EASY

1. Which of the following is not regarded as constituting a separate element in the Framework for the Preparation and
Presentation of Financial Statements?
a. Income c Expense
b. Gain d. Equity

2. At the date of purchase of a service which is not immediately used up, the cost of such unused service is a(n):
a. revenue c. asset
b. liability d. expense

3. Revenue from an artistic performance is recognized once

a. The audience register for the event online.
b. The tickets for the concerts are sold.
c. Cash has been received from the ticket sales.
d. The event takes place.

4. Any gain on a subsequent increase in the fair value less cost to sell of a noncurrent asset classified as held for sale
should be treated as follows:
a. The gain should be recognized in full.
b. The gain should not be recognized.
c. The gain should be recognized but not in excess of the cumulative impairment loss.
d. The gain should be recognized but only in retained earnings.

5. When it is difficult to distinguish between a change of estimate and a change in accounting policy, then an entity
should
a. Treat the entire change as a change in estimate with appropriate disclosure.
b. Apportion, on a reasonable basis, the relative amounts of change in estimate and the change in
accounting policy and treat each one accordingly.
c. Treat the entire change as a change in accounting policy.
d. Since this change is a mixture of two types of changes, it is best if it is ignored in the year of the change;
the entity should then wait for the following year to see how the change develops and then treat it accordingly.

6. Which of the following is the most reliable basis for determining the fair value of a biological asset and agricultural
produce?
a. The quoted market price in an active market.
b. The most recent market transaction price.
c. Market prices for similar assets with adjustment to reflect differences.
d. Sector benchmarks such as the value of cattle expressed per kilogram of meat.

7. The classification of the lease is normally carried out

a. At the end of the lease term.
b. After “cooling off” period of one year.
c. At the inception of the lease.
d. When the entity deems it necessary.

8. Under PAS 2 Inventories, items of inventory that are used by business enterprise as components in a self-constructed
property asset are required to be:
a. aggregated into the ‘cost of goods sold’ expense in the period in which the items are used;
b. expensed directly into equity in the period in which the items are used;
c. capitalized and depreciated;
d. added to a ‘property construction’ provision account.

9. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Performing analytical procedures to identify areas that may represent specific risks.
b. Reviewing investment transactions of the audit period to determine whether related parties were credited.
c. Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have
occurred.
d. Obtaining a written representation letter from the client to emphasize management’s responsibilities.

10. The element of the audit planning process most likely to be agreed upon with the client before implementation of the
audit strategy is the determination of the
a. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
b. Procedures to be undertaken to discover litigation, claims and assessments.
c. Pending legal matters to be included in the inquiry of the client’s attorney.
d. Timing of inventory observation procedures to be performed.

11. The auditor observed that the long term debt increased from the prior year, but interest expense increased a larger-
than-proportionate amount than long-term debt. Which of the following is the most likely explanation for this
situation?
a. Interest expense decreased, as compared to the prior year.
b. Short-term borrowing was refinanced on a long term basis at the same interest rate.

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c. Short-term borrowing was refinanced on a long term basis at lower interest rate.
d. Short-term borrowing was refinanced on a long term basis at higher interest rate.
12. In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.

13. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.

14. The cash receipts function should be separated from the related record keeping in an organization to
a. Physically safeguard the cash receipts.
b. Establish accountability when the cash is first received.
c. Minimize undetected misappropriations of cash receipts.
d. Prevent paying cash disbursements from cash receipts.

15. The authority to accept incoming goods in receiving should be based on a (an)
a. Vendor’s invoice.
b. Bill of lading.
c. Materials requisition.
d. Approved purchase order.

AVERAGE
1. Gehrig Corporation renewed an insurance policy for 3 years beginning July 1, 2007 and recorded the P81,000
premium in the prepaid insurance account. The P81,000 premium represents an increase of P23,400 from the
P57,600 premium charged 3 years ago. Assuming Gehrig’s records its insurance adjustments only at the end of the
calendar year, the adjusting entry required to reflect the proper balances in the insurance accounts at December 31,
2007, Gehrig’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500
c. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.
d. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.

2. A corporation’s accounting records provided the following information:

12/31/06 12/31/07
Current assets P 240,000 P ?
Noncurrent assets 1,600,000 1,500,000
Current liabilities ? 130,000
Noncurrent liabilities 580,000 ?

All assets and liabilities of the company are reported in the schedule above. Working capital of P92,000 remained
unchanged from 2006 to 2007. Net income in 2007 was P88,000. No dividends were declared during 2007 and
there were no other changes in equity. Total noncurrent liabilities at December 31, 2007 would be
a. P616,000 c. P568,000
b. P392,000 d. P480,000

3. The general ledger trial balance of Didrikson Corporation includes the following balance sheet accounts at December
31, 2007:

Inventory (including inventory expected in the ordinary course of

operations to be sold beyond 12 months amounting to P70,000) P100,000
Trade receivables 120,000
Prepaid insurance 8,000
Listed investments held for trading purposes at fair value 20,000
Available for sale investments 80,000
Cash and cash equivalents 30,000
Deferred tax asset 15,000
Bank overdraft 25,000

The amount that should be reported as current assets on Didrikson's balance sheet is
a. P208,000 c. P278,000
b. P358,000 d. P288,000

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4. Chamberlain Equipment Inc. furnishes you with the following list of accounts:

Accounts payable P 66,000

Accounts receivable 40,000
Accumulated depreciation 44,000
Advances to sales persons 10,000
Advertising Expense 72,000
Allowance for Bad Debts 10,000
Bonds payable 80,000
Cash 22,000
Certificates of deposit 16,000
Share capital, (par) 100,000
Deferred income tax liability 46,000
Equipment 215,500
Inventory 55,000
Investment in Rowe Oil Co. shares
(40% of outstanding shares owned) 76,500
Investment in Siebert Co. shares (trading securities) 21,000
Share premium 42,500
Premium on Bonds Payable 6,000
Prepaid Insurance 6,000
Rent revenue 37,000
Rent revenue received in advance (4 months) 12,000
Retained earnings 97,500
Taxes payable 10,000
Tools 52,000

The company’s working capital is

a. P72,000 c. P62,000
b. P66,000 d. P46,000

5. Deception Company’s usual sales terms are net 30 days, FOB shipping point. Sales, net of returns and allowances,
totaled P8,000,000 for the year ended December 31, 2007 before year-end adjustments.
Additional data are as follows:
• In 2007, Deception transferred goods to a retailer on consignment. The transaction was recorded as a sale by
Deception. The goods cost P45,000 and normally are sold at a 30% markup. In 2008, P12,000 (cost) of
merchandise was sold by the retailer at the normal markup, and the balance of the merchandise was returned to
Deception. The retailer withheld a 15% commission from payment.
• On December 30, Deception Company segregated goods costing P100,000 for future shipment to one of its
customers, Tally Company. Tally was billed P130,000. Tally is a regular customer, and Deception has been
expecting an order for the past 2 weeks. To make sure that sufficient goods are available when the order from
Tally finally does come, Deception has segregated the goods.
• On December 30, Deception Company segregated goods costing P150,000 for future shipment to one of its
customers, Sally Company. Sally was billed P195,000. Sally has requested, in writing, that Deception segregate
the goods. Sally is conducting temporary repairs to its storage warehouse, so Sally has arranged to make its
shipments directly from Deception's warehouse for the duration of the repairs. The goods have been carefully
separated so that Deception employees don't accidentally ship them to another customer.

Deception’s adjusted net sales for 2007 should be

a. P7,616,500 c. P7,825,000
b. P7,811,500 d. P7,941,500

6. You are given the following information which may be relevant to the computation of the cash balance of Robinson
Corporation on December 31, 2007:
• Two checks for P125,000 were received in December from a customer for payment of its P125,000
account balance. One of the checks was returned in January.
• A check was received and deposited for P175,000 in December. The check was returned by the bank
in January market “NSF”.
• A check from a customer for P87,000, was received and deposited in December. In January it was
discovered that it was in payment of an invoice in the amount of P78,000. A check for P9,000 was issued and
mailed by the company to the customer.

Using the above data, what is the total amount to be included in the cash balance for purpose of the December 31,
2007 balance sheet?
a. P203,000 c. P387,000
b. P212,000 d. P378,000

7. On January 1, 2007, NCR Company sold equipment with a carrying amount of P800,000 to X Company. As payment,
X gave NCR Company a P1,200,000 note. The note bears an interest rate of 5% and is to be repaid in three annual
installments of P400,000 (plus interest on the outstanding balance). The first payment was received on December

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31, 2007. The market price of the equipment is not reliably determinable. The prevailing rate of interest for notes of
this type is 10%.

The interest income to be recognized in 2008 is (Round off present value factors to four decimal places)
a. P109,735 c. P74,708
b. P 69,587 d. P40,000

8. The Alcala Company counted its ending inventory on December 31. None of the following items were included when
the total amount of the company’s ending inventory was computed:
• P150,000 in goods located in Alcala’s warehouse that are on consignment from another company.
• P200,000 in goods that were sold by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by the customer on January 2. Terms were FOB Destination.
• P300,000 in goods were purchased by Alcala and shipped on December 30 and were in transit on
December 31; the goods were received by Alcala on January 2. Terms were FOB shipping point.
• P400,000 in goods were sold by Alcala and shipped on December 30 and were in transit on December
31; the goods were received by the customer on January 2. Terms were FOB shipping point.

The company’s reported inventory (before any corrections) was P2,000,000. What is the correct amount of the
company’s inventory on December 31?
a. P2,550,000 c. P2,500,000
b. P1,950,000 d. P2,700,000

9. A herd of 10 2 year old animals was held at 1 January 2007. One animal aged 2.5 years was purchased on 1 July
2007 for 108, and one animal was born on 1 July 2007. No animals were sold or disposed of during the period. Per-
unit fair values less estimated point-of-sale costs were as follows:

2 - year old animal on January 1, 2007 100

Newborn animal at July 1, 2007 70
2.5 - year old animal on July 1, 2007 108
New born animal on December 31, 2007 72
0.5 - year old animal on December 31, 2007 80
2 - year old animal on December 31, 2007 105
2.5 - year old animal on December 31, 2007 111
3 - year old animal on December 31, 2007 120

The increase in fair value of biological assets in 2007 due to price change is
a. P 55 c. P 53
b. P222 d. P212

10. On December 31, 2007, Charlton acquired an investment for P500,000 plus a purchase commission of P10,000. The
investment is designated as available-for-sale. On December 31, 2007, quoted market price of the investment is
P500,000. If the investment were sold, a commission of P15,000 would be paid. On December 31, 2007, the
investment should be carried at
a. P510,000 c. P485,000
b. P495,000 d. P500,000

11. On January 1, 2007, Doodles Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years.
Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2010. Under the
agreement, the market rate of interest on each January 1 resets the variable rate for that period and the amount of
interest to be paid on December 31.

To protect itself from fluctuations in interest rates, the entity hedges the variable interest by entering into a four-year
"receive variable, pay fixed" interest rate swap with a speculator. The interest rate swap is based on the notional
amount of P5,000,000 and an 8% fixed interest rate. The entity has designated this interest rates swap as a cash
flow hedge of the variability of interest payments on the variable rate loan. Assume that market interest rates are
8% on January 1, 2007, 10% on January 1, 2008, and 11% on January 1, 2009. (Round off present value factors to
four decimal places)

The amount to be recognized as derivative asset on December 31, 2008 is

a. P122,185 c. P256,875
b. P366,555 d. P 85,625

12. In a cash flow hedge, the gain on the hedging instrument in the first period after designation is P600,000 and the
loss on the hedged item is P800,000. How much will be recognized in profit or loss?
a. P800,000 c. P200,000
b. P600,000 d. P 0

13. On January 1, 2004, the Sahara Company purchased machinery for P650,000 which it installed in a rented factory.
It is depreciating the machinery over 12 years by the straight-line method to a residual value of P50,000. Late in
2008, because of increasing competition in the industry, the company believes that its asset may be impaired and
will have a remaining useful life of 5 years, over which it estimates the asset will produce total cash inflows of

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

P1,000,000 and will incur total cash outflows of P825,000. The cash flows are independent of the company's other
activities and will occur evenly each year. The company is not able to determine the fair value based on a current
selling price of the machinery. The company's discount rate is 10%. The impairment loss to be recognized in 2008
profit or loss is
a. P267,322 c. P246,490
b. P317,322 d. P 0

14. In 2006, Lepanto Mining Company purchased property with natural resources for P28,000,000. The property had a
residual value of P5,000,000. However, the company is required to restore the property to its original condition for
P2,000,000.

In 2006, Lepanto spent P1,000,000 in development costs and P3,000,000 in buildings on the property. Lepanto does
not anticipate that the buildings will have utility after the natural resources are removed. In 2007, an amount of
P1,000,000 was spent for additional development on the mine. The tonnage mined and estimated remaining tons for
years 2006 to 2008 are as follows:

Tons extracted Tons remaining

2006 0 10,000,000
2007 3,000,000 7,000,000
2008 3,500,000 2,000,000

The company should recognize depletion for 2008 at

a. P10,150,000 c. P14,245,000
b. P12,040,000 d. P 9,450,000

15. PADRE has just acquired the net assets of GARCIA for P100,000. In acquiring GARCIA, the owners of PADRE felt that
GARCIA had unrecorded goodwill. They decided to capitalize the estimated annual superior earnings of GARCIA at
20% to determine the amount of goodwill. The computation resulted in an estimated goodwill of P10,000. A rate of
10% on net assets before recognition of goodwill was used to determine normal annual earnings of GARCIA, because
it is the rate that is earned on net assets in the industry in which GARCIA operates. All other assets of GARCIA were
properly recorded. The estimated annual earnings of GARCIA is
a. P10,000 c. P 2,000
b. P 9,000 d. P11,000

DIFFICULT
1. On December 31, Naismith Company noted the following transactions that occurred during 2007, some or
all of which might require adjustment to the books.
a. Payment of P2,900 to suppliers was made for purchases on account during the year and was not recorded.
b. Building and land were purchased on January 2 for P175,000. The building’s fair market value was P120,000 at
the time of purchase. The building is being depreciated over a 20-year life using the straight-line method,
assuming no salvage value.
c. Of the P34,000 in Accounts Receivable, 2.5% is estimated to be uncollectible. Currently, Allowance for Bad Debts
shows a debit balance of P460.
d. On August 1, P40,000 was loaned to a customer on a 6-month note with interest at an annual rate of 12%.
e. During 2007, Naismith received P8,500 in advance for services, 80% of which will be performed in 2008. The
P8,500 was credited to sales revenue.
f. The interest expense account was debited for all interest charges incurred during the year and shows a balance of
P1,100. However, of this amount, P600 represents a discount on a 60-day note payable, due January 30, 2008.

The net reduction in reported net income as a result of the required adjustments is
a. P14,710 c. P10,890
b. P11,810 d. P 9,810

2. The Sterling National Bank has a note receivable of P200,000 from the Trembling Company that it is
carrying at face value and is due on December 31, 2011. Interest on the note payable at 9% each December 31.
The Trembling Company paid the interest due on December 31, 2007, but informed the bank that it would probably
miss the next two years' interest payments because of its financial difficulties. After that, it expected to resume its
annual interest payments, but it would make the principal payment one year late, with interest paid for that
additional year at the time of the principal payments. The carrying amount of the note receivable as December 31,
2008 is (Round off present value factors to four decimal places.)
a. P200,000 c. P168,331
b. P183,480 d. P165,480

3. On December 28, 2007, Bakeks Company commits itself to purchase a financial asset to be classified as
held for trading for P1,000,000, its fair value on commitment (trade) date. This security has a fair value of
P1,002,000 and P1,005,000 on December 31, 2007 (Bakeks' financial year-end), and January 5, 2008 (settlement
date), respectively. If Bakeks applies the settlement date accounting method to account for regular-way purchases
of its securities, how much should be recognized as unrealized gain on trading securities in its 2007 income
statement?
a. P2,000 c. P3,000

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b. P4,000 d. P 0

4. On January 1, 2003, Super Corporation acquired 25% of the shares of Twins, Inc. for P1,000,000. At
that date, the equity of Twins was P4,000,000, with all the identifiable assets and liabilities being measured at
amounts equal to fair value. The table below shows the profits and losses made by Twins during 2003 to 2007:

Year Profit (Loss)

2003 P 200,000
2004 (2,000,000)
2005 (2,500,000)
2006 160,000
2007 300,000

The income from investment in Twins, Inc. for year ended December 31, 2007 is
a. P40,000 c. P75,000
b. P15,000 d. P 0

5. Reiley Co. purchased land as a factory site for P1,000,000. Reiley paid P40,000 to tear down two
buildings on the land. Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making
the purchase. Income of P8,000 was earned through using the land as a car park before construction started.
Architect's fees were P41,200. Title insurance cost P2,400, and liability insurance during construction cost P2,600.
Excavation cost P10,440. The contractor was paid P2,400,000. An assessment made by the city for pavement was
P6,400. Interest costs during construction were P170,000.

The cost of the land that should be recorded by Reiley Co. is

a. P1,040,480 c. P1,046,880
b. P1,032,480 d. P1,038,880

6. The following information was included in the bank reconciliation for Ryan, Inc. for June. Assume all
other reconciling items are listed.

Checks and charges recorded by bank in June, including a June service charge of P600 P344,200
Service charge made by bank in May and recorded in the books in June 400
Total of credits to Cash in all journals during June 396,040
Customer’s NSF check returned as a bank charge in June (no entry made on books) 2,000
Customer’s NSF check returned in May and redeposited in June (no entry made on books
in either May or June) 5,000
Outstanding checks at June 30 265,200
Deposits in transit at June 30 12,000

What was the total of outstanding checks at the beginning of June?

a. P319,240 c. P219,360
b. P211,160 d. P213,160

7. During 2008, Grant Industries, Inc. constructed a new manufacturing facility at a cost of P12,000,000.
The weighted average accumulated expenditures for 2008 were calculated to be P5,400,000. The company had the
following debt outstanding at December 31, 2008:
• 10 percent, five-year note to finance construction of the manufacturing facility, dated January 1, 2008,
P3,600,000.
• 12 percent, 20-year bonds issued at par on April 30, 2004, P8,400,000.
• 8 percent, six-year note payable, dated March 1, 2007, P1,800,000.

Determine the amount of interest to be capitalized by Grant Industries for 2008.

a. P360,000 c. P557,280
b. P563,220 d. P591,840

8. Edmond Dantes Company purchased a customer list and an ongoing research project for a total of
P400,000. Edmond uses the expected cash flow approach for estimating the fair value of these two intangibles. The
appropriate interest rate is 7%. The potential future cash flows from the two intangibles, and their associated
probabilities, are as follows:

Customer List
Outcome 1 - 20% probability of cash flows of P50,000 at the end of each year for 5 years.
Outcome 2 - 30% probability of cash flows of P30,000 at the end of each year for 4 years.
Outcome 3 - 50% probability of cash flows of P10,000 at the end of each year for 3 years.

Ongoing Research Project

Outcome 1 - 10% probability of cash flows of P500,000 at the end of each year for 10 years.
Outcome 2 - 10% probability of cash flows of P10,000 at the end of each year for 4 years.
Outcome 3 - 80% probability of cash flows of P100 at the end of each year for 3 years.

How much should be recognized as customer list?

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a. P400,000 c. P 77,025
b. P 84,609 d. P322,975

9. At the beginning of year 1, the entity grants 10,000 shares with a fair value of P27 per share to a senior
executive, conditional upon the completion of three years’ service. By the end of year 2, the share price has dropped
to P21 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose
whether to receive 10,000 shares or cash equal to the value of 10,000 shares on vesting date. The share price is
P18 on vesting date.

The net expense to be recognized in year 3 is

a. P90,000 c. P70,000
b. P60,000 d. P40,000

10. The physical inventory of Merlion Company as of December 26, 2008 totaled P1,965,000. In trying to
establish the December 31 inventory, the accountant noted the following transactions from December 27 to
December 31, 2008.

Sales (20% markup on cost) P 600,000

Credit memos issued:
For goods returned on:
December 15 27,000
December 20 35,000
December 29 36,000
For goods delivered to customers not in accordance with
specifications 9,500
Credit memos received:
For goods returned on:
December 10 17,000
December 26 23,000
December 28 8,000
Purchases:
Placed in stock 120,000
In transit, FOB shipping point 50,000
In transit, FOB destination 33,000

The inventory as of December 31, 2008 is

a. P1,675,800 c. P1,663,000
b. P1,657,000 d. P1,668,667

11. You are preparing the income statement of Anonymous Company for the year ended December 31, 2008.
You determine that company's income from continuing operations before income taxes is P2,400,000. At this point,
you are considering the proper treatment of the items listed below. Unless otherwise indicated, assume that none of
the items listed are included in the P2,400,000 income figure.
a. Because of changes in technology, inventory costing P100,000 was written off as obsolete in
2008. The company had never recorded this type of loss before.
b. An unusual earthquake damaged the company's plant on January 10, 2009 resulting in a loss to
Anonymous of P400,000.
c. A loss of P360,000 was sustained on April 5, 2008 as a result of typhoon damage to the
company's warehouse in Davao. Typhoons are a yearly occurrence in that area.
d. Prior to 2008, Anonymous used an accelerated depreciation method for its plant equipment. In
2008, Anonymous changed to the straight-line method for previously acquired equipment and new acquisitions.
At December 31, 2007, the carrying amount of plant equipment was P7,000,000. If the straight-line method had
previously been used, the carrying amount would have been P7,500,000 on December 31, 2007.
e. In 2008, Anonymous changed its method of accounting for inventory from direct costing, which
was used in previous years, to absorption costing. The 2008 ending inventory has been recorded on the
absorption cost basis, but no adjustment has been made to beginning inventory, which has a total cost of
P2,300,000, made up of P1,400,000 direct materials and P900,000 direct labor. The manufacturing overhead
application rate is 75% of direct labor cost.
f. On July 1, 2008, Anonymous paid bondholders P1,200,000 to retire its bonds payable with a
carrying amount of P950,000.

How much should be reported as income from continuing operations before income taxes for the year ended
December 31, 2008?
a. P1,290,000 c. P1,015,000
b. P1,115,000 d. P1,690,000

12. Bugis Corp. acquired a machine on January 1, 2000. Details of the machine at December 31, 2007 are
given below:

Depreciation
Component Cost basis
Engine P170,000,000 Useful life of

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40,000 hours
Outer casings 510,000,000 25 years
straight line
Other 12 years
components 255,000,000 straight line
P765,000,000

During the year 2008, the following events took place:

a) Engine, which had run for 30,000 hours till date developed serious snags. It was replaced by a better engine
with a cost of P238 million and estimated life of 50,000 hours. The new engine was used for 5,000 hours during
the year.
b) Polishing and painting was done to the outer casings at a cost of P1.3 million.
c) Other components were upgraded at a cost of P102 million. The remaining life of the other components is 5
years.

Compute the total depreciation for the year 2008, assume that all the work mentioned above was completed at the
beginning of 2008.
a. P85,850,000 c. P90,950,000
b. P81,676,470 d. P81,600,000

13. On January 1, 2008, Santayana Company sold a special machine that had a list price of P900,000. The
buyer paid P100,000 cash and signed an P800,000 note. The note specified that it would be paid off in four equal
annual payments of P274,565 each starting on December 31, 2008. The carrying amount of the receivable on
December 31, 2008 is (Round off present value factors to four decimal places)
a. P525,435 c. P701,435
b. P637,435 d. P725,435

14. The following segments have been identified for a business, along with their sales. No segment qualifies
on any other criterion for determining reportable segments except possibly for revenue. Sales for each segment, and
the total for the company follow:

Segment Sales
1 P 500,000
2 200,000
3 100,000
4 800,000
5 150,000
6 200,000
7 175,000
P2,125,000 (total company sales)

What is the minimum number of reportable segments for this company?

a. 5 c. 3
b. 4 d. 2

15. The following information pertains to Yellow Company for 2008:

a. The company had net monetary items of P80,000 on January 1.
b. Sales of P300,000 and purchases of P120,000 were made evenly throughout the year
c. Operating expenses of P90,000 and income tax expense of P60,000 were incurred evenly throughout the
year
d. Cash dividends of P20,000 were declared on December 31. Selected values of the CPI-U during 2008
appear below:

Jan. 1 110.0
Average for year 121.0
Dec. 31 133.1

The purchasing power gain or (loss) for 2008 expressed in constant year-end pesos is
a. P19,800 c. P(19,800)
b. P18,000 d. P(18,000)

TIE BREAKER
1. Newcastle Ltd uses many kinds of machines in its operations. It constructs some of these machines itself and
acquires others from the manufacturers. The following information relates to machine A that it has recorded in the
2005-06 period.

Cash paid for equipment, including VAT of P8,000 P88,000

Costs of transporting machine - insurance and transport 3,000

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Labor costs of installation by expert fitter 5,000

Labor costs of testing equipment 4,000
Insurance costs for 2005-06 1,500
Costs of training for personnel who will use the machine 2,500
Costs of safety rails and platforms surrounding machine 6,000
Costs of water devices to keep machine cool 8,000
Costs of adjustments to machine during 2005-06 to make it operate
more efficiently 7,500

Determine the amount at which machine A should be recorded in the records of Newcastle Ltd.
a. P113,500 c. P116,000
b. P121,500 d. P105,500

2. In May 2006, Chubby Company relocated an employee from the company's head office to an office in another
city. As of June 30, 2006, the company's balance sheet date, the relocation costs are estimated as follows:

Cost of shipping goods P30,000

Airfare 60,000
Temporary accommodation costs for May and June 80,000
Temporary accommodation costs for July and August 90,000
Reimbursement for lease break cost paid in July. The
lease was terminated May 20,000
Reimbursement for costs of living increases for the
period May 2006 to April 2007 120,000
Total P400,000

How much is the provision for relocation costs as of June 30, 2006?
a. P400,000 c. P280,000
b. P210,000 d. P190,000

3. The following differences enter into the reconciliation of financial income and taxable income of Celtics Company
for the year ended December 31, 2006, its first year of operations.

Pretax accounting income P4,500,000

Excess tax depreciation 3,000,000
Litigation accrual 450,000
Unearned rent revenue deferred on the books but
appropriately recognized in taxable income 250,000
Interest income from long-term certificate of deposit 100,000

Additional information:
• Excess tax depreciation will reverse equally over a four-year period, 2007-2010.
• It is estimated that the litigation liability will be paid in 2010.
• Rent revenue will be recognized during the last year of the lease, 2010.
• Interest revenue from the from long-term certificate of deposit is expected to be P100,000 each year
until their maturity at the end of 2010.

Compute for the current income tax expense in 2006.

a. P735,000 c. P560,000
b. P647,500 d. P770,000

4. Mandaue Company provides the following information for 2006:

Cash received from customers P8,000,00

0
Rent received 500,000
Interest received 300,000
Cash paid to suppliers and employees 3,000,000
Taxes paid 400,000
Interest paid on long term debt 600,000
Cash dividend paid 1,000,000

Under the direct method, cash provided by operating activities was

a. P3,800,000 c. P5,400,000
b. P4,800,000 d. P5,100,000

5. Under the accrual basis, rental income of Macho Company for the calendar year 2007 is P60,000. Additional
information regarding rental income are:

Unearned rental income, Jan. 1, 2007 P5,000

Unearned rental income, Dec. 31, 2007 7,500
Accrued rental income, Jan. 1, 2007 3,000

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

Accrued rental income, Dec. 31, 2007 4,000

How much actual cash rental was received by Macho Company in 2007?
a. P58,500 c. P62,500
b. P61,500 d. P65,500

6. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise
received is recorded. The population of documents for this test consists of all
a. Payment vouchers.
b. Purchase requisitions.
c. Receiving reports.
d. Vendor’s invoices.

7. How can an auditor test to determine whether Receiving Department procedures are applied properly?
a. Test a sample of receiving documents.
b. Observe receiving procedures on a surprise basis.
c. Review procedures manuals.
d. Interview receiving personnel.

8. For appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned
to
a. The treasurer’s department
b. Payroll accounting
c. General accounting
d. The timekeeping department

9. During an audit of the production cycle, you noted a control procedure requiring the accounting clerk to look up
the material invoice and match the material unit costs to the unit cost of material shown on the job cost sheet for all
government contract work. This procedure is designed to meet the control objective of
a. Validity.
b. Authorization.
c. Valuation.
d. Classification.

10. When perpetual inventory records are maintained in quantities and in pesos, and internal control procedures over
inventory are deficient, the auditor would probably
a. Have to disclaim an opinion on the income statement that year.
b. Want the client to schedule the physical inventory count at the end of the year.
c. Insist that the client perform physical counts of inventory items several times during the year.
d. Increase the extent of tests for unrecorded liabilities at the end of the year.

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