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PRACTICAL ACCOUNTING 2 OCTOBER 2013 BATCH 2 nd PRE-BOARD EXAMS 2013 (Sun) 2:00-4:30

AUGUST 19,

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by writing a VERTICAL LINE corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use Pencil No. 1 or No. 2 only.

Use the following information in answering questions 1 and 2

The income statement of Vita Plus Partnership for the year ended December 31,

2007 appear below:

Vita Plus Partnership Income Statement For the year ended December 31, 2007 Sales

P300,000

P110,000

P 80,000

Less: Cost of Goods Sold

190,000

Gross Profit

Less: Operating Expenses

30,000

Net Income

Additional Information:

  • 1. Melon and Dalandan began the year with capital balances of P40,800 and

P112,000, respectively.

  • 2. On April 1, Melon invested an additional P15,000 into the partnership and on

August 1, Dalandan invested an additional P20,000 into the partnership.

  • 3. Throughout 2007, each partner withdrew P400 per week in anticipation of

partnership net income. The partners agreed that these withdrawals are not to

be included in the computation of average capital balances for purposes of income distribution.

Melon and Dalandan have agreed to distribute partnership net income according to the following plan:

DALANDAN

  • 1. Interest on average capital balances

MELON

6%

 

6%

  • 2. Bonus of net income before the bonus but after interest

 
 

on average capital balances

10%

  • 3. Salaries

P25,000

P30,000

  • 4. Residual (if positive)

70%

30%

  • 5. Residual (if negative)

50%

50%

  • 1. The share of Melon and Dalandan on the net income, respectively is:

    • a. P40,473 and P39,527

    • b. P40,282 and P39,718

    • c. P40,342 and P39,658

    • d. P38,935 and P41,065

  • 2. The ending capital balance of Dalandan is:

  • a. P152,328

    b. P150,727

    c. P150,918

    d. P150,858

    Use the following information in answering questions 3 and 4

    On January 2, 2007, P Company purchased 1,500 shares of the outstanding common stock of S Company for P140,000 and additional payment of. P4,000

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    indirect cost and P5,000 direct cost. On that date, the assets and liabilities of S Company had fair market values as indicated below. Balance sheets of the companies on January 2, 2007, after acquisition are as follows:

     

    P Company

    S Company

     

    Book

    Fair value

    Value

    Cash

    P 80,000

    P 14,000

    P 14,000

    Accounts Receivable

    56,000

    28,000

    28,000

    Inventory

    56,000

    22,000

    28,000

    Land

    28,000

    54,000

    60,000

    Building, net

    163,000

    72,000

    98,000

    Equipment, net

    224,000

    56,000

    39,000

    Investments in S Company

    149,000

     

    P 756,000

    P 246,000

    Accounts Payable

    P

    42,000

    16,000

    16,000

    8% Bonds Payable

    62,000

    52,000

    Common Stock – P Company,

    320,000

    P40 par Common Stock – S Company,

    50,000

    P25 par Additional Paid-In Capital – P

    100,000

    Company Additional Paid-In Capital – S

    56,000

    Company Retained Earnings – P Company

    294,000

    Retained Earnings – S Company

    62,000

     

    P 756,000

    P

     

    246,000

    • 3. As a result of business combination, the amount of total net assets is

    • a. b.P764,000

    P714,250

    c.P718,250

    d.P768,000

    • 4. The Retained earnings balance is

    • a. b.P356,000

    P294,000

    c. P294,250

    d. P290,000

    • 5. A statement of the capital accounts of Roel and Bless follows:

     

    ROEL

    BLESS

    Balance, January 1

    Salaries

    P 72,000

    P 96,000

    Add: Additional Investments, July 1

    32,000

    16,000

    Net Income for the Year:

    12,000

    14,400

    Interest on Capital

    5,280

    6,240

    Remainder

    10,362

    8,478

    Totals Deduct Drawings:

    P131,642

    P141,118

    Monthly Amounts

    P

    9,600

    P 10,800

    Additional Drawings, Dec. 31

    2,042

    318

     

    P 11,642

    P 11,118

    Balance, December 31

    P120,000 P130,000

    If the net income remains the same the following year, and if there is neither a change in the partnership agreement nor any additional investments, how much

    more or less will Roel’s total share of the net income be than it was this year?

    • a. More by P6.00

    b. Less by P6.00

    c. P27,648

    d. P29,112

    • 6. Partner’s Rachel, Cecil, and Arlene share profits and losses 5:3:2, respectively, and their balance sheet on October 31, 2007 follows:

    Cash

    P

    240,000

    Accounts

    P 600,000

     

    Payable

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    Other Assets

    2,160,00

    Rachel, Capital

    444,000

    0

     

    Cecil, Capital

    780,000

    Arlene, Capital

    576,000

     

    P 2,400,000

    P 2,400,000

    The assets and liabilities are recorded at their current fair value. Lark is to be admitted as a new partner with a 1/5 interest in capital and earnings. Rachel was credited a bonus of P15,000. How much should Lark contribute?

     

    a.

    P456,000

    b. P450,000

    c. P480,000

    d. P487,500

    Use the following information in answering questions 7 and 8

     

    S Co. had net income of P400,000 and paid dividends of P200,000 during the year

    2007. S Co.’s stockholders’ equity on December 31, 2006 and December 31, 2007 is summarized as follows:

     

    Dec. 31,2006

    Dec.

    31, 2007 10% cumulative preferred stock, P100 par

    P 300,000

    P

    300,000

     

    Common stock, P1 par

     

    1,000,000

    1,000,000

     
     

    Additional paid-in capital

     

    2,200,000

    2,200,000

     
     

    Retained earnings

    500,000

    700,000

     

    Stockholders’ Equity

     

    P4,000,000

    P4,200,000

     
     

    On January 2, 2007, P Co. purchased 400,000 common shares of S Co. at P4 per share and also paid P50,000 direct cost of acquiring the investment. P uses equity method in accounting for its investment in S.

    7.

    P Co.’s income from Shine for 2007 should be:

     

    a.

    P160,000

    b. P155,000

    c. P148,000

    d. P143,750

    8.

    The balance of the investment in Shine account at December 31, 2007 should be:

     

    a.

    P1,725,750

    b. P1,730,000

    c. P1,650,000

    d. P1,742,750

    Use the following information in answering questions 9 and 10

     

    Parent Company sells land with a book value of P5,000 to Subsidiary Company for

    P6,000 in 2004. Subsidiary Company holds the land during 2005. Subsidiary Company sells the land for P8,000 to an outside entity in 2006.

    9.

    In 2004 the unrealized gain:

     

    a.

    To be eliminated is affected by the minority interest percentage.

    b.

    Is initially included in the subsidiary’s accounts and must be eliminated from Parent Company’s income from Subsidiary Company under the equity method.

    c.

    Is eliminated from consolidated net income by a working paper entry that includes a credit to the land account for P1,000

    d.

    Is eliminated from consolidated net income by a working paper entry that includes a credit to the land account for P6,000.

    10.

    Which of the following statements is true?.

     
     

    a.

    Under the equity method, Parent Company’s investment in Subsidiary account will be P1,000 less than its underlying equity in Subsidiary throughout 2005.

    b.

    No working paper adjustments for the land are required in 2005 in Parent Company has applied the equity method correctly

    c.

    A working paper entry debiting gain on sale of land and crediting land will be required each year until the land is sold outside the consolidated entity.

    d.

    In 2006, the year of Subsidiary’s sale to an outside entity, the working paper adjustment for the land will include a debit to gain on sale of land for P2,000.

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    Perry Corporation sold machinery to its 80 percent-owned subsidiary, Samuel Corporation, for P100,000 on December 31, 2006. The cost of the machinery to Perry was P80,000, the book value at the time of sale was P60,000, and the machinery had a remaining useful life of five years (Perry uses equity in accounting for its investment in Samuel).

    • 11. How will the intercompany sale affect Perry’s income from Samuel and Perry’s net income for 2006?

     

    Perry’s Income

     

    Perry’s

    Perry’s Income

    Perry’s

     

    from Samuel

    Net Income

    from Samuel

    Net Income

     

    a.

    No effect

    No effect

    c.

    Decreased

    No effect

    b.

    Increased

    No effect

    d.

    Decreased

    Decreased

    • 12. How will the consolidated assets & consolidated net income for 2006 be affected by the intercompany sale?

     

    Consolidated

    Consolidated Net

    Consolidated

    Net

    Consolidated Net

    Net Assets

    Income

    Assets

    Income

     

    a.

    No

    Decreased

    c.

    Increased

    No effect

    effect

     

    b.

    Decreased

    d.

    No effect

    No effect

    Decreased

     

    Use the following information in answering questions 13 and 14

     

    Punk Corp. manufactures and sells heavy industrial equipment. On July 1, 2006

    Punk sold equipment that it manufactured at a cost of P300,000 to its 100 percent owned subsidiary, Sunk Company, for P400,000. Sunk is depreciating the equipment over a five-year period using the straight-line method.

    • 13. The equipment and accumulated depreciation that appear in the consolidated balance sheet for Punk and subsidiary at December 31, 2006 will include amounts related to this transaction of:

     

    a.

    P300,000 and P30,000

     

    c. P400,000 and P40,000

    b.

    P300,000 and P60,000

    d. P400,000 and P80,000

    • 14. If Punk account for its investment in Sunk as a one-line consolidation,

    working paper entries to consolidate the financial statements of Punk and Sunk for 2006 will include which of the entries:

     

    a.

    Sales

    P100,000

     

    c. Sales

    P400,000

     
     

    Cost of Sales

    P100,000

    Cost of Sales

    P300,000

    P100,000

     

    b.

    Sales P100,000

    Equipment

     

    Investment in S

    P100,000

    d. Sales

    P400,000

     
     

    Cost of Sales

    P400,000

    • 15. The following selected accounts appeared in the trial balance of Genius Sales as of December 31, 2007:

    Installment receivable-

    P 6,000

    Repossessions

    P 1,200

    2006

    sales

    Installment receivable-

    80,000

    Installment sales

    170,000

    2007

    sales

    Inventory, December 31,

    28,000

    Regular sales

    154,000

    2006

    Purchases

    222,000

    Deferred gross profit –

    21,600

     

    2006

    Operating Expenses

    46,000

    Additional information:

    Installment receivable – 2006 sales, December 31, 2006 P

    57,100

    Inventory of new and repossessed merchandise as of December 31, 2007

    38,000

    Gross Profit percentage on installment sales in 2006 is 10% higher than the gross profit percentage on regular sales in 2007

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    Repossession was made during the year and was recorded correctly. It was a 2006 sales and the corresponding uncollected account at the time of repossession was P3,100.

    Net Income for 2007 is

    a.

    P54,180

    b. P6,740

    c. P52,940

    d. P53,600

    • 16. On January 1, 2007, M Products Corp. issues 12,000 shares of its P10 par stock to acquire the net assets of L Steel Company. Underlying book value and fair value information for the balance sheet of L Steel Company at the time of acquisition are as follows:

    Balance sheet Items

    Book

    Fair value

    value

    Cash

    P60,00

    P60,000

    0

    Accounts receivable

    100,00

    100,000

    0

    Inventory

    60,00

    115,000

    0

    Land

    50,00

    70,000

    0

    Building and Equipment

    400,00

    350,000

    0

    Less: Accumulated Depreciation

    (150,000

    )

    Total Assets

    P520,000

    Accounts payable

    P10,000

    10,000

    Bonds payable

    200,000

    180,000

    Common stock (P5 par value)

    150,000

    Additional paid-in capital

    70,000

    Retained earnings

    90,000

    Total Liabilities and Capital

    P520,000

    L Steel shares were selling at P18 and M Product shares were selling at P50 just before the merger announcement. Additional cash payments made by M Corporation in completing the acquisition were:

    Finder’s fee paid to firm that located L Steel

    P10,000

    Audit fee for stock issued by M Products

    3,000

    Stock registration fee for new shares of M Products

    5,000

    Legal fees paid to assist in transfer of net assets

    9,000

    Cost of SEC registration of M Products shares

    1,000

    How much is the increase in the total assets to be recorded by M Products?

    • a. P809,000 b. P591,000 c. P781,000 d. P667,000

    • 17. I Inc., K Inc., and E Inc. agreed to a business combination that meets all the requirements for purchase of interests. Their condensed balance sheets before combination show:

    Assets

    K

     

    E

    I P7,000,000 P875,000

    P9,625,000

    Liabilities

    P4,987,500 P306,250

    P2,625,000

    Capital stock, par P100

    2,625,000

    437,500

    1,750,000

    Additional paid in capital

    218,750

    700,000

    Retained earnings (deficit)

    (612,500)

    ( 87,500)

    4,550,000

    P7,000,000 P875,000

    P9,625,000

    It was agreed that I Inc. will be the continuing entity and shall issue 4,375 shares to K and 52,500 shares to E. To what extent will the stockholders equity of I increase after the combination?

    • a. P7,568,750

    b. P2,187,000

    c. P5,687,500

    d. P875,000

    • 18. On July 2007, Jonathan Company sold P2,400,000 real estate that had a cost P1,440,000, receiving P350,000 cash and mortgage note for the balance payable in monthly installments. Installment received in 2008 reduced the

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    principal of the note to a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2009, and the property was repossessed. The property had an appraised value of P1,150,000 at the time of repossession. Compute the gain (loss) on repossession, assuming that:

    Profit is recognized when the sale is made (point of sale)

    Gross profit is recognized in proportion to periodic collection

    a.

    P(850,000)

    P(450,000)

    b.

    (850,000)

    (50,000)

    c.

    850,000

    (450,000)

    d.

    (50,000)

    50,000

    • 19. Abogado Company uses the installment method of reporting for

    accounting purposes. The following data were obtained.

     

    2004

    2005

    2006

    Installment sales P600,000

    P810,000

    P990,000

    Cost of installment

    _420,000

    _486,000

    _643,500

    sales Gross profit

    P180,000

    P324,000

    P346,500

    Installment contract receivables, December 31:

     
     

    2004

    2005

    2006

    2004 sales

    P360,000

    P270,000

    P120,000

    2005 sales

    600,000

    390,000

    2006 sales

    780,000

    In 2006, one of the customers defaulted in his payment and the company repossessed the merchandise with an estimated market value of P30,000. The

    sales was in 2004 and the unpaid balance on the date of repossession was

    P45,000.

    Compute for 2006 (1) the gain (loss) on repossession; (2) total realized gross profit, and (3) the deferred gross profit.

     

    (1)

    (2)

    (3)

    a.

    P

    P 189,000

    P

    (1,500)

    451,500

    b.

    129,000

    465,000

    750

    c.

    189,000

    465,000

    (1,500)

    d.

    73,500

    273,000

    1,500

    • 20. Lea Mae Stores sell appliances for cash and also on the installment plan. Entries to

    record cost of sales are made monthly. The following information appears on the trial balance of the

    company as of

    December 31, 2007.

    Cash

    P153,00

    0

    Installment Accounts Receivable,

    48,000

    2006

    Installment Accounts Receivable,

    91,000

    2007

    Inventory – New Merchandise

    123,200

    Inventory – Repossessed

    24,000

    Merchandise Accounts Payable

    P98,500

    Deferred Gross Profit, 2006

    45,600

    Capital Stock

    170,000

    Retained Earnings

    93,900

    Sales

    343,000

    Installment Sales

    200,000

    Cost of Sales

    255,000

    Cost of Installment Sales

    128,000

    Gain or Loss on Repossession

    800

    Selling and Administrative Expenses

    _128,00

    _______

    0

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    P951,00

    0

    P951,000

    The accounting department has prepared the following analysis of cash receipts for the year:

    Cash sales (including repossessed

    P424,00

    merchandise)

    0

    Installment accounts receivable, 2006

    104,000

    Installment accounts receivable, 2007

    109,000

    Other

    36,000

    Total

    P673,00

    0

    Repossessions recorded during the year are summarized as follows:

    2006

     

    Uncollected balance

    P8,000

    Loss on repossession

    800

    Repossessed merchandise

    4,800

    How much must be the total realized gross profit net of loss from repossession in

    2007?

    • a. P161,710

    b. P157,640

    c. P158,440

    d. P73,710

    • 21. Lily, Susan, and Yen agreed to invite Lucy to join the partnership. Lucy

    was presently working as a marketing specialist of a dynamic firm and presently receiving a salary of P35,000 per month. In order to encourage Lucy to join the partnership, the partners agreed to the following profit distribution:

    1) 12% interest on contributed capital is to be given to each partner. 2) Salaries of P20,000, P30,000, P40,000, and P35,000 per month is to be given to Lily, Susan, Yen, and Lucy respectively. 3) Lucy is to receive a minimum guaranteed share equal to her present salary and interest on her capital. 4) Lily is to receive an aggregate share of P300,000 per year. 5) Balance of profits is to be distributed in the ratio of 2:2:3:3 between Lily, Susan, Yen, and Lucy respectively. The partners’ capital contributions are: Lily, P200,000; Susan, P150,000; and Yen, P100,000. Lucy is willing to invest sufficient cash so that her capital interest in the partnership net assets will give her a ¼ interest. How much must the partnership earned during the year so that Lily will receive the agreed aggregate amount and Lucy to receive at least the minimum guaranteed share?

    • a. P1,752,000

    b. P1,698,000

    c. P1,477,000

    d. P1,521,000

    Use the following information in answering questions 22 and 23

    On Jan. 1, 2003, PI Co. acquired 75 percent of outstanding shares of SU Co. at book value. For the year 2005, PI Co. purchased merchandise from SU Co. while S also purchased merchandise from PI Co. Data regarding intercompany sales, inventories and profit percentages are as follows:

     

    PI Co.

    SU Co.

    Intercompany sales Intercompany inventories:

    P200,000

    P75,000

    January 1, 2005

    20,000

    10,000

    December 31, 2005

    15,000

    20,000

    Gross profit percentages on intercompany As a percentage of selling price

    60%

    50%

    On July 1, 2005, Su Co. sold equipment to PI Co. at a gain of P20,000.

    This

    equipment is estimated to have a useful life of five years from the date of sale.

    Income statements for the two companies exclusive of the recording of Equity in Earnings – Subsidiary for year 2005 are as follows:

     

    PI Co.

    SU Co.

    Sales

    P

    P 400,000

    1,500,000

    Cost of sales

    600,000

    200,000

    Expenses

    300,00

    100,000

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    Gain on sale of equipment

     

    .

    20,000

     
     

    P

    600,000

     

    P 120,000

    • 22. The consolidated cost of sales is:

     

    a.

    P800,000

    b. P528,500

    c. P521,500

     

    d. P527,000

    • 23. The income from investment using equity method:

     

    a.

    P72,375

    b. P71,542

    c. P72,750

     

    d. P75,750

     
    • 24. PC Corp. owns 70 percent pf SO Co.’s common stock acquired January

    1, 2004. Total amortization of excess from the investment is at a rate of P20,000 per year. SO regularly sells merchandise to PC at 150 percent of SO’s cost. PC’s December 31, 2004 and 2005 inventories include goods purchased intercompany of P112,500 and P33,000, respectively. The separate incomes (*do not include investment income) of PC and SO for 2005 are summarized as follows:

     

    PC

    SO

     

    Sales

     

    P 1,200,000

     

    P

    800,000

    Cost of sales

     

    (600,000)

     

    (500,000)

    Other expenses

    (400,000)

    (100,000)

    Separate income

     

    P

    200,000

     

    P P200,000

    Total consolidated income should be allocated to Retained Earnings and minority interest income in the amounts of:

    a.

    P344,550

    and

    P61,950,

    c.

    P406,500

     

    and

    P61,950,

    respectively

     

    respectively

     

    b.

    P358,550

    and

    P60,000,

    d.

    P338,550

     

    and

    P67,950,

    respectively

     

    respectively

     
    • 25. Mystic, Inc. was involved in two default and repossession cases during

    the year:

     
     

    (i.)

    A refrigerator was sold to Mary More for P19,000. Including a 35% markup on selling price. More paid a down payment of 20%, four of the remaining 10 equal payments, and then defaulted on further payments. The refrigerator was repossessed, at which time the fair value was determined to be P8,000.

    (ii.) An oven that cost P12,000 was sold to Panadero, Inc. for P16,000 on the installment basis. Panadero made a downpayment of P2,400 and paid P800 a month for 6 months, after which it defaulted. The oven was repossessed and the estimated value at the time of repossession was determined to be P7,500.

    Determine the gain/(loss) on repossession that Mystic must report in its financial statement.

    a.

    P2,972

    b. P4,100

    c. P4,880

     

    d. (P2,420)

     
    • 26. The Felix Contracting Co. uses the percentage of completion method of recognizing profit. Data for a recently awarded project is given below:

     

    Contract price

     

    P80,000,000

     
     

    2006

    2007

    2008

     

    Estimated costs per year

    P20,100,0

    P30,150,0

     

    P16,750,0

     

    00

    00

    00

     

    Progress billings per year

    10,000,00

    25,000,00

     

    45,000,00

     

    0

    0

    0

     

    Cash collections

     

    8,000,000

    23,000,00

     

    49,000,00

     

    0

    0

    Using the data provided above, calculate Felix’s gross profit for 2007. Assume

    that the estimated costs were actually incurred during the year.

    a. P5,850,000

    b. P3,900,000

    c. P3,250,000

    d. P9,750,000

    • 27. The Marvin Co. as a receivable from a foreign customer that is payable in the local currency of the foreign customer. The amount receivable for 900,000 local currency units (LCU) has been restated into P315,000 on Marvin’s Dec. 20X5, balance sheet. On Jan. 15, 20X6, the receivable was collected in full

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    and converted when the exchange rate was 3 LCU to P1. What journal entry should Marvin make to record the collection of this receivable?

    • a. Cash Accounts receivable

     

    300,000

    300,000

    • b. Cash

    300,000

    Transaction loss

    15,000

    Accounts receivable

     

    315,000

    • c. Cash

     

    300,000

    Deferred transaction loss

    15,000

    Accounts receivable

     

    315,000

    • d. Cash Accounts receivable

     

    315,000

    315,000

    • 28. On

    Nov.

    15,

    20X8,

    Celt,

    Inc.

    a

    Philippine

    company,

    ordered

    merchandise FOB shipping point from a German company for 200,000 marks. The merchandise was shipped and invoiced to Celt on Dec. 10, 20X8. Celt paid the invoice on Jan. 10, 20X9. The spot rates for marks on the respective dates are as follows:

    Nov. 15, 20X8

    P.4955

    Dec. 10, 20X8

    .4875

    Dec. 31, 20X8

    .4675

    Jan. 10, 20X9

    .4475

    In Celt’s Dec. 31, 20X8 income statement, the foreign exchange gain is:

    a. P9,600

    b. P8,000

    c. P4,000

    d. P1,600

    • 29. On April 1, 2007, Onawaki entered into franchise agreement with Lhyve to sell their products. The agreement provides for an initial franchise fee of P4,218,750 payable as follows: P1,181,250 cash to be paid upon signing of the contract and the balance in five equal annual payment every December 31, starting at the end of 2007. Onawaki signs 12% interest bearing note for the balance. The agreement further provides that the franchise must pay a continuing franchise fee equal to 5% of its monthly gross sales. On August 30 the franchisor completed the initial services required in the contract at a cost of P1,350,000 and incurred indirect costs of P232,500. The franchise commenced business operations on September 3, 2007. The gross sales reported to the franchisor are September sales, P110,000; October sales, P125,000; November sales P138,000; and December sales, P159,000. The first installment payment was made on due date.

    Assume the collectibility of the note is reasonably assured. How much is the income earned from the franchise agreement.

    • a. P2,868,750

    b. P2,936,225

    c. P2,895,350

    d. P3,168,725

    • 30. Shore Co. records its transactions in US Dollar. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in French francs. Shore recorded a foreign

    exchange gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?

    Yen Exchangeable for

    US$1

    Francs exchangeable for US$1

    a

    Increase

    Increase

    .

    Decrease

    Decrease

    b

    Decrease

    Increase

    .

    Increase

    Decrease

    c

    .

    d

    .

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    • 31. Candido Co. entered into a contract to build a small bridge for Guagua. The contract price for the bridge was P7,500,000 and Candido estimated a total costs of P6,900,000 in 2006. The company incurred P2,300,000 of cost during 2006. By the end of 2007 it was apparent that Candido had underestimated the real costs. The estimated total cost of project skyrocketed to P7,800,000. Construction cost incurred in 2007 totaled P4,000,000. The project was completed

    in 2008 at a final cost of P7,800,000. No progress billing were made under the contract and no cash was selected by the end of 2008. The amount of gross profit (loss) that must be recognized in 2007 must be:

    a. P300,000 loss

    b. P200,000 profit

    c. P500,000 loss

    d. P100,000 loss

    • 32. The following information pertains to a river-control project of Rainy Construction Inc. in Tabuk, Kalinga which was commenced in 2006 and completed the following the year:

    Cost incurred to-date

    at June 30, 2006

    P9,750,000

    at June 30, 2007

    15,750,000

    Estimated total cost at completion at June 30, 2006

    19,500,000

    at June 30, 2007

    20,250,000

    The project is a P22,500,000 fixed-price construction contract and Rainy uses the percentage-of-completion method of accounting. What is the income reported by Rainy on its Kalinga project on June 30, 2007?

    a. P750,000

    b. P1,500,000

    c. P1,750,000

    d. P250,000

    • 33. REH Company Trial Balance as of January 1, 2006

     

    DR

    CR

    Ordinary shares – 30,000 fully

    30,000

    shares Retained Earnings

    50,000

    Equipment

    42,000

    Accumulated Depreciation

     

    12,000

    Inventory

    20,000

    Accounts Receivable

    10,000

    Patents

    15,000

    Accounts Payable

     

    8,000

    Cash

    13,000

    100,000

    100,000

    At this date REH is acquired by BNC with REH going into liquidation

    Ordinary shareholders of REH Company are to receive 2 fully paid ordinary

    shares in BNC for every share held or alternatively P2.50 in cash payable half at the exchange date and half in one year thereafter. Accounts Payable and cost of liquidation amounting to P5,000 were paid by

    REH prior to turnover to BNC. 5,000 ordinary shares elect to receive cash

    BNC shares are selling at P1.10

    The incremental borrowing rate of BNC is 10% per annum.

    What is the cost of combination?

    a. P66,931

    b. P67,500

    c.P66,000

    d.P61,931

    Use the following information in answering questions 34 and 35

    The following balance sheets were prepared for Avril Corp. and Blink Co. on January 1, 2007, just before they entered into a business combination.

    Cash

    Avril Corp.

    P 210,000

    Blink Co

    P

    5,000

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    Accounts Receivable

     

    75,000

    20,000

    Merchandise Inventory

    200,000

    50,000

    Building and Equipment

    400,000

    100,000

    Accumulated Depreciation

     

    (100,000)

     

    (25,000)

    Goodwill

     

    50,000

    Total Assets

     

    P

    785,000

    P 200,000

    Accounts Payable

    P30 par value

    P

    125,000

    P 70,000

    Bonds Payable

     

    200,000

    30,000

    Common Stock

    210,000

    P20 par value

     

    50,000

    Additional paid-in capital

     

    50,000

    10,000

    Retained Earnings

    200,000

    40,000

    Total

    Liabilities

    &

    P 785,000

     

    P 200,000

    Stockholders’ Equity

    On that date, the fair market value of Blink’s inventories and building and equipment were P78,000 and P124,000 respectively, while bonds payable has a fair value of P42,000. The fair values of all other asset and liabilities of Blink (except for goodwill) were equal to their book values. Avril Corp. acquired the net assets of Blink Co. by issuing 2,500 shares of its P30 par value common stock (current fair value P36 per share) and purchase price in cash amounting to P12,000. Contingent consideration that is determinable (probable and reasonably estimated) amounted to P2,000 (discounted value). Additional cash payment made by Avril Corp. in completing the acquisition were: Legal fee for contract of business combination, P8,000; Accounting and legal fees for SEC registration, P11,000; Printing costs of stock certificates, P6,000; Finder’s fee, P7,000; Indiret cost, P5,000.

    • 34. As a result of the business combination, the amount of total assets in the books of Avril Company.

    a. P1,016,000

    b. P963,000

    c. P967,000

    d. P1,1012,000

    • 35. As a result of the business combination, the amount of retained earnings in the books of Avril Company.

    a. P195,000

    b.P193,000

    c. P200,000

    d.P240,000

    • 36. On January 1, 2007, ABC Corporation purchased 75% of the common stock of XYZ Company. Separate balance sheet data for the companies at the combination date are given below:

     

    ABC

    XYZ

    Cash

    P 84,000

    P 721,000

    Trade Receivable

    504,000

    91,000

    Merchandise Inventory

    462,000

    133,000

    Land

    273,000

    112,000

    Plant assets

    2,450,000

    1,050,000

    Accumulated Depreciation

    (840,000)

    (210,000)

    Investment in XYZ

    1,372,000

    Total Assets

    4,305,000

    P 1,897,000

    Accounts Payable

    P 721,000

    P 497,000

    Capital Stock

    2,800,000

    1,050,000

    Retained Earnings

    784,000

    350,000

    Total Equities

    4,305,000

    P 1,897,000

    On the date of combination the book values of XYZ’s net assets was equal to the fair value of the net assets except for XYZ’s inventory which has a fair value of

    P210,000.

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    Page 12 of 12

    On the date of acquisition in the consolidated balance sheet, how much is the total assets?

    • a. P3,533,250

    b. P4,984,000

    c. P6,543,250

    • - End Examination –

    d. P5,171,250

    PRACTICAL ACCOUNTING 2

    • 1 11

    A

    C

    21

    A

    31

    C

    • 2 12

    B

    B

    22

    B

    32

    D

    • 3 13

    B

    A

    23

    A

    33

    A

    C

    • 4 14

    C

    24

    A

    34

    C

    • 5 15

    B

    C

    25

    A

    35

    B

    • 6 16

    D

    C

    26

    A

    36

    D

    C

    • 7 17

    A

    27

    B

    • 8 18

    B

    A

    28

    C

    C

    • 9 19

    C

    29

    B

    10

    A

    20

    B

    30

    B

    -