Easy Question No.

1
Under a royalty agreement with another company, W and Co. will pay
royalties for the assignment of a patent for three years. When should the
company recognize the royalty payment as an expense?
A
.
B
.
C
.
D
.

In the period paid.

In the period incurred.

At the date the royalty agreement began.
At the date the royalty agreement expired.

Easy Question No. 2

The following shall be considered as "de minimis" benefits not subject to
income tax as well as withholding tax on compensation income of both
managerial and rank and file employees, except:
a. Monetized value of vacation and sick leave credits paid to government
officials and employees
b. Monetized unused sick leave credits of private employees not exceeding ten
(10) days during the year
c. Medical cash allowance to dependents of employees, not exceeding P750 per
employee per semester or P125 per month;
d. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to
not more than P1,500;

ANSWER: B - Must be vacation leave instead of sick leave

BASIS: Sec. 1 of RR No. 5-11 (Further amendments to RR Nos. 2-98 and
3-98, as last amended by RR No. 5-2008, with respect to "De Minimis
Benefits".
Easy Question No. 3

Diamante Motors sells locally manufactured jeeps on installments. Information

presented below relates to Diamantes operations for the last three calendar years.
Cost of installment sales
Gross profit on installment sales
Outstanding installment recl,
Dec. 31:
From 2015
From 2014
From 2013

2015
P8,765,625
32%
P9,728, 125
3,025, 000

2014
P7,700,000
30%

2013
P4,950,000
28%

P8,387,500
1,512,500

P4,812,500

Diamante Motors uses the installment method of accounting.

How much is the total realized gross profit for calendar year 2015?

Answer: P3,044,250
From 2015 [(8,765,625/68%)9,728,125]*32%
From 2014 (8,387,500-3,025,000)*30%
From 2013 (1,512,500*28%)
Total

P1,012,000
1,608,750
423,500
P3,044,250

Easy Question No. 4

The inventory on hand at December 31, 2015 for FLASH Company is valued
at a cost of Php947,800. The following items were not included in the
inventory amount:
a. Purchased goods in transit, shipped FOB destination invoice price
Php32,000 which included freight charges of Php1,600.
b. Goods held on consignment by FLASH Company at a sales price of
Php28,000, including sales commission of 20% of the sales price
c. Goods sold to ARROW Company, under terms FOB destination, invoiced
for Php18,500 which includes Php1,000 freight charges to deliver the
goods. Goods are in transit.
d. Purchased goods in transit, terms FOB shipping point, invoice price
P48,000 freight cost Php3,000.
e. Goods out on consignment to COCO Company, sales price hpP36,400.
Assuming that the Companys selling price is 140% of inventory cost, the
adjusted cost of Arrow Companys inventory at December 31, 2015 should
be:
ANSWER: Php1,037,500
Unadjusted balance
a. Goods in transit (P18,500-1,000)/140%
b. Purchased goods (P48,000+3,000)
c. Goods on consignment (36,400)/140%
Adjusted balance

Php947,80
0
12,500
51,000
26,000
Php1,037,3
00

Easy Question No. 5

Which of the following is true in relation to law of diminishing marginal
utility?
A. Marginal utility will decline as a consumer acquires additional units of a
specific product.
B. Total utility will decline as a consumer acquires additional units of a
specific product.
C. Declining utilities causes the demand curve to slope upward.
D. Margin is excess of cost over sales.

Answer: A
The law states that marginal utility declines as consumers acquire
more of a good. Therefore, answer (a) is correct. Answer (b) is incorrect
because total utility will not decline as more of a good is acquired.
Answer (c) is incorrect because the demand curve slopes downward.
Easy Question No. 6
(LW) Which of the followingterms is normally not associated
extinguishing an obligation through the process of novation?
D
a Expromission
.
b Subrogation
.
c Delegacion
.
d Remission
.

with

Easy Question No. 7

Which of the following situations is most likely to be the subject of a written
interim report to the engagement client?
a) Seventy percent of the planned audit work has been completed with no
significant adverse observations.
b) The auditors have decided to substitute survey procedures for some of the
planned detailed review of certain records.
c) The engagement program has been expanded because of indications of
possible fraud.
d) Open burning at a subsidiary plant poses a prospective violation of pollution
regulations.

Solution: D

a) Incorrect. There is no need for earlier consideration in this situation.

b) Incorrect. Changes in auditor methodology are not of particular importance to
the engagement client.
c) Incorrect. Indications of possible fraud would not be communicated to the
engagement client.
d) Correct. Such a situation would require immediate attention.

Easy Question No. 8

Which of the following is the most likely strategy to reduce the breakeven
point?
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.

D. Increase the fixed costs and decrease the contribution margin.

Answer: C
The short-cut breakeven point formula is calculated as follows:

Thus, by decreasing the numerator (fixed costs) and increasing the

denominator (contribution margin), the breakeven point will be
reduced.
Easy Question No. 9
Minecraft Company quarries marble at two locations and sells it to be used in
construction of buildings. The Company provides for a depletion rate of 5%.
The quarry is leased on a year-to-year basis with the Company paying a
royalty of Php0.05 per ton of marble quarried. Other data relevant to the
requirements are:
Estimated total reserves, tons
Php60,000,000
Tons quarried through December 31, 2014
4,000,000
Tons quarried, 2014
1,600,000
Sales, 2014
1,200,000
How much would be the depletion for 2014 for financial reporting
purposes?
ANSWER: P-0Since the two quarries are merely leased and the Company pays a
Php0.05 royalty for every ton of marble quarried, Minecraft will not
recognize the quarries as assets in its books and will record only
royalty expense for leasing them. Hence, there is no depletion
expense.
Easy Question No. 10

AAB Construction Company uses the percentage-of-completion method of

accounting. In 2014 AAB began work under contract #1348, which provided for a
contract price of P20,000,000. Other details follow:
Cost incurred during the year
Estimated costs to complete, as of December
31
Billing during the year
Collections during the year

2014
P3,000,000
12,000,000

2015
P15,750,000
-0-

3,600,000
2,500,000

15,400,000
15,500,000

The portion of the total contract price to be recognized as revenue in 2014 is

Answer: P4,000,000
Cost incurred during the year
Total
estimated
(3,000,000+12,000,000)
Percentage of completion
Contract price
Revenue in 2014

costs

P3,000,000

15,000,000

20%
20,000,000
P4,000,000

Average Question No. 1

1. The manager of a production line has the authority to order and receive
replacement parts for all machinery that require periodic maintenance. The
internal auditor received an anonymous tip that the manager ordered
substantially more parts than were necessary from a family member in the parts
supply business. The unneeded parts were never delivered. Instead, the
manager processed receiving documents and charged the parts to machinery
maintenance accounts. The payments for the undelivered parts were sent to the
supplier, and the money was divided between the manager and the family
member.

Which of the following tests would best assist the auditor in deciding
whether to investigate this anonymous tip further?

a) Comparison of the current quarters maintenance expense with prior-period

activity.
b) Physical inventory testing of replacement parts for existence and valuation.
c) Analysis of repair parts charged to maintenance to review the reasonableness
of the number of items replaced.
d) Review of a test sample of parts invoices for proper authorization and receipt.

Solution: C

a) Incorrect. The current quarters expense would equal the prior periods
activity unless the manager just started this fraud. The auditor has no
information on how long this might have been occurring.
b) Incorrect. Physical testing would not locate nonexistent parts that have
already been charged to maintenance.
c) Correct. An analysis of repair parts charged to maintenance would
quantify the excessive number of items and detect that abuse may
be occurring.
d) Incorrect. Lack of segregation of duties allowed the fraud to occur. The
manager was authorized to process both the purchase and receipt, so the
test would only verify the fraudulent paperwork.

Average Question No. 2

(LW) Under the cumulative voting system of electing directors of a 5-member
board of a duly organized corporation, a stockholder owning 100 shares is
entitled to cast a total of

a.
b.
c.
d.

20 votes, distributed equally among 5 candidates that the stockholder

wishes to elect
100 votes, distributed equally among 5 candidates that the stockholder
wishes to elect
100 votes, all casted in favor of a single candidate that the stockholder
wishes to elect

500 votes, with majority of votes casted in favor a single

candidate and remaining votes distributed equally among 4 other
candidates that the stockholder wishes to elect

Average Question No. 3

The McGraw Company manufactures and sells Abriza handbags to assorted
prints. Data for 2014 follows:
Selling price per piece
Variable cost per piece
Number of handbags to breakeven
Net post-tax income (35% tax rate)

P8.00
P2.00
25,000
P5,850

In 2015, the company estimates that the selling price will be P9.50 per
piece, variable cost to manufacture will increase by 25%, and fixed costs
will increase by 20%. Income tax rate of 35% will not change.
How many units of handbags does McGraw Company must see in 2015 in
order to maintain the same net income after tax as in 2014?
Answer: 27,000 units
BEP in units =

Fixed Cost
(SP per unit - VC
per unit)

Fixed cost = BEP in units * (SP per unit - VC per unit)

Fixed cost = 25,000 units * (P8 - P2)
P150,0
Fixed cost =
00
CURREN
T YEAR
P189,00
P159,000
0 Squeezed
(150,000) (180,000)[P150,000 *120%]

LAST YEAR
Contribution
Margin
Fixed cost
Net income
before tax
[(NI after tax /
35%)]

9,000

9,000

Income tax [35%

NI before tax]
Net income after
tax
Contribution
margin
New CM Rate
[(P9.5 - (P2 *
125%))]
Sales to meet last
year's net income

(3,150)

(3,150)

P5,850

P5,850

P189,0
00
P7
27,000
units

Average Question No. 4

An asset is sold in three different active markets at different prices. An entity enters
into transactions in all markets and can access the price of those markets for the
asset at the measurement date.
Market A
Price that would be received
Transaction costs in that market
Costs to transport the asset to
the market
Net amount that would be
received

Market C

Php26
(3)

Market
B
Php25
(1)

(2)

(2)

(2)

21

22

20

Php23
(1)

Assuming none of these markets is the principal market, which of the

three markets is the most advantageous market and what is the fair
value of the asset?
ANSWER: Market B and FV is Php23
Per PFRS 13, Fair Value Measurement, a fair value measurement
assumes that the transaction to sell the asset or transfer the liability
takes place either in the principal market of the asset or liability or in
the absence of a principal market, in the most advantageous market
for the asset.
The most advantageous market is the market that maximizes the
amount that would be received to sell the asset or minimizes the
amount paid to transfer the liability, after taking into account
transaction costs and transport costs. Thus, Market B is the most

advantageous market as it has the largest net amount that would be

received.
Fair value then is equal to Php23 which is the price that would be
received minus the costs to transport the asset to the market.

Average Question No. 5

On January 2, 2014, Keith Urban Corporation purchased 70% of the ordinary

shares
of
Mimi
Company
for
P 4,675,000. At that date, Mimi Company had P 4,887,500 of ordinary shares
outstanding and accumulated profits of P 1,572,500. Mimis equipment with a
remaining life of 5 years had a book value of P 2,380,000 and a fair value of P
2,550,000. Mimis remaining assets had a book value equal to their fair
values. All intangible assets except goodwill are expected to have remaining
lives of 10 years. Non-controlling interest shall be measured at fair value.
The income and dividend figures for both Keith Urban and Mimi Company are
as follows:
Income
Dividends
Keith
Urban 201
P
P
Corporation:
4
1,572,500
425,000
201
1,785,0
510,0
5
00
00
Income
Dividends
Mimi Company:
201
P
P
4
340,000
55,000
201
569,5
127,5
5
00
00
Keith Urbans income shown does not include any dividend income from Mimi.
Keith Urbans accumulated profits balance at the date of acquisition was P
5,958,500. Assume that Mimi has outstanding 6% P 100 par value cumulative
preference shares with an aggregate value of P 1,000,000 that are classified
as equity and are held by non-controlling interests. What is the income
attributable to parent on December 31, 2014?
Answer: P1,744,700

Average Question No. 6

Kings Landing Corporation has the following sales during the month:
Sales:
Sale to private entities subject to 12%
P 50,000
Sale to private entities subject to 0%
150,000
Sale of exempt goods
200,000
Total sales for the month
400,000

The following input taxes were passed on by its VAT suppliers:

Input tax:
Input tax on taxable goods
Input tax on zero-rated sales
Input tax on sale of exempt goods
Input tax on depreciable capital goods
not attributable to any specific activity
(pertains to monthly amortization for 60 months)

P5,000
3,000
2,000
20,000

How much is the creditable input tax for the month?

a.
b.
c.
d.

P21,750
P10,500
P32,000
P18,000

ANSWER: D
SOLUTION:
Input tax on sale subject to 12%
Input tax on zero-rated sale
Ratable portion of the input tax not
directly attributable to any activity:
Taxable sales (0% and 12%) X Amount of
Total Sales
input tax
not directly
attributable
200,000 X P20,000
400,000
Total creditable input tax for the month

P5,000
3,000

10,000
P18,000

BASIS: Section 4.110-4 of RR No. 16-05, as amended.

Average Question No. 7
Which statement is incorrect?
A
.

B
.
C
.
D
.

To assess whether an internally generated intangible asset meets the criteria

for recognition, an entity classifies the generation of the asset into a research
phase and a development phase.
The cost of an internally generated asset comprises all directly attributable
costs necessary to create, produce and prepare the asset for its intended use.
Internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance shall be recognized as intangible assets.
Internally generated goodwill shall not be recognized as an intangible asset.

Answer: C
PAS 38, Intangible Assets paragraph 63 states that internally generated
brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.
Average Question No. 8
Spouses Ramsay and Sansa sold their family home, a capital asset for
P10,000,000. It was acquired in 1980 at P3,000,000. The fair market value as
determined by the BIR is P12,000,000 but the fair market shown in the
schedule of values of the City Assessor is P11,000,000. Later, the spouses
utilized P8,000,000 for the acquisition of their new family home. The capital
gains tax due is
a.
b.
c.
d.

P720,000
P576,000
P144,000
P120,000

ANSWER: C
Solution:
(12,000,000 x 6%) x (2,000,000/10,000,000) = P144,000

Average Question No. 9

The following are types of hedging relationships except?
A
.
B
.
C
.
D
.

Fair Value Hedge

Cash Flow Hedge

Hedge of a Net Investment in a Foreign Operation
Hedge of Foreign Currency Risk of a Firm Commitment

Answer: D
PAS 39, Financial Instruments: Recognition and Measurement, paragraph
86 provides that hedging relationships are of three types a sfollows:
a) fair value hedge: a hedge of the exposure to changes in fair value of a
recognised asset or liability or an unrecognised firm commitment, or an
identified portion of such an asset, liability or firm commitment, that is
attributable to a particular risk and could affect profit or loss.
b) cash flow hedge: a hedge of the exposure to variability in cash flows
that (i) is attributable to a particular risk associated with a recognised
asset or liability (such as all or some future interest payments on variable

rate debt) or a highly probable forecast transaction and (ii) could affect
profit or loss.
c) hedge of a net investment in a foreign operation as defined in PAS
21.

Average Question No. 10

A race track bettor won on the following bets:
On double, a bet of P200 and dividend of P100 per P10 ticket
On winner take all, a bet of P500 and a dividend of P700 per P50 ticket
On forecast, a bet of P1,000 and dividend of P150 per P50 ticket
The total percentage tax due from the winnings is
a. P2,060
b. P1,030
c. P802
d. P412
ANSWER: C
Solution:
On double {[(20010)x100] 200} x 4%
On winner take all {[(50050)x700] 500} x 10%
On forecast {[(1,00050)x150] 1,000} x 4%
Total percentage tax due

72
650
80

P 802

Difficult Question No. 1

What computer-assisted audit technique would an auditor use to identify a
fictitious or terminated employee?
a)
b)
c)
d)

Parallel simulation of payroll calculations.

Exception testing for payroll deductions.
Recalculations of net pay.
Tagging and tracing of payroll tax-rate changes.

Solution: B

a) Incorrect. In a parallel simulation, data that were processed by the

engagement clients system are reprocessed through the auditors program
to determine if the output obtained matches the output generated by the
clients system. This technique might identify problems with the clients
processing but would not identify a fictitious or terminated employee.
b) Correct. This type of computer-assisted audit technique (CAAT)
program can identify employees who have no deductions. This is
important because fictitious or terminated employees will generally
not have any deductions.
c) Incorrect. A CAAT program can recalculate amounts such as gross pay, net
pay, taxes and other deductions, and accumulated or used leave times.
These recalculations can help determine if the payroll program is operating

correctly or if employee files have been altered, but would not identify a
fictitious or terminated employee.
d) Incorrect. In this type of CAAT program, certain actual transactions are
tagged, and as they proceed through the system, a data file is created that
traces the processing through the system and permits an auditor to
subsequently review that processing. This would not, however, identify a
fictitious or terminated employee.

Difficult Question No. 2

Statement I: A corporation may be a partner in a partnership.
Statement II: A corporation may be a stockholder of another corporation.
Statement III: A limited partner may contribute money to a partnership but
not services.
A
a Only statement I is false
c Only statement III is false
.
.
b Only statement II is true
d All of the statements are true
.
.
Difficult Question No. 3
During 2014, Diana Corp. experienced the following power outages:
Number of
outages per
month
0
1
2
3

Number of
months
3
2
4
3
12

Each power outage results in an out-of-pocket costs of P400. For P500 per
month, Diana can lease an auxiliary generator to provide power during outages.
If Diana leases an auxiliary generator in 2015 the estimated savings (or
additional expenditures) for 2015 would be?

Answer: Php1,600 or Php1,600 savings

In 2014 Diana incurred the following costs due to power outages:
Number of outages
per month
0
1
2
3

x
x
x
x

Number of
months
3
2
4
3
12

Number of
outages
0
2
8
9
19

19 outages x P 400/outage = P7,600

The cost of leasing an auxiliary generator is only P6,000 (12 mos.
P500/mo). Therefore, Diana would be expected to save P1,600 (P7,600
P6,000) in 2015 by leasing the generator.
Difficult Question No. 4
On December 31, 2015, an entity has an asset of Php4,000 for interest
receivable that will be taxed when the cash is received in 2016. Tax is
payable at 20 percent on the first Php500,000 of taxable profit earned and
30 percent on any remainder. In 2015, the entity earned taxable profit of
Php450,000. In 2016, the entity expects to earn taxable profit of
Php550,000. What amount should the entity recognize for the deferred tax
liability relating to the interest receivable?
ANSWER: Php836
PAS 12 Income Taxes provides that when different tax rates apply to
different levels of taxable income, deferred tax assets and liabilities are
measured using the average rates that are expected to apply the
taxable profit (tax loss) of the periods in which the temporary
differences are expected to reverse.
Expected tax to be paid in 2016
(500,000 x 20% + 50,000 x
30%)

Php115,0
00

Expected average tax rate

(115,000/550,000)

20.91%

Deferred tax liability

(4,000 x 20.91%)

Php836

Difficult Question No. 5

Jon Snow Company had the following results of operations for the taxable
year 2015:
Gross Income
P500,000
Business expenses
P200,000
Capital Gain (capital asset held for one(1) year)
P 50,000
Capital Loss (capital asset held for 24 months)
P100,000
How much is the taxable income of John Snow Company for the year
2015?
Answer: P300,000

Solution:
Gross Income
Business expenses
Net Income from operations
Capital Gain
Capital Loss
Net Capital Loss
Taxable Income

P500,000
200,000
P300,000
P 50,000
(P100,000)
(50,000)

P300,000

Section 39(C) of the NIRC states that losses from sales or exchanges of
capital assets shall be allowed only to the extent of the gains from such
sales or exchanges.
Difficult Question No. 6
Sarah Company, a manufacturing entity, owns 75% of the ordinary shares of
Sandra Company, an investment entity. Sandra Company owns 60% of the
ordinary shares of Vanessa Company, an insurance entity. Sandra Company
has control over Vanessa Company. In Sarah Companys consolidated
financial statements, should consolidation accounting or equity method be
used for Sandra Company and Vanessa Company?
A
.
B
.
C
.
D
.

Consolidation used for Sandra and equity method used for Vanessa.
Consolidation used for both Sandra and Vanessa
Equity method used for Sandra and consolidation used for Vanessa
Equity method used for both Sandra and Vanessa

Answer: B
Sarah should use consolidation for both Sandra and Vanessa. Sarah has a
controlling financial interest in Sandra through a 75% direct ownership.
The intercorporate stock ownership of Sarah with respect to Vanessa is
45%. Sandra owns 60% of Vanessa and Sarah owns 75% of Sandra. Thus,
indirectly, Sarah owns 45% of Vanessa (75% x 60%). Further, Sandra
controls Vanessa.
Difficult Question No. 7
On April 1, 2014 a company engages in the development of a property,
which is expected to take five years to complete, at a cost of P6M. the
statements of financial position at December 31, 2013 and December 31,
2014, prior to capitalization of interest are as follows:
12/31/13

12/31/14

Development property
Other assets
Loans
5.5% debenture stock
Bank loan at 6% per
annum
Bank loan at 7% per
annum
Shareholders equity

6,000,000
P 6,000,000

P1,200,000
6,000,000
P7,200,000

P 2,500,000
-

P2,500,000
1,200,000

1,000,000

1,000,000

P 3,000,000

P4,700,000

2,500,000

2,500,000

The bank loan with effective interest rate at 6% was drawn down to match
the development expenditure on April 1, July 1, and October 1 2014. The
5.5% debenture stocks were irredeemable. Expenditure was incurred on the
development as follows: April 1 P600,000; July 1 P400,000; October 1
P200,000. If all the borrowing were general (i.e., the bank loan 6% was not
specific to the development) and would have been avoided but for the
development, then the amount of interest to be capitalized would be
(Round-off to 2 decimal % for the general borrowing rate)
Answer: P46,130

Difficult Question No. 8

Which of the following is not a source of obligation?
B
a Culpa Aquiliana
c Negotiorum Gestio
.
.
b Mora Accipendi
d Solutio Indebeti
.
.

Difficult Question No. 9

An audit committee is concerned that management is not addressing all
internal audit observations and recommendations. What should the audit
committee do to address this situation?

a) Require managers to provide detailed action plans with specific dates for
addressing audit observations and recommendations.
b) Require all managers to confirm when they have taken action.
c) Require the chief executive officer to report why action has not been taken.
d) Require the chief audit executive to establish procedures to monitor progress.

Solution: D

a) Incorrect. Management are responsible for ensuring action on all internal

audit observations and recommendations, but some actions may take time to

complete and it is not practical to expect that all will be resolved when an
audit committee meets.
b) Incorrect. See answer a.
c) Incorrect. See answer a.
d) Correct. The chief audit executive is responsible for establishing
appropriate procedures for monitoring the progress by management
on all internal audit observations and recommendations. This
responsibility should be written into its charter by the audit
committee, and progress should be reported at each audit
committee meeting.

Difficult Question No. 10

Cersei owns shares of stocks of Castle Black Corporation which she
purchased several years ago for P1 million. The stocks have a current fair
market value of P10 million. She donates one-half of the stocks to her
daughter Myrcella on December 31, 2014 and the remaining half to her
daughter Myrcella again on January 2, 2015 when the fair market value of
the stocks was P5 million.
Assuming Myrcella subsequently sold all the shares of stocks to Ellaria Sand
for P10 million, how much did Cersei gain on the sale?
a.
b.
c.
d.

P4 million
P5 million
P9 million
P10 million

Answer: C. P9 million
Solution: P10 million P1 million = P9 million