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The following T-account summarizes the transactions affecting the accounts receivable of FLASH Company
for 2014:
Accounts Receivable
Beginning balance after deducting credit Collections from customers, including
balances of P9,000 P 106,000 Overpayment of P10,000 P1,240,000
Charge sales 1,250,000 Write offs 7,000
Charge to goods out on consignment 25,000 Merchandise returns 5,500
Shareholders’ subscriptions 60,000 Allowance to customers for shipping damages 3,000
Accounts written-off but recovered 5,000 Collections on carrier claims 2,000
Cash paid to customer for Jan. 1 credit Collection on subscription 45,000
Balance 5,000
Deposit on contract 50,000
Claim against common carrier for shipping
damages 5,000
IOUs from employees 1,000
Cash advance to affiliate 50,000
Advances to supplier 10,000
Audit notes:
a. It was ascertained that half of the adjusted outstanding accounts receivable-trade balance are
still currently collectible. The term of sale is 5/30, n/60. Based on past experience, a 25% of
customers whose accounts are still current normally pay within the discount period.
b. 30% of the adjusted accounts receivable-trade is 60 days past due and is expected to be only
90% collectible.
c. 20% of the adjusted accounts receivable-trade balance is more than 120 days past due and is
expected to be 50% collectible.
Answer: P107,537
As part of a preliminary survey of the purchasing function, an auditor read the department's
policies and procedures manual. The auditor concluded that the manual described the processing
steps well and contained an appropriate internal control design. The next engagement objective
was to determine the operating effectiveness of internal controls. Which procedure would be most
appropriate in meeting this objective?
a) Prepare a flowchart.
b) Prepare a system narrative.
c) Perform a test of controls.
d) Perform a substantive test.
Solution: C
a) Incorrect. Flowcharts are most appropriate for studying internal control design. The audit
objective is whether the controls are in place and effective, which indicates the need for a
test of controls.
b) Incorrect. System narratives are most appropriate for studying internal control design. The
audit objective is whether the controls are in place and effective, which indicates the need
for a test of controls.
c) Correct. Tests of controls, also known as compliance tests, help an auditor determine
whether controls are being followed and are effective. For instance, a policy may
require that all large transactions be approved by a manager. As a test of controls, the
auditor may sample large transactions and review whether manager approval was
obtained and whether the proposed transaction meets all the criteria that the
manager was supposed to verify.
d) Incorrect. Substantive tests are tests to determine whether an objective has been achieved
and do not necessarily test internal controls.
A. Financing
B. Risk-management
C. Internal control
D. Capital budgeting
Answer: C
The correct answer is (c) because internal control is a function of the controller’s office.
Answers (a), (b), and (d) are incorrect because the functions of financial management include:
financing, capital, budgeting, financial management, corporate governance, and risk
management.
Bankrupt Bank has a 5-year loan receivable with face value of Php2,000,000 dated January 1, 2014
from a borrower that is due on December 31, 2018. Interest on the loan is payable at 10% every
December 31. The borrower paid the interest that was due on December 31, 2014 but informed
Bankrupt on December 31, 2015 that interest accrued in 2015 and the interest for 2016 will be paid
on maturity date. The borrower will also probably miss the last two years for interest payments
because of financial difficulty. After that, the borrower will also probably be expected to pay the
loan and accrued interest in 2015 and 2016 on December 31, 2018. What is the loan impairment
loss to be recognized on December 31, 2015? (Round off the present value factor to three decimal
places)?
ANSWER: Php397,600
Carrying amount (2,000,000 + 200,000) Php2,200,000
Present value of remaining cash flows
[2,000,000 +(200,000 x 2)] x 0.751 1,802,400
Impairment loss Php397,600
CLINCHER QUESTION No. 5
Sharon Company uses the installment sales method in accounting for its installment sales. On
January 1, 2014, Sharon Company had an installment account receivable from Rowena with a
balance of P
=18,000. During 2014, P=4,000 was collected from Rowena. When no further collection
could be made, the merchandise sold to Rowena was repossessed. The merchandise had a fair
market value of P6,500 after the company spent for P =600 for reconditioning of the merchandise.
The merchandise was originally sold with a gross profit rate of 40%.
Which of the following is not part of the powers of the Commissioner of Internal Revenue (CIR)?
ANSWER: B
The CIR has the power to interpret tax laws and decide on tax cases (Sec. 4), to obtain
information, and to summon, examine, and take testimony of persons (Sec. 5), and to make
assessments and prescribe additional requirements for tax administration and enforcement
(Sec. 6).
CLINCHER QUESTION No. 7
Based on the information as follows, for what taxable year will a corporation become liable for
MCIT?
SEC Registration May 29, 2009
BIR Registration June 19, 2010
Start of commercial operations October 14, 2010
a. 2012
b. 2013
c. 2014
d. 2015
Answer: C. MCIT is imposed upon any domestic corporation beginning the fourth taxable
year in which such corporation commenced its business operations. For purposes of MCIT,
the taxable year in which the business commenced shall be the year in which the domestic
corporation registered with the Bureau of Internal Revenue.
Which of the following statements would the hedging relationship qualify for hedge accounting?
I. At the inception of the hedge there is formal designation and documentation of the
hedging relationship and the entity's risk management objective and strategy for
undertaking the hedge.
II. The hedge is assessed on an ongoing basis and determined actually to have been highly
effective throughout the financial reporting periods for which the hedge was designated.
III. The effectiveness of the hedge can be reliably measured
IV. The hedge is expected to be highly effective.
Solution: C
a) Incorrect. The interviewee's answer may suggest a follow-up question that should be asked
before asking the next planned question.
b) Incorrect. This may be confusing for the respondent.
c) Correct. General information should be obtained first before details are sought.
d) Incorrect. The interrogator should avoid leading questions, that is, questions that suggest an
answer.
(Average) Assume that Stripler Industries is considering investing in a project with the following
characteristics:
Assume that all cash flows come at the end of the year.
Answer: Php125,000
Answer (b) is correct. The after-tax cash flows are calculated by deducting tax expense from
the before-tax cash flows. Since depreciation is deductible for tax purposes it provides a tax
shield. Therefore, income taxes for year 2 are equal to P15,000 [(P140,000 – P90,000) ×
30%], and after-tax cash flows are P125,000 (P140,000 – P15,000). Answer (a) is incorrect
because P140,000 is the before-tax cash flows. Answer (c) is incorrect because this solution
fails to consider the deductibility of depreciation.
The JPIA Co. operations resulted to regular corporate income tax (RCIT) amounting to Php25,000
with the minimum corporate income tax (MCIT) computed at Php100,000. It is the first time that
JPIA will be paying MCIT after operating for 7 years. The RCIT rate is 30% while MCIT rate is 2%. If
JPIA expects that the Company will still be liable to MCIT for the next periods, deferred tax asset to
be recognized on the balance sheet for the year will be:
ANSWER: Php-0-
PAS 12, Income Taxes provides that deferred tax assets shall be recognized for the
carryforward of unused tax losses and unused tax credits to the extent that it is probable
that future taxable profit will be available against which the unused tax losses and unused
tax credits can be utilized.
Since the Company expects to still be liable to MCIT for the next periods, the tax credit from
paying MCIT during the year may not be utilized and therefore should be recognized as
zero.
Any remaining profit (or loss) was to be allocated equally among the partners.
Answer:P59,233.50 (Average)
C D Total
Salaries =15,000.00
P =15,000.00
P =30,000.00
P
Interest (9% x Average) 4,725.00 2,925.00 7,650.00
Bonus * 16,667.00 0.00 16,667.00
Balance (equally) 22,841.50 22,841.50 45,683.00
=59,233.50
P =40,766.50
P =100,000.00
P
Average Capital (Use Calculator)
C: 60,000 x 2 = M+
55,000 x 4 = M+
50,000 x 4 = M+
45,000 x 2 = M+ MR/12 = 52,500
D: 40,000 x 2 = M+
35,000 x 4 = M+
30,000 x 4 = M+
25,000 x 2 = M+ MR/12 = 32,500
ANSWER: D
BASIS: Compensation of both rank and file and supervisory and managerial employees are
subject to WTW. Fringe benefits of rank and file employees are also subject to WTW. Section 33
of the Tax Code:
“Imposition of Tax. — A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-
three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1,
2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein) by the
employer, whether an individual or a corporation (unless the fringe benefit is required by the
nature of, or necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer).”
CLINCHER QUESTION No. 14
Answer: D
Paragraph 5 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors states that
Prior period errors are omissions from, and misstatements in, the entity's financial statements
for one or more prior periods arising from a failure to use, or misuse of, reliable information
that:
a) was available when financial statements for those periods were authorised for issue;
and
b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
a. P 5,000
b. P 10,000
c. P 30,000
d. P 82,000
ANSWER: B
Chris Products uses a process cost system and sells a variety of ready-to-cook meat products. Four
joint products were recovered during May 2015 as follows:
Solution: B
a) Incorrect. Because the finding is significant, the internal audit activity should not wait until
the next regularly scheduled audit to assess the status of corrective action.
b) Correct. The internal audit activity should monitor the status of the corrective action.
A follow-up engagement should be scheduled when changes to the claims processing
system have been sufficiently completed to allow for testing of adequacy and
effectiveness.
c) Incorrect. Although management indicated that the corrections should be completed within
six months, this may not be the case. As a result, the internal audit activity should monitor
the status of corrective action and schedule a follow-up engagement when it is appropriate.
d) Incorrect. Although the findings should be discussed with the audit committee because of
their significance, the scope and timing of a follow-up engagement should be determined by
the chief audit executive based on available information.
(Average) Assume that demand for a particular product changed as shown below from D1 to D2.
Which of the following could cause the change shown in the graph?
A. A decrease in the price of the product
B. An increase in supply of the product
C. A change in consumer tastes
D. A decrease in the price of a substitute for the product
Answer: C
The correct answer is (c) because a shift demand could result from a change in consumer
tastes. Answer (a) is incorrect because this would result in movement along the existing
demand curve. Answer (b) is incorrect because a change in supply would not affect the
demand function. Answer (d) is incorrect because a decrease in price of a substitute would
result in a shift of the curve to the left.
CLINCHER QUESTION No. 19
Titan Company issued a convertible bond on January 1, 2014, that matures in five years. The bond
can be converted into ordinary shares at any time. Titan has calculated that the liability and the
equity components of the bond are Php3,000,000 for the liability component and Php1,000,000 for
the equity component, giving a total amount of the bond of Php4,000,000. The interest rate of the
bond is 6% and local tax legislation allows a tax deduction for the interest paid in cash. What is the
deferred tax liability arising on the bond as at the year ending December 31, 2014 if the tax rate is
32%?
ANSWER: Php320,000
Temporary
Financial Tax base difference
Bonds payable 3,000,000 4,000,000 Php1,000,000