POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY
Sta. Mesa, Manila
Junior Philippine Institute of Accountants
Financial Accounting Part 1 & 2
INSTRUCTIONS: Select the best answer for each of the following questions. Mark only one answer for
each item on the answer sheet provided. Strictly NO ERASURES ALLOWED. Erasures will render your
examination answer sheet INVALID. Smile while answering these questions, smile keeps the stress away,
and stress is the one which prevent you from answering questions correctly. So keep your smile, like this. 
GOODLUCK!

1. Which of the following may be optionally measured at fair value in the Statement of Financial
Position?
I. Held for trading securities
II. Property, plant and equipment
III. Biological Assets, current
IV. Noncurrent assets held for sale
V. Intangible assets
a. I and II only c. I, II and III only
b. II and V only d. II, IV and V only

2. To be reported as “cash and cash equivalents,” the cash and cash equivalents must be
a. Unrestricted in use for current operations
b. Available for the purchase of property, plant and equipment
c. Deposited in the bank
d. Set aside for the liquidation of long-term debt

3. At the beginning of 2010, Finney Company received a three-year non-interest bearing P1,000,000
trade note. Finney reported this note as a P1,000,000 trade note receivable on its 2010 year-end
statement of financial position and P1,000,000 as sales revenue for 2010. What effect did this
accounting for the note have on Finney's net earnings for 2010, 2011, 2012, and its retained earnings
at the end of 2012 respectively?
a. Overstate, overstate, understate, no effect
b. Overstate, understate, understate, no effect
c. Overstate, understate, understate, understate
d. No effect, no effect, no effect, no effect

4. Which statement is incorrect concerning biological assets and agricultural produce?

a. Inventories comprising agricultural produce that an entity has harvested from its biological
assets are measured on initial recognition at fair value.
b. Changes in fair value of a biological assets or an agricultural produce are included in the
determination of income of the current period.
c. An unconditional government grant related to a biological asset that has been measured at fair
value less point of sale costs should be recognized as income when the grant becomes
receivable.
d. Biological assets are measured at fair value less costs to sell at initial recognition and at each
subsequent reporting period.

5. Which of the following statements regarding biological assets and agricultural produce is (are) true?
I. The gain or loss on value change of a biological asset due to price change and physical change
is taken to profit or loss.
II. A gain is recognized in the income statement when agricultural produce are harvested, ready
for sale.
 III. An entity that owns a mango orchard reports both the land and the fruit trees at fair value as
biological assets.
a. I and II only c. II and III only
b. I and III only d. I, II and III

6. An entity imported machinery to install in its new factory before year-end. However, due to
circumstances beyond its control, the machinery was delayed by a few months but reached the
factory premises before year-end. While this was happening, the entity learned from the bank that it
was being charged interest on the loan it had taken to fund the cost of the plant. What is the proper
treatment of freight and interest expense under PAS 16?
a. Both expenses should be capitalized
b. Interest may be capitalized but freight should be expressed
c. Freight charges should be capitalized but interest cannot be capitalized under these
circumstances
d. Both expenses should be expensed

7. Which of the following statements regarding revaluation of asset is incorrect?

a. When an item of property, plant and equipment is revalued, accumulated depreciation is either
restated proportionately with the change in the carrying amount of the asset or eliminated
against the gross carrying amount of the asset and the net amount restated to the revalued
amount.
b. When an item of property and equipment is revalued, the entire class of property in which the
asset belongs should be revalued.
c. Revaluation of assets should be done annually
d. The revaluation surplus included in equity may be transferred directly to retained earnings
when the surplus is realized, either upon sale or disposal, as the asset is used in the enterprise.

8. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resources
d. Expenditure for activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource

9. OJ Corporation owns an office building where nine out of ten floors are leased out to a third party
under an operating lease, while the 10th floor is occupied by OJ as its head office. What is the proper
accounting treatment for this in OJ’s financial statements?
a. Nine floors are reported as Investment Property while the tenth floor as Property and
Equipment
b. Nine floors are reported as Property and Equipment while the tenth floor as Investment
Property
c. The entire building is reported as Investment Property
d. The entire building is reported as Property and Equipment

10. Which of the following should be amortized over the periods of estimated benefit?
a. Patent registration cost for a successfully developed product for commercial sale
b. Goodwill arising from the purchase of an existing business
c. Legal cost in successful defense of a patent infringement suit
d. Costs incurred in organizing a corporation

11. Which is incorrect concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price, including
import duties and taxes and any directly attributable expenditure of preparing the asset for its
intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is
based on its fair value at the date of acquisition.
 c. If an intangible asset is acquired free of charge or by way of government grant, the cost is
equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to
the total payments over the credit period.

12. What is the acceptable approach in accounting for government grants?

a. Government grants should be recognized as income over the periods necessary to match them
with the related costs
b. Government grants should be credited directly to donated capital
c. Government grants should be credited directly to retained earnings
d. Government grants should be deferred and amortized over a maximum period of 20 years

13. Which of the following statements is false concerning repayment of government grants?
a. Repayment of a grant related to income should be applied first against any unamortized
deferred credit set up in respect of the grant.
b. The excess of the repayment over the deferred credit set up (or when no deferred credit exists)
should be recognized immediately as an expense.
c. A government grant that becomes repayable should be accounted for as a revision to an
accounting policy
d. Repayment of a grant related to an asset should be recorded by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable.

14. Under the revised PAS 23, borrowing costs that are not directly attributable to the acquisition,
construction or production of a qualifying asset (other borrowing costs)
a. should be charged to expense when incurred
b. should be capitalized as part of the cost of the asset for which the funds borrowed are used
c. may be charged to expense or capitalized, depending on the decision of management
d. should not be charged to expense nor capitalized

15. Which of the following most likely would be considered a discontinued operation?
a. Shifting production or marketing functions from one location to another.
b. A sporting goods manufacturer has a bicycle division that meets FRSC's definition of a
component of the entity and decides to outsource the manufacture of its bicycles.
c. The unprofitable brands of a beauty products component of an entity that manufactures and
sells consumer products are discontinued.
d. An entity that is a franchiser in the quick-service restaurant business also operates company-
owned restaurants that are unprofitable in a certain region and, as a result, the entity decides
to exit both the quick-service business as well as the company-owned restaurants in that
region.

16. According to PFRS 5, an entity should classify a segment as “discontinued operations”

a. At the time the board of directors enter into a binding sale agreement to dispose the segment.
b. At the time the board of directors approved the plan and formally announces the plan to
dispose
c. At the date the operation meets the criteria to be classified as held for sale or when the entity
has disposed of the operation.
d. At the earlier of the date the entity enters into a binding sale agreement and the date the board
of directors formally announces the plan to dispose of the segment.

17. Which statement is correct in determining recoverable amount?

a. If the carrying amount is less than fair value less costs to sell or value in use, it is not
necessary to calculate the other amount.
b. If fair value less costs to sell cannot be determined, then recoverable amount is value in use.
c. For assets to be disposed of, recoverable amount is fair value less costs to sell.
d. All of the above
18. Which statement is incorrect regarding fair value less costs to sell?
a. If there is a binding sale agreement, use the price under that agreement less costs of disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal.
c. If there is no active market, use the best estimate of the asset's selling price less costs of
disposal.
d. Costs of disposal are the direct added costs including existing costs and overhead.

19. Which of the following is (are) external sources of information on impairment of an asset?
I. Significant decline in market value of an asset which is more than would be expected as a
result of passage of time or normal use.
II. Significant changes in technological, market, economic or legal environment with an adverse
effect on the enterprise or in the market to which the asset is dedicated.
III. Evidence of obsolescence or physical damage of the asset
a. I only c. II and III only
b. I and II only d. I, II and III

20. A temporary difference which would result in a deferred tax liability is

a. Accrual of estimated litigation loss
b. Accrual of estimated warranty cost
c. Subscriptions received in advance
d. An installment sale which is included in financial income at the time of sale and included in
taxable income when collected

21. A future taxable amount is exemplified by:

a. revenue that is included in the tax return before it is included in pretax a ccounting income
b. gain that is included in the tax return before it is included in pretax accounting income.
c. expense that is included in the tax return after it is included in pretax accounting income.
d. expense that is included in the tax return before it is included in pretax accounting income.

22. RMV Inc.’s financial reporting basis of its plant asset exceeded the tax basis because it uses a
different method of reporting depreciation for financial reporting purposes and tax purposes. If there
is no other temporary differences, RMV should report a
a. Current tax asset c. Deferred tax asset
b. Deferred tax liability d. Current tax payable

23. A lease does not qualify as finance lease if

a. The lease transfer ownership of the leased asset to the lessee at the end of the lease term.
b. The lease gives right to the lessee to purchase the leased asset for an amount that is equal to
the fair value of the leased asset on exercise date.
c. The lease term is for the major part of the economic life of the asset even if title is not
transferred.
d. The present value of minimum lease payments amounts to at least substantially all of the fair
value of the leased asset.

24. Where there is a lease of land and buildings and the title to the land is not transferred, generally the
lease is treated as if
a. Both land and buildings are finance leases
b. Both land and buildings are operating leases
c. Land is operating lease; building is finance lease
d. Land is finance lease; building is operating lease

25. Under a defined benefit plan, the retirement expense in the current period includes all of the
following, except
a. Current service cost
b. Amount recognized in the current period with respect to past service cost of current and
retired employees, experience adjustments, and changes in actuarial assumption
 c. The result of any plan termination, settlement or curtailment
d. Contribution to a separate fund

26. The vested benefits of an employee represent

a. Benefits to be paid to the retired employee in the current year
b. Benefits to be paid to the retired employee in the subsequent year
c. Benefits accumulated in the hands of an independent trustee
d. Benefits that are not contingent on the employer’s continuing in the service of the employer

27. Trading securities are investments that are, by their very nature
a. Readily marketable
b. Intended to be held for more than one year
c. Readily marketable and intended to be held for more than one year
d. Readily marketable and intended to be held for not more than one year

28. Which of the following statements regarding provisions is incorrect?

a. Provisions should be recognized for penalties or clean-up costs for unlawful environmental
damage.
b. Provisions should be recognized for product warranties
c. Provisions should be recognized for future operating losses
d. Provisions should be recognized for outstanding premiums offered to customers

29. Use of the effective interest method in amortizing a premium on bonds payable would result in
a. A constant amount of premium amortization each period over the life of the bonds
b. An increasing amount of premium amortization each period over the life of the bonds
c. A decreasing amount of premium amortization each period over the life of the bonds
d. Cannot be determined from the information given.

30. The bonus issue of shares has the following impact on the equity of a company;
a. total equity increases;
b. total equity decreases;
c. one equity account increases and another equity account decreases by an equal amount;
d. only the amount of issued share capital changes.

31. Hypno Limited estimated that it would receive future cash flows from the use of Equipment:
 End of Year 1 P10,000
 End of Year 2 P50,000
 End of Year 3 P20,000

The discount rate was determined as 8%. The ‘value in use’ of the Equipment is:
a. P80,000 c. P68,000
b. P73,600 d. P63,500

32. One of the cash-generating units of Fume Corporation is that associated with the manufacture of
wine barrels. At 31 December 2009, Fume Corporation believed, based on an analysis of economic
indicators, that the assets of the unit were impaired. The carrying amounts the assets of the unit at
31 December 2009 were:

Buildings P420,000
Accumulated depreciation - buildings
(Depreciated at P60,000 per annum) (180,000)
Factory machinery 220,000
Accumulated depreciation – machinery
(Depreciated at P45,000 per annum) (40,000)
Goodwill 15,000
 Inventory 80,000
Receivables 40,000
Allowance for doubtful debts (5,000)
Cash 20,000

Fume Corporation determined the value in use of the unit to be P535,000. The receivables were
considered to be collectible, except those considered doubtful.

During 2010, Fume Corporation increased the depreciation charge on buildings to P65,000 per
annum, and to P50,000 per annum for factory machinery. The inventory on hand at 31 December
2009 was sold by the end of 2010. At 31 December 2010, Fume Corporation, due to a return in the
market to the use of traditional barrels for wines and an increase in wine production, assessed the
recoverable amount of the cash-generating to be P20,000 greater than the carrying amount of the
unit. The recoverable amount of the buildings at 31 December 2010 was P175,000.

How much is the carrying amount of factory machinery at 31 December 2010 after the reversal of
impairment loss?
a. P135,000 c. P131,322
b. P133,200 d. P123,271

33. The Buckethead Company has a single investment property which had originally cost P580,000 on 1
January 2007. At 31 December 2009 its fair value was P600,000 and at 31 December 2010 it had a fair
value of P590,000. On acquisition, the property had a useful life of 40 years.

What should be the expense recognized in Buckethead's profit or loss for the year ending 31 December
2010 under each of the fair value model and the cost model?

Fair value model Cost model

a. P14,750 P14,500
b. P10,000 P14,500
c. P24,500 P10,000
d. P10,000 P14,750

34. The Conehead Company purchased an investment property on 1 January 2007 for a cost of CU220,000.
The property had a useful life of 40 years and at 31 December 2009 had a fair value of P300,000. On 1
January 2010 the property was sold for net proceeds of P290,000. Conehead uses the cost model to
account for investment properties.

What is the gain or loss to be recognized in profit or loss for the year ended 31 December 2010
regarding the disposal of the property?
a. P86,500 gain c. P10,000 loss
b. P81,000 gain d. P92,000 gain

35. On January 1, 2007, Wall-Nut Co. purchased a patent for P714,000. The patent is being amortized
over its remaining legal life of fifteen years from the date of purchase. During 2010, Wall-Nut
determined that the economic benefits of the patent would not last longer than ten years from the
date of acquisition. What amount should be reported in the statement of financial position for the
patent, net of accumulated amortization, at December 31, 2010?
a. P428,400 c. P504,000
b. P489,600 d. P523,600

36. Squash Company purchased a customer list and a formula for a total of P400,000. Squash 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.

Formula
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?

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

37. The cash account in the current asset section of the statement of financial position of Grave Buster
Company showed a balance of P55,500. It was found to include the following items:

Petty cash fund (P100 is in the form of paid vouchers)

P 500
Checking account balance in Philippine Trust Company, per bank statement (a P2,500
check is still outstanding)
25,500
Undeposited receipts, including a post-dated check for P500
12,000
Currencies and coins awaiting deposit 5,500
Bond sinking fund - cash 10,000
Check drawn by management, returned by bank marked NSF
2,000

The correct cash balance for Grave Buster Company's statement of financial position is
a. P43,000 c. P42,400
b. P42,900 d. P40,400

38. The following information is shown in the accounting records of Sun Company:

Balances as of January 1
Cash 620,000
Accounts receivable 670,000
Merchandise inventory 860,000
Account payable 530,000

Balances as of December 31
Accounts receivable 910,000
Merchandise inventory 780,000
Account payable 480,000

The total sales and cost of goods sold for the current year were P7,980,000 and P5,830,000,
respectively. All sales and all merchandise purchases were made on credit. Various expenses of
P1,070,000 were paid in cash. Deferred income tax liability increased by P75,000 during the year.
There were no other pertinent transactions. The cash balance on December 31 should be?
a. P1,080,000 c. P1,490,000
b. P2,560,000 d. P3,050,000
 39. Scaredy, Inc. had the following bank reconciliation at March 31, 2010:
Balance per bank statement, 3/31/10 P37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding checks 12,600
Balance per books, 3/31/10 P34,900

Data per bank for the month of April 2010 follow:

Deposits P42,700
Disbursements 49,700

All reconciling items at March 31, 2010 cleared the bank in April. Outstanding checks at April 30,
2010 totaled P5,000. There were no deposits in transit at April 30, 2010. What is the cash balance
per books at April 30, 2010?
a. P25,200 c. P27,900
b. P30,200 d. P35,500

40. The following information was included in the bank reconciliation for Jalapeno, 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

41. Ice Corp. has the following data relating to accounts receivable for the year ended December 31,
2010:

Accounts receivable, January 1, 2010 P480,000

Allowance for doubtful accounts, January 1, 2010
19,200
Sales during the year, all on account, terms 2/10, 1/15, n/60
2,400,000
Cash received from customers during the year 2,560,000
Accounts written off during the year 17,600

An analysis of cash received from customers during the year revealed that P1,411,200 was received
from customers availing the 10-day discount period, P792,000 from customers availing the 15-day
discount period, P4,800 represented recovery of accounts written-off, and the balance was received
from customers paying beyond the discount period.

The allowance for doubtful accounts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31, 2010 is 125%
of the rate used on December 31, 2009.
 The accounts receivable at December 31, 2010 is
a. P270,400 c. P265,600
b. P307,200 d. P302,400

42. Certain information relative to the operation of Spikeweed Company follows:

Accounts receivable, January 1 P 800,000

Account receivable collected 2,600,000
Cash sales 500,000
Inventory, January 1 1,200,000
Inventory, December 31 1,100,000
Purchases 2,000,000
Gross profit on sales 900,000

What is the accounts receivable balance at December 31?

a. P1,700,000 c. P1,200,000
b. P1,300,000 d. P 700,000

43. On December 1, 2010, Tangle Mortgage Co. gave Kelp Corp. a P200,000, 12% loan. Kelp received
proceeds of P194,000 after the deduction of a P6,000 nonrefundable loan origination fee. Principal
and interest are due in 60 monthly installments of P4,450, beginning January 1, 2011. The
repayments yield an effective interest rate of 12% at a present value of P200,000 and 13.4% at a
present value of P194,000. What amount of accrued interest receivable should Tangle include in its
December 31, 2010, statement of financial position?
a. P4,450 c. P2,000
b. P2,166 d. P 0

44. Based on the information:

Credit sales P1,720,000

Collections on accounts receivable during the year
1,700,000
Cash sales 8,100,000
Unadjusted balance in Allowance for doubtful accounts
500 debit
Sales returns and allowances for credit sales 40,000
Accounts receivable, beginning of the year 140,000

If bad debts are estimated to be 1 1/2% of ending accounts receivable, in the adjusting entry to
recognize bad debts, you would debit bad debt expense for:
a. P2,300 c. P1,300
b. P1,900 d. P1,800

45. Data regarding Cattail Corp.'s available-for-sale securities follow:

Cost Fair value

December 31, 2009 P150,000 P130,000
December 31, 2010 150,000 160,000

Differences between cost and fair values are considered temporary. Cattail's 2010 other
comprehensive income would be
a. P30,000 c. P10,000
b. P20,000 d. P 0
46. Blover, Inc. is preparing its financial statements for the year ended December 31, 2010. Accounts
payable amounted to P200,000 before any necessary year-end adjustment related to the following:

 At December 31, 2010, Blover has a P50,000 debit balance in its accounts payable to Twist, a
supplier, resulting from a P50,000 advance payment for goods to be manufactured to Blover's
specifications.
 Checks in the amount of P25,000 were written to vendors and recorded on December 29,
2010. The checks were dated January 5, 2011.

What amount should Blover report as accounts payable in its December 31, 2010 statement of
financial position?
a. P275,000 c. P200,000
b. P250,000 d. P125,000

47. The following data were compiled prior to preparing Plantern Company’s statement of financial
position at December 31, 2010:

Cash in BPI (current account), including a compensating balance of P50,000

which is not legally restricted
P160,000
Cash in Metro Bank (savings account) set aside for building construction to
start next year 200,000
Cash surrender value of life insurance policy 80,000
Investment in shares of an associate 250,000
Investment in shares held for trading 42,000
Investment in shares held indefinitely 24,000

Merchandise inventory (of which P100,000 is pledged as security as security

for a bank loan) 400,000
Notes receivable, all due within one year, including a P30,000 note discounted
120,000
Prepaid items, including deferred bond issue costs of P20,000
34,000
Reserve for anticipated inventory market price declines
40,000
Unearned finance charges on installment accounts receivable
30,000
Undeposited collections, including P2,000 customer’s check returned, marked
DAIF 12,000
Trade installment accounts receivable, including amount of P100,000 due after
one year 300,000

Determine the total amount of current assets to be reported in Plantern’s statement of financial
position at December 31, 2010.
a. P988,000 c. P888,000
b. P986,000 d. P848,000

48. On 1 July 2010, Zen Company handed over to a client a new computer system. The contract price for
the supply of the system and after-sales support for 12 months was P800,000. Zen estimates the cost of
the after-sales support at P120,000 and it normally marks up such costs by 50% when tendering for
support contracts. The revenue Zen should recognize in its financial year ended 31 December 2010 is
a. P620,000 c. P710,000
b. P800,000 d. Nil

49. The Zombies Company provides service contracts to customers for maintenance of their electrical
systems. On 1 October 2010 it agrees a four-year contract with a major customer for P154,000. Costs
 over the period of the contract are reliably estimated at P51,333. How much revenue should the
company recognize in profit or loss in the year ended 31 December 2010?
a. P 9,625 c. P 3,208
b. P38,500 d. P12,833

50. Bungee Co. is a calendar-year retailer. Its year-end physical count of inventory on hand did not
consider the effects of the following transactions:
 Goods with a cost of P50,000 were shipped by Bungee FOB shipping point on December 30 and
were tendered to and accepted by the buyer on January 4.
 Goods with a cost of P40,000 were shipped FOB destination by a vendor on December 30 and
were tendered to and accepted by Bungee on January 4.
 Goods were sold on the installment basis by Bungee. Installment receivables representing sales of
goods with a cost of P30,000 were reported at year-end. Bungee retains title to such goods until
full payment is made.
 Goods with a cost of P20,000 were held on consignment for a vendor. These goods were excluded
from the count although they were sold in January.

If inventory based solely on the physical count of items on hand equaled P1 million. Bungee should
report inventory at year-end of
a. P1,000,000 c. P1,040,000
b. P1,070,000 d. P1,020,000

51. The accounting staff of PRTC Company submitted an inventory list at December 31, 2010 which
showed a total value of P5,000,000. The following information which may or may not be relevant to
the inventory value submitted, are given below:
i. Excluded from the inventory were merchandise costing P80,000 because they were transferred to
the delivery department for packaging on December 28 to be shipped on January 2, 2011.
ii. The bill of lading and their import documents on a merchandise were delivered by the bank and
the trust receipt accepted by the Company on December 26, 2010. Taxes and duties have
been paid on this shipment but the customs broker has not delivered the merchandise until
January 7, 2011. Delivered cost of shipment totaled P800,000. This shipment was not
included in the inventory on December 2010.
iii. A review of the company's purchase orders shows a commitment to buy P100,00 worth of
merchandise. This was not included in the inventory because the goods were received on
January 3, 2011.
iv. Suppliers' invoice for P30,000 worth of merchandise dated December 28, 2010 was received thru
the mails on December 20, 2010 although the goods arrived only January 4, 2011. Shipment
term is FOB, seller. This term was included on December 31, 2010 inventory by the
company.
v. Goods valued at P20,000 were received on December 28, 2006 for approval by PRTC Company.
The inventory team included this merchandise in the list but did not place value on it. On
January 4, 2011, the company informed the supplier by long distance telephone of the
acceptance of the goods and the supplier's invoice was received on January 7, 2011.
vi. On December 27, 2010, an order for P25,000 worth of merchandise was placed. This was
included in the year-end inventory although it was received only on January 5, 2011. Seller
shipped goods FOB, buyer.
vii. The company performed net realizable value testing. The NRV was correctly determined at
P5,880,000.

How much is the adjusted value of inventory on December 31, 2010?

a. P5,855,000 c. P5,825,000
b. P5,055,000 d. P5,880,000

52. Catapult Corp. purchased merchandise during 2010 on credit for P200,000; terms 2/10, n/30. All of
the gross liability except P40,000 was paid within the discount period. The remainder was paid
within the 30-day term. At the end of the annual accounting period, December 31, 2010, 90% of the
 merchandise had been sold and 10% remained in inventory. The entity has no beginning inventory.
The entity uses net method of recording purchases.

If the entity used the gross method of recording purchases instead of the net method, the reported
cost of goods sold would have been
a. The same c. Lower by P720
b. Higher by P720 d. P176,400

53. In reviewing an entity's draft financial statements for the year ended 31 December 2010, management
decided that market conditions were such that the provision for inventory obsolescence at 31 December
2010 should be increased by P30,000. If the same basis of calculating inventory obsolescence had been
applied at 31 December 2009, the provision would have been P18,000 higher than the amount
recognized in the statement of financial position. What adjustments should be made to the draft profit
for the year ended 31 December 2010 and the profit for the year ended 31 December 2009 presented as
a comparative figure in the 2010 financial statements?

Draft profit for 2010 Profit for 2009

a. P30,000 decrease P18,000 decrease
b. P12,000 decrease P18,000 decrease
c. No change P30,000 decrease
d. P30,000 decrease No change

54. Chomper Co. incurred P1,200,000 in manufacturing 10,000 widgets. The inventories were
manufactured for the purpose of filling-up a binding contract to sell of 9,000 units of widgets.

The contract with the buyer stipulates unit price of 100. The Company actively sells widgets in the
market at 200 per unit. The delivery date will be on January 10, 2011.

As of December 31, 2010, how much should the company recognize as net provision?
a. P180,000 c. P900,000
b. P200,000 d. Nil

55. Following information pertain to Prudential Company for the first quarter of 2010

Accounts receivable, Jan. 1, 2010 P 90,000

Accounts receivable, Mar. 31, 2010 85,000
Cash sales 32,000
Cash collected on accounts receivable 220,000
Inventory, March 31, 2010 52,000
Purchases, net 180,350
Gross profit rate on sales 30%
Bad debts written off 3,500
The inventory on January 1, 2010 is
a. P24,600 c. P52,000
b. P47,000 d. P43,500

56. On September 15, 2010, a fire destroyed the Torchwood Company’s warehouse causing damage to
its inventories stored in the warehouse. The company uses average retail inventory method in
inventory estimation. In connection with this, the company’s accountant gathered the following
information relating its inventories:
Cost Retail Price
Inventory, Beginning 190,000 300,000
Purchase Price 2,900,000 4,000,000
Purchase Discount 50,000 100,000
Purchase Allowance 90,000 150,000
 Cost Retail Price
Purchase returns 60,000 120,000
Freight In 20,000 30,000
Net Mark-up 60,000
Net Mark Down 80,000
Departmental Transfer – in (Debit) 386,800 430,000
Departmental Transfer – Out (Credit) 400,000 550,000
Abnormal Wastages 80,000 120,000
Normal Wastages 100,000 120,000
Employee Discounts 6,000 9,500
Sales Discount 5,000 8,200
Sales Allowances 21,000 32,150
Sales Returns 5,000 6,780

The company’s policy is to record sales adjustments directly to sales account. The sales account
showed ending balance of P2,908,000 on the date of fire. Physical inventory conducted after the fire
disclosed usable damaged goods which the company estimates can be sold at P100,000. Also, it is
estimated that the company will incur P4,000 to sell the goods. The original cost of this goods
amounted to P50,000.

How much should the company recognize as loss on inventory fire?

a. P 665,299 c. P615,299
b. P590,299 d. P565,299
BONUS,

57. On December 31, 2010, Repeater Corporation held wool (agricultural produce) that it had purchased
from three other farms at a cost of 30,000. The fair value less costs to sell of this wool was
determined to be 32,000 at the year-end. This wool was subsequently sold for 33,000 (after
deducting costs to sell of P500) on February 14, 2011.

At December 31, 2010, how much is the carrying amount of the wool?
a. P30,000 c. P32,000
b. P33,000 d. P32,500

58. The Survival Company is purchasing a second-hand polishing machine from a competitor who has
gone bankrupt. It will incur the following costs:

Agreed price to be paid to vendor P8,000

Dismantling the machine at its current location 400
Transportation to Survival's factory 350
Machine refurbishment costs prior to re-installation 175
Re-installation 125

The total amount included in non-current assets in respect of the machine should be
a. P8,875 c. P8,125
b. P9,050 d. P8,650

59. On 1 January 2009 Puzzle Company purchased a plating machine costing P135,000. Puzzle received a
grant of P13,500 towards the capital cost. Company policy is to treat the grant as a reduction in the cost
of the asset. What should be the depreciation expense in respect of this machine for the year ended 31
December 2010, assuming that depreciation is calculated on a 20% reducing balance basis?
a. P27,000 c. P21,600
b. P24,300 d. P19,440
60. On 1 January 2010 Imp Company borrowed P6 million at an annual interest rate of 10% to finance the
costs of building an electricity generating plant. Construction commenced on 1 January 2010 and cost
P6 million. Not all the cash borrowed was used immediately, so interest income of P80,000 was
generated by temporarily investing some of the borrowed funds prior to use. The project was completed
on 30 November 2010. What is the carrying amount of the plant at 30 November 2010?
a. P6,000,000 c. P6,520,000
b. P6,470,000 d. P6,420,000

61. The Gargantuar Company commenced the construction of a new packaging plant on 1 February 2010.
The cost of P1,800,000 was funded from existing borrowings. The construction was completed on 30
September 2010.

Gargantuar's borrowings during 2010 comprised:

 Loan from Allied Bank: P800,000 at 6% per annum;
 Loan from BDO Bank: P1 million at 6.6% per annum; and
 Loan from Metro Bank: P3 million at 7% per annum.

The amount of borrowing costs to be capitalized in relation to the packaging plant is

a. Nil c. P81,000
b. P121,500 d. P91,125

62. On January 1, 2008, Sunflower Company purchased for P240,000 a machine with a useful life of ten
years and no salvage value. The machine was depreciated by the double-declining balance method
and the carrying amount of the machine was P153,600 on December 31, 2009. Sunflower changed
to the straight-line method on January 1, 2010. Sunflower can justify the change. What should be
the depreciation expense on this machine for the year ended December 31, 2010?
a. P15,360 c. P24,000
b. P19,200 d. P30,720

63. The Zomboni Company is involved in the exploration of mineral resources. Its policy is to recognize
exploration assets and measure them initially at cost.

During 2010 Zomboni incurs the following expenditure:

Million
Exploratory drilling for minerals on site and related activities P200
Roads and infrastructure to access exploration site 350
Expenditures relating to the subsequent development of the resources 340

In accordance with PFRS6 Exploration for and Evaluation of Mineral Resources, at what amount should
exploration assets be initially recognized in the financial statements of Zomboni?
a. P200 million c. P550 million
b. P540 million d. P890 million

64. In January 2010, Potato Mine Co. purchased a mineral mine for P2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Potato Mine will be required by law to
restore the land to its original condition at an estimated cost of P220,000. The present value of the
estimated restoration costs is P180,000. Potato Mine believes it will be able to sell the property
afterwards for P300,000. During 2010, Potato Mine incurred P360,000 of development costs
preparing the mine for production and removed and sold 60,000 tons of ore. In its 2010 statement of
comprehensive income, what amount should Potato Mine report as depletion?
a. P135,000 c. P150,000
b. P144,000 d. P159,000

65. On December 31, 2010, the statement of financial position of Pea Shooter Corporation showed the
following property and equipment after charging depreciation:
 Building P3,000,000
Accumulated depreciation (1,000,000) P2,000,000
Equipment 1,200,000
Accumulated depreciation (400,000) 800,000

The company has adopted the revaluation model for the valuation of property and equipment. This
has resulted in the recognition in prior periods of an asset revaluation surplus for the building of
P140,000. On December 31, 2010, an independent valuer assessed the fair value of the building to
be P1,600,000 and the equipment to be P900,000.

The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December 31, 2010.

The net amount to be recognized in comprehensive income for 2010 related to the revaluation of
property and equipment is
a. P160,000 c. P260,000
b. P240,000 d. P300,000

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