Review 105-----------Day 5 d.

Is a contra account to cash

THEORY OF ACCOUNTS 7. The payments of accounts payable made subsequent to the close of the accounting period
are recorded as if they were made at the end of the current period.
1. Cash equivalents are a. Window dressing
a. Short-term and highly liquid investments that are readily convertible into cash. b. Kiting
b. Short-term and highly liquid investments that are readily convertible into cash with c. Lapping
remaining maturity of three months. d. Imprest system
c. Short-term and highly liquid investments that are readily convertible into cash and so
near their maturity that they represent insignificant risk of changes in value because of 8. Bank reconciliation
changes in interest rates. a. Is the process of transferring money in or out of a bank account.
d. Short term and highly liquid marketable equity securities. b. Requires that every transaction which will result in a cash payment be verified,
approved and recorded before a bank check is prepared.
2. Which of the following statements is false? c. Is an analysis that reflects the bank transactions made by a depositor.
a. Not all items included in cash constitute legal tender. d. Explains the difference between the bank balance and the balance shown in the
b. Cash may be offset against a liability if the deposit of funds in restricted account clearly depositor’s records.
constitutes the legal discharge of the liability.
c. Legally restricted bank deposit held as compensating balances should be segregated 9. If the cash balance shown in a company’s accounting records is less than the correct cash
from the cash account and reported under a separate caption. balance and neither the company nor the bank has made any errors, there must be
d. One-year BSP treasury bills with remaining maturity of three months on balance sheet a. Deposits credited by the bank but not yet recorded by the company
date may be shown as part of “cash and cash equivalents” provided this is disclosed. b. Deposits in transit
c. Outstanding checks
3. All cash receipts are deposited intact and all cash disbursements are made by means of d. Bank charges not yet recorded by the company
check. This internal control is known as
a. Administrative control 10. Which of the following cash flows does not appear in a cash flow statement using indirect
b. Imprest system method?
c. Accounting control a. Net cash flow from operating activities
d. Auditing control b. Cash received from customers
c. Cash inflow from sale of equipment
4. Entries to record the replenishment of petty cash fund result in a debit to various expense d. Cash outflow for dividend payment
accounts and a credit to cash in bank. This accounting procedure typically exemplifies the
a. Imprest petty cash system 11. In a cash flow statement using the indirect approach for operating activities, an increase
b. Fluctuating petty cash system in inventory should be presented as
c. Internal control a. Outflow of cash
d. Administrative control b. Addition to net income
c. Inflow and outflow of cash
5. What is the major purpose of an imprest petty cash fund? d. Deduction from net income
a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors 12. Which should not be disclosed in the cash flow statement using the indirect method?
c. To determine the honesty of the employees a. Interest paid, net of amounts capitalized
d. To effectively control cash disbursements b. Income taxes paid
c. Cash flow per share
6. A cash over or short account d. Dividends paid on preferred stock
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over 13. How should a gain from the sale of used equipment for cash be reported in a cash flow
c. Is debited when the petty cash fund proves out short statement using the indirect method?
 a. In investing activities as a reduction of the cash inflow from the sale Depreciable
b. In investment activities as a cash outflow
a. In operating activities as a deduction from income Cost Scrap cost Life Annual dep
b. In operating activities as an addition to income
Building 8,800,000 800,000 20 years
14. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a Machinery 3,200,000 320,000 15 years
cash flow from investing activities equals the carrying amount of the equipment
a. Plus the gain Equipment 640,000 5 years
b. Plus the gain and less the amount of tax attributable to the gain
c. Plus both the gain and the amount of tax attributable to the gain
d. With no addition or subtraction Bauan computes depreciation on the straight line method. The composite life of the
assets should be
15. If the cash balance in a company’s bank statement is less than the correct cash balance
and neither the company nor the bank has made any errors, there must be a. 19.8
a. Deposits credited by the bank but not yet recorded by the company b. 13.3
b. Outstanding checks c. 18.0
c. Bank charges not yet recorded by the company d. 16.0
d. Deposits in transit
P1 4. Alitagtag Company purchased factory equipment which was installed and put into service
July 1, 2004 at a total cost of P9,000,000. Residual value was estimated at P1,000,000. The
1. On January 1, 2005, Corregidor Company is granted a large tract of land in the Cordillera equipment is being depreciated over 10 years by the double declining balance method. For
region by the Philippine government. The fair value of the land is P10 million. Corregidor the year 2005 how much depreciation expense should Alitagtag record on this equipment?
Company is required by the grant to construct chemical research facility and employ only a. 1,620,000
personnel residing in the Cordillera region. The estimated cost of the facility is P50 million b. 1,440,000
with useful life of 20 years. Corregidor Company should recognize in 2005 an income from c. 2,220,000
government grant at d. 1,280,000
a. 10,000,000
b. 2,500,000
c. 500,000 5. On January 1, 2004, Taal Company acquired equipment to be used in its manufacturing
d. 0 operations. The equipment has an estimated useful life of 5 years and residual value of
P3,000,000. The depreciation applicable to this equipment was P3,200,000 for 2005
2. On April 1, 2004, Batangas Company bought machinery under a contract that required a computed under the sum of year’s digits method. What was the acquisition cost of the
down payment of P500,000 plus 24 monthly payments of P300,000 for total payments of equipment?
P7,700,000. The cash price of the machinery was P6,500,000. The machinery has an a. 12,000,000
estimated useful life of four years and estimated residual value of P500,000. Batangas uses b. 15,000,000
SYD method of depreciation. In its 2005 income statement, what amount should Batangas c. 12,600,000
report as depreciation for this machinery? d. 19,000,000
a. 2,400,000
b. 1,800,000 6. Lemery Company acquired property in 2005 which contains mineral deposit. The
c. 1,950,000 acquisition cost of the property was P20,000,000. Geological estimates indicate that
d. 2,275,000 5,000,000 tons of mineral may be extracted. It is further estimated that the property can be
sold for P5,000,000 following mineral extraction. For P2,000,000, Lemery is legally required
3. A schedule of plant assets owned by Bauan Company is presented below. to restore the land to a condition appropriate for resale. After acquisition, the following costs
were incurred:

Exploration cost 13,000,000

 Development cost related to drilling of wells 10,000,000 a. 32,500,000
b. 45,000,000
Development cost related to production equipment 15,000,000
c. 29,000,000
d. 15,000,000
The company extracted 600,000 tons of the mineral in 2005 and sold 450,000 tons. In
the 2005 income statement, what amount of depletion is included in cost of sales? 10. Lian Company acquired a building on January 1, 2001 at a cost of P50,000,000. The
a. 4,800,000 building has an estimated life of 10 years and residual value of P5,000,000. The building was
b. 3,600,000 revalued on January 1, 2005 and the revaluation revealed replacement cost of P80,000,000,
c. 5,400,000 residual value of P2,000,000 and revised life of 12 years. What is the revaluation surplus on
d. 4,050,000 December 31, 2005?
a. 30,000,000
7. Calaca Company quaries limestone, crushes it and sells it to be used in road building. b. 26,250,000
Calaca paid P20,000,000 for a certain quarry on January 1, 2004. The property can be sold c. 16,800,000
for P4,000,000 after production ceases. The original total estimated reserves totaled d. 14,700,000
5,000,000 tons. Calaca quarried 500,000 tons in 2004 and 1,500,000 tons in 2005. An
engineering study performed in 2005 indicated that as of December 31, 2005, 4,500,000 tons 11. On January 1, 2005, the historical balances of the land and building of Lipa Company are:
were available. Calaca Company should record 2005 depletion at
a. 3,600,000 Cost Accumulated depreciation
b, 4,800,000 Land 50,000,000
c. 6,000,000
d. 4,500,000 Building 300,000,000 90,000,000

8. On July 1, 2005 Balayan Company purchased rights to a mine. The total purchase price The land and building were appraised on same date and the revaluation revealed the
was P50,000,000 of which P5,000,000 was allocated to the land. Estimated reserves were following:
6,000,000. Balayan expects to extract and sell 100,000 tons per month. Balayan Company
purchased new equipment on July 1, 2005 for P21,000,000 with estimated life of 8 years. Sound value
However, after all the resource is removed, the equipment will be of no use and will be sold Land 80,000,000
for P3,000,000. What is the depreciation of the equipment for 2005? Building 350,000,000
a. 1,800,000
b. 2,100,000 There were no additions or disposals during 2005. Depreciation is computed on the
c. 1,125,000 straight line. The estimated life of the building is 20 years. The depreciation of the
d. 3,600,000 building for the year ended December 31, 2005 should be
a. 25,000,000
9. Calatagan Company provides the following balances at the end of 2005: b. 10,000,000
c. 15,000,000
Wasting asset, at cost 100,000,000 d. 17,500,000
Accumulated depletion 30,000,000 Capiz Company has the following information on January 1, 2005 relating to its land and
Capital liquidated 10,000,000 building.
Retained earnings 15,000,000
Land 20,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Building 450,000,000
Inventory of resource deposit (50,000 units) 6,000,000
Accumulated depreciation 75,000,000

Calatagan can declare maximum dividend on December 31, 2005 of

 There were no additions or disposals during 2005. Depreciation is computed using MAS
straight line over 15 years for building. On June 30, 2005, the land and building were
revalued as follows: 1. Sarah Company is planning to purchase a new machine for P600,000. Depreciation for
tax purposes will be P100,000 annually for six years. The new machine is expected to
Replacement cost Sound value produce cash flow from operations, net of income taxes, of P150,000 a year in each of
Land 35,000,000 35,000,000 the next six years. The accounting (book value) rate of return on the initial investment is
expected to be
Building 600,000,000 480,000,000
A. 8.3% C. 16.7%
B. 12.0% D. 25.0%
12. What is the depreciation of the building for 2005?
a. 30,000,000 2. Investor’s Inc. uses a 12% hurdle rate for all capital expenditures and has done the
b. 35,000,000 following analysis for four projects for the upcoming year.
c. 40,000,000 Project 1 Project 2 Project 3 Project 4
d. 32,000,000
Initial cash outlay P200,000 P298,000 P248,000 P272,000
Annual net cash
13. What is the revaluation surplus on June 30, 2005?
inflows
a. 135,000,000
Year 1 P 65,000 P100,000 P 80,000 P 95,000
b. 125,000,000
Year 2 70,000 135,000 95,000 125,000
c. 120,000,000
Year 3 80,000 90,000 90,000 90,000
d. 160,000,000
Year 4 40,000 65,000 80,000 60,000
Net present value ( 4,276 14,064 14,662
14. What is the revaluation surplus on December 31, 2005?
3,798)
a. 125,000,000
Profitability index 98% 101% 106% 105%
b. 130,000,000
Internal rate of return 11% 13% 14% 15%
c. 123,750,000
d. 115,000,000 Which project(s) should Investors, Inc. select during the upcoming year under each

15. During December 2005, Talisay Company determined that there had been a significant budgeted amount of funds?
decrease in market value of its equipment. At December 31, 2005, Talisay compiled the
following information concerning the equipment: No Budget Restriction P600,000 Available P300,000Available
Funds Funds
Original cost 20,000,000
Accumulated depreciation 12,000,000 A. Projects 2, 3 & 4 Projects 3 & 4 Project 3
Expected undiscounted net future cash inflows from the B. Projects 1, 2 & 3 Projects 2, 3 & 4 Projects 3 & 4
continued use and eventual disposal 7,000,000 C. Projects 1, 3 & 4 Projects 2 & 3 Project 2
Expected discounted net future cash inflows from the D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
continued use and eventual disposal 5,000,000
Fair value less cost to sell 6,500,000
3. If the North Division of Alliance Products Company had an operating asset turnover of
4.2 and an operating income margin of 0.10, the return on investment would be
What is the impairment loss that should be reported in the 2005 income statement?
a. 1,000,000 A. 23.8% C. 42.0%
b. 2,000,000 B. 420.0% D. 4.2%
c. 1,500,000
d. 0 4. The sales director of Lloyd Company suggested that certain credit terms be modified. He
estimates the following effects:
 Sales will increase by at least 20% D. Earn maximum returns on investment assets.
 Accounts receivable turnover will be reduced to 8 times from the present turnover of 10
times 10. Which of the following actions would not be consistent with good management?
 Bad debts, now at 1% of sales will increase to 1.5% a. Increased synchronization of cash flows.
Sales before the proposed changes is at P900,000. Variable cost ratio is 55% and the b. Minimize the use of float.
c. Maintaining an average cash balance equal to that required as a compensating
desired rate of return is 20%. Fixed expenses amount to P150,000. balance or that which minimizes total cost.
d. Use of checks and drafts in disbursing funds.
Should the company allow revision of its credit terms?
A. Yes, because income will increase by P64,800
11. When managing cash and short-term investments, a corporate treasurer is primarily
B. Yes, because losses will be reduced by P73,800
concerned with
C. No, because income will be reduced by P13,000
A. Maximizing rate of return.
D. No, because losses will be increased by P28,000
B. Minimizing taxes.
C. Investing in Treasury bonds since they have no default risk.
5. Bye Company borrows from a bank a certain loan at a stated discount rate of 12 percent
D. Liquidity and safety.
per annum. The bank requires 10 percent of loan as compensating balance in its new
checking account. The loan is payable at the end of 6 months. The effective interest rate
12. The economic order quantity (EOQ) formula can be adapted in order for a firm to
of this loan is
determine the optimal mix between cash and marketable securities. The EOQ model
A. 28.21 percent C. 27.27 percent assumes all of the following except
B. 14.29 percent D. 15.38 percent a. The cost of a transaction is independent of the dollar amount of the transaction and
interest rates are constant over the short run.
6. Which of the following is not a major function in cash management? b. An opportunity cost is associated with holding cash, beginning with the first dollar.
c. The total demand for cash is known with certainty.
a. Cash flow control c. Maximizing sales
d. Cash flow requirements are random.
b. Cash surplus investment d. Obtaining financing services
13. The following are desirable in cash management except:
7. A precautionary motive for holding excess cash is
a. To enable a company to meet the cash demands from the normal flow of business a. Cash is collected at the earliest time possible.
activity. b. Most sales are on cash basis and receivables are aged “current”
b. To enable a company to avail itself of a special inventory purchase before prices rise c. Post-dated checks are not deposited on time upon maturity.
to higher levels. d. All sales are properly receipted and promptly deposited intact.
c. To enable a company to have cash to meet emergencies that may arise periodically.
d. To avoid having to use the various types of lending arrangements available to cover
14. The one item listed below that would warrant the least amount of consideration in credit
projected cash deficits.
and collection policy decisions is the
A. Quality of accounts accepted. C. Cash discount given.
8. The amount of cash that a firm keeps on hand in order to take advantage of any bargain
B. Quantity discount given. D. Level of collection expenditures.
purchases that may arise is referred to as its
A. Transactions balance. C. Precautionary balance.
15. Which of the following investments is not likely to be a proper investment for temporary
B. Compensating balance. D. Speculative balance.
idle cash?
a. Initial public offering of an established profitable conglomerate.
9. All of the following are valid reasons for a business to hold cash and marketable b. Commercial paper.
securities except to c. Treasury bills.
A. Satisfy compensating balance requirements. d. Treasury bonds due within one year.
B. Maintain adequate cash needed for transactions.
C. Meet future needs.
P2 Debit Credit
Current Receivable due from Aeta..... 40,000
1. In an 80% purchase accounted for as a tax-free exchange, the excess of Noncurrent Receivable due from Beta... 100,000
cost over book value is 200,000. The equipment's book value for tax Cash Advance to Beta.................. 26,000
purposes is 100,000 and its fair value is 150,000. All other Cash Advance from Gaeta............... 75,000
identifiable assets and liabilities have fair values equal to their book Intercompany Payable to Gaeta......... 40,000
values. The tax rate is 30%. What is the total deferred tax liability In its 12/31/X1 consolidated balance sheet, what amount should Patti
that should be recognized on the consolidated balance sheet on the date report as intercompany receivables?
of purchase? a. 166,000
a. 12,000 b. 51,000
b. 60,000 c. 26,000
c. 72,857 d. 0
d. 85,714
5. Pease Corporation owns 100% of Sade Corporation common stock. On January
2. Paro Company purchased 80% of the voting common stock of Sabon Company 2, 20X6, Pease sold machinery with a carrying amount of 30,000 to Sade
for 900,000. There are no liabilities. The following book and fair for 50,000. Sade is depreciating the acquired machinery over a 5-year
values are available: life using the straight-line method. The net adjustments to compute the
Book Value Fair Value 20X6 and 20X7 consolidated income before income tax would be an increase
Current assets...................... 100,000 200,000 (decrease) of
Land and building................... 200,000 200,000 20X6 20X7
Machinery........................... 300,000 600,000 a. (16,000) 4,000
Goodwill............................ 100,000 ? b. (16,000) 0
Using the parent company concept, the machinery will appear on the c. (20,000) 4,000
consolidated balance sheet at __________. d. (20,000) 0
a. 600,000
b. 540,000
c. 480,000 6. Ponti Company purchased the net assets of the Sorri Company for
d. 300,000 800,000. The net assets of Sorri Company were recorded as follows on
the acquisition date:
3. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s 10 par Cash............................................. 50,000
common stock for 975,000. On this date, the carrying amount of Sunny's Inventory........................................ 150,000
net assets was 1,000,000. The fair values of Sunny's identifiable Land............................................. 150,000
assets and liabilities were the same as their carrying amounts except Building (net)................................... 400,000
for plant assets (net), which were 100,000 in excess of the carrying Liabilities...................................... (200,000)
amount. Net assets..................................... 550,000
In the January 1, 20X1, consolidated balance sheet, goodwill should be =========
reported at _______. The market values were as follows: Inventory, 160,000; Land, 170,000;
a. 0 Building, 450,000. The excess purchase price is allocated to goodwill.
b. 75,000 What is the amount that will appear as cash applied to investing as a
c. 95,000 result of this purchase?
d. 175,000 a. 800,000
b. 720,000
4. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are c. 750,000
included in its consolidated financial statements. In its 12/31/X1 d. 670,000
separate balance sheet, Patti had the following intercompany balances
before eliminations: 7. Company P purchased an 80% interest in Company S on January 1, 20X3, for
700,000. On the purchase date, Company S stockholders' equity was
800,000. Any excess of cost over book value was attributed to a patent
with a 15-year life. In 20X3, Company P reported internally generated
net income before taxes of 80,000. Company S reported a net income
before taxes of 40,000. The firms file separate tax returns at a 30%
tax rate. Assume an 80% dividend exclusion rate on intercompany
dividends. The controlling share of consolidated net income is
__________.
a. 81,200
b. 79,280
c. 78,480
d. 74,256
8. Company P owns a 30% interest in Company S and accounts for the
investment under the sophisticated equity method. The investment was
purchased at underlying book value, and there is no excess of cost or
book value. Company S sells merchandise to Company P at cost plus 25%.
Intercompany sales during 20X1 were 100,000. There were 20,000 worth
of such goods in Company P's beginning inventory and 30,000 worth of
such goods in Company P's ending inventory. Company S's reported income
for 20X1 is 40,000, and no dividends were paid. What amount will
Company P record as investment income in 20X1?
a. 12,000
b. 11,400
c. 9,750
d. 4,500
9. Pine Company purchased a 55% interest in the Sent Company on January 1,
20X1 for 350,000. On that date, the stockholders' equity of Sent
Company was 450,000. Any excess cost was attributable to the fair value
increase of equipment with a 10-year life. Pine purchased another 20%
interest on January 1, 20X5 for 200,000. On January 1, 20X5, Sent
Company's stockholders' equity was 700,000, the entire increase due to
retained earnings. Any excess cost was again attributed to the fair
value increase of equipment with a 6-year life. The additional expense
on the December 31, 20X5, income statement is __________.
a. 10,250
b. 20,250
c. 10,000
d. 16,250
10. Prior to January 1, 20X4, Parts Inc. owned a 60% controlling interest in
Sorter Company. On July 1, 20X4, Parts Inc. purchased an additional 20%
interest in Sorter for 150,000. Sorter's stockholders' equity was
600,000 on January 1, 20X4. Any excess was attributed to goodwill. On
July 1, 20X4, there was intercompany inventory owned by Parts Inc. that
had been purchased from Sorter. Sorter's profit on the inventory was
5,000. Parts Inc. sold the inventory during the latter half of 20X4.
Sorter's net income for 20X4 was 60,000, earned evenly during the year.
Goodwill arising from the second acquisition is __________.
a. 30,000
b. 29,500
c. 25,000
d. 23,500
11. Palto Inc. purchased a 10% interest in the Sauer Company for 50,000 on
January 1, 20X1. On that date, Sauer's stockholders' equity was
400,000. Any excess would have been attributed to a patent with a 10-
year life. On January 1, 20X3, Palto purchased another 60% interest for
500,000 when Sauer's stockholders' equity was 700,000. Again, any
excess was attributed to the patent with an 8-year life. The Sauer
Company earned $50,000 during 20X3. The patent on the December 31, 20X3,
consolidated balance sheet will be __________.
a. 90,000
b. 77,000
c. 80,000
d. 10,000
12. Company P purchased the outstanding common stock of Company S as
follows:
15%, January 1, 20X1
20%, June 1, 20X1
30%, August 1, 20X1
35%, September 30, 20X1
The fiscal year of both firms ends on December 31. S's stock was
acquired by P at book value. The controlling interest in consolidated
net earnings for the fiscal year ended December 31, 20X1, would include
which of the following earnings of the subsidiary?
a. 100%, January-December 20X1
b. 15%, January-May 20X1; 20%, June-July 20X1; and 30%, August-
September 20X1
c. 15%, January-May 20X1; 35%, June-July 20X1; 65%, August-October
20X1; and 100%, September - December
d. 15%, January-May 20X1; 35%, June-July 20X1; 65%, August-September
20X1; and 100%, November – December
13. Paris LTD. owned a 75% interest in Scott Company prior to January 1,
20X3. On January 1, 20X1, Paris LTD. paid 600,000 for its interest when
Scott Company had total equity of 550,000. On January 1, 20X3, Scott 2. What is the interest expense to be reported on Kung Fu Kids Corp.’s income
Company had the following stockholders' equity: statement for the year ended December 31, 2008?
Common stock, 10 par............... 100,000 a. 303,113 b. 332,662 c. 341,002 d. 350,092
Other paid-in capital............... 200,000
Retained earnings................... 350,000
On January 2, 20X3, Scott Company sold 2,500 additional shares of stock 3. What is the credit to share premium account assuming that 3,000 of the bonds were
for 35 each in a public offering to noncontrolling shareholders. As a converted on January 1, 2009?
result of this sale, which of the following changes would appear in the a. 1,717,432 b. 1,928,525 c. 2,017,432 d. 2,289,908
20X3 consolidated statements?
a. 45,000 loss 4. Assuming that on the issuance date, the company paid transactions costs totaling to
b. 21,875 loss P151,469, and as a result the yield rate increased by 1.5%, what is the equity
c. 45,000 decrease in controlling paid-in capital
component of the compound instrument?
d. 21,875 decrease in controlling paid-in capita
a. 292,253 b. 303,755 c. 443,722 d. 315,257
14.Apple Inc. owns a 90% interest in Banana Company. Banana Company, in
turn, owns a 80% interest in Carrot Company. During 20X4, Carrot Company 5. Using the assumption in number 34, and assuming all the 4,000 bonds were retired
sold $50,000 of merchandise to Apple Inc. at cost plus 25%. Of this on January 1, 2009 when the prevailing yield rate on the bonds was at 9%, at
merchandise, $10,000 was still unsold by Apple Inc. at year end. The P4,000,000, what is the loss to be reported in the income statement?
adjustment to the controlling interest in consolidated net income for a. 0 b. 52,804 c. 162,895 d. 330,275
20X4 is __________.
a. 560
b. 1,440
c. 1,600
The long-lived assets and related accounts of BANDILA INC. had the following balances as
d. 1,800
of January 1, 2007:
15. A owns 80% of B and 20% of C. B owns 32% of C, and C owns 10% of A.
Which interest will not be included in the consolidated balance sheet? PPE Cost Accumulated Depreciation
a. 10% of A
b. 100% of C Land 700,000
c. 10% of A and 48% of C
d. 20% of B and 48% of C Land Improvements, straight line, 15yrs. 360,000 120,000

Building, 150%declining balance, 20yrs. 9,000,000 2,905,316

AP Machinery and equipment, SYD, 10yrs. 2,320,000 1,434,182

On January 1, 2007 KUNG FU KIDS CORP. issued 3-year, 4,000 convertible bonds at face Automobiles, 150% declining balance, 3yrs. 1,800,000 900,000
value of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate
of 6%. Each bond is convertible, at the holder’s option, into 40 P10 par value ordinary shares
at any time up to maturity. On the date of issuance, the prevailing market interest rate for
INTANGIBLES Cost Accumulated Depreciation
similar debt without the conversion privilege was 9%. On the same date, the market price of
one common share was P12. Patent 960,000 120,000
1. What is the equity component of the compound instrument?
a. 110,091 b. 211,093 c. 303,755 d. 388,766
Review of transactions during the period revealed the following information:
 a. The patent was purchased for 960,000 on January 1, 2005, incurring additional a. 87,500 b. 105,000 c. 109,375 d. 102,735
license-transfer processing fees charged to operations amounting to 40,000. On the
acquisition date the remaining legal life was 16 years. On January 1, 2007, the
company determined that the useful life of the patent was only ten years from the
You were assigned to audit the financial statements of NORTHERN LUZON MINING CORP.
date of acquisition.
for the year ended December 31, 2007. The company started its operation in 2005 when it
b. On January 5, 2007, Bandila acquired a tract of land with an existing building in
acquired an undeveloped mine property at a total acquisition price of P15,000,000,
exchange for 50,000 shares of Bandila’s P10 par value share capital that had a
P1,500,000 of which was attributed to the land. The company incurred exploration and
market price of P18 per share on this date and a 5 year, P500,000, 10% face value
evaluation costs necessary to prove technical feasibility and viability of commercially
bonds which currently yields 12% in the market. Shortly after the acquisition, the
extracting and producing minerals totaling to 4,800,000. Technical feasibility of the operations
building was razed at a cost of 45,000 in anticipation of new building construction
was established midyear of 2005, thus the company started developing the property and
within the year. The property was appraised by an independent appraiser at
preparing it for mine extraction. The company incurred the following development costs which
1,200,000.
were accounted for as separate depreciable property and equipment:
c. On April 5, 2007, a machine purchased for 520,000 on January 1, 2003, was sold for
120,000. Buildings 4,500,000
d. On June 2, 2007, the company purchased a new automobile for 920,000 cash and
trade-in of an automobile purchased for 1,080,000 on January 1, 2006. The old Developmental excavation 1,200,000
automobile has a trade in value of 220,000.
e. An extensive work was done to the five-year old building during the year end was Mining equipment 6,000,000
completed by the end of August. The total cost of the work done amounted to
It was estimated that the property contains 10M tons of mineral reserves after which
500,000 which consisted the following:
P800,000 is expected to be incurred to restore the land to a sellable condition (it is the
Repainting of ceilings and walls 50,000
company’s practice to deduct this amount from the residual value of the mine property in
Routinary repairs 150,000
computing for the depletion).
Major electrical work 300,000
The company reported the following information in its 2006 financial statements after 1 year
Audit note: It is the company’s policy to provide full year’s depreciation on the year of
of mine operations:
acquisition/addition and no depreciation on the year of disposal.
Mine inventory, 200,000 tons 1,916,667
6. What is the credit to the share premium account related to the acquisition of land on
January 5? Mine property 19,800,000
a. 191,048 b. 236,048 c. 281,048 d. 400,000
Accumulated depletion 1,719,000
7. What is the gain or loss on disposal of machinery and equipment on April 5?
a. 64, 363 b. 78, 545 c. 201,455 d. 215,636 Property and equipment 11,700,000

Accumulated depreciation- building 300,000

8. How much is the carrying value of the Automobiles as of 2007?
a. 180,000 b. 360,000 c. 640,000 d. 750,000 Accumulated depreciation- developmental excavation 120,000

9. What is the depreciation expense on the buildings for 2007? Accumulated depreciation- mining equipment 1,000,000
a. 457,100 b. 469,101 c. 487,101 d. 492,101
Accumulated profits 4,256,667
10. What is the total amortization expense on the patent for the year?
 1. A offered 20 Tamiya cars to B for P1,000.00 each. B answered by letter that he was
The company carries its inventories on a first in-first out basis. Depletion on the mine property
was made under the output method while depreciation was made based on the assumed
useful lives of the property and equipment. The depreciation on the building is allocated
60:40 to production and other operations, respectively, while depreciation on the other
properties are entirely charged to production. The company is yet to declare or distribute any
dividends to shareholders.
The operations of the company for the current year are summarized as follows:
willing to purchase not 20 but 30 pieces at said price of P1,000.00 each. Is the
contract perfected?
a. No, because there is qualified acceptance which constitutes an offer by the
buyer.
b. Yes, there is perfected sale because the number of pieces is only incidental
matter in the sale.
c. Yes, because the letter of acceptance was already sent by the offeree.
d. No, because there is no offer yet of A that is certain.

Tons mined 940,000 tons 2. Statements:

If one of the parties at the time of making the offer or acceptance was already
Tons sold 952,000 tons was already insane the contract is voidable.
If before the acceptance is conveyed to the offerer, either of the parties
Selling price per ton P15.00/ton
becomes insane, the contract is void, that is, the offer is noneffective.
Direct labor P3,675,000 a. Both statements are incorrect.
b. Both are correct.
Overhead costs, excluding depreciation P3,150,000 c. First is correct, second is incorrect.
d. Second is correct, first is incorrect.
Other operating expenses, excluding depreciation P1,575,000
3. A, a minor sold to B a parcel of land registered in his name misrepresenting to the
Using the information above and as a result of your audit, answer the following:
latter that he is of legal age. Having been misled as to the true age of A, B entered
11. What is the correct depletion on 2006? into the contract. Is the contract voidable?
a. 1,719,000 b. 1,827,000 c. 1,910,000 d. 2,100,000 a. It is voidable because the seller is a person incapable of giving consent to a
contract being a minor.
12. What is the correct net income in 2006? b. It is voidable because of mistake on the part of B when he thought that A was of
a. 4,136,000 b. 4,152,667 c. 4,175,000 d. 4,210,667 legal age.
c. It is not voidable but rather void because of lack of consent of A who is onli a
13. What is the correct inventory at the beginning of 2007? minor without capacity to enter into contracts.
a. 1,950,667 b. 1,936,667 c. 1,928,000 d. 1,924,000 d. It is not voidable because of the fraud committed by the minor seller and the
buyer being in good faith.
14. What is the correct net income in 2007?
a. 4,261,400 b. 4,092,200 c. 3,718,800 d. 2,618,200 4. A, a director of X corporation , through an agent bought the shares of stocks of
another stockholder without revealing to the seller stockholder that negotiations
15. What is the maximum dividends the company can distribute in 2007? were in progress to enhance the value of the shares. The sale is defective contract
a. 11,620,760 b. 11,247,360 c. 10,456,500 d. 10,146,760 being:
a. Void, because of fraud committed by A against the other stockholder.
BLT b. Voidable because the mistake on the part of the seller-stockholder.
c. Rescissible because of the damage suffered by the seller.
d. Voidable due to the fraud concealment by A against a fellow stockholder.
 c. Both statements are true;
5. While his father was still alive, A sold to B the property he (A) expected to receive d. Both statements are false.
from his father. Is the contract defective?
10. Taxes must be for public purpose means that:
a. It is completely valid contract because the seller is compulsory heir. a. Taxes must be raised from the public;
b. It is valid for there can be sale of future things and what A sold is future b. Taxes should be used for recognized public needs benefiting a community;
property. c. Power of taxation should government be exercised by the legislature;
c. It is voidable sale if he fails to receive the property he expected to receive from d. Relationship of the government and the governed must be transparent and
his father. democratic.
d. It is void for future inheritance cannot be sold.
11. Exemption from tax is a privilege, which is being looked upon by law with disfavor
because everyone should be sharing the burden of taxation. On account of this view,
6. A promised to give B a car reward after B has killed C. later, after the killing, the exemption from tax is construed strictly against the taxpayer, except in certain
contract was changed to a lease of a big house for a certain period. situation like:
The contract of lease is: a. Exemption is granted to the impoverished sector in certain situation like;
a. Void b. Exemption relates to a public officials;
c. Exemption refers to a public property;
b. Unenforceable
d. All of the above.
c. Voidable
d. Rescissible 12. First Statement: A mere request by the taxpayer for reinvestigation without the
corresponding action of the part of the Bureau of Internal Revenue Commissioner
7. S orally sold to B a parcel of land for which the latter paid P1M. B now wants to does not interrupt the running of the prescriptive period;
register the sale so that he can have a Transfer Certificate of Title in his name.
Second Statement: A warrant of distraint and levy which is merely issued does not
Decide.
suspend the running of the prescriptive period for collection unless said warrant is duly
a. S cannot be compelled to execute the public document of sale served.
b. S can be compelled to execute the public the public document of sale because a. Both statements are false;
the sale is enforceable. b. First statement is true, second statement is false;
c. The sale is void and therefore cannot be registered. c. First statement is false, second statement is true;
d. S cannot be compelled to execute the public document of sale because the sale d. Both statements are true.
is voidable.
13. Penalties imposed under the Tax Code for failure of a taxpayer to file or pay taxes,
except one:
8. S orally leased to R his parcel of land for a term of two years. The contract is: a. Interest on deficiency tax or on delinquency;
a. Rescissible b. Civil penalties in the form of surcharges;
b. Voidable c. Fine and/or imprisonment;
c. Unenforceable d. Subsidiary imprisonment in case of failure to pay fines.
d. Void
14. Bogok, Manager of Tongek Co., receives a monthly salary of P120,000. On January 15,
2008, Bogok received a bonus for services rendered in 2007 in the form of 200 shares of
9. Statement 1. A person , refuse to pay on the ground that he will not receive a stock of Tongek Co. Said shares have a par value of P120 per share and a fair market
benefit from the tax. value of P240 per share at the time of receipt on January 15, 2008. Its fair market value
in 2007 was P210 per share.
Statement 2. A person may not refuse to pay a tax on the ground that it is confiscatory Bogok shall report income from bonus in the amount of:
of his property. a. P48,000 b. P42,000 c. P24,000 d. None of the above
a. The first statement is true while the second statement is false;
b. The first statement is false while the second statement is true:
15. Mabagal Transportation Company is a holder of a franchise to operate twelve (12) units
of buses in the Ilocos Region. It also owns a gas station, which is used exclusively to load
its own buses although in very rare instances it is accepting repair jobs from outsiders.
During the month of December 2008, it had the following gross receipts.
From the buses P280,000
From the gas station 300,000
From the garage 12,000

How much is the common carrier’s tax payable?

a. 17, 760 b. P 8,400 c. P8,760 d. P17,400