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FINANCIAL ACCOUNTING 2

FINAL DEPARTMENTAL EXAM


SET A
INSTRUCTION: Select the correct answer for each of the following questions. Mark only one answer for
each item by shading the box corresponding to the letter of your choice on the answer sheet provided.
STRICTLY NO ERASURES ALLOWED.
FOR ITEMS 1 TO 10 (TRUE OR FALSE)
If your answer is True shade box A if False shade box D.
1.

Nontaxable revenues are added to, and nondeductible expenses are deducted from,
financial income to determine the income that is subject to tax.

2.

Rent revenue received in advance is recognized as revenue for financial reporting


purposes prior to its recognition for tax purposes.

3.

Estimated warranty liabilities are deductible on the tax return prior to being reported in the income
statement.

."Unrealized losses on Financial assets at Fair Value through profit or loss result in lower
taxable income than financial accounting income.

5.

Permanent differences between financial and taxable income do not create any
accounting or reporting problems.

6.

Compensated absences include payments by employers for vacation, holiday, illness, or other
personal activities.

7.

PFRS requires sick pay to be accrued only if it vests with the employee.

8.

Defined benefit pension plans provide for an increase in future retirement benefits as additional
services are rendered by an employee.

9.

Rental payments, including any executory costs, are part of the minimum lease payments.

10.

The lessor uses the implicit interest rate in determining the present value of the minimum lease
payments.
11. An obligation that is contingent on the occurrence of a future event should be reported in the
balance sheet as a liability if
a. the future event is likely to occur
b. the amount of he obligation can be reasonably estimated
c. the occurrence of the future event is at least reasonably possible and the amount is known
d. the occurrence of the future event is probable and the amount can be reasonably
estimated

12. An item that would create a permanent difference in pretax financial and taxable incomes would be
a. using accelerated depreciation for tax purposes and straight-line

depreciation for book purposes.


b. purchasing equipment previously leased with an operating lease in prior years.
c. using the percentage-of-completion method on long-term construction contracts.
d. paying fines for violation of laws.

13 Which of the following temporary differences ordinarily creates a deferred tax asset?
a. Accrued warranty costs
b. Depreciation
c. Installment sales
d. Prepaid insurance
14. Which of the following statements characterizes defined contribution plans?
a. They are more complex in construction than defined benefit plans.
b. The employer's obligation is satisfied by making the appropriate amount of periodic
contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amounts by employer and employees.
15. Which of the following statements characterizes defined benefit plans?
a. They are comparatively simple in construction and raise few accounting issues for
employers.
b. Retirement benefits are based on the plan's benefit formula.
c. Retirement benefits depend on how well pension fund assets have been managed.
d. All of the above.
16. Generally accepted accounting principles require that certain lease agreements be accounted for as
purchases. The theoretical basis for this treatment is that a lease of this type
a. effectively conveys all of the benefits and risks incident to the ownership of property.
b. is an example of form over substance.
c. provides the use of the leased asset to the lessee for a limited period of time.
d. must be recorded in accordance with the concept of cause and effect.
17. Which of the following statements characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor transfers title of the leased property to the lessee for the duration of the lease
term.
d. The lessor records depreciation and lease revenue.
18.
When share options are granted, in what circumstances is compensation expense immediately
recognized?
a. In all circumstances
b. In circumstances when options are exercisable within 2 years for services rendered the next two
years
c. In circumstances when options are granted for prior service and the options are immediately
exercisable
d. In no circumstances

19. Which statement is incorrect concerning retained earnings?


a. When the deficit exceeds the total of other capital account balances, the excess is a capital
deficiency.

b. Appropriated retained earnings should be clearly distinguished from unappropriated retained


earnings.
c. A deficit should be presented as an asset.
d. A deficit is a debit balance in retained earnings.
20. Equity swap is define as
a. a debt restructuring arrangement whereby the debtor transfers noncash assets to the creditor in
full settlement of the debt
b. a debt restructuring arrangement whereby the debtor issues shares of stock to the
creditor in settlement of the debt
c. a debt restructuring arrangement whereby the debtor asks concession to change terms relating to
maturity value and/or interest
d. it may be also known as the dacion en pago mode of extinguishing obligation
21.
a.
b.
c.
d.

Earnings per share should be computed on the basis of


Average ordinary shares outstanding during the year.
Ordinary shares outstanding at the end of the year.
Ordinary shares outstanding at the beginning of the year.
Average ordinary and preference shares outstanding during the year.

22.

How would a share split affect each of the following?


Total
Shareholders'
Additional
Assets
Equity
Paid-In Capital
a
Increase
Increase
No effect
.
b
No effect
No effect
No effect
.
c
No effect
No effect
Increase
.
d
Decrease
Decrease
Decrease
.
23.

Under the effective-interest method of bond discount or premium amortization, the periodic
interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

24.

Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.

25. When share options are granted, in what circumstances is compensation expense immediately
recognized?
a. In all circumstances
b. In circumstances when options are exercisable within 2 years for services rendered the
next two years
c. In circumstances when options are granted for prior service and the options are
immediately exercisable
d. In no circumstances

26. State Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000, payable in
advance for five years. After five years, there is a bargain purchase option of $75,000. The appropriate
interest rate is 12 percent. What is the total present value of the lease and the first year's interest
expense?
a. $224,234 and $21,508
b. $224,234 and $26,908
c. $204,771 and $21,508
d. $204,771 and $19,173

27. Slice Company manufactures equipment that they sell or lease. On December 31, 2005, Slice leased
equipment to Hook Company for a five-year period after which ownership of the leased asset will be
transferred to Hook. The lease calls for equal annual payments of $50,000, due on December 31 of each
year. The first payment was made on December 31, 2005. The normal sales price of the equipment is
$220,000, and cost is $176,000. For the year ended December 31, 2005, what amount of income should
Slice report from the lease transaction?
a. $10,000
b. $30,000
c. $44,000
d. $74,000
Belle leased equipment to Darwin Ltd on 1 May 2008. At that time the collectability of the minimum lease
payments was not reasonably predictable. The lease expires on 1 May 2009. Darwin could have bought
the equipment from Belle for $1,600,000 instead of leasing it. Belle's accounting records showed a book
value for the equipment on 1 May 2008, of $1,400,000. Belle's depreciation on the equipment in 2008
was $180,000. During 2008, Darwin paid $360,000 in rentals to Belle for the 8-month period. Belle
incurred maintenance and other related costs under the terms of the lease of $32,000 in 2008. After the
lease with Darwin expires, Belle will lease the equipment to another company for two years.
28.

The income before income taxes derived by Belle from this lease for the year ended 31
December 2008, should be
a. $148,000.
b. $180,000.
c. $328,000.
d. $360,000.

Use the following information for questions 29 through 21


On 1 January 2008, Benner Pty Ltd signs a 10-year non-cancellable lease agreement to lease a storage
building from Grant Warehouse Ltd. Collectability of lease payments is reasonably predictable and no
important uncertainties surround the amount of costs yet to be incurred by the lessor. The following
information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the end of each year.
(b) The fair value of the building on 1 January 2008 is $900,000; however, the book value to Grant is
$750,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Benner
depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Benner's incremental borrowing rate is 11% per year. Grant Warehouse Ltd set the annual rental
to ensure a 10% rate of return. The implicit rate of the lessor is known by Benner.
(f) The yearly rental payment includes $3,000 of executory costs related to taxes on the property.

28.

What is the amount of the minimum annual lease payment? (Use four decimal places for the
factor and round off to the nearest dollar.)
a. $56,471
b. $143,471
c. $146,471
d. $149,471

29.

What is the amount of the total annual lease payment?


a. $56,471
b. $143,471
c. $146,471
d. $149,471

30.

From the lessor's viewpoint, what type of lease is involved?


a. Sales-type lease
b. Operating lease
c. Direct financing lease
d. None of these

31.

Benner Pty Ltd would record depreciation expense on this storage building in 2008 of (Rounded
to the nearest dollar.)
a. $0.
b. $75,000.
c. $90,000.
d. $146,471.

32.
In 2015, Eric Corporation reported $90,000 net income before income taxes. The income tax rate
for 2015 was 30 percent. Eric had an unused $60,000 net operating loss carryforward arising in 2014
when the tax rate was 35 percent. The income tax expense Eric would report for 2015 would be
a. $6,000.
b. $9,000.
c. $10,500.
d. $27,000.
33.
The Indy Company had taxable income of $12,000 during 2005. Indy used accelerated
depreciation for tax purposes ($3,400) and straight-line depreciation for accounting purposes ($2,000).
Assuming Indy had no other temporary differences, what would the company's pretax accounting income
be for 2005?
a. $1,400
b. $6,600
c. $13,400
d. $17,400
34.

The following information is taken from Blackhawk Corporation's 2005 financial records:

Pretax accounting income .............................


Excess tax depreciation ..............................
Taxable income .......................................

$1,500,000
(45,000)
$1,455,000

Assume the taxable temporary difference was created entirely in 2005 and will reverse in equal net
taxable amounts in each of the next three years. If tax rates are 40 percent in 2005, 35 percent in 2006,
35 percent in 2007, and 30 percent in 2008, then the total deferred tax liability Blackhawk should report
on its December 31, 2005, balance sheet is
a. $13,500.
b. $15,000.
c. $15,750.
d. $18,000.
EPS WITH PREFERENCE
35.
The following information was taken from Buccaneer Corporation's 2005 income statement:
Income before income taxes ...............
Income tax expense:
Current ................................
Deferred ...............................
Net income ...............................

$1,500,000
$564,000
36,000

600,000
$ 900,000

Buccaneers' first year of operations was 2005. The company has a 30 percent tax rate. Management
decided to use accelerated depreciation for tax purpose and the straight-line method of depreciation for
financial reporting purposes. The amount charged to depreciation expense in 2005 was $600,000.
Assuming no other differences existed between book income and taxable income, what amount did
Buccaneer deduct for depreciation on its tax return for 2005?
a. $480,000
b. $570,000
c. $600,000
d. $720,000
36.
Eden Company had pretax accounting income of $24,000 during 2005. Eden's only temporary
difference for 2005 relates to a sale made in 2003 and recognized for accounting purposes at that time.
However, Eden uses the installment sales method of revenue recognition for tax purposes. During 2005
Eden collected a receivable from the 2003 sale which resulted in $6,000 of income under the installment
sales method. Eden's taxable income for 2005 would be
a. $6,000.
b. $18,000.
c. $24,000.
d. $30,000.
BASIC NET INCOME COMPUTATION

29. 37. Wright, Inc. has an incentive compensation plan under which the sales
manager receives a bonus equal to 10 percent of the company's income after
deductions for bonus and income taxes. Income before bonus and income taxes
is $400,000. The effective income tax rate is 30 percent. How much is the bonus
(rounded to the nearest dollar)?
a. $40,000
b. $30,108
c. $28,000
d. $26,168

Use the following information for questions 38 through 40.


Lansing & Co. at the end of 2008, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income
$ 600,000
Estimated litigation expense
800,000
Extra depreciation for taxes
(1,200,000)
Taxable income
$ 200,000
The estimated litigation expense of $800,000 will be deductible in 2005 when it is expected to be paid.
Use of the depreciable assets will result in taxable amounts of $400,000 in each of the next three years.
The income tax rate is 30% for all years.
38.

Income tax payable is


a. $0.
b. $60,000.
c. $120,000.
d. $180,000.

39.

The deferred tax asset to be recognised is


a. $60,000 current.
b. $120,000 current.
c. $180,000 current.
d. $240,000 current.

40.

The deferred tax liability to be recognised is


Current
Non-current
a. $120,000
$240,000
b. $120,000
$180,000
c. $0
$360,000
d. $0
$300,000

41.
Northwest Company determined that it has an obligation relating to employees' rights to receive
compensation for future absences attributable to employees services already rendered. The obligation
relates to rights that vest, and payment of the compensation is probable. The amounts of Northwest's
obligations as of December 31 are reasonably estimated as follows:
Vacation pay .........................................
$110,000
Sick pay .............................................
80,000
In its December 31 balance sheet, what amount should Northwest report as its liability for compensated
absences?
a. $0
b. $80,000
c. $110,000
d. $190,000

42.
On January 1, 2005, Cubs Corporation adopted a defined benefit pension plan. The plan's
service cost of $150,000 was fully funded at the end of 2005. Prior service cost was funded by a
contribution of $60,000 in 2005. Amortization of prior service cost was $24,000 for 2005. What is the
amount of Cub's prepaid pension cost at December 31, 2005?
a. $36,000
b. $60,000
c. $84,000
d. $90,000
43.
Chester Company has a defined benefit plan. The fair value of plan assets on January 1, 2005,
was $1,500,000. No unrecognized net loss or gain existed. On December 31, 2005, the fair value of the
plan assets was $1,860,000. Benefits paid to retirees equaled $300,000. Company contributions to the
plan totaled $360,000. The settlement rate was 8 percent, and the expected long-term rate of return on
plan assets was 10 percent. The actual return on plan assets was
a. $150,000.
b. $180,000.
c. $224,000.
d. $300,000.
44. The Amelia Corporation was incorporated on January 1, 2015, with the following authorized
capitalization:

40,000 shares of ordinary share, no par value, stated value P40 per share
10,000 shares of 5 percent cumulative preference share, par value P10 per share

During 2015, Amelia issued 24,000 shares of ordinary share for a total of P1,200,000 and 6,000 shares of
preference share at P16 per share. In addition, on December 20, 2015, subscriptions for 2,000 shares of
preference share were taken at a purchase price of P17. These subscribed shares were paid for on
January 2, 2016. What should Amelia report as total contributed capital on its December 31, 2015,
statement of financial position?
a. P1,040,000
b. P1,262,000
c. P1,296,000
d. P1,330,000
45.
On July 1, Rainbow Corporation issued 2,000 shares of its P10 par ordinary and 4,000 shares of
its P10 par preference share for a lump sum of P80,000. At this date, Rainbow's ordinary share was
selling for P18 per share and the preference share for P13.50 per share. The amount of proceeds
allocated to Rainbow's preference share should be
a. P40,000.
b. P48,000.
c. P54,000.
d. P60,000.
46. On January 1, 2005, Digos Company granted an employee an option to purchase 50,000 shares
of Digos P50 par value common stock at P150 per share. The option became exercisable on
December 31, 2006, after the employee completed two years of service. The fair value of the
stock options cannot measured reliably on the date of grant. The option was exercised on
January 15, 2007. The market prices of Digos stock were:
January 1, 2005
200
December 31, 2006
230
January 15, 2007
250

Under the intrinsic value method, Digos should recognize compensation expense in 2005 at
a. 2,500,000
b. 1,250,000
c. 2,000,000
d.
0
47. On March 31, 2014, Caress Company issued P5,000,000 of 12% nonconvertible bonds
at 103 which are due on February 28, 2018. In addition, each P1,000 bond was
issued with 30 detachable stock warrants, each of which entitled the bondholder to
purchase, for P50, one share of Caress ordinary share, par value P25. On March 1,
2014, the quoted market value of each bonds at the time of issuance is 95. What
amount of the proceeds from the bond issue should Caress record as an increase in
stockholders equity?
a P600,000

b. P400,000

c. P300,000

d. P200,000

48. During 2014, Lancer Company experienced financial difficulties and is likely to default
on a P5,000,000, 15% three-year note dated January 1, 2011 and made payable to
Ibank. On December 31, 2014, the bank agreed to settle the note and unpaid
interest of P750,000 for 2014. The settlement
amount is P4,100,000 cash
payable on January 1, 2014. Ignoring income taxes, what amount should Lancer
report as a gain from debt restructuring in its 2014 income statement?
a. P1,650,000
b. P900,000
c. P750,000
d. P-049. On January 1, 2014, Darling Company issued P5,000,000 of 12%, 10-year bonds at
88.5. Interest is payable on December 31. If the market rate of interest was 10% at
the time the bonds were issued, how much cash was paid for interest in 2014?
a.
P600,000
b. P531,000
c. P500,000
d. P442,500
50. Lovely Companys trial balance reflected the following liability account balance at
December 31, 2014
Accounts Payable-P 380,000, Bonds Payable, due 2015-P680,000, Premium on Bonds
Payable, P40,000, Share dividends payable on 2.15.15- P100,000, Income Tax PayableP180,000, Notes Payable due 1.19.16-P120,000
In Lovelys December 31, 2014, balance sheet, the current liabilities total was.
a. P1,280,000
b. P1,300,000
c. P1,380,000
d.
d.P1,420,000

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