RMYC CUP 1

DUMAGUETE 2014
NEW QUESTIONS

EASY

1. P1 Revenue Recognition: On January 1, 2014, Cash Company sold specialized computers

costing P760,000 to AR Inc. for P990,000. Cash Companys trainers present numerous training
sessions for ARs employee during the installation period. AR made a 50% down payment, with
the balance due upon completion of installation. There is reasonable assurance that the
balance will be collected. How much revenue should Cash Company recognize on its books on
January 1, 2014?

A. P990,000
B. P495,000
C. P115,000
D. Nil

Answer: (D) Nil

No revenue is recognized. PAS 18 provision.

2. P2/TOA Joint Arrangements: According to PFRS 11, there are two types of joint
arrangements joint operations and joint ventures. Which of the following does not generally
characterize joint operations?

A. Rights to the net assets

B. Proportionate consolidation
C. No separate vehicle
D. All of the above characterizes a joint operation

Answer: (A) Rights to net assets

Joint operations are characterized by operators having rights to the assets, liabilities, income
and expenses of the joint operation. Rights to the NET assets is a general characteristic of joint
ventures (which follows why equity method is used by venturers in a joint venture).

3. P1 Basic Accounting: You bought 100 grams of Pwede-na-gamot. Each Pwede-na-gamot

costs P 1,500 if bought individually. However, your supplier gave you a 15% trade discount due
to your bulk purchase. The purchase was on account, subject to terms 3/15, net 30. You paid
the supplier on the 15th day from the date of purchase, and after payment, you immediately
resold 65 pieces of Pwede-na-gamot to your friend at 30% mark-up on cost.
What is your revenue on the sale to your friend?

A. P114,841.07
B. P160,777.50
C. P104,505.38
D. P24,116.63

Answer: (C) P104,505.38

P1500 x 0.85 x 0.97 x 65 x 130%

4. P1 EQUITY BV per share: Wenki Company had 5000 ordinary shares of P250 par value
outstanding and 500 preference shares of P500 par value outstanding. The current market price
of the ordinary share is P600 and total equity amounts to P1,800,000. The preference
shareholders have a liquidation preference of P700 per share and no dividends are in arrears.
What is the book value per ordinary share?

A. 290
B. 260
C. 255
D. 409

Answer: A. 290

Total equity 1,800,000

Preference shareholders equity
Preference share capital (500xP500) 250,000
Liquidation premium (500xP200) 100,000 350,000
Ordinary shareholders equity 1,450,000
Book value per ordinary share (1450,000/5,000) 290

5. P2 PARTNERSHIP: In the AI partnership, AKOs capital is P140,000 and IKAWs capital is

P40,000 and they share income in a 3:1 ratio, respectively. They decide to admit SIYA to the
partnership. AKO and IKAW agree that some of the inventory is obsolete. The inventory account
is decreased before SIYA is admitted. SIYA invests P40,000 for a 1/5 interest. What is the
amount of the inventory write down?

A. 40,000
B. 30,000
C. 20,000
D. 10,000
Answer: C. 20,000

TAC (40,000 x 5) 200,000

TCC (140,000+40,000+40,000) (220,000)
Reduction of Inventory (20,000)

6. P1 CORRECTION OF ERRORS: During year 3, Paul Company discovered that the ending
inventories reported on its financial statements were incorrect by the following amounts:

Year 1 60,000 understated

Year 2 75,000 overstated

Paul uses the periodic inventory system to ascertain year-end quantities that are converted to
dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and
ignoring income taxes, Pauls retained earnings at January 1, year 2, would be:

A. Correct.
B. 15,000 overstated.
C. 75,000 overstated.
D. 60,000 understated.

Answer: D. 60,000 understated

7. P1 NET METHOD: On December 3, Oliver Company purchased inventory listed at P8,600

from Laurel Corp. Terms of the purchase were 3/10, n/20. Oliver Company also purchased
inventory from Tommy Company on December 10 for a list price of P7,500. Terms of the
purchase were 3/10, n/30. On December 16, Oliver paid both suppliers for these purchases.

If Oliver uses the net method of recording purchases, the journal entry to record the payment
on December 16 will include

A. A debit to Accounts payable of P15,875

B. A debit to Purchase Discounts Lost of P258
C. A credit to Purchase Discounts of P258
D. A credit to cash of P15,617

Answer: B. A debit to Purchase Discounts Lost of P258

8. P2 BUSINESS COM: To acquire a business, Jabba Co. paid finders fees of P40,000, legal fees
of P13,000, audit fees related to the stock issuance of P10,000, stock registration fees of
P5,000, and stock listing application fees of P4,000.
Based on the preceding information, under the acquisition method, what amount relating to
the business combination would be expensed immediately?

A. P19,000
B. P53,000
C. P63,000
D. P72,000

Answer: B. 53,000

Finders fees 40,000

Legal fees 13,000
Total expenses 53,000

9. P1 Asset valuation: On January 1, 2014, Beki Co. replaced its old ice cream truck. The
following information was available on that data:

Carrying amount of old ice cream truck P4,000

Fair value of old ice cream truck 1,000
Purchase & installation price of new ice cream truck 50,000

The old ice cream truck was sold for P1,000. What amount should Diz capitalize as the cost of
the new ice cream truck?

A. 46,000
B. 47,000
C. 49,000
D. 50,000

Answer: D. P50,000

10. P1 BOND ISSUANCE On July 1, year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at
99 plus accrued interest. The bonds are dated April 1, year 1, and mature on April 1, year 11.
Interest is payable semi-annually on April 1 and October 1. What amount did Eagle receive from
the bond issuance?

A. $579,000
B. $594,000
C. $600,000
D. $609,000
Answer: (D. 609,000)

The bonds were issued at 99 ($600,000 99% = $594,000), so the discount is $6,000 ($600,000
$594,000). The accrued interest covers the three months from 4/1 to 7/1 ($600,000 10%
3/12 = $15,000). The cash received includes the $594,000 for the bonds and the $15,000 for the
accrued interest, for a total of $609,000.

MEDIUM

1. P2 PARTNERSHIP COMPUTATION OF BONUS: Torlong and Shoga are considering forming a

partnership whereby profits will be allocated through the use of salaries and bonuses. Bonuses
will be 10% of net income after total salaries and bonuses. Torlong will receive a salary of
P30,000 and a bonus. Shoga has the option of receiving a salary of P40,000 and a 10% bonus or
simply receiving a salary of P52,000. Both partners will receive the same amount of bonus.

Determine the level of net income that would be necessary so that Shoga would be indifferent
to the profit sharing option selected.

A. P240,000
B. 300,000
C. 304,000
D. 334,000

Answer: D. 334,000

24000= .10 [NI-(30,000+40,000)]-24,000]

24000= .10 [NI-94,000]
24000= .10 NI-9400
33,400/.1=NI
NI = 334,000

2. P1 BIFURCATION: Grim Corporation reports under IFRS. Grim issued 2,000 $1,000
convertible bonds AT PAR, with an annual interest rate of 6% when the market was 8%. The
bonds are due in 5 years and each $1,000 bond is convertible into 3 shares of common stock. At
what amount would Grim record the liability component of the bond? (round of PV factors to 5
decimal places)

A. $2,000,000
B. $1,840,285
C. $1,848,369
D. $1,896,916
Answer: B. 1,840,285

Under IFRS, Grim should bifurcate the convertible bond into its debt and equity components.
Use the effective rate to calculate the PV factors.
Face amount of the bonds: 2,000 $1,000 = $2,000,000 Present value of $1 for the principal
($2,000,000 0.68058) = $1,361,160
PVOA of interest:
($120,000 3.99271) = 479,125
Total Value of the liability = $1,840,285

3. P2 HOME OFFICE - Henki Corporations shipments to and from its Brazil City branch are billed
at 120% of cost. On December 31, Brazil branch reported the following data, at billed prices:
inventory, January 1, of 33,600; shipments received from home office of P840,000; shipments
returned of P48,000; and inventory, December 31, of P36,000. What is the balance of the
allowance for over-valuation of branch inventory on December 31 before adjustments?

A. 5,600
B. 137,600
C. 6,000
D. 145,600

Answer: B 137,600

Inventory, January 1 P33,600

Add: Shipments from office net of returns
(840,000-48,000) 792,000
Cost of goods available for sale 825,600
Multiplied by: Mark-up 20/120
Allowance for overvaluation before adjustments 137,600

4. P1 BANK RECON: The bank reconciliation for Ronnie Company includes the following:
balance per bank P 147,300; balance per accounting records P142,100; Unrecorded services
charges P200; Unrecorded NSF check P100; Outstanding checks P13,700; The amount of
deposits in transit is:

A. 9,200
B. 2,900
C. 2,800
D. 8,200

SOLUTION: D 8,200
Balance Per Accounting records P142,100
Less: Unrecorded Services charges 200
Unrecorded NSF Check 100____
Adjusted Balance P141,800
Balance Per Bank 147,300
Less Outstanding Check 13,700
Unadjusted Balance 133,600
Less Adjusted Balance 141,800
Deposit in transit P8,200

5. P2 NGAS In the New Government Accounting System (NGAS), which of the following
requires only a memorandum entry?

A. Budgetary allotments
B. Incurrence of obligations
C. Both A and B
D. Neither A nor B

Answer: C. Both A and B

6. P1 REVENUE RECOGNITION: Rill Co. owns a 20% royalty interest in an oil well. Rill receives
royalty payments on January 31 for the oil sold betweenthe previous June 1 and November 30,
and on July 31 for oil sold
between December 1 and May 31. Production reports show the following oil sales:

June 1, year 1 - November 30, year 1 $300,000

December 1, year 1 - December 31, year 1 50,000
December 1, year 1 - May 31, year 2 400,000
June 1, year 2 - November 30, year 2 325,000
December 1, year 2 - December 31, year 2 70,000

What amount should Rill report as royalty revenue for year 2?

A. $140,000
B. $144,000
C. $149,000
D. $159,000

Answer: (C. 149,000)

Royalty revenues should be recognized when earned, regardless of when the cash is collected.
Royalty revenue earned from 12/1/Y1 to 5/31/Y2 is $80,000 ($400,000 20%).Of this amount,
$10,000 ($50,000 20%) was earned in December of year 1, so the portion earned in the first
five months of year 2 is $70,000 ($80,000 $10,000). Royalty revenue earned from 6/1/Y2 to
11/30/Y2 is $65,000 ($325,000 20%). The amount earned from 12/1/Y2 to 12/31/Y2, which
would be accrued at 12/31, is $14,000 ($70,000 20%).

1/1/Y2 - 5/31/Y2 $70,000

6/1/Y2 - 11/30/Y2 65,000
12/1/Y2 - 12/31/Y2 14,000
Total Revenue Earned Y2 $149,000

7. P2 BUSINESS COMBI P Company is acquiring S1 company and S2 company. P company

issued P1,400,000 worth of stocks to acquire the net assets of S1 company that has a fair value
of P900,000. Also, P company gave P900,000 cash to acquire the net assets of S2 company
which has a fair value of P1,000,000. What amount of goodwill and/or gain from bargain
purchase will be presented in the consolidated statement of financial position?

A. Goodwill P 500,000; Gain from Bargain Purchase 100,000

B. Goodwill P 400,000; Gain from Bargain Purchase Nil
C. Goodwill P 100,000; Gain from Bargain Purchase 500,000
D. Goodwill P 500,000; Gain from Bargain Purchase Nil

Correct answer: D. Goodwill 500,000; Gain from BG Nil

Cost of consideration Fair value of net assets = Goodwill/Gain

P1,400,000 900,000 = 500,000 goodwill, for the acquisition of S1 company

8. P1 Revenue Recognition - Anne Publishing Co, publishes textbooks for colleges and
universities. Bookstores purchase books with terms f.o.b. shipping point and payment is due 60
days after shipment. The bookstore may return 40% of each order (at the bookstores expense).
Annes experience indicates that the normal return rate is 10% and the average collection
period is 72 days. Anne shipped and invoiced P300,000 of books during August 2012. The books
were recorded on Annes books for P120,000. What amount on net sales revenue will Anne
record for the August 2012 sales?

A. P300,000
B. P270,000
C. P210,000
D. P180,000

Answer: B 270,000

300,000 X 90% = 270,000

9. P2 PARTNERSHIP: AA, BB and CC are partners with average capital balances during 2012 of
P360,000, P180,000 and P120,000, respectively. Partners receive 10% interest on their average
capital balances. After deducting salaries of P90,000 to AA and P60,000 to CC the residual profit
or loss is divided equally. In 2012 the partnership sustained a P99,000 loss before interest and
salaries to partners. By what amount should AAs capital account change?

A. 21,000 increase
B 33,000 decrease
C. 105,000 decrease
D. 126,000 increase

Answer: A. 21,000 increase

AA BB CC Total
Interest on Average Capital
AA: 360,000x10% 36,000
BB: 180,000x10% 18,000
CC: 120,000x10% 12,000 66,000
Salaries 90,000 60,000 150,000
Balance (105,000) (105,000) (105,000) (315,000)
Increase (Decrease) 21,000 (87,000) (33,000) (99,000)

10. P1 Cash flows Presented below are changes in all the account balances of JPIA Co. for
2014, except for accumulated profits (losses):

Increase (Decrease)
Cash 790,000
Accounts Receivable (net) 240,000
Inventory 1,270,000
Investments (470,000)
Accounts payable (380,000)
Bonds payable 820,000
Share capital 1,250,000
Share premium 130,000

What amount should net income (net loss) be, assuming there were no entries to the
accumulated profits/losses account except for net income and dividend declaration of 190,000,
which was paid during the year?

A. P10,000
B. P210,000
C. P200,000
D. P180,000
Answer: C. P200,000

The simplest approach would be to use the accounting equation to compute the increase in
accumulated profits due to net income (loss)
Total Debits (790 + 240 + 1270 + 380 + 190) = P 2,870,000
Less: Total Credits (470 + 820 + 1250 +130) = P 2,670,000
Net income P 200,000

DIFFICULT

1. P2 Installment sales - Rizzalyn Corporation, a capital goods manufacturing business that

started on January 4, 2013, and operates on a calendar-year basis. The following data were
taken from the records of 2013 and 2014:

2013 2014
Installment sales P480,000 P620,000
Gross profit as a percent of costs 25% 28%
Cash collections on sales of 2013 P240,000 P240,000
Cash collections on sales of 2014 P0 P180,000

Compute the realized gross profit to be reported in the 2014 income statement using the
installments sales method of accounting.

Answer: P 87,375

180,000 x 28/128 + 240,000 x 25/125

2. P1 GOVERNMENT GRANT - Abdel Company purchased a machine for P8,000,000 on January

1, 2013. The machine's useful life is 10 years, with no residual value and is depreciated using
the double declining balance method. Also on this date, the entity received a grant of P500,000
and the entitys policy is to deduct the grant from the cost of the asset. On January 1, 2014, the
entity violated certain conditions attached to the grant and had to return P500,000 to the
government. What amount of depreciation expense should be recognized for 2014?

Answer: C P1,380,000

Double declining rate = 1/10 x 2 = 20%

Initial Depreciation, 2014 (8,000 x 80% x 20%) P1,280,000
Insufficient depreciation, 2013 (8000 x 20% 7500 x 20%) 100,000
Total depreciation, 2014 P1,380,000
3. P1 LOAN IMPAIRMENT - On December 31, 2013, JB Bank has a 5-year loan receivable with a
face value of P6,000,000 dated January 1, 2012 that is due on December 31, 2016. Interest is
payable annually every December 31 at 9%. The borrower made the required interest payment
on December 31, 2012 but informed the bank that interest accrued on December 31, 2013 will
be paid at maturity.

There is a high probability that remaining interest payments will not be paid because of
financial difficulty. The prevailing market interest rate on December 31, 2013 is 10%. The PV of
1 for 3 periods is 0.772 at 9% and 0.751 at 10%. What is the loan impairment loss on December
31, 2013?

Answer: P1,491,120

Use the original effective rate (9%):

Unpaid debt Principal and Interest (6,000,000 x 1.09) P6,540,000
PV of cash flows (6,000,000 x 1.09 x 0.772) 5,048,880
Loan impairment loss P1,491,120

4. P2 Cost Accounting The following information is available for Detox Company for the current
year:

Beginning Work in Process (75% complete) 14,500 units

Started 75,000 units
Ending Work in Process (60% complete) 16,000 units
Abnormal spoilage 2,500 units
Normal spoilage (continuous) 5,000 units
Transferred out 66,000 units
Costs of Beginning Work in Process:
Material P25,100
Conversion 50,000
Current Costs:
Material P120,000
Conversion 300,000

All materials are added at the start of the process. Using FIFO, what is the cost per equivalent
unit of production for conversion costs? (round off to nearest two decimal places)

Answer: P4.46

(14,500 x 25%) + (66000 -14500) + (16000 x 60%) + 2500 = 67,225 EU

P 300,000 / 67,225 = P4.46 cost/EU

5. P1 Employee benefits: In 2014, Rafael Jaime Company provided the following data in
connection with its defined benefit plan:

Current service cost 2,500,000

Past Service Cost 1,000,000
Contribution to the plan 3,500,000
Benefits paid to retirees 3,000,000
Actual return on plan assets 1,500,000
Settlement interest rate 10%
Remeasurement of PBO loss 1,000,000

The beginning balance of the PBO on January 1, 2012 was 13,000,000. According to a count and
appraisal of the Fair Value of Plan assets at December 31, 2012, it has a correct value of
10,000,000. The past service cost is incurred during the year and applies to employees with
remaining service period of 10 years.

How much is the fair value of plan assets to be presented on the face of the statement of
financial position?

Answer: Zero.

6. P2 Franchise - T restaurant sold a fast-food restaurant franchise to I. The sale agreement,

signed on January 2014 called for a P100,000 down payment plus two P50,000 annual
payments representing the value of initial franchise services rendered by T restaurant. In
addition, the agreement required the franchisee to pay 8% of its gross revenues to the
franchisor. The restaurant opened early in 2014 and its sales for the year amounted to
P750,000.
Assuming a 12% interest rate is appropriate, Ts 2014 total income due to the franchise will be
(PV of annuity of P1 at 12% for two periods is 1.6901)

Answer: P254,546

100,000 + 50,000 x 1.6901 + (750,000 x 8%) + (50,000 x 1.6901 x 0.12)

7. P1 Definition According to IFRS 13 Fair Value Measurement, there are three approaches in
determining fair value. Present value techniques, option pricing model such as the Black-
Scholes-Merton formula, binomial model and multi-period excess earnings method are
examples of what kind of approach in determining fair value?
Answer: Income approach

8. P2 Forex Translation A foreign subsidiary started its operations in January 1, 2014. The
following amounts were extracted from the foreign subsidiarys year-end financial statements
for the first year of operations, along with pertinent data:

Total Assets $ 4,100

Total Liabilities $ 3,000
Net Income - 2014 $ 800
Cash dividend issuance (6/1/14) $ 300

Spot rate (January 1, 2014) $1 = PhP 49.25

Spot rate (June 1, 2014) $1 = PhP 52.00
Spot rate (December 31, 2014) $1 = Php 56.10
Weighted average rate $1 = PhP 51.75

What is the amount of the foreign translation adjustment (credit) that will appear in the
stockholders equity section of the foreign subsidiary?

Answer: PhP 6,360

Net assets at 12/31 rate: ($4100 3000) x 54.10 P 61,710

Share capital at 1/1 rate: ($4100 3000 800 + 300) x 49.25 (29,550)
Dividend issuance at 6/1 rate: ($300 x 52.00) 15,600
Net income at average rate: ($800 x 51.75) (41,400)
Foreign translation adjustment - credit P 6,360

9. P1 Lease - As an inducement to enter a lease, a lessor grants Jailbird Company, a lessee, nine
months of free rent under a five-year operating lease. The lease is effective on July 1, 2012, and
provides for monthly rental of P100,000 to begin April 1, 2013. In the income statement for the
year ended June 30, 2013, what amount should be reported as rent expense?

Answer: P1,020,000

P100,000 monthly rent x (60 months 9 months) / 5 years

10. P2 Construction Contracts The Giant Construction Company started work in three job sites
during the current year. Any costs incurred are expected to be recoverable. Data relating to the
three jobs are given below:

Contract Costs Estimated Billings on Collections

Price Incurred to costs to contract on contract
date complete
Project 6 P500,000 P375,000 -0- P500,000 P500,000
Project 7 700,000 100,000 P400,000 100,000 100,000
Project 8 250,000 100,000 100,000 150,000 100,000

What would be the amount of Construction-in-Progress account to be reported on the year-

end balance sheet if the cost recovery method of construction accounting were used?

Answer: P200,000
Project 7 cost incurred (100,000) + Project 8 cost incurred (100,000)

Clinchers

1. According to the Standards, it is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.

Answer: Qualifying asset

2. According to the conceptual framework, there are two types of qualitative characteristics: (1)
______ qualitative characteristics and (2) ______ qualitative characteristics.

Answer: Fundamental, Enhancing

3. According to PFRS for SMEs, what is the minimum and maximum amount of liabilities an SME
can have without breaching the floor-ceiling criteria?

Answer: P3,000,000 to P250,000,000

4. JMS Co. prepared its statement of cash flows at year-end using the direct method. The
following amounts were used in the computation of cash flows from operating activities:

Beginning inventory P 200,000

Ending Inventory 150,000
Cost of goods sold 1,200,000
Beginning accounts payable 300,000
Ending accounts payable 200,000
What amount should JMS report as cash paid to suppliers for inventory purchases?

Answer: P1,250,000

1,200 + 150 200 +300 200 = P1,250

5. LOGIC TEST: The phrase I love you, when translated to a certain unknown language, is Ako
mahal ikaw. The phrase You hate me in the same language is Mahal ako di-ikaw. The
phrase Love and hate collide in the same language is Ikaw kaboom di-ikaw. The word you
in such unknown language is ___________.