EASY ROUND

LAW 1E - A corporation commences its existence from the issuance of the certificate of
incorporation, which one is the exception?
a. Close corporation;
b. Widely-held corporation;
c. Religious corporation;
d. Educational corporation.

LAW 2E - The term used when both parties are guilty. Pari delicto

AT 1E - The use of an analytical review to verify the correctness of various operating expenses would not
be a preferred approach if:
a) An auditor notes strong indicators of a specific fraud involving these accounts.
b) Operations are relatively stable and have not changed much over the past year.
c) An auditor would like to identify large, unusual, or non-recurring transactions during the year.
d) Operating expenses vary in relation to other operating expenses, but not in relation to revenue.

Solution: A

a) Correct. If the auditor already suspects fraud, a more directed audit approach would be
appropriate.
b) Incorrect. Relatively stable operating data is a good scenario for using analytical review.
c) Incorrect. Analytical review would be useful in identifying whether large, non-recurring, or
unusual transactions occurred.
d) Incorrect. Analytical review only needs to have accounts related to other accounts or other
independent data. It does not require that they be related to revenue.

MAS 1E - A retail company determines its selling price by marking up variable costs by 60%. In
addition, the company uses frequent selling price markdowns to stimulate sales. If the markdowns
average 10%, what is the company’s contribution margin ratio? Round final answer to one decimal
point. 30.6%

MAS 2E - A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells
softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If
the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be
P2,000. The probability of cold weather on a given day at this time is 60%. The expected payoff if the
vendor has perfect information is P2,200

FAR/AP 1E - On January 1, 2003, the Paul Company purchased a machine for P1,300,000 which it
installed in a rented factory. It is depreciating the machine over 12 years by the SLM to a residual
value of P100,000. Late in 2007, because of increasing competition in the industry, the company
believes that its asset may be impaired and will have a remaining useful life of 5 years over which it
estimates the asset will produce total cash inflows of P2,000,000 and will incur total cash outflows of
P1,650,000. The cash flows are independent of the company’s other activities and will occur evenly
each year. The fair value of the machine is P280,000. The cost to sell the machine is P40,000. The
company’s discount rate is 10%. The Recoverable Cost of the machine is 265,356
FAR/AP 2E - On January 1, 2019, Charmaine Corporation decided to dispose of an item of plant that
is carried in its records at a cost of P900,000, with accumulated depreciation of P160,000.
Depreciation on the plant since it was originally acquired has been charged of P10,000 per month.
The plant will continue to be operated until it is sold, at which time the operations of the plant will be
outsourced. The company undertook all the necessary actions to be able to classify the asset as held
for sale. It is estimated that it could sell the plant for its fair value, P720,000, incurring P20,000
selling costs in the process. The plant has been depreciated at an amount of P10,000 per month.

On March 31, 2019, the plant had not been sold but, due to shortage of this type of plant, there had
been an increase in the fair value to P770,000. On June 30, 2019, Charmaine sold the plant for
P785,000 incurring P25,000 selling costs.

The depreciation expense to be recognized in 2007 is P0

FAR/AP 3E

In reconciling the Cash in bank of INA Company with the bank statement balance for the month of November
2019, the following data are summarized:

Book debits for November, including October CM for note collected, Php800,000
Php60,000
Book credits for November, including NSF of Php20,000 and service charge
of Php800 for October 620,000
Bank credits for November including CM for November for bank loan of
Php100,000 and October deposit in transit for Php80,000 700,000
Bank debits for November including October outstanding checks of
Php170,800 and November service charge of Php200 600,000

What is the amount of outstanding checks for November?

ANSWER: P170,200

October Outstanding Checks Php170,800

Book credits for November representing checks (620,000-20,000-800) 599,200
Bank debits for November representing checks (600,000-200) (599,800)
November Outstanding Checks Php170,200

AFAR 1E

The following amounts were taken from the statement of affairs for Bagsik Company:

Unsecured liabilities without priority Php90,000

Stockholders' equity 36,000
Loss on realization of assets 45,000
Estimated administrative expenses that have not been 4,500
entered in the accounting records
Unsecured liabilities with priority 10,000
 How much is the estimated payment for the unsecured liabilities without priority?

Answer: P76,500

Total liabilities (90,000+10,000) =100,000

P
Stockholders’ equity 36,000
Total assets 126,000
Loss on realization of assets (45,000)
Administrative expenses (4,500)
Payment to unsecured liabilities with priority (10,000)
New capital =76,500
P

AFAR 2E - Reyes, Silva, and Tan formed a joint venture. Reyes was designated as the manager and
was to record the joint venture’s transactions in his own books. As a manager, Reyes was to be
allowed a salary of P12,000; the remaining profit or loss was to be divided equally. The venture was
terminated on December 31, 2017, and unsold merchandise costing P10,500 were taken over by Tan.
Reyes made cash settlement with Silva and Tan. The following balances appeared at the end of 2017,
before adjustment for venture inventory and profit:

Debit Credit

Joint venture cash 48,000 -

Joint venture - 15,000
Silva, capital 1,000 -
Tan, capital - 27,000

In the final settlement, how much did Tan receive? P21,000

AVERAGE ROUND

Law 3A –

AT 2A - A chief audit executive (CAE) suspects that several employees have used desktop computers for
personal gain. In conducting an investigation, the primary reason that the CAE chose to engage a
forensic information systems auditor rather than using the organization’s information systems auditor is
that a forensic information systems auditor would possess:
a) Knowledge of the computing system that would enable a more comprehensive assessment of
the computer use and abuse.
b) Knowledge of what constitutes evidence acceptable in a court of law.
c) Superior analytical skills that would facilitate the identification of computer abuse.
d) Superior documentation and organization skills that would facilitate in the presentation of
findings to senior management and the board.

Solution: B
a) Incorrect. The organization’s information systems auditor would probably have more knowledge
of the organization’s computing systems.
b) Correct. The distinguishing characteristic of forensic auditing is the knowledge needed to
testify as an expert witness in a court of law. Although a forensic auditor may possess the
 other attributes listed, the organization’s information systems auditor may also possess these
skills or knowledge elements.
c) Incorrect. A forensic auditor would not necessarily have analytical or organizational skills that
are superior to those of the organization’s auditor.
d) Incorrect. See answer “c”.

MAS 3A - During 2019, a department’s 3-variance overhead standard costing system reported
unfavorable spending and volume variances. The activity level selected for allocating overhead to the
product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead,
how would the reported unfavorable spending and volume variances be affected?
Spending Variance Volume Variance
a. Increased Unchanged
b. Increased Increased
c. Unchanged Increased
d. Unchanged Unchanged

Answer: C
The requirement is to determine how unfavorable spending and output level (volume) variances
computed using the three-variance method would be affected if the estimated activity level
were increased. An increase in the activity level used to allocate overhead to the product will
lower the standard fixed application rate (SFR). The formula for computing the SFR is

If the denominator in this formula is raised, the SFR is lowered. However, an increase in activity
level used to allocate overhead will not affect the standard variable application rate (SVR). This
rate is computed using the high-low method or regression analysis. The diagram for the 3-
variance method is

When computing the standard variance, the SVR is used but the SFR is not. Therefore, this
variance will not change with a change in activity level. The output level variance is computed by
comparing the budgeted amount of total overhead costs for outputs achieved with the total
amount of overhead applied. Both computations use SVR, but only the applied figure uses the
SFR. In this problem, the output level variance is unfavorable indicating that the budgeted
amount is more than the applied amount. When the SFR is lowered with the increase in activity
level, less cost will be applied for every unit produced. The output level variance will therefore
be increased and become more unfavorable.

MAS 4A - Smooth Yogurt, Inc. has average receivables of P80,000, which turn over once every 60
days. It pledges all of its receivables to a bank that advances 80% of the total at 4% over prime rate
and charges a 2% administrative fee on the total amount pledged. If prime rate is 10.5%, what
effective interest rate is Smooth paying for its receivables financing? 29.5%

FAR/AP 4A - On December 31, 2019, the balance sheet of Timo Company showed the following
property and equipment after charging depreciation:

Building 3,000,000
Accumulated depreciation 1,000,000 2,000,000

Equipment 1,200,000
Accumulated depreciation 400,000 800,000

The company has adopted the revaluation model for the valuation of property and equipment. This
has resulted in the recognition in prior periods of an asset revaluation surplus for the building of
P150,000. On December 31, 2019, an independent valuer assessed the fair value of the building to be
P1,600,000 and the equipment to be P900,000.

The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of
December 31, 2019.

Amount to be recognized in 2019 profit or loss related to the revaluation of property and equipment.
P 250,000

FAR/AP 4A - Caine, Osman, and Roberts formed a partnership on January 1, 2016, agreeing to distribute
profits and losses in the ratio of original capitals. Original investments were P
=625,000, P
=250,000 and
=125,000 respectively. Earnings of the firm and drawings by each partner for the period 2016-2018
P
follows:

Drawings
Net income (loss) Caine Osman Roberts
2016 Php440,000 Php150,000 Php78,000 Php52,000
2017 185,000 150,000 78,000 52,000
2018 (105,000) 100,000 52,000 52,000

At the beginning of 2019, Caine and Osman agreed to permit Roberts to withdraw from the partnership.
Since the books for the partnership had never been audited, the partners agreed to an audit in arriving
at the settlement amount. In withdrawing, Roberts was allowed to take certain furniture and was
charged P=15,000, although the book value was P=45,000; the balance of Roberts’ interest was paid in
cash.
The following items were revealed in the course of the audit.
End of 2016 End of 2017 End of 2018
Understatement of accrued expenses Php4,000 Php5,000 Php6,500
Understatement of accrued revenue 2,500 1,000 1,500
Overstatement of inventories 15,000 20,000 20,000
Understatement of depreciation expense
on assets still held 1,500 3,500 2,000
 How much must Roberts received from the partnership?

Answer: P11,250
Total income (440,000+185,000-105,000) =P520,000
Adjustment (-6,500+1,500-20,000-1,500-3,500-2,000) (32,000)
Adjusted total net income 488,000
Multiplied by the P/L percentage 12.50%
Share in net income 61,000
Original investment 125,000
Total withdrawal (52,000 x 3) (156,000)
Share on the impairment of the furniture (45,000-15,000) x 12.50% (3,750)
Fair value of the furniture (15,000)
Cash received by Roberts from the partnership =11,250
P

FAR/AP 5A

AFAR 3A - Wave Company operates three producing departments - Cutting, Sewing and Finishing. In
March, Sewing Department transferred 6,200 units to Finishing Department, and had 400 units in
process at the end of the month. Sewing Department work-in-process inventories as of February 28,
were 1,200 units. These units were still one-fourth incomplete as of that date, with a cost of P13,312.
The units started in Sewing Department in March were received from the preceding department at a
cost of P47,595.60. During March, Sewing Department incurred the following costs: Materials -
P11,772; Labor - P15,660 and Factory Overhead - P2,268. As of March 31, Sewing Department has
done one quarter of the work required to complete the process inventories. Using the first-in, first-out
method, compute for the cost of the units transferred to Finishing Department.

Answer: P86,532
Solution:
Quantity schedule (computation of equivalent units of production)
In process, beginning (1,200 x 1/4) 300
Started, finished and transferred (6,200 - 1,200) 5,000
In process, ending (400 x 1/4) 100
Equivalent units of production 5,400
Costs during March (P11,772 + P15,660 + P2,268) P29,700
Divided by: Equivalent units of production 5,400
Cost per equivalent unit P 5.50

Total Cost Transferred

In process, beginning, finished and transferred

Cost last month P13,312

Cost this month (P5.50 x 300) 1,650 P14,962
Received, finished and transferred
[(P47,595.60 / 5,400) + P5.50] x 5,000 71,570
Total cost transferred P86,532
AFAR 4A - QR Appliances sells home theatre set both on installment and cash basis. Mr. X purchased a
set from QR Appliances on March 30, 2019 for P367,500 which has a cost of P289,800.

A used set is accepted as down payment, P89,600 being allowed on the trade in. The used set can be
resold for P112,140 after reconditioning cost of P5,362. The company expects to make a 20% gross
profit on the sale of used set.

The balance of the sale is to be paid on a 10-month instalment basis starting May 1, 2018. Mr. X
defaulted payment starting November 1, 2019 and the set was immediately repossessed.

The repossessed merchandise was appraised at a value of P65,625 at the time of repossession. QR has
to incur additional cost of repairs amounting to P6,475 before the car was subsequently resold on
December 1, 2018 for P90,125 cash to Mr. Y.

What is the net income to be recognized for 2019? 44,940

AFAR 5A - Summary adjusted trial balance for the home office and branch of TJ Corporation at
December 31, 2019 are as follows:

Home office Branch

Debits:
Other assets =530,000
P =165,000
P
Inventories, January 1, 2019 50,000 45,000
Branch 200,000 -
Purchases 500,000 -
Shipments from home office - 240,000
Expenses 120,000 50,000
Dividends 100,000 -
Total debits P
=1,500,000 = 500,000
P

Credits:
Other liabilities =
P 90,000 = 25,000
P
Capital stock 500,000 -
Retained earnings 100,000 -
Home office - 175,000
Unrealized profit in branch inventory / loading 10,000 -
Sales 537,500 300,000
Shipments to branch 200,000 -
Branch profit 62,500 _______
Total credits P
=1,500,000 = 500,000
P

Additional information:

1. The home office ships merchandise to its branch at 120% of home office cost.
2. Inventories at December 31, 2019 are P
=70,000 for the home office and =60,000 for the branch.
P
The branch inventory is at transfer prices.
How much is the combined net income of the home office and the branch for the year ended
December 31, 2019? 200,000

DIFFICULT ROUND

FAR/AP 6A - The following differences enter into the reconciliation of accounting profit and taxable
profit of Mulanay Company for the year ended December 31, 2018, its first year of operations

Life insurance expense P100,000

Excess tax depreciation 2,000,000
Warranty Expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred in the books but 400,000
appropriately recognized in taxable profit
Interest income from long-term certificate of deposit 200,000

Additional information:

a. On July 1, 2018, Mulanay paid insurance premium of P200,000 on the life of an officer with
Mulanay Company as beneficiary.
b. Excess tax depreciation will reverse equally over a four-year period, 2019-2022.
c. The warranty liability is the estimated warranty cost that was recognized as expense in 2018 but
deductible for tax purposes when actually paid.
d. It is estimated that the litigation liability will be paid in 2022.
e. In January 2018, Mulanay Company incurred P4,000,000 of computer software cost. Considering
the technical feasibility of the project, this cost was capitalized and amortized over 4 years for
accounting purposes. However, the total amount was expensed in 2018 for tax purposes.
f. Rent income will be recognized during the last year of the lease, 2022.
g. Interest income from the long-term certificate of deposit is expected to be P200,000 each year
until their maturity at the end of 2019.
h. Accounting profit for 2018 is P10,000,000. Tax rate is 35%.

The total tax expense 3,465,000

FAR/AP 7A - To encourage employees older than 60 years to extend their employment with the entity,
Lamentations Corporation promises its 60-year old employees a lump-sum benefit equal to 1% of final
salary for each year of service they remain employed by the entity after their 60th birthday provided
they remain in the employ of the Lamentations Corporation until they are 65, at which time, in
accordance with local laws, employees are required to retire. The benefit is payable to the employees
on retirement.

Employee A’s 60th birthday is on January 1, 2018. Her salary for the year ended December 31, 2018 is
P100,000.
At December 31, 2018, the entity made the following actuarial assumptions:
 Employee A’s salary should increase by 5% (compound) each year.
 There is a 20% probability that employee A’s employment with the entity will terminate before
January 1, 2023.
 The appropriate discount rate is 10% per year.
 Employee A’s salary for 2019 is P105,000.
 At December 31, 2019, the entity revised its actuarial assumptions as follows:
 Employee A’s salary should increase by 15% (compound) each year
 There is a 10% probability that employee A’s employment with the entity will terminate before
reaching retirement date of January 1, 2023.
The appropriate discount rate remains 10% per year.

The entity does not fund its obligations to pay lump-sum benefits. (Round off future and present value
factors to four decimal places)

Calculate the amount that the entity would recognize in profit or loss and in other comprehensive
income for the year ended December 31, 2019? P1,146; P350

AFAR 6D - Cleared Corp. owns a subsidiary in Singapore whose statement of the financial position in
Singapore Dollars for the last two years follows:

December 31, 2017 December 31, 2018

Assets
Cash and Cash Equivalent $ 90,000 $ 75,000
Receivables 367,500 442,500
Inventory 480,000 510,000
Property and Equipment, net 765,000 690,000
Total Assets $ 1,702,500 $ 1,717,500
Liabilities and Equity
Accounts Payable $ 165,000 $ 225,000
Long-Term debt 967,500 855,000
Common Stock 345,000 345,000
Retained earnings 225,000 292,500
Total Liabilities and Equity $ 1,702,500 $ 1,717,500

Relevant exchange rates are:

January 1, 2017 $ 1 = P45

December 31, 2017 $ 1 = P42.50
December 31, 2018 $ 1 = P47.50
Average 2017 $ 1 = P43.75
September 12, 2017 $ 1 = P40
 Cleared formed the subsidiary on January 1, 2017. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth $45,000 on September 12,
2017 and none were declared during 2018.

How much is the cumulative translation adjustment for 2018? P1,706,250

AFAR 7D