Review 105-----------Day 4 5. The following statements pertain to the concept of income and expenses.

Which
statement is incorrect?
THEORY OF ACCOUNTS a. The definition of expenses encompasses losses as well as those expenses
that arise in the course of the ordinary activities of the enterprise.
1. Which statement is incorrect concerning the recognition principles? b. Losses represent other items that meet the definition of expenses and may or
1. An asset is recognized when it is probable that future economic benefits will may not arise in the course of the ordinary activities of the enterprise.
flow to the enterprise and the asset has a cost or value that can be measured c. The definition of revenue encompasses both income and gains.
reliably. d. Gains represent other items that meet the definition of income and may or
2. A liability is recognized when it is probable that an outflow of resources may not arise in the course of the ordinary activities of an enterprise.
embodying economic benefits will result from the settlement of a present
obligation that can measured reliably. 6. Which of the following is not regarded as constituting a separate element in the
3. Income is recognized when an increase in future economic benefits related to ASC Framework?
an increase in asset or a decrease in liability has arisen that can be a. Income b. Expense c. Gain d. Equity
measured reliably.
4. Expenses are recognized when a decrease in future economic benefits 7. Which capital maintenance concept is applied to currently reported net income
related to an increase in asset or a decrease in liability has arisen that can be and comprehensive income?
measured reliably. Currently reported net income Comprehensive income
a. Financial capital Physical capital
2. Which is incorrect concerning the recognition of a liability? b. Physical capital Physical capital
1. Obligations may be legally enforceable as a consequence of a binding c. Financial capital Financial capital
contract or statutory requirement. d. Physical capital Financial capital
2. If an enterprise decides as a matter of policy to rectify faults in its products
even when these become apparent after the warranty period has expired, the 8. Which statement is correct concerning the two concepts of capital?
amounts that are expected to be expended in respect of goods sold are I. Under a financial capital concept, such as invested money or invested
liabilities. purchasing power, capital is synonymous with the net assets or equity of
3. An obligation normally arises only when the asset is delivered or the the enterprise.
enterprise enters into an irrevocable agreement to acquire the asset. II. Under a physical capital concept, such as operating capability, capital is
4. A decision by the management of an enterprise to acquire assets in the regarded as the productive capacity of the enterprise.
future, in itself, gives rise to a present obligation. a. Both I and II b. Neither I nor II c. I only d. II only
3. Technically, this arises in the course of the ordinary activities of an enterprise and
9. Which statement is correct concerning the concepts of capital?
is referred to by a variety of different names including sales, interest, dividends,
I. Under a financial capital concept, a profit is earned only if the financial
royalties and rent.
amount of the net assets at the end of the period exceeds the financial
a. Income b. Gain c. Profit d. Revenue
amount of the net assets at the beginning of the period, after excluding
4. This process involves the simultaneous or combined recognition of revenues and any distributions to and contributions from owners during the period.
expenses that result directly and jointly from the same transactions or other events II. Under a physical capital concept, a profit is earned only if the physical
on the basis of direct association between the costs incurred and the earning of productive capacity at the end of the period exceeds the physical
specific items of income. productive capacity at the beginning of the period, after excluding
a. Matching of revenues with costs c. Systematic and rational allocation distributions to and contributions from owners during the period.
b. Matching of costs with revenues d. Immediate recognition a. Both I and II b. Neither I nor II c. I only d. II only
10. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as
money order and bank drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash
on hand to cover all normal operating expenses for a period of time.
c. Classification of a restricted cash balance as current or noncurrent
should parallel the classification of the related obligation for which the
cash was restricted.
d. Compensating balances required by a bank should always be excluded
from “cash and cash equivalent”.
11. In the case of long-term installments receivable (real estate installment sales)
where a major portion of the receivables will be collected beyond the normal
operating cycle
a. The entire receivables are classified as noncurrent
b. Only the portion currently due is classified as current and the balance as
noncurrent
c. The entire receivables are classified as current with disclosure of the amount
not currently due
d. The entire receivables are classified as current without disclosure of the
amount not currently due
12. A discount given to a customer for purchasing a large volume of merchandise is
typically referred to as a
a. quantity discount. b. cash discount. c.trade discount. d. size discount.
13. When the allowance method of recognizing bad debt expense is used, the entry
to record the write-off of a specific uncollectible account would decrease
a. Allowance for doubtful accounts. c. Net realizable value of accounts
receivable.
b. Net income. d. Working capital.
14. At the beginning of 2003, Finney Company received a three-year interest-bearing
P1,000,000 trade note. Finney reported this note as a P1,000,000 trade note
receivable on its 2003 year-end statement of financial position and P1,000,000 as
sales revenue for 2003. What effect did this accounting for the note have on
Finney's net earnings for 2003, 2004, 2005, and its retained earnings at the end of
2005, respectively?
a. Overstate, overstate, understate, no effect
b. Overstate, understate, understate, no effect
c. Overstate, understate, understate, understate
d. No effect, no effect, no effect, no effect
15. Which of the following items should be excluded from a company’s inventory at
the balance sheet date?
a. Goods in transit which were sold FOB destination.
b. Goods delivered to another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at
the customer’s convenience.
d. Goods in transit which were purchased FOB shipping point.
P1
1. Silang Company acquired a welding machine with an invoice price of
P3,000,000 subject to a cash discount of 5% which was not taken. Silang
incurred freight and insurance during shipment of P50,000 and testing and
installation cost of P200,000. Silang also incurred cost of P20,000 in
removing the old welding machine prior to the installation of the new one.
Welding supplies were acquired at a cost of P100,000. The VAT on the
acquisition is P300,000. The cost of the new welding machine should be
a. 3,100,000
b. 3,250,000
c. 3,220,000
d. 3,400,000
2. Imus Company acquired two items of machinery as follows:
 On December 30, 2005, Imus Company purchased a machine in
exchange for a noninterest bearing note requiring three payments
of P1,000,000. The first payment was made on December 30,
2005, and the others are due annually on December 30. The
prevailing rate of interest for this type of note at date of issuance
was 12%. The present value of an ordinary annuity of 1 at 12% is
1.69 for two periods and 2.40 for three periods. The new machine
was damaged during its installation and the repair cost amounted to
P50,000.
 On January 1, 2005, Imus Company acquired used machinery by
issuing to the seller a three-year, noninterest-bearing note for
 P3,000,000. In recent borrowing, Imus has paid a 12% interest for
this type of note. The present value of 1 at 12% for 3 years is 0.71. 6. In Looc’s income statement, what amount of gain should be reported from
the exchange of oil?
What is the total cost of the machinery? a. 20,000,000
a. 4,820,000 b. 6,000,000
b. 4,530,000 c. 3,000,000
c. 4,580,000 d. 0
d. 4,870,000

3. In December 2005, Kawit Company exchanged an old machine, with a cost 7. Naic Company acquired an equipment by exchanging a similar used
P6,000,000 and 50% depreciated, for a dissimilar used machine and paid a equipment with the following data:
cash difference of P1,500,000. The fair value of the old machine was
determined to be P2,000,000. Kawit should record the machine at Equipment 10,000,000
a. 6,000,000 Accumulated depreciation 3,500,000
b. 2,000,000 Fair value 8,000,000
c. 3,500,000 Cash received on exchange 2,000,000
d. 3,000,000
Naic Company should record gain on exchange at
a. 1,500,000
Romblon Company and Looc Company are fuel oil distributors. To facilitate b. 2,000,000
the delivery of oil to customers. Romblon and Looc exchanged ownership of c. 375,000
5,000 barrels of oil without physically moving the oil. Romblon paid Looc d. 0
P9,000,000 to compensate for a difference in the grade of oil. On the date of
exchange, cost and fair value of oil were: 8. During 2005 Magdiwang Company had the following transactions
Romblon Company Looc Company pertaining to its new office building:
Cost 45,000,000 40,000,000
Fair value 51,000,000 60,000,000 Purchase price of land 1,500,000
Legal fees for contract to purchase land 50,000
4. Romblon should record the oil inventory received in exchange at Architect’s fees 200,000
a. 45,000,000 Demolition of old building on site 150,000
b. 54,000,000 Sale of scrap from old building 20,000
c. 51,000,000
Construction cost of new building (fully 9,000,000
d. 60,000,000
completed)
5. Looc Company should record the oil inventory received in exchange at In Magdiwang’s December 31, 2005 balance sheet, what amounts should
a. 40,000,000 be reported as the cost of land and building?
b. 34,000,000 Land Building
c. 60,000,000 a. 1,500,000 9,380,000
d. 51,000,000
 b. 1,680,000 9,200,000 a. 11,400,000
c. 1,550,000 9,330,000 b. 11,450,000
d. 1,550,000 9,200,000 c. 10,000,000
d. 10,550,000

9. On January 1, 2005, Tagaytay Company purchased a tract of land with an 11. Maragondon Company had the following borrowings during 2005. The
old building which was razed shortly after acquisition. The costs incurred in borrowings were made for general purposes but the proceeds were used in
connection with the acquisition were: part to finance the construction of a new building:
Purchase price 5,000,000 Principal Interest
Agent commission 250,000 12% bank loan 10,000,000 1,200,000
Legal fees for the purchase contract 100,000 15% long-term loan 20,000,000 3,000,000
Guarantee insurance 10,000 The construction began on January 1, 2005 and was completed on
Cost of razing the old building 200,000 December 31, 2005. Expenditures on the building were made as follows:
Salvage value of old building materials 50,000 January 1
Property taxes for 2004 and 2005 (equally each year) 300,000 8,000,000
Option paid for an alternative land which was not acquired 30,000 June 30
Cost of relocating squatters 20,000 8,000,000
December 31
The cost of the land should be 4,000,000
a. 5,680,000
Following the alternative treatment, the capitalizable borrowing cost
b. 5,660,000
should be
c. 5,830,000
a. 1,680,000
d. 5,530,000
b. 4,200,000
c. 1,400,000
d. 1,620,000
10. Tanza Company entered into a P10,000,000 fixed contract with Philstress
Company on January 1, 2005 for the construction of a new building. On
January 1, 2005, Tanza obtained a loan of P10,000,000 at an interest rate of 12. On January 1, 2005, Kawit Company borrowed P6,000,000 at an interest rate of
12% to finance specifically the construction. Availments from the loan may be 10% specifically for the construction of its new building. Interest earned from the
made quarterly at unequal amounts. Total interest incurred for 2005 was temporary investment of the proceeds the loan prior to their disbursement amounted
P900,000. Prior to their disbursement, the proceeds from the loan were to P75,000. Kawit also had the following other loans in 2005 which were borrowed
temporarily invested and earned interest income of P50,000. The building for general purposes. The proceeds of these loans were used in part for the
was completed on December 31, 2005. Additional costs incurred during the construction of the building:
construction were P200,000 for plans, specifications and blueprint, and Principal Interest
P350,000 for architectural design and supervision.
10% bank loan 4,500,000 450,000
Tanza Company follows the alternative treatment of capitalizing borrowing 12% long-term loan 6,000,000 720,000
cost. The cost of the building should be
 The construction began on January 1, 2005 and the building was costs are expected to be incurred over four years, respectively, P4 million, P8
completed on December 31, 2005. Expenditures on the building were million, P12 million and P16 million.
made as follows: How much income from the government grant should be recognized in
January 2 1,500,000 2005?
April 1 3,750,000 a. 50,000,000
July 1 4,500,000 b. 12,500,000
c. 5,000,000
September 30 3,750,000
d. 0
December 31 1,500,000
15,000,000
15. On January 1, 2004, Indang Company received a grant of P50 million
The amount of capitalizable borrowing cost is from the US government for the construction of a laboratory and research
a. 1,350,000 facility with an estimated cost of P60 million and useful life of 25 years. The
b. 690,000 facility was completed in early 2005.
c. 525,000
d. 165,000 Indang Company should include in its 2005 income statement an income
from the government at
13. During 2005 Dasmariñas Company installed a production assembly line to a. 50,000,000
manufacture furniture. In 2005 Dasmariñas purchased a new machine and b. 2,000,000
rearranged the assembly line to install this machine. The rearrangement did c. 2,400,000
not increase the estimated useful life of the assembly line but it did result in d. 0
significantly more efficient production. The following expenditures were MAS
incurred in connection with this project:
1. Return on investment (ROI) is a term often used to express income earned on
Machine 5,000,000
capital invested in a business unit. A company’s ROI would be increased if sales
Labor to install new machine 400,000
A. increased by the same peso amount as expenses and total assets increased.
Parts added in rearranging the assembly line to provide future benefits 2,000,000
B. remained the same and expenses were reduced by the same peso amount that
Labor and overhead to rearrange the assembly line 600,000 total asset increased.
C. decreased by the same peso amount that expenses increased.
What amount of the above expenditures should be capitalized in 2005?
D. and expenses increased by the same percentage that total assets increased.
a. 8,000,000
b. 5,400,000
2. The per-unit standard cost for variable overhead is normally based on the
c. 7,400,000
A. standard quantity of an input factor used in a unit of product.
d. 2,600,000
B. actual variable overhead cost incurred at the achieved level of production.
C. budgeted total cost for variable overhead divided by the number of units
14. On January 1, 2005, Carmona Company received a grant of P50 million
expected to be produced.
from the British government in order to defray safety and environmental costs
D. ratio of fringe benefits to the basic cost of labor.
within the area where the enterprise is located. The safety and environmental
3. Bush Electronics, Inc. had the following sales results for 2004: Product X Product Total
TV sets CD player Radios Y
Peso sales component 0.30 0.30 0.40 Sales P200,000 P200,000 P400,000
ratio Cost of goods sold ( 120,000) ( 250,000)
Contribution margin ratio 0.40 0.40 0.60 (130,000)
Bush Electronics, Inc. had fixed costs of P2,400,000. Gross Profit P 80,000 P 70,000 P150,000
Period expenses:
The break-even sales in pesos for Bush Electronics, Inc. are:
Research & development ( 70,000)
TV sets CD player Radios Marketing ( 50,000)
A. P1,800,000 P1,800,000 P3,600,000 Life-cycle income P 30,000
B P1,800,000 P1,800,000 P1,600,000 A 10% return on sales is required for new products. Because the proposed
C. P1,500,000 P1,500,000 P2,000,000
D. P1,531,915 P1,531,915 P2,042,553 products did not have a 10% return on sales, the products were going to be

4. The following activities are typical in production management: dropped.

1. Warranty work
2. Labor and overhead incurred for rework of defective products found by an Relative to Product Y, Product X requires more research and development costs
inspector but fewer resources to market the product. Sixty percent of the research and
3. Quality training program development costs are traceable to Product X and 30 percent of the marketing
4. The costs of a consumer complaint department costs are traceable to Product X.
5. In-process inspection costs If research and development costs and marketing costs are traced to each product,
6. Reinspection of reworked products life-cycle income for Product Y would be
7. Downtime attributed to quality problems A. P35,000 C. P12,000
8. Product recalls B. P20,000 D. P7,000
9. Lower sales due to poor product performance
10. Quality audits 6. Smile Corporation uses a standard cost system. Information for the month of
To what classification of quality costs do the foregoing described costs belong? April is as follows:
Actual manufacturing overhead costs (P13,000 is fixed) P40,000
Prevention Appraisal Internal Failure External Direct labor:
Failure Actual hours worked 12,000 hours
A. 3,7,10 3,5 2 1,4,8,9 Standard hours allowed 10,000 hours
B. 3,10 5 2,6,7 1,4,8,9 Average actual labor cost per hour P9
C. 10 3 2,5,6 1,4,7,8,9 The factory overhead rate is based on a normal volume of 12,000 direct labor
D. 3,10 5 1,2,10 4,7,8,9 hours
Standard cost data at 12,000 direct labor hours was:
5. Richards, Inc. developed the following budgeted life-cycle income statement
for two proposed products. Each product’s life cycle is expected to be two years. Variable factory overhead P24,000
 Fixed factory overhead 12,000 July 1, 2000 June 30, 2001
Total factory overhead P36,000 Raw material* 40,000 50,000
What are the following overhead variances? Work-in-process 10,000 10,000
Finished goods 80,000 50,000
A. B. C. D. *Two (2) units of raw material are needed to produce each unit of finished product.
Variable OH P3,000 U P3,000 U P7,000 U P7,000 U
Spending 9. If Paradise Company plans to sell 480,000 units during the 200-2001 fiscal year,
Variable OH P2,000 U P4,000 U P2,000 U P4,000 U the number of units it would have to manufacture during the year would be
Efficiency A. 440,000 C. 510,000
Fixed OH P4,000 U P1,000 U P1,000 U P4,000 U B. 480,000 D. 450,000
Spending
10. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal
year by Paradise Company, the units of raw material needed to be purchased
7. Which of the following statements is true for a firm that uses variable (direct)
would be
costing?
A. 1,000,000 units C. 1,020,000 units
A. The cost of a unit of product changes because of changes in the number of
B. 1,010,000 units D. 990,000 units
units manufactured.
B. Profits fluctuate with sales
11. Sensitivity analysis, if used with capital projects,
C. An idle facility variation is calculated
A. Is used extensively when cash flows are known with certainty
D. Product costs include “direct” (variable) administrative costs.
B. Measures the change in the discounted cash flows when using the discounted
payback method rather than the net present value method.
8. An appropriate transfer price between two divisions of the Star Corporation can
C. Is a “what-if” technique that asks how a given outcome will change if the
be determined from the following data:
original estimates of the capital budgeting model are changed.
Fabrication Division D. Is a technique used to rank capital expenditure requests.
Market price of subassembly P50
Variable cost of subassembly P20 12. A measure of a company’s immediate short-term liquidity is the
Excess capacity (in units) 1,000 a. current ratio.
b. current cash debt coverage ratio.
Assembling Division c. cash debt coverage ratio.
Number of units needed 900 d. acid-test ratio.
What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Any amount less than P50 13. The ratio that indicates a company’s degree of financial leverage is the
B. Between P50 and P70 D. P50 is the only acceptable price a. cash debt coverage ratio.
b. debt to total assets ratio.
Questions 9 & 10 concern Paradise Company, which budgets on annual basis for its c. free cash flow ratio.
fiscal year. The following beginning and ending inventory levels (in units) are d. times interest earned ratio.
planned for the fiscal year of July 1, 2000 through June 30, 2001.
14. Earnings per share is computed by dividing net income
 a. by average common shares outstanding. combination only and not as a result of efficient operations.
b. by ending common shares outstanding. c. Liabilities may be undervalued when the price paid by the
investor
c. less preferred stock dividends by average common shares outstanding. is allocated to specific liabilities.
d. less preferred stock dividends by ending common shares outstanding. d. An undue amount of cost may be assigned to goodwill, thus
potentially allowing an understatement of pooled earnings.
15. If Sol Company expects to get a one-year loan to help cover the initial financing
5. Company B acquired the assets (net of liabilities) of Company S
of capital project, the analysis of the project should in
A. offset the loan against any investment in inventory or receivable required by exchange for cash. The acquisition price exceeds the fair value of
the project the
B. show the loan as an increase in the investment net assets acquired. How should Company B determine the amounts to
C. show the loan as a cash outflow in the second year of the project’s life be
reported for the plant and equipment, and for long-term debt of the
D. ignore the loan acquired Company S?
Plant and Equipment Long-Term Debt
a. Fair value S's carrying amount
b. Fair value Fair value
P2 c. S's carrying amount Fair value
d. S's carrying amount S's carrying amount
1. An economic advantage of a business combination includes
a. Utilizing duplicative assets. 6. Publics Company acquired the net assets of Citizen Company during
b. Creating separate management teams. 20X5.
c. Coordinated marketing campaigns. The purchase price was $800,000. On the date of the transaction,
d. Horizontally combining levels within the marketing chain. Citizen had no long-term investments in marketable equity securities
and $400,000 in liabilities. The fair value of Citizen assets on the
2. A tax advantage of business combination can occur when the acquisition date was as follows:
existing Current assets................................. $ 800,000
owner of a company sells out and receives: Noncurrent assets.............................. 600,000
a. cash to defer the taxable gain as a "tax-free reorganization." $1,400,000
b. stock to defer the taxable gain as a "tax-free reorganization." ==========
c. cash to create a taxable gain. How should Publics account for the $200,000 difference between the
d. stock to create a taxable gain. fair
value of the net assets acquired, $1,000,000, and the cost,
3. A controlling interest in a company implies that the parent $800,000?
company a. Retained earnings should be reduced by $200,000.
a. owns all of the subsidiary's stock. b. Current assets should be recorded at $685,000 and noncurrent
b. has influence over a majority of the subsidiary's assets. assets recorded at $515,000.
c. has paid cash for a majority of the subsidiary's stock. c. The noncurrent assets should be recorded at $400,000.
d. has transferred common stock for a majority of the subsidiary's d. A deferred credit of $200,000 should be set up and subsequently
outstanding bonds and debentures. amortized to future net income over a period not to exceed 40
years.
4. Which of the following is a potential abuse that may arise when a ANS: C DIF: M OBJ: 4
business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by the 7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible
investor is allocated among specific assets. assets:
b. Earnings of the pooled entity may be increased because of the Patent on a product that is deemed to have no useful life $10,000.
Customer List with an observable fair value of $50,000. a. goodwill related to each reporting segment.
A 5-year operating lease with favorable terms with a discounted b. contingent payment agreements, options, or commitments included
present value of $8,000. in
Identifiable R & D of $100,000. the purchase agreement, including accounting methods to be
ABC will record how much for acquired Intangible Assets from the followed.
Purchase of XYZ Inc? c. results of operations for the current period if both companies
a. $168,000 had
b. $58,000 remained separate.
c. $158,000 d. amount of in-process R&D purchased and written-off during the
d. $150,000 period.
ANS: B DIF: D OBJ: 4 ANS: C DIF: M OBJ: 5

8. Vibe Company purchased the net assets of Atlantic Company in a 11. Cozzi Company is being purchased and has the following balance
business sheet as
combination accounted for as a purchase. As a result, goodwill was of the purchase date:
recorded. For tax purposes, this combination was considered to be a Current assets.......... $200,000 Liabilities.... $ 90,000
tax-free merger. Included in the assets is a building with an Fixed assets............ 180,000 Equity......... 290,000
appraised Total................. $380,000 Total........ $380,000
value of $210,000 on the date of the business combination. This ======== ========
asset The price paid for Cozzi's net assets (the purchaser assumes the
had a net book value of $70,000, based on the use of accelerated liabilities) is $500,000. The fixed assets have a fair value of
depreciation for accounting purposes. The building had an adjusted $220,000, and the liabilities have a fair value of $110,000. The
tax amount
basis to Atlantic (and to Vibe as a result of the merger) of of goodwill to be recorded in the purchase is __________.
$120,000. a. $0
Assuming a 36% income tax rate, at what amount should Vibe record b. $50,000
this c. $70,000
building on its books after the purchase? d. $90,000
a. $120,000
b. $134,400 ANS: C DIF: M OBJ: 6
c. $140,000 12. Separately identified intangible assets are accounted for by
d. $210,000 amortizing:
ANS: D DIF: M OBJ: 4 a. exclusively by using impairment testing.
b. based upon a pattern that reflects the benefits conveyed by the
9. Goodwill represents the excess cost of an acquisition over the asset.
a. sum of the fair values assigned to intangible assets less c. over the useful economic life less residual value using only the
liabilities assumed. straight-line method.
b. sum of the fair values assigned to tangible and intangible assets d. amortizing over a period not to exceed a maximum of 40 years.
acquired less liabilities assumed. ANS: B DIF: E OBJ: 6
c. sum of the fair values assigned to intangibles acquired less 13. Acme Co. is preparing a pro-forma set of financial statements
liabilities assumed. after an
d. book value of an acquired company. acquisition of Coyote Co. The purchase price is less than the fair
ANS: B DIF: M OBJ: 5 value of the assets acquired. However, the purchase price is greater
than net book value of the acquired company.
10. When purchasing a company occurs, FASB recommends disclosing all a. Acme's goodwill will decrease over time.
of the b. Acme's amortization of intangible assets will increase over time.
following EXCEPT: c. Depreciation expense will be greater than Coyote Company's
expense. g. Unamortized premium on bonds payable 413,200
d. Coyote's loss on the sale of the assets will create a net loss
carryforward.
h. Appropriated for plant expansion 700,000
ANS: C DIF: D OBJ: 6 i. Loss on treasury share reissue 515,000
j. Share premium in excess of par from issued shares 215,000
14. Which of the following income factors should not be factored
into a k. Share issuance expense 45,000
calculation of goodwill? l. Appropriated for remaining treasury shares at cost P50/share 1,000,000\
a. sales for the period
b. income tax expense Additional notes:
c. extraordinary items
d. cost of goods sold
 The equipment declared as dividends had a recoverable value of 450,000 as of the
date of declaration.
15. Pagach Company purchased 100% of the voting common stock of Rage  The stock dividend distributed was based on a 10% share dividend declared on
Company
for $1,800,000. The following book and fair values are available: 100,000, 25 par value shares issued. The market value of shares on the date of
Book Value Fair Value declaration was at 42 per share.
Current assets...................... $ 150,000 $300,000  The only transactions affecting the treasury shares were those described in item f
Land and building................... 280,000 280,000
Machinery........................... 400,000 700,000 and item i.
Bonds payable....................... (300,000) (250,000) 1. How much should be the correct debit to retained earnings for the property
Goodwill............................ 150,000 ?
dividends?
The bonds payable will appear on the consolidated balance sheet
a. at $300,000 (with no premium or discount shown). a. 600,000 b. 550,000 c. 500,000 d. 450,000
b. at $300,000 less a discount of $50,000. 2. How much should be the correct debit to retained earnings for the share dividends?
c. at $0; assets are recorded net of liabilities.
d. under a net amount of $250,000 since it is a bargain purchase. a. 420,000 b. 336,000 c. 250,000 d. 200,000
3. How much is the correct balance of the Accumulated retained earnings
unappropriated account?
AP a. 190,000 b. 140,000 c. 375,000 d. 515,000
4. What is the balance of the share premium from treasury stock transactions?
The following information has been taken from the Accumulated Profits ledger account of a. 0 b. 140,000 c. 375,000 d. 550,000
GOING CORP.: 5. The necessary net adjustment involves an adjustment to additional paid in capital in
the amount of:
a. Total net income since incorporation 3,200,000
a. 320,500 b. 365,500 c. 460,500 d. 456,500
b. Total cash dividends paid 150,000
c. Carrying value of the company’s equipment
declared as property dividend 600,000
The NINGNING INC. has requested you to audit its financial statements for the year2007.
d. Proceeds from sale of donated stocks 150,500 During your audit, Ningning presented to you its balance sheet as of December 31,
e. Total value of stock dividends distributed 250,000 2006which had the following Shareholders’ equity section:
f. Gain on treasury share transaction 375,000
 Preference shares, 10 par; 90,000 shares authorized and issued,
of which 9,000 are in the treasury costing 135,000 and shown as an asset h. Unadjusted net income for the year ended December 31, 2007 was 1,946,250 per
900,000 company’s books.
ordinary shares, 4 par value; 900,000 shares authorized, of which 675,000
shares are issued and outstanding 2,700,000 Based on the information above, answer the following:
Share premium (5 per share on preference shares issued in 2001) 450,000
Allowance for doubtful accounts receivable 180,000 6. What is the adjusted net income for the year ended December 31, 2007?
Reserve for depreciation 1,260,000 a. 1,946,250 b. 1,973,250 c. 1,937,250 d. 1,892,250
Reserve for fire insurance 297,000 7. What is the correct Additional Paid in Capital as of December 31, 2007?
Accumulated profits 3,375,000
a. 1,296,000 b. 1,215,000 c. 1,206,000 d. 621,000
Total shareholders’ equity P9,000,000
8. What is the correct Appropriated accumulated profits as of December 31, 2007?
a. 454,500 b. 387,000 c. 342,000 d. 0
Audit notes: 9. What is the correct Unappropriated accumulated profits as of December 31, 2007?
a. 4,016,250 b. 3,939,750 c. 3,935,250 d. 3,867,750
a. Of the preference shares, 4,500 shares were sold for 18 per share on August 30,
10. What is the total shareholders’ equity as of December 31, 2007?
2007. Ningning credited the proceeds to the Preference share account. The treasury
a. 5,550,750 b. 8,718,750 c. 9,474,750 d. 9,479,250
shares as of December 31, 2006 were acquired in one purchase in 2006.
b. The preference shares carry an annual dividend of 1 per share. The dividend is
cumulative. As of December 31, 2006, unpaid cumulative dividends amounted to 5
per share. The entire accumulation was liquidated in June 2007, by issuing to the You are auditing the financial statements of LABANDERA INC., a company which carries a
preference shareholders 81,000 ordinary shares. wide variety of laundry appliance and supplies, for the year ended December 31, 2007.
c. A cash dividend of 1 per share was declared on December 1, 2007 to preference Information about the company’s varied liability accounts are as follows:
shareholders of record December 15, 2007. The dividends are payable on January
a. Premiums items are being offered to its Class A (residential use) washing machines
15, 2008.
and dryers. Customers shall receive a coupon for each P50 spent on Class A laundry
d. At December 31, 2007, the Allowance for Doubtful Accounts Receivable and Reserve
appliance. Customers may exchange 400 coupons and P1,000 for a dryer. Labandera
for Depreciation had balances of 37,500 and 1,575,000, respectively.
pays P5,100 for each dryer and estimates that 60% of the coupons given to
e. On March 1, 2007, the Reserve for Fire Insurance was increased by 90,000;
customers will be redeemed. A total of 4,500 dryers to be used on the premium
Accumulated profits was debited.
program were purchased during the year and there were 1,680,000 coupons
f. On December 31, 2007, the Reserve for fire insurance was decreased by 45,000
redeemed during the year.
which represents the carrying value of a machine destroyed by fire on that date. Fire
b. Class B laundry appliances are sold with a two-year warranty for replacement of
cleanup costs 9,000 does not appear in the records.
parts and labor. The estimated warranty cost, based on the past experience, is 1% of
g. The December 31, 2006 Accumulated profits consists of the following:
sales to be incurred on the year of sale and 2% of sales to be incurred on the year
Donated land from a stockholder 675,000
following the year of sale. Replacement of parts and labor for warranty work totaled
Gains from treasury stock transactions 76,500
1,640,000 during 2007.
Earnings retained in the business 2,623,500
P3,375,000
 c. The company provides key employees 5% bonus based on the net income of the 2. When does a stock become delinquent?
company after tax. The same is yet to be accrued at year end. a. When no payment is made within fifteen (15) days from the date
as fixed in the subscription contract or in the call made by the
d. Labandera uses the accrual method to account for the warranty and premium costs
Board of Directors.
for financial reporting purposes. Labandera’s sales for 2007 totaled 280,000,000, b. When no payment is made within two (2) months as fixed in the
60% of which is attributed to Class A laundry appliance sales. contract or call.
e. The company reported the following balances at year end: c. When no payment is made within one (1) month from date as
fixed in the contract or call.
Inventory of premium items 1,530,000
d. None of the above.
Premium expense 17,220,000
Warranties expense 1,640,000 3. Ultra vires acts are acts of a corporation which are:
Net income, before 35% income tax a. Exercised by the Board of Directors but not ratified by the
And before any adjustments 80,164,000 stockholders.
b. Not within the corporate powers conferred by the Code or
articles of incorporation.
c. Necessary and incidental to the exercise of the powers conferred
11. What is the correct premiums liability as of December 31, 2007? upon the corporation.
d. None of the above
a. 4,284,000 b. 3,444,000 c. 1,530,000 d. 1,230,000
12. What is the correct warranties expense? 4. Why is a de facto corporation not considered a de jure corporation?
a. 1,640,000 b. 1,720,000 c. 2,240,000 d. 3,360,000 a. Because it failed to incorporate under existing statutory authority.
13. What is the total bonus to key employees? b. The corporation’s exercise of corporate powers is not recognized
by the courts for reason of public policy.
a. 2,395,577 b. 2,468,354 c. 2,480,916 d. 3,865,504
c. Its corporate existence may be challenged in court by any
taxpayer.
d. None of the above.
14. What is the correct income tax? 5. Which one of the following is not a characteristic of a voting trust agreement?
a. 25,381,679 b. 25,386,076 c. 25,411,548 d. 25,897,074 a. A voting trust is created for the purpose of conferring upon the
15. What is the correct net income? trustee the right to vote and other rights pertaining to the shares.
b. A voting trust is irrevocable during the time stipulated.
a. 47,137,405 b. 47,145,570 c. 47,192,875 d. 46,237,422
c. The stockholder remains the beneficial or equitable owner of the
shares while the trustee is the legal owner.
BLT d. All voting trust agreements shall not exceed five (5) years.
6. In an “invitation to bid”, B proposes the following
1. What are watered stocks? “I will buy the property for P100,000 and if the bid of any other offerror or bidder shall be
a. Stocks issued for a consideration less than P10. considered the best in terms of amount and conditions, I am equal to that offer.”
b. Stocks issued for a consideration more than its par or issued a. The offer is speculative, because it cannot be considered as against another offer which
value. is certain
c. Stocks issued for a consideration less than its par or issued b. The offer is considered a counter-offer
value. c. This is a continuing offer which is very certain
d. None of the above d. The advertiser is not bound to accept the highest bidder
 7. Statement no. 1: if the cause is not stated in the contract if is presumed that it is unlawful 12. This doctrine is a recognition by the courts that the fiduciary
Statement no. 2: the action for rescission is subsidiary if cannot be instituted except when
standards could not be upheld where the fiduciary is acting for two entities
there is no other legal means to obtain reparation for damages suffered.
with competing interests. It rests on fundamentally on the unfairness of a
a. Both statements are true
corporate officer or director taking advantage of a prospect for his own
b. Both are false
c. Only the first is false
personal benefit when the interest of the corporation justly needs
d. only the first is true protection.
a. Corporate Entity Doctrine
8. g was appointed guardian of S, thr latter being 16 years old. S sold his parcel of land in writing b. Corporate Interest Doctrine
to B valued at P100,000 for P75,000, suffering lesion of ¼ of the value. What is the status if the c. Business Judgment Rule
contract? d. Corporate Opportunity Doctrine.
a. Rescissible
b. Unenforceable 13. It is a legal scheme whereby a debtor, who has sufficient assets but
c. Void who may be unable to meet his obligations as and when they fall due, may
d. Voidable petition for more time within which to settle such obligations.
a. Insolvency Proceedings
9. One of the stipulations contained in the contract between M Company and its employees is b. Suspension of Payments
that the company shall pay a bonus to employees of the company who shall continue c. Corporate Rehabilitation
employment for at least 2 consecutive years, unless he quits or discharged before the expiration d. Voluntary Insolvency
of the period of 2 years. X, an employee of the company was discharged without just cause, one
week before the completion of the two-year period. 14. What is the so-called “Grandfather Rule” under the Corporation Code?
a. X is not entitled to the bonus because his discharge was in accordance with the contract a. It is a rule that determines the nationality of a corporation on the
b. X is not entitled to the bonus, because the employer’s right to terminate is superior than basis of the place where the foreign corporation is incorporated or
the right of the employee to be employed registered?
c. X is entitled to the bonus whether the discharged is with or without cause b. It is a rule that determines the nationality of a corporation on the
d. X is entitled to the bonus because the debtor company has voluntary prevented the basis of the nationality of the majority of the stockholders.
happening of the condition c. It is a rule that determines the nationality of the corporation on the
10 Statement no 1: If one party was mistaken and the other acted fraudulently or inequitable is basis of the nationality of its officers and directors.
such a way that the instrument does not state their true intention, the former may ask for the d. All of the above
annulment of the instrument
e. None of the above
Statement no. 2: The statement of a false cause in contracts shall render them void, if it
should not be proven that they were founded upon another cause which is true and lawful
a. Both are true
b. Both are false 15. Legal compensation will take place in which of the following circumstances?
c. No. 1 is true, No. 2 is false a. A owes B ₱1,000.00.
d. No. 1 is false, No. 2 is true B owes A₱1,000.00, the latter as guardian or administrator.
b. A owes B, C, and D (partners in partnership P) ₱1,000.00.
11. One of the following is exempt from MCIT: P owes A₱1,000.00.
a. Banks c. A (stockholder) owes B (corporation) for amounts A collected as treasurer of B.
b. Mining companies
B owes A amount representing overpayment by A of his stocks.
c. Publicly held corporations
d. Educational institutions