THEORY OF ACCOUNTS ELIMINATION ROUND

1. Which of the following is a current asset?

(a) Cash surrender value of a life insurance policy, where the company is the
beneficiary
(b) Investment in marketable securities for the purpose of controlling the issuing
company
(c) Cash designated for the purchase of tangible fixed assets
(d) Trade installments receivable normally collectible in 24 months

ANSWER: D

2.In a statement of cash flows, which of the following items is reported as a cash outflow
from financing activities?
I. Payments to retire mortgage notes.
II. Interest payments on mortgage notes.
III. Dividend payments.

a. I, II, and III.

b. I and III.
c. I only.
d. II and III.

ANSWER: B

***Mortgage Note is a long term liability, while dividend payments affect SHE. Interest
payments on mortgage is an expense (hence operating).

***Payments to retire mortgage notes are considered cash outflows from financing
activities. Interest payments on mortgage notes are included in cash outflows from
operating activities because these payments are expenses and included in the
determination of net income. Dividend payments are included in cash outflows from
financing activities.

3. Which of the following is not among the elements of “control” based on PFRS 10?
a. investor’s power over the investee
b. investor’s exposure, or rights, to variable returns from its involvement with the
investee
c. investor’s ability to participate in the financial and operating policy decisions of an
entity
d. investor’s ability to use its power over the investee to affect the amount of the
investor's returns

ANSWER: C
An investor controls an investee if and only if the investor has all of the following
elements: [IFRS 10:7]

 power over the investee, i.e. the investor has existing rights that give it the ability
to direct the relevant activities (the activities that significantly affect the investee's
returns)
 exposure, or rights, to variable returns from its involvement with the investee
 the ability to use its power over the investee to affect the amount of the investor's
returns
4. Which statement is(are) correct regarding the scope of PAS 36 – Impairment of
Assets?
I. PAS 36 applies to some financial assets (i.e., investment in subsidiaries, associates,
and joint ventures).
II. PAS 36 does not apply to inventories, assets arising from construction contracts,
deferred tax assets, assets arising from employee benefits, or assets classified as held
for sale because existing PFRSs applicable to these assets contain requirements for
recognizing and measuring these assets.
III. PAS 36 applies to investment property that is measured at cost.
a. II only
b. I and II only
c. II and III only
d. I, II, and III

ANSWER: D

5. A newly set up dotcom entity has engaged you as its financial advisor. The entity has
recently completed one of its highly publicized research and development projects and
seeks your advice on the accuracy of the following statements made by one of its
stakeholders. Which of the following statements is accurate?
a. Costs incurred during the “research phase” can be capitalized.
b. Costs incurred during the “development phase” can be capitalized if criteria such as
technical feasibility of the project being established are met.
c. Training costs of technicians used in research can be capitalized.
d. Designing the jigs and tools qualify as research activities.

ANSWER: B

6. In accordance with PFRS 7 – Financial instruments: disclosures, which of the

following best describes the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities
a. Liquidity risk
b. Credit risk
c. Financial risk
d. Payment risk
ANSWER: A

7. Under the National Government Accounting System (NGAS), allotments of the

government general appropriation are recorded in the registries
a. At the beginning of the year
b. At the end of the year
c. Semiannually
d. Quarterly

ANSWER: D

8. In calculating diluted earnings per share (EPS), which of the following should not be
considered?
a. The weighted number of shares outstanding
b. The amount of cash dividends declared on ordinary shares
c. The amount of dividends declared on cumulative preference shares
d. The number of ordinary shares resulting from the assumed conversion of debentures
outstanding

ANSWER: B

9. From the viewpoint of the investor, which of the following securities provides the least
risk?
a. Mortgage bond
b. Subordinated debenture
c. Income bond
d. Debentures

ANSWER: A

10. The measurement basis often used to report a long-term payable requiring a
commitment to pay money at a determinable future date is
a. Current cost
b. General price level
c. Net realizable value
d. Present value of future cash flows

ANSWER D

11. In reconciling net income on an accrual basis to net cash provided by operating
activities. What adjustment is needed to net income because of (1) an increase during
the period in prepaid expenses, and (2) the periodic depreciation expense of company
properties?
a. (1) Add (2) Add
b. (1) Add (2) Deduct
c. (1) Deduct (2) Add
d. (1) Deduct (2) Deduct

ANSWER: C

12. Which of the following is the allowed method of accounting for interest in joint
venture of a joint venturer under IFRS 11 – Joint Arrangement?
a. proportionate consolidation
b. equity method
c. fair value model
d. cost model

ANSWER: B

A joint venturer recognises its interest in a joint venture as an investment and shall
account for that investment using the equity method in accordance with IAS 28
Investments in Associates and Joint Ventures unless the entity is exempted from
applying the equity method as specified in that standard. [IFRS 11:24]

13. Which of the following standards may apply in accounting for financial assets and
financial liabilities?
III. PAS 39 – Financial Instruments: Recognition and Measurement
IV. PFRS 9 – Financial Instruments
a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER: C

14. For which of the following purposes should an appropriation for possible loss
contingencies be established?
a. To match applicable costs with current revenue.
b. To reduce fluctuations in net income in order to lend stability of the entity.
c. To charge operations in periods of rising prices for the losses which may otherwise
be absorbed in periods of falling prices.
d. To inform shareholders that a portion of retained earnings should e set aside from
amounts available for dividends because of such contingencies.

ANSWER: D

15. The amortization of intangible assets over their useful lives is justified by the
a. Economic entity assumption
b. Going concern assumption
c. Monetary unit assumption
d. Historical cost assumption

ANSWER: B

16. After initial recognition, Investment property are measured using

a. fair value model
b. cost model
c. either A or B
d. Neither A nor B

ANSWER: C

17. Under PAS 33, treasury shares are considered as anti-dilutive because
a. They decrease the basic earnings per share
b. They decrease the diluted earnings per share
c. They decrease the number of common shares outstanding
d. They increase the income available to common shareholders

ANSWER: C

18. A cable television company receives deposits from customers, which are refunded
when service is terminated. The average customer stays with the company eight years.
How should these deposits be shown on the financial statements?
a. Operating revenue
b. Paid-in capital
c. Other revenue
d. Liability

ANSWER D

19. When equipment held under an operating lease is subleased by the original lessee,
the original lessee would account for the sublease as:
(a) operating lease (c) direct financing lease
(b) sales-type lease (d) capital lease

ANSWER: A

20. If the pattern in which the economic benefits from the asset are consumed cannot
be predicted reliably, the method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years’ digits

ANSWER: A
21. For a defined benefit pension plan, the discount rate used to calculate the projected
benefit obligation is determined by the
Expected return on plan asset Actual return on plan asset
a. yes yes
b. no no
c. yes no
d. no yes

ANSWER: D

22. These are differences between carrying amount of an asset or liability in the
statement of financial position and its tax base.
a.Temporary differences
b.Timing differences
c. Permanent differences
d. Accounting differences

ANSWER: A

23. Noncurrent asset classified as for rental to others shall be presented in the
statement of financial position as:
(a) Current asset
(b) Other noncurrent asset
(c) Noncurrent investment
(d) Property, plant and equipment

ANSWER: C

24. An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary
meets the criteria to be classified as held for sale. At the end of the reporting period,
the subsidiary has not yet been sold, and six months have passed since its acquisition.
How will the subsidiary be valued in the statement of financial position at the date of the
first financial statements after acquisition?
(a) At fair value
(b) At the lower of its cost and fair value less cost to sell
(c) At carrying amount
(d) In accordance with applicable PFRS

ANSWER B

25. The following statements relate to the term “profit”.

Statement 1: Profit is any amount over and above that required to maintain the capital at
the
beginning of the period.
Statement 2: Profit is the residual amount that remains after expenses have been
deducted
 from income.
(a) Both statements are false.
(b) Statement 1 is false.
(c) Statement 2 is false.
(d) Both statements are true.

ANSWER D

26. The purpose of trial balance is to:

(a) indicate whether total debits equal total credits.
(b) ensure that all transactions have been recorded.
(c) speed the collection of cash receipts from customers.
(d) increase assets and owner’s equity.

ANSWER: A

27. Under the accrual basis of accounting, if cash is received prior to the sale, then:
(a) revenue is recognized when the cash is received
(b) a liability is recognized when cash is received
(c) a liability is removed from the system when the cash is received
(d) revenue is removed from the system when the services have been performed or
the goods have been delivered

ANSWER B

28. Which of the following is the correct statement?

(a) Investments in available for sale securities and trading securities are classified
separately in a balance sheet.
(b) Investments in available for sale securities include only equity securities.
(c) Investments in trading securities include only debt securities.
(d) Increases in the market value of trading securities and available for sale
securities investments always cause the valuation account to decrease.

ANSWER A

29. Current liabilities include:

(a) only obligations which are expected to be settled within the normal operating
cycle.
(b) only obligations which are due to be settled within one year from balance sheet
date.
(c) obligations which are expected to be settled within the normal operating cycle
and obligations which are due to be settled within one year from balance sheet date.
(d) refinanced long-term debt falling due within one year from balance sheet.

ANSWER C
30. Which of the following statement is true?
(a) Managers of an entity are considered to be internal decision makers.
(b) External decision makers can be obtained whatever financial data they need
whenever they need it.
(c) Accounting information is prepared for and useful to only outside decision
makers.
(d) The members of the Board of Directors are not “internal users” only

PRACTICAL ACCOUNTING ONE ELIMINATION ROUND

1. On January 1, 2014, Angeline Company offered the top management share
appreciation right with the following terms:

Predetermined price P100 per share

Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2017

The quoted prices per share are 100, 124, 151 and 151 on January 1, 2014,
December 31, 2014, December 31, 2015 and December 31, 2016, respectively.
What amount should be charged to compensation expense for 2016 as a result of
the share appreciation right?
a. 2,550,000
b. 1,300,000
c. 850,000
d. 0

Solution:

Compensation Expense for 2014: 50,000 shares * 1/3 * (100- 124) per share = 400,000
Compensation Expense for 2015: 50,000 shares * 2/3 * (100- 151) per share – 400,000
= 1,300,000
Compensation Expense for 2016: 50,000 shares * 3/3 * (100- 151) per share – 400,000-
1,300,000
= 850,000

2 GRACE COMPANY owns a car dealership that it uses for servicing cars under
warranty. In preparing the financial statements, the entity needs to ascertain the
provision for warranty that it would be required to recognize at year-end. The entity
experience indicates that 60% of all cars sold in a year have zero defect, 25% of all
cars sold in a year have normal defect, and 15% of all cars sold in a year have
significant defect. The cost of rectifying a normal defect in a car is P10,000. The cost
of rectifying a significant defect in a car is P30,000. The entity sold 500 cars during
the year. What is the expected value of the provision for warranty for the current
year?
a. 3,500,000
b. 1,750,000
c. 1,400,000
d. 4,000,000

Solution:

Amount of Car Sales (per Unit): 500 cars

Cost of Normal Defect: (500 cars * 25% * Php 10,000) = 1,250,000

Cost of Significant Defect: (500 cars * 15% * Php 30, 000) = 2,250,000

Total: 3,500,000
3 PAMAE COMPANY provided the following data pertaining to dividends on ordinary
share investments for the current year.

 On October 1, the entity received P600,000 liquidating dividend from A

Company. The entity owned a 10% interest in A Company
 The entity owned a 20% interest in B Company which declared and paid a
P4,000,000 cash dividend to shareholders on December 31
 On December 1, the entity received from C Company a dividend in kind of one
share of D Company for every 4 C Company shares held. The entity had 100,000
C Company shares which have a market price of P50 per share on December 1.
The market price of D Company share was P10

What amount should be reported as dividend income for the current year?

a. 1,650,000
b. 1,050,000
c. 850,000
d. 250,000

Solution:

Dividend From Company A: Considered as a return on investment and is used to

reduce the investment account.

Dividend From Company B: Company B is considered as an Associate thus, dividend

is considered a deduction on the income from associate

Dividend From Company C:

# of Shares from C Company owned by Grace Company : 100,000

=100,000/4 = 25,000 shares of D Company to be received by Grace Company

25,000*10 = Php 250,000

4 CELINE COMPANY provided the following information on December 31, 2015:
Cash on hand 200,000
Petty cash fund 20,000
Philippine Bank current account 5,000,000
Manila Bank current account 4,000,000
City Bank current account (bank overdraft) ( 100,000 )
Asia Bank savings account for equipment acquisition 250,000
Asia Bank time deposit, 90 days 2,000,000

*Cash on hand included the following items:

Customer’s check for P35,000 returned by the bank December 26, 2015 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 10, 2016.
Customer’s check for P15,000 dated January 10, 2014, received December 23, 2015.
*The petty cash fund compromised the following items on December 31, 2015:
Currency and coins 5,000
IOU from an officer 2,000
Unreplenished petty cash vouchers 12,000
*Included among the checks drawn by Celine against the Philippine Bank current account
and recorded in December 2015 are:
Check written and dated December 31, 2015 and delivered to payee on January 3, 2014,
P25,000
Check written December 26, 2015, dated January 30, 2016 delivered t othe payee on
December 28, 2015, P45,000
What total amount should be reported as cash and cash equivalents on December 31,
2015?

a. 11,125,000
b. 11,225,000
c. 11,155,000
d. 11,205,000

Solution:

Cash on Hand: 200,000 – 35,000 -15,000= 150,000

Petty Cash Fund: 5,000
Philippine Bank:5,000,000+25,000+45,000 5,070,000
Manila Bank Current Account: 4,000,000
Asia Bank: 2,000,000

Total: 11,225,000

5. On July 1, 2014, Bell Company purchased P1,000,000 face value 8% bonds for
P950,000 including accrued interest to yield 10%. The bonds mature on January 1, 2021,
pay interest annually on December 31, and are classified as trading securities. On
December 31, 2014, the bonds had a market value of P960,000. On February 13, 2015, the
entity sold the bonds for P980,000. What total amount of income should be recognized for
the year ended December 31, 2014?

a. 130,000
b. 95,500
c. 90,000
d. 50,000
Solution:

Interest Income: P1,000,000*8% = 80,000 (Includes

accrued interest)
Gain on Revaluation of Tradin Securities: P950,000 – P960,000 = 10,000
90,000

6. Zoe Company started operations in 2014 and provided the following data:

Purchases for the year 8,000,000

Inventory on December 31, 2014 2,500,000
Collection from customers 3,000,000

The entity sold all of the goods on credit at a gross profit of 20% on cost. Allowance for
doubtful accounts has been set at P150,000 on December 31, 2014. What is the
balance of accounts receivable on December 31, 2014?

a. 3,600,000
b. 6,600,000
c. 3,875,000
d. 3,450,000

Solution:

Beginning Inventory: 0
Add: Purchases: 8,000,000
COGS: 5,500,000

Ending Inventory: 2,500,000

Beginning AR: 0
Add: Sales: (5,500,000 *120%) 6,600,000

Less: Collections: 3,000,000

Ending Balance of AR: 3,600,000

7. The inventory on hand at December 31, 2014 for Chime Company is valued at a cost of
P 947,800. The following items were not included in this inventory amount:

a. Purchased goods in transit, shipped FOB Destination. Invoice price P 32,000, which
includes freight charges of P 1,600.
b. Goods held on consignment by Chime at a sales price of P 28,000, including sales
commission of 20% of the sales price.
c. Goods sold to Ken Company under terms FOB Destination, invoiced for P 24,400
which includes P 1,000 freight charges to deliver the goods. The goods are in transit.
d. Purchased goods in transit, shipped FOB shipping point. Invoice price P 48,000.
Freight costs P 3,000.
e. Goods out on consignment to Joboy Company, sales price, P 36,400. Shipping cost
of P 2,000.
 Mark-up on cost for all sales is 30%. What is the correct cost of inventory to be reported
in Conrad’s financial statements?

a. 1,022,400
b. 1,041,800
c. 1,046,800
d. 1,078,800

Solution

Unadjusted Inventory P947,800

Add (item c) : (24,400 -1000) /130% 18,000
(Item d): (48,000+ 3000) 51,000
(Item e): (36,400/130%) + 2000 30,000

Adjusted Inventory: 1,046,800

8. The following transactions pertain to the general borrowings made during 2014 by
Victory Company in connection with the construction of the company’s new warehouse:

Principal Borrowing Costs

8% bank loan P 2,400,000 P 192,000
6% short term note 1,600,000 96,000
8% long term note 2,000,000 160,000
The construction started on January 1, 2014 and the warehouse was completed on
December 31, 2014. Expenditures on the warehouse were as follows:

January 1 P 400,000 March 31 P 1,000,000

June 30 1,200,000 September 30 1,000,000
December 31 400,000

How much is the capitalizable borrowing cost of Victory Company?

a. None
b. 149,400
c. 298,500
d. 448,000

Solution:

Weighted Average Expenditures: 400,000 * 12/12 = 400,000

1,200,000 * 6/12= 600,000
400,000 * 0 = 0
1,000,000 * 9/12= 750,000
1,000,000 * 3/12= 250,000

Total: 2,000,000
 Weighted Average Interest Rate: 448,000/6,000,000 = 7.47%

Maximum Allowable Capitalized Cost: 149,400

9. Lorenzo Company acquired a tract of land containing an extractable natural resource.
Lorenzo Company is required by the purchase contract to restore the land to a condition
suitable for recreational use after it has extracted the natural resource. Geological
survey indicated that the recoverable reserves will be 2,000,000 tons and that the
extraction will be completed in ten years. Relevant data follow:

Land 20,000,000
Exploration and development cost 5,000,000
Expected cash flow for restoration cost 2,000,000
Credit-adjusted risk free interest rate 10%
PV of 1 at 10% for ten periods 0.39

What should be the depletion charge per ton of extracted material?

a. 12.50
b. 12.89
c. 10.00
d. 11.00

Solution: Land: 20,000,000

Exploration and Development Cost: 5,000,000
Present Value of Restoration Cost 780,000
(2,000,000*0.39)

Total: 25,780,000
Divided by 2,000,000 Tons: 12.89

10. Christie is a retail store specializing in sportswear, including team jerseys and caps for
amateur sports teams. On March 1, 2014, Christie had inventory on hand with cost of
P40,000. During March 2014, it acquired P180,000 additional inventory (at cost) and
sold P200,000 of goods (at selling price that included gross profit of 25%). On March 31,
the store burned down and all accounting records were destroyed. If only P12,000 of
goods (at selling price) remain undamaged, what is the cost of the inventory destroyed
that Christie should claim from its insurance company?

a. 54,600
b. 60,000
c. 61,000
d. 70,000

Solution:

Inventory on March 1, 2014 40,000

Add: Purchases 180,000
Less: COGS: 150,000
(200,000*0.75)
Ending Inventory on March 31, 2014 70,000
Cost of Undamaged Inventory: 9,000
(12,000*.75)
Cost of Inventory Destroyed: 61,000
11. The entity has the following information:

12/31/2014 12/31/2015
Cumulative temporary difference giving rise
to future taxable amounts P8,000,000 P10,000,000
Cumulative temporary difference giving rise
to future deductible amounts P6,000,000 P5,000,000
Tax rate 30% 30%

The deferred tax expense for the year 2015 is

a. 300,000
b. 600,000
c. 900,000
d. 1,500,000

Solution:

Increase in Future Taxable Amounts: 2,000,000

Decrease in Future Deductible Amount: 1,000,000

Total: 3,000,000
Tax Rate: 30%

Deferred Tax Expense: 900,000

12. VINCENT COMPANY reported accounts receivable on December 31, 2015 as follows:
Aye Company 800,000
Bee Company 2,000,000
Cee Company 1,200,000
Day Company 1,000,000
All other accounts receivable 5,000,000

The entity determined that Aye Company receivable is impaired by P400,000 and Day
Company receivable is totally impaired. The other receivables from Bee and Cee are not
considered impaired. The entity determined that a composite rate of 5% is appropriate to
measure impairment on the remaining accounts receivable. What is the total impairment
of accounts receivable for 2015?

a. 1,810,000
b. 1,400,000
c. 1,650,000
d. 1,830,000

Solution:

Impairment for Aye Company : 400,000

Impairment for Day Company : 1,000,000

Collective Impairment for remainder of the receivables: 410,000

(2,000,000+1,200,000+5,000,000)*.05
13. On February 1, 2015, REGINA COMPANY factored receivables with a carrying amount
of P2,000,000 to ELENA COMPANY. REGINA assesses a finance charge of 3% of the
receivables and retains 5% of the receivable.

1. If the factoring is treated as a sale, what amount of loss from sale should REGINA
report in its 2015 statement of comprehensive income?

a. None
b. 60,000
c. 100,000
d. 160,000

Solution:
2,000,000 * 3%

2. Assume that REGINA retained significant amount of risks and rewards of ownership
and had a continuing involvement on the factored financial asset, what amount of
loss from factoring should REGINA recognize?

a. None
b. 60,000
c. 100,000
d. 160,000

14. MAICA COMPANY sells products in reusable containers. The customer is charged a
deposit for each container delivered and receives a refund for each container returned
within two years after the year of delivery. The entity accounts for the containers not
returned within the time limit as being retired by sale at the deposit amount. Information
for 2014 is as follows:

Container deposits on December 31, 2014 from deliveries in:

2013 150,000
2014 430,000 580,000
Deposits for containers delivered in 2015 780,000
Deposits for containers returned in 2015 from deliveries in:
2013 90,000
2014 250,000
2015 286,000 626,000

On December 31, 2015, what amount should be reported as liability for deposits on
returnable containers?

a. 494,000
b. 584,000
c. 674,000
d. 734,000

Solution:
 Year: Balance as of 12/31/14 Returns Balance as of
12/31/15
2013 150,000 90,000 0
2014 430,000 250,000 180,000
2015 780,000 286,000 494,000

15. During 2014, Redeem Company constructed asset costing P8,400,000. The weighted
average expenditures during 2014 amounted to P7,800,000. The entity borrowed
P4,000,000 at 7.5% on January 1, 2014. Funds not needed for construction were
temporarily invested in short-term securities and earned P120,000 in interest revenue. In
addition to the construction loan, the entity jmihad two other notes outstanding during the
year, a P3,000,000, 10-year, 10% note payable dated October 1, 2012, and a
P2,000,000, 8% 5-year note payable dated November 1, 2013. What amount of interest
should be capitalized during 2014?

a. 647.600
b. 593,000
c. 544,000
d. 529,600

Solution:

Specific Borrowing: P4,000,000*7.5% -120,000= 180,000

General Borrowigs:

Total Expected Interest Payment:

P3,000,000*10%= 300,000
P2,000,000*8%= 160,000
460,000

Weighted Average Interest Rate: 460,000/5,000,000 = 9.2%

Limit of Capitalizable Borrowing cost: 9.2%*(P7,800,000-4,000,000) =
349,600

Total Allowable Capitalizable Cost: 180,000+349,600 = 529,600

16. CHANTAL COMPANY acquired an asset costing P3,165,000. The asset is leased on
January 1, 2015 to another entiy. Five annual lease payments are due each December
31, beginning December 31, 2015. The unguaranteed residual value of the asset at the
end of the lease term on December 31, 2019 is P500,000. The asset will revert to the
lessor at the end of the lease term. The lessor’s implicit interest rate is 12%. The PV of 1
at 12% for 5 periods is 0.57 and the PV of an ordinary annuity of 1 at 12% for 5 periods
is 3.60. What is the annual rental payment?
 a. 879,166
b. 740,278
c. 800,000
d. 500,000

Solution:

Cost of the Asset: 3,165,000

PV of Unguaranteed Residual Value: 285,000
(500,000*0.57)

PV of Minimum Lease Payments: 2,880,000

PV Factor 3.60

Annual Rental Payment: 800,000

17. In 2014, ARUTRO COMPANY purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000. However, the entity is required to restore
the property to the original condition at discounted amount of P2,000,000. In 2014, the entity
spent P1,000,000 in development costs and P3,000,000 in building. In 2015, the amount of
P4,000,000 was spent for additional development on the mine. Production began in 2015
and tons extracted totaled 3,000,000 in 2015 and 2,500,000 in 2016. The remaining tons
totaled 7,000,000 and 3,500,000, respectively on December 31, 2015 and December 31,
2016. What amount of depletion should be recognized in 2016?

a. 10,500,000
b. 12,250,000
c. 9,000,000
d. 8,750,000

Solution:

Purchase price 28,000,000 Depletable amount

30,000,000
Restoration cost 2,000,000 Depletion in 2015 9,000,000
Development cost – 2014 1,000,000 Carrying value 21,000,000
Development cost – 2015 4,000,000
Total cost 35,000,000
Residual value ( 5,000,000 )
Depletable amount 30,000,000

Tons extracted in 2015 3,000,000 Tons extracted in 2016 2,500,000

Tons remaining on 2015 7,000,000 Tons remaining on 2016 3,500,000
Total no. of tons available 10,000,000 Total no. of tons available 6,000,000

Rate in 2015 (30,000,000/10,000,000) 3.00 Rate in

2016 (21,000,000/6,000,000) 3.50

Depletion in 2015 (3,000,000 * 3.00) 9,000,000 Depletion in 2016 (2,500,000 * 3.50)8,750,000

18. CARLO COMPANY reported the following information for 2015:

Inventory, January 1 5,000,000

Purchases 26,000,000
Freight in 2,000,000
Purchases returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales 30,000,000
Sales returns 3,000,000
Sales discounts 1,000,000
 A physical inventory taken on December 31, 2015 resulted in an ending inventory of
P4,000,000. On December 31, 2015, unsold goods out on consignment with selling price of
P1,000,000 are in the hands of a consignee. The gross profit was 25% on cost. On
December 31, 2015, what is the estimated cost of inventory shortage?

a. 2,400,000
b. 2,900,000
c. 1,600,000
d. 3,100,000

Solution:
Sales 30,000,000
Sales returns ( 3,000,000 )
27,000,000
Cost of goods sold (27,000,000/125%)21,600,000

Inventory, beginning 5,000,000

Purchases 26,000,000
Freight in 2,000,000
Purchase returns and allowances ( 3,500,000 )
Purchase discounts ( 1,500,000 )
Cost of goods sold ( 21,600,000 )
Inventory, end 6,400,000

Per physical inventory

Undamaged goods 4,000,000
Goods out on consignment (at cost) 800,000
Total 4,800,000

Estimated cost of shortage

(6,400,000-4,800,000) 1,600,000

19. On December 31, 2015, GISELLE COMPANY received two P2,000,000 notes receivable
from customers. On both notes, interest is calculated on the outstanding principal balance at
the annual rate of 3% and payable at maturity. The first note, made under customary trade
terms, is due in nine months and the second note is due in five years. The market interest
rate for similar notes on December 31, 2015 was 8%. The PV of 1 at 8%due in nine months
is 0.944 and the PV of 1 at 8% due in five years is 0.68. On December 31, 2015, what total
carrying amount should be reported for the two notes receivable?

a. 3,248,000
b. 3,494,400
c. 3,360,000
d. 3,564,000
 Solution:

Principal 2,000,000 Principal 2,000,000

Interest (2,000,000*3%*9/12) 45,000 Interest (2,000,000*3%*5) 300,000
Maturity value 2,045,000 Maturity value 2,300,000
PV factor 0.944 PV factor 0.68
PV of Notes receivable 1,930,480 PV of Notes receivable 1,564,000

Total carrying amount (1,930,400+1,564,000) 3,494,480

20. Hazzel Company was organized on January 1, 2014. On that date, the entity issued
200,000 shares with P10 par value at P15 per share. During the period January 1, 2014
through December 31, 2015, the entity reported net income of P2,000,000 and paid cash
dividends of P500,000. On January 5, 2015, the entity purchased 10,000 shares at P20 per
share to be held as treasury. On December 31, 2015, 5,000 treasury shares were sold at
P30 per share and the remaining treasury shares were retired. What is the total
shareholders’ equity on December 31, 2015?

a. 4,450,000
b. 4,350,000
c. 4,400,000
d. 4,950,000

Solution:

Equity – January 1, 2014 3,000,000

Net income 2,000,000
Dividends paid ( 500,000 )
Purchase of treasury shares (10,000*20) ( 200,000 )
Reissuance of treasury shares (5,000*30) 150,000
Total shareholder’s equity – December 31, 2015 4,450,000

21. Pearl Company revealed the following changes in the accounts for 2014:

Increase
(Decrease)
Cash 1,000,000
Accounts receivable, net of allowance 1,900,000
Inventory 2,200,000
Equipment (1,500,000)
Accounts payable 500,000
Bonds payable (2,000,000)
 During the current year, the entity issued 10,000 ordinary shares of P100 par value for
P150 per share. Dividend of P4,000,000 was paid in cash during the year. The entity
borrowed P3,000,000 from the bank and made interest payment of P200,000. The bank
loan is unpaid on December 31, 2014 and the interest payable on December 31, 2014
was P100,000. There is no interest payable on January 1, 2014. Equipment with fair
value of P500,000 was donated by a shareholder during the year. What is the net
income for the current year?
a. 2,000,000
b. 6,000,000
c. 4,500,000
d. 4,000,000

Solution:
Increase (Decrease)
Cash 1,000,000
Accounts receivable, net of allowance 1,900,000
Inventory 2,200,000
Equipment (1,500,000)
Accounts payable 500,000
Bonds payable (2,000,000)
Loan payable 3,000,000
Interest payable 100,000
Net increase (decrease) 2,000,000

Share capital (10,000*100) 1,000,000

Additional paid-in capital (10,000*50) 500,000
Dividends paid (4,000,000)
Donated capital (equipment) 500,000
Equity (2,000,000)

Net income (2,000,000+2,000,000) 4,000,000

22. On January 1, 2015, AURALENE COMPANY purchased a new machine for P6,000,000
for the purpose of leasing it. The machine has an estimated 10-year life. On April 1, 2015,
the entity leased the machine to a lessee for three years at a monthly rental of P400,000.
The lessee paid the rental for one year of P4,800,000 on April 1, 2015 and additionally paid
P900,000 to the lessor as a lease bonus to obtain the three-year lease. On April 1, 2015, the
entity paid P300,000 to a broker as a finder fee. What is the net rental income for 2015?

a. 3,150,000
b. 4,350,000
c. 3,200,000
d. 4,400,000

Solution:

Rental income – 4/1/2015-12/31/2015 (400,000*9 months) 3,600,000

Depreciation expense – 4/1/2015-12/31/2015
(6,000,000/10 years * 9/12) ( 450,000 )
Net rental income for 2015 3,150,000
23. JENNYFER COMPANY sells gift certificates redeemable only when merchandise is
purchased. The certificates have no expiration date. Upon redemption, the entity recognizes
the unearned revenue as realized. Data for 2014 are as follows:

Unearned revenue, January 1 1,500,000

Gift certificates sold 5,000,000
Gift certificates redeemed 4,000,000
Gift certificates expected not to be redeemed 300,000
Cost of goods sold 60%

On December 31, 2014, what amount should be reported as unearned revenue?

a. 2,500,000
b. 2,200,000
c. 1,000,000
d. 0

Solution:

Unearned revenue, January 1 1,500,000

Gift certificates sold 5,000,000
Gift certificates redeemed (4,000,000)
Gift certificates expected not to be redeemed ( 300,000 )
Unearned revenue – December 31 2,200,000

24. Herald Company reported P9,000,000 income before provision for income tax. The following
data are provided for the current year:

Rent received in advance 1,600,000

Income from exempt municipal bonds 2,000,000
Depreciation deduction for income tax purposes in excess of depreciation
reported for financial reporting purposes 1,000,000
Estimated tax payment for current year 500,000
Enacted future tax rate 30%

What amount of current income tax liability should be reported at year-end?

a. 1,780,000
b. 2,280,000
c. 2,580,000
d. 2,880,000

Accounting income 9,000,000

Advance rent received 1,600,000
Non-taxable income (2,000,000)
Excess depreciation (1,000,000)
Taxable income 7,600,000
Tax rate 30%
Income tax liability 2,280,000
25. ANTHONY COMPANY purchased an investment property on January 1, 2012 at a cost of
P2,200,000. The property had a useful life of 40 years and on December 31, 2014 had a fair
value of P3,000,000. On December 31, 2014 the property was sold for net assets proceeds
of P2,900,000. The entity used the cost model to account for investment property. What is
the gain or loss to be recognized for 2014 regarding the disposal of the property?

a. 865,000 gain
b. 810,000 gain
c. 100,000 loss
d. 700,000 gain

Cost 2,200,000
Accumulated depreciation – 1/1/2012-12/31/2014
(2,200,000/40*3 years) ( 165,000)
Carrying amount 2,035,000
Proceeds from sale 2,900,000
Gain on disposal of investment property 865,000

26. MAICA COMPANY reported the following current assets on December 31, 2015:
Cash in bank, net of P500,000 bank overdraft in another bank 4,000,000
Accounts receivable 7,500,000
Notes receivable 2,000,000
Note receivable discounted 500,000
Inventory, including P300,000 expected to be sold in the ordinary course
beyond 12 months 4,500,000
Financial assets at FVTPL 1,000,000
Financial assets at FVTOCI 1,500,000
Prepaid expenses, including cash surrender value of P200,000 500,000
Deferred tax assets 2,500,000
Equipment classified as “held for sale” 3,000,000

The accounts receivable included customers’ accounts of P5,000,000, net of customers’

credit balances of P600,000, allowance for doubtful accounts P500,000, and selling price of
unsold goods out on consignment at a markup of 50% on cost and excluded from ending
inventory P3,000,000. What amount should be presented as total current assets on
December 31, 2015?

a. 21,900,000
b. 22,400,000
c. 18,900,000
d. 21,600,000

Solution:

Cash in bank (4,000,000+500,000) 4,500,000

Accounts receivable (7,500,000+600,000-500,000) 7,600,000
Notes receivable 2,000,000
Notes receivable discounted 500,000
Inventory (4,500,000+1,500,000) 6,000,000
Financial assets at FVTPL 1,000,000
Prepaid expenses 300,000
Total current assets 21,900,000
27. On July 1, 2014, Veronica Company committed to a plan to dispose of a major subsidiary.
The disposal met the requirements for classification as discontinued operation. The carrying
amount of the subsidiary was P8,000,000 and management estimated the fair value less
cost of disposal at P6,500,000. The subsidiary had an operating loss of P2,000,000 for the
entire year. What amount should be presented as pretax loss from discontinued operation
for the current year?
a. 3,500,000
b. 1,500,000
c. 2,000,000
d. 0

Solution:

Carrying amount of subsidiary 8,000,000

FV less cost of disposal (6,500,000)
Loss from disposal of subsidiary 1,500,000
Operating loss 2,000,000
Pretax loss from discontinued operations 3,500,000

28. PAOLO COMPANY had the following account balances on December 31, 2015:
Petty cash fund 50,000
Cash on hand 500,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,000,000
Time deposit 2,000,000
Cash in bank – restricted account for plant addition, expected to be disbursed in 2016
500,000
Cash in sinking fund set aside for bond payable due June 30, 2016 1,500,000

The petty cash fund included unreplenished December 31, 2015 petty cash expense
vouchers of P5,000 and employee IOU of P5,000. The cash on hand included a P100,000
check payable to the entity dated
January 31, 2016. In exchange for a guaranteed line of credit, the entity has agreed to
maintain a minimum balance of P200,000 in the unrestricted current bank account. What
amount should be reported as cash and cash equivalents on December 31, 2015?

a. 6,940,000
b. 8,940,000
c. 7,940,000
d. 7,440,000

Solution:

Petty cash fund (50,000-5,000-5,000) 40,000

Cash on hand (500,000-100,000) 400,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,000,000
Time deposit 2,000,000
Cash in sinking fund 1,500,000
Cash and cash equivalents – December 31, 2015 8,940,000
29. Socorro Company provided the following share transactions for the current year.

January 1 Shares outstanding 44,000

February 1 Issued for cash 56,000
May 1 Acquired for treasury shares 25,000
August 1 25% stock dividend
September 1 Resold treasury shares 10,000
November 1 Issued 3 for 1 share split

What is the weighted average number of shares for EPS computation?

a. 305,000
b. 307,500
c. 103,750
d. 311,250

Solution:

January 1 Shares outstanding (44,000) 44,000

February 1 Issued for cash (56,000*11/12) 51,333.33
May 1 Acquired for treasury shares (25,000*8/12) (16,666.67)
August 1 25% stock dividend (78,666.67*.25) 19,666.67
September 1 Resold treasury shares (10,000*4/12) 3,333.33
101,666.67
November 1 Issued 3 for 1 share split (101,666.67*3) 305,000

30. MICHAEL COMPANY includes one coupon in each box of laundry soap it sells. A towel is
offered as premium to customers who send in 10 coupons and a remittance of P10.

2014 2015
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 65,000 90,000
Coupons redeemed 600,000 850,000

Experience indicates that only 40% of the coupons will be redeemed. What is the estimated
premium liability on December 31, 2015?

a. 1,400,000
b. 1,500,000
c. 3,200,000
d. 4,000,000
Solution:
2014 2015
Boxes of soaps sold 2,000,000 2,500,000
Percentage of redemption 40% 40%
Estimated no. of redemption 800,000 1,000,000
Coupons redeemed ( 600,000 ) ( 850,000 )
Unredeemed coupons 200,000 150,000
Divided by no. of coupons needed for a towel 10 10
No. of towels to be given 20,000 15,000
Multiply by cost of towel (50-10) 40 40
Estimated liability at year end 800,000 600,000

Total liability as of December 31, 2015 (800,000+600,000) 1,400,000