on December 31,
2019?
a. 60,000 c. 30,000
b. 52,620 d. 0
____ 3. On January 1, 2019, BAAL Company adopted a plan to accumulate funds for a new plant building to
be erected beginning July 1, 2024. at an estimated cost of P6,000,000. The entity intends to make
five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first
deposit is made on July 1, 2019.
Present value and future value factors are as follows:
Present value of 1 at 8% for 5 periods 0.68
Present value of 1 at 8% for 6 periods 0.63
Future value of an ordinary annuity of 1 at 8% for 5 periods 5.87
Future value of an annuity of 1 in advance at 8% for 5 periods 6.34
What is the annual deposit to the fund?
a. 816,000 c. 1,022,150
b. 946,400 d. 756,000
____ 4. On December 31, 2018 and 2019, CHOSS Company had outstanding 40,000 preference shares with P100 par
value and 6% cumulative, and 200,000 ordinary shares with P10 par value. On December 31, 2019, dividends
in arrears on the preference shares were P120,000. Cash dividends declared in 2019 totaled P440.000. What is
the dividend payable on each class of share capital in 2019?
Preference Ordinary
a. 320,000 120,000 c. 240,000 200,000
b. 360,000 80,000 d. 440,000 0

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University of Makati SET A
THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING
On January 1, 2019, VOLTORV Company purchased serial bonds with face amount of P5,000,000
and stated interest at 12%. The stated interest is payable annually on December 31. The bonds are
acquired to have an effective yield at 10%. The bonds mature at annual installment of P1,250,000
every December 31.
Present value of 1 at 10% for one period 0.9091
Present value of 1 at 10% for two periods 0.8264
Present value of 1 at 10% for three periods 0.7513
Present value of 1 at 10% for four periods 0.6830

____ 5. What is the carrying amount of the investment on December 31, 2020?
a. 3,878,173 c. 2,565,990
b. 1,272,589 d. 5,000,000
____ 6. KORRA Company provided the following information on January 1, 2018:
Share capital, 250,000 shares authorized;
100,000 shares issued and outstanding 3,000,000
Share premium 4,000,000
Retained earnings 8,000,000
The entity declared a 10% dividend on April 1, 2018 when the market value of the share was P70. The stock
dividend was issued on July 1, 2018 when the market value of the share was P100. The share has a par value
of P30. The entity sustained a net loss of P1,200,000 for 2018. What amount should be reported as retained
earnings on December 31, 2018?
a. 6,500,000 c. 6,800,000
b. 6,100,000 d. 5,050,000
____ 7. On July 1, 2018, THARA Company issued 4,000 of 8%, P1,000 face value bonds payable for P3,504,000.
The bonds were issued to yield 10%. The bonds are dated July 1, 2018 and mature on July 1, 2028. Interest is
payable semiannually on January 1 and July 1. Using the effective interest method, what amount of the bond
discount should be amortized for the six months ended December 31, 2018?
a. 19,840 c. 30,400
b. 15,200 d. 24,800
____ 8. How would a share split affect each of the following?
Asset Shareholders’ equity
a. Increase No effect c. No effect Increase
b. Increase Increase d. No effect No effect
____ 9. POOHGUE Company reported the following capital structure at year-end?
2012 2013
Ordinary shares 500,000 500,000
Convertible preference shares 100,000 100,000
10% convertible bonds payable P3,000,000 P3,000,000
During 2018, the entity paid the annual dividend of P5 per share on the preference share. The preference
shares are convertible into 200,000 ordinary shares and the 10% bonds are convertible into 100,000 ordinary
shares. Net income for 2018 was P5,000,000. The tax rate is 30%. What amount should be reported as diluted
earnings per share?
a. 9.00 c. 6.25
b. 6.51 d. 7.85
____ 10. The amount initially paid by the entity for a call option is referred to as
a. Option premium c. Strike price
b. Intrinsic value d. Notional amount

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University of Makati SET A
____ 11. SEDO Company provided the following information pertaining to a pension plan for 2019:
Actuarial value of projected benefit obligation on January 1 7,200,000
Assumed discount rate 10%
Service cost 1,800,000
Pension benefits paid 1,500,000
No change in actuarial estimate occurred in 2014. What is the projected benefit obligation on December 31,
2019?
a. 7,920,000 c. 6,420,000
b. 8,220,000 d. 7,500,000
____ 12. The gross profit method of estimating inventory would not be useful when
a. inventories have been destroyed or lost by fire, theft, or other casualty, and the
specific data required for inventory valuation are not available.
b. there is a significant change in the mix of the products being sold.
c. there is significant unmonitored change in the relationship between gross profit
and the selling price of goods being sold.
d. a periodic system is in use and inventories are required for interim statements.

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

On January 1, 2019, HORI Company acquired 20% of the ordinary shares of an associate for
P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded at
fair value.

An analysis of the acquisition showed that goodwill of P300,000 was acquired. The net income and
dividend of the associate for 2019 and 2020 were as follows:
2019 2020
Net income 3,000,000 4,000,000
Dividend paid 1,000,000 1,500,000
In December 2019, the associate sold inventory to HORI Company for P900,000. The cost of the
inventory was P600,000. This inventory remained unsold by HORI Company on December 31,
2019. However, it was sold by HORI Company in 2020.

In December 2020, the associate sold inventory to HORI Company for P750,000. The cost of the
inventory was P500,000. This inventory remained unsold by HORI Company on December 31,
2020.

____ 13. What is the carrying amount of the investment in associate on December 31,2020?
a. 6,790,000 c. 6,850,000
b. 6,900,000 d. 6,000,000
____ 14. FREI Company purchased a machine for P4,500,000 on January 1, 2019. The machine has an
estimated useful life of four years and a residual value of P500,000. The machine is being
depreciated using the sum of the years' digits method. What is the carrying amount of the asset on
December 31, 2020?
a. 2,900,000 c. 2,700,000
b. 1,350,000 d. 1,700,000

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University of Makati SET A
____ 15. During 2019, ISABEL Company constructed asset costing P4,215,000. The weighted average expenditures
during 2019 amounted to P3,900,000. The entity borrowed P2,000,000 at 7.5% on January 1, 2019. Funds not
needed for construction were temporarily invested in short-term securities and earned P59,000 in interest
revenue, In addition to the construction loan, the entity had two other notes outstanding during the year, a
P1,500,000, 10-year, 10% note payable dated October 1, 2017, and a P1,000,000, 8% 5-year note payable
dated November 2, 2018. What amount of interest should be capitalized during 2019?
a. 265,800 c. 297,500
b. 324,800 d. 273,000
____ 16. Directly attributable costs of preparing the intangible asset for the intended use include all, except
a. Cost of testing whether the asset is functioning properly
b. Initial operating losses
c. Cost of employee benefits arising directly from bringing the asset to the working condition
d. Professional fees .arising directly from bringing the asset to the working condition
____ 17. FIDO Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new knowledge 200,000
Cost of testing prototype (economic viability not achieved) 50,000
Quality control during commercial production 300,000
Construction of research facility having an estimated
useful life of 5 years but no alternative future use 400,000
What is the total amount of research and development expense for the current year?
a. 630,000 c. 950,000
b. 330,000 d. 650,000
____ 18. How is compensation expense measured for equity settled share-based payment transaction?
a. Measure the difference between the market price and the fair value of share options.
b. Measure the fair value of share options using an option pricing model.
c. Measure the intrinsic value of share options.
d. Use the normal hourly rate of employees.
____ 19. Which statement characterizes an operating lease?
a. The lessor transfers title of the leased property to the lessee for the duration of the lease
term.
b. The lessee records the lease obligation related to the leased asset.
c. The lessee records depreciation and interest.
d. The lessor records depreciation and lease revenue.
____ 20. WEEPING Company reported the following carrying amount of assets and liabilities on December 31, 2018:
Property 10,000,000
Plant and equipment 5,000,000
Inventory 4,000,000
Trade receivables 3,000,000
Trade payables 6,000,000
Cash 2,000,000
The value for tax purposes for property and for plant and equipment was P7,000,000 and P4,000,000,
respectively. The entity has made a provision for inventory obsolescence of P2,000,000 which is not
allowable for tax purposes. Further, an impairment loss against trade receivables of P1,000,000 has been
made. This charge will not be allowed in the current year for tax purposes. The tax rate is 30%. What
amount should be recognized as deferred tax expense for 2018?
a. 1,200,000 c. 350,000
b. 300,000 d. 1,400,000

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University of Makati SET A
____ 21. ECHOS Company was organized on January 1, 2019 with share capital consisting of 10% cumulative
preference share capital, par value P10, liquidation value P12, authorized, issued and outstanding 100,000
shares, P1,000,000, and ordinary share capital, par value P100, authorized 40,000 shares, issued and
outstanding 30,000 shares, P3,000,000. The net income for the year ended December 31, 2019 was
P6,000,000 and no dividends were declared. What is the book value per ordinary share?
a. 290 c. 333
b. 300 d. 293
____ 22. COKE Company pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next
biweekly period. The entity accrues salaries expense only at its December 31 year-end.
Last payroll was paid on December 26, 2019, for the 2-week period ended December 26, 2019. Overtime pay
earned in the 2-week period ended December 26, 2019 was P50,000.
Remaining work days in 2019 were December 27, 28, 29, on which days there was no overtime. The
recurring biweekly salaries total P900,000. The entity follows a five-day work week.
What amount should be recorded as liability for accrued salaries on December 31, 2019?
a. 270,000 c. 590,000
b. 320,000 d. 540,000
____ 23. On July 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate.
The face amount of the note receivable and the entire amount of the interest are due in one year. When the
note receivable was recorded on July 1, which of the following was debited?
a. Interest receivable
b. Neither interest receivable nor unearned discount on note receivable
c. Both interest receivable and unearned discount on note receivable
d. Unearned discount on note receivable
____ 24. SUICOON Company had an outstanding share capital with par value of P50,000,000 and a 12% convertible
bond issue in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and
December 31. The conversion clause in the bond indenture entitled the bondholders to receive 40 shares of
Spare Company with P20 par value in exchange for each P1,000 bond. The holder of P5,000,000 face value
bonds exercised the conversion privilege at year-end. The market price of the bonds at year-end was P1,100
per bond and the market price of the share was P30. The total unamortized bond discount was P500,000 and
the share premium from conversion privilege has a balance of P2,000,000 at the date of conversion. What
amount of share premium should be recognized by reason of the conversion of bonds payable into share
capital?
a. 2,750,000 c. 2,000,000
b. 3,000,000 d. 1,750,000
____ 25. IVYSAUR Company provided the following accounts at year-end:
Preference share capital authorized, P100 par 5,000,000
Ordinary share capital authorized, P10 par 2,000,000
Unissued preference share capital 1,800,000
Unissued ordinary share capital 1,000,000
Subscriptions receivable, ordinary 180,000
Subscriptions receivable, preference 190,000
Preference share capital subscribed 300,000
Ordinary share capital subscribed 220,000
Treasury preference shares (700 shares at cost) 680,000
Share premium 850,000
Retained earnings 2,000,000
What is the shareholders' equity at year-end?
a. 6,890,000 c. 6,520,000
b. 7,880,000 d. 7,200,000

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University of Makati SET A
____ 26. On March 31, 2019, LUKA Company had an unadjusted credit balance of P10,000 in its allowance
for uncollectible accounts. An analysis of LUKA's trade accounts receivable at that date revealed the
following:
Age Amount Estimated Uncollectible
0-30 days P600,000 5%
31-60 days 40,000 10%
Over 60 days 20,000 P14,000
What amount should LUKA report as allowance for uncollectible accounts in its March 31, 2019
statement of financial position?
a. P48,000 c. P30,000
b. P40,000 d. P38,000
____ 27. The interest rate written on the face of bond is known as
a. Nominal rate c. Coupon rate
b. Nominal rate, coupon rate or stated rate d. Stated rate
____ 28. SOLID Company is engaged in raising dairy livestock. Information regarding activities relating to the dairy
livestock during the current year is as follows:
Carrying amount on January 1 5,000,000
Increase due to purchases 2,000,000
Gain arising from change in fair value less cost of disposal
attributable to price change 400,000
Gain arising from change in fair value less cost of disposal
attributable to physical change 600,000
Decrease due to sales 850,000
Decrease due to harvest 200,000
What is the carrying amount of the biological asset on December 31 ?
a. 7,150,000 c. 6,000,000
b. 6,950,000 d. 8,000,000
____ 29. If shares are issued for noncash consideration, the proceeds shall be measured by the
a. Fair value of the noncash consideration received
b. Fair value of the shares issued
c. Cost of the noncash consideration received
d. Par value of the shares issued
____ 30. The principal classifications of liabilities are
a. Noncurrent liabilities and deferred revenue
b. Current liabilities, noncurrent liabilities and deferred revenue
c. Current liabilities and deferred revenue
d. Current liabilities and noncurrent liabilities
____ 31. It is the deferred tax consequence attributable to a deductible temporary difference and operating loss
carryforward.
a. Current tax asset c. Deferred tax liability
b. Deferred tax asset d. Current tax liability
____ 32. VISANGO Company, after having experienced financial difficulties in 2019, negotiated with a major creditor
and arrived at an agreement to restructure a note payable on December 31, 2019. The creditor was owed
principal of P3,600,000 and interest of P400,000 but agreed to accept equipment worth P700,000 and note
receivable from a VISANGO Company's customer with carrying amount of P2,700,000. The equipment had
an original cost of P900,000 and accumulated depreciation of P300,000. What amount should be recognized
as gain from extinguishment of debt on December 31, 2019?
a. 400,000 c. 0
b. 700,000 d. 600,000

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University of Makati SET A
____ 33. During 2018, GROUDON Company purchased marketable equity securities as a trading investment.
For the year ended December 31, 2018, the entity recognized an unrealized loss of P230,000.
There were no security transactions during 2019. Pertinent information on December 31, 2019 is as
follows:
Security Cost Market value
A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000
In the 2019 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of P100,000 c. Unrealized gain of P130,000
b. Unrealized loss of P100,000 d. Unrealized loss of P 130,000
____ 34. The formula in a defined benefit plan
a. Requires that the benefit of gain or the risk of loss from the assets contributed to the plan
should be borne by the employee.
b. Requires that the defined benefit cost and funding must the same.
c. Defines the benefits that the employee will receive at the time of retirement.
d. Defines the contribution to be made by the employer and no promise is made concerning
the ultimate benefits to be paid out to the employees.
____ 35. VIDAR Company initiated a performance-based employee share option plan on January 1, 2019. The
performance base for the plan is net sales in the year 2021.
The plan provides for share options to be awarded to the employees as a group on the following basis:
Level Net sales range Options granted
1 Less than- 2,500,000 10,000
2 P2,500,000- 4,999,999 20,000
3 P5,000,000- 10,000,000 30,000
4 More than- 10,000,000 40,000
The options become exercisable on January 1, 2022. The option exercise price is P200 per share. On January
1, 2019, each option had a fair value of P90. The share market prices on selected dates during 2019-2021
were as follows:
January 1, 2019 250
December 31, 2019 300
December 31, 2020 350
December 31, 2021 320
The entity reported the following sales each year:
2019 4,500,000
2020 5,500,000
2021 7,000,000
What amount should be recognized as compensation expense for 2021?
a. 900,000 c. 600,000
b. 1,200,000 d. 1,800,000
____ 36. Which of the following statements best describes the term "significant influence"?
a. The contractually agreed sharing of control over an economic entity
b. The mutual sharing in the risks and benefits of a combined entity
c. The power to participate in the financial and operating policy decisions of an entity
d. The holding of a significant proportion of the share capital in another entity
____ 37. CAMMY Company is in the business of leasing new hi-tech equipment. As lessor, CAMMY Company
expects a 12% return on the net investment. All leases are classified as direct financing lease. At the end of
the lease term, the equipment will revert to CAMIA Company. On January 1, 2019, an equipment is leased to
another entity with the following information.

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University of Makati SET A
Cost of equipment to Camia Company 5,500,000
Residual value - guaranteed 400,000
Annual rental payable in advance 959,500
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment January 1, 2019
What amount of interest income should be recognized for 2019?
a. 322,000 c. 496,860
b. 660,000 d. 544,860
____ 38. EVEE Company recorded the following data pertaining to Inventory X during January 2019:
Date - Received Unit Cost Sold On hand
1/01 Inventory - P8.00 - 3,200
1/12 - - - 1,600 1,600
1/22 - 4,800 P9.60 - 6,400
What is the moving average unit cost of Inventory X at January 31, 2019?
a. P8.96 c. P9.60
b. P9.20 d. P8.80
____ 39. According to the Conceptual Framework, predictive value and confirmatory value are ingredients of
a. Relevance c. Understandability
b. Comparability d. Faithful representation
____ 40. On January 1, 2019, WINSTON Company lent P1,780,000 cash to STURDY Company. The promissory note
made by STURDY for P2,000,000 did not bear explicit interest and was due on December 31, 2020. The
prevailing interest rate for a loan of this type was 6%. The present value of 1 for two periods at 6% is .89.
What amount of interest expense should be recognized for 2019?
a. 106,800 c. 120,000
b. 110,000 d. 0
____ 41. An asset is recognized when
a. It is probable that future economic benefit will flow to the entity and the; cost or value of
the asset can be measured reliably.
b. It is probable that future economic benefit will flow to the entity.
c. The entity obtains control of the rights associated with the asset.
d. The cost or value of the asset can be measured reliably.
____ 42. BOLLY Company purchased a P1,000,000 ordinary life insurance policy on its president. BOLLY
Company is the beneficiary under the life insurance policy. The policy year and the entity's
accounting year coincide. Additional data available for the year ended December 31, 2019 are as
follows:
Cash surrender value, January 1 43,500
Cash surrender value, December 31 54,000
Annual advance premium paid January 1 20,000
Dividend received July 1 3,000
What amount should be reported as life insurance expense for 2019?
a. 20,000 c. 9,500
b. 17,000 d. 6,500

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University of Makati SET A
____ 43. What is impairment of asset?
a. A decline in value of an asset so that the recoverable amount is more than carrying
amount.
b. A change in the estimated useful life of an asset.
c. A fall in the market value of an asset so that the recoverable amount is less than carrying
amount.
d. An allocation of cost over the useful life of an asset.
____ 44. Which of the following terms is associated with recognizing a provision?
a. Possible c. Remote
b. Probable d. Likely

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

On December 31, 2019, ZIRCON Company acquired the following three intangible assets:
 A trademark for P3,000,000. The trademark has 4 years remaining in its legal life. It is
anticipated that the trademark will be renewed in the future indefinitely.
 Goodwill for P500,000.
 A customer list for P2,100,000. By contract, the entity has exclusive use of the list for five
years. However, it is expected that the list will have an economic life of 3 years.
On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled:
a Because of a decline in the economy, the trademark is now expected to generate cash flows of
just P105,000 per year.
b The cash flow expected to be generated by the cash generating unit to which the goodwill is
related is P200,000 per year for the next 20 years. The carrying amounts of the assets and
liabilities of the cash generating unit are:
Identifiable assets 3,500,000
Goodwill 500,000
Liabilities 1,100,000
It is reliably determined that the cash flows of the cash generating unit cannot be computed
without consideration of the liabilities.
c The cash flows expected to be generated by the customer list are P800,060 in 2021 and P500,000
in 2022.
d The appropriate discount rate is 6%. The present value of 1 at 10% is .94 for one period and .89
for two periods. The present value of an ordinary annuity of 1 at 10% for 20 periods is 11.45.

____ 45. What is the impairment loss on trademark?

a. 1,250,000 c. 3,000,000
b. 1,750,000 d. 0
____ 46. SUGARFREE Company prepared the following bank reconciliation on March 31:
Book balance 1,405,000
Add: March 31 deposit 750,000
Collection of note 2,500,000
Interest on note 150,000 3,400,000
Total 4,805,000
Less: Careless Company's deposit to our account 1,100,000
Bank service charge 45,000 1,145,000
Adjusted book balance 3,660,000

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Bank balance 5,630,000
Add: Error on check No. 175 45,000
Total 5,675,000
Less: Preauthorized payments for water bills 205,000
NSF check 220,000
Outstanding check 1,650,000 2,075,000
Adjusted bank balance 3,600,000
Check No. 175 was made for the proper amount of P249,000 in payment of account. However it was entered
in the cash payments journal as P294,000. The entity authorized the bank to automatically pay its water bills
as submitted directly to the bank. What is the adjusted cash in bank on March 31 ?
a. 3,660,000 c. 2,880,000
b. 3,630,000 d. 3,600,000
____ 47. On December 31, 2019, PICOLO Company had 500,000 ordinary shares issued and outstanding, 400,000 of
which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1,
2019. The net income for the year was P5,100,000. What amount should be reported as basic earnings per
share?
a. 12.75 c. 12.00
b. 11.35 d. 10.10
____ 48. MAGICARP Company revealed the following information pertaining to dividends from nontrading
investments in ordinary shares during the year ended December 31, 2019:
 The entity owned a 10% interest in BRUTUS Company, which declared a cash dividend of
P500,000 on November 30, 2019 to shareholders of record on December 31, 2019 and
payable on January 15, 2020.
 On October 15, 2019, the entity received a liquidating dividend of P100,000 from DUG
Mining Company. The entity owned a 5% interest in DUG Mining Company.
What amount of dividend income should be reported for the current year?
a. 150,000 c. 50,000
b. 500,000 d. 600,000
____ 49. On December 31, 2019, RUE Company reported cash accounts with the following details:
Undeposited collections 60,000
Cash in bank - PCIB checking account 500,000
Cash in bank - PNB (overdraft) (50,000)
Undeposited NSF check received from customer, dated Dec. 1, 2019 15,000
Undeposited check from a customer, dated January 15, 2020 25,000
Cash in bank - PCIB (fund for payroll) 150,000
Cash in bank - PCIB (saving deposit) 100,000
Cash in bank - PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank restricted 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Financial asset held for trading 120,000
On December 31, 2019, what total amount should be reported as "cash and cash equivalents"?
a. 2,660,000 c. 2,810,000
b. 2,770,000 d. 810,000
____ 50. If bonds are issued at a premium, this indicates that
a. The nominal rate of interest exceeds the yield rate
b. The yield and nominal rates coincide
c. The yield rate of interest exceeds the nominal rate
d. No necessary relationship exists between the two rates

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