Professor Devzon Uy Porras, CPA Quizbowlers Entrance Examination College of Accountancy Problem 1.

You have been assigned to the audit of Edgar Company, a manufacturing company. You have been asked to summarize the transactions for the year-ended December 31, 2009, affecting shareholders equity and other related accounts. The shareholders equity section of Edgars December 31, 2008, balance sheet follows: Ordinary shares, P2 par value, 1,000,000 shares authorized, 180,000 shares issued, 177,580 shares outstanding Share premium in excess of par Share premium from treasury shares Retained earnings Cost of 2,420 share of treasury Total shareholders equity 360,000 3,640,000 45,000 649,378 (145,200) 4,549,178

You have extracted the following information from the accounting records and audit working papers for 2009. Jan. 15 Edgar reissued 1,300 shares of treasury for P40 per share. The 2,420 shares of treasury on hand at Dec. 31, 2008, were purchased in one block in 2007. Feb. 1 Sold 180, P1,000, 9% bonds due February 1, 2019, at 103 with one detachable share warrants attached to each bond. Interest is payable annually on February 1. The fair market value of the bonds without the share warrants is 95. The detachable warrants have a fair market value of P50 each and expire on February 1, 2010. Each warrant entitles the holder to purchase 10 shares of ordinary shares at P40 per share. Mar. 6 2,800 shares of ordinary shares were subscribed for at P44 per share. 40% of the subscription was collected. Mar. 20 The balance due on 2,400 shares was received and those shares were issued. Nov. 1 There were 110 share warrants detached from the bonds and exercised. Edgars net income for 2009 is P950,000. Questions: Based on the preceding information, determine the correct December 31, 2009, balance of each of the following: 1. Ordinary share 2. Share premium in excess of par 3. Share premium from treasury shares

4. Retained earnings 5. Total shareholders equity Problem 2 You have been asked to audit the Juliet Company. During the course of your audit, you are asked to prepare comparative data from the companys inception to the present. You have determined the following: a. Juliet Companys charter became effective on January 2, 2003, when 20,000 shares of P10 ordinary shares and 10,000 share of 7% cumulative, nonparticipating, preference shares were issued. The ordinary share was sold at P12 per share, and the preference share was sold at its par value of P100 per share. Juliet was unable to pay preference dividends at the end of its first year. The owners of the preference shares agreed to accept 2 shares of ordinary shares for every 50 shares of preference shares owned in discharge of the preference dividend due on December 31, 2003. The shares were issued on January 2, 2004. The fair market value was P30 per share for ordinary on the date of issue. Juliet Company acquired all the outstanding share of Bingbong Corporation on May 1, 2006, in exchange for 10,000 shares of Juliet ordinary shares. Juliet split its ordinary shares 3 for 2 on January 1, 2006, and 2 for 1 on January 1, 2007. Juliet offered to convert 20% of the preference shares to ordinary share on the basis of 2 shares of ordinary for 1 share of preference share. The offer was accepted, and the conversion was made on July 1, 2007. No cash dividends were declared on ordinary shares until December 31, 2005. Cash dividends per share of ordinary share were declared and paid as follows: 2005 2006 2007 June 30 P 1.50 P 1.25 Dec 31 P 3.20 P 2.50 P 1.00

b.

c. d. e.

f.

Based on the preceding information, determine the following: The number of ordinary and preference shares outstanding on December 31 of each of the following years: 6. 2004 7. 2005 8. 2006 9. 2007

The amount of cash dividends declared and paid to shareholders for each of the following years: 10. 2005 11. 2006 12. 2007 Problem 3 Darwin Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. To promote the sale of its products, Darwin uses tow promotion techniques premiums and warranties. Premiums The premium is offered on the recorded and sheet music. Customers received a coupon for each P10 spend on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player. Darwin pays P340 for each CD player and estimates that 60% of the coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2007. Warranties Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2007. Darwin uses the accrual method to account for the warranty and premium costs for financial reporting purposes. Darwins sales for 2007 totaled P72,000,000 P54,000,000 from musical instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet music. The balances in the accounts related to warranties and premiums on January 1, 2007, were as shown below: Inventory of premium CD players Estimated premiums claims outstanding Estimated liability from warranties 399,500 448,000 1,360,000

Question: Based on the preceding information, determine the amounts that will be shown on the 2007 financial statements for the following: 13. Warranty expense 14. Estimated liability from warranties 15. Premium expense 16. Inventory of premium CD players 17. Estimated premium claims outstanding

Problem 4. Joy Company issued 10-year bonds on January 1, 201. The companys year-end is December 31, and financial statements are prepared annually. The amortization and interest schedule below reflects the bonds issuance and the subsequent interest payments and charges. Amortization Schedule Date Interest Paid 1/1/01 12/31/01 55,000 12/31/02 55,000 12/31/03 55,000 12/31/04 55,000 12/31/05 55,000 12/31/06 55,000 12/31/07 55,000 12/31/08 55,000 12/31/09 55,000 12/31/10 55,000 Interest Expense 56,610 56,803 57,019 57,261 57,533 57,837 58,177 58,558 58,985 59,470* Amount Unamortized 28,253 26,643 24,840 22,821 20,560 18,027 15,190 12,013 8,455 4,470 Carrying Value 471,747 473,357 475,160 477,179 479,440 481,973 484,810 487,987 491,545 495,530 500,000

Questions: 18. The bonds were issued at 19. What amortization method is used in the amortization schedule presented? 20. What is the nominal interest rate of the bonds issued on January 1, 2001? 21.What is the effective interest rate of the bonds issued on January 1, 2001? 21. On the basis of the schedule presented, what is the journal entry to record the issuance of the bonds on January 1, 2001?

On January 1, 2007, Charmaine Company issued 3-year, 4,000 convertible bonds at face 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 holders option, into 200 P2 par value ordinary shares at any time up to maturity. On the dates of issuance, the prevailing market interest rate for similar debt without the conversion privilege was 9%. On the same date, the market price of one share was P3. The bonds were converted on December 31, 2008. Questions: 22. The liability component of the convertible debt is a. P 1,600,000 b. P 3,696,232 c. P 3,730,242 4,000,000 23. The equity component of the convertible debt is a. P 303,768 b. P 1,600,000 c. P 1,973,621 2,400,000

d.

d.

24. The interest expense to be reported on Charmaines income statement for the year ended December 31, 2008 is a. P 101,000 b. P 110,107 c. P 240,000 d. P 341,000 25. The entry to record the bond conversion on December 31, 2008, should include a credit to share premium of a. P 0 b. P 2,289,893 c. P 2,400,000 d. P 2,593,661 Problem 5 The following data pertain to Princess Joy Corporations property, plant, and equipment for 2007. Audited balances at December 31, 2006: Land Buildings Accumulated depreciation buildings 13,155,000 Machinery and equipment Accumulated depreciation mach. & equip. 12,500,000 Delivery equipment Accumulated deprecation delivery equipment 4,230,000 Depreciation data: Buildings Machinery and equipment Delivery equipment Leasehold improvements Debit 7,500,000 60,000,000 45,000,000 5,750,000 Credit

150% declining balance; 25 years SLM; 10 years SYD; 4 years SLM

Transactions during 2007 and other information are as follows: a. On January 2, 2007, Princess Joy purchased a new truck for P1,000,000 cash and trade-in of a 2-year old truck with a cost of P900,000 and a book value of P270,000. The new truck has a cash price of P1,200,000; the market value of the trade-in is not known. b. On April 1, 2007, a machine purchased for P1,150,000 on April 1, 2002, was stolen. Princess Joy recovered P775,000 from its insurance company. c. On May 1, 2007, costs of P8,400,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2013. d. On July 1, 2007, machinery and equipment were purchased at a total invoice cost of P14,000,000; additional costs of P250,000 for freight and P1,250,000 for installation were incurred.

e. Princess Joy determined that the delivery equipment comprising the P5,750,000 balance at January 1, 2007, would have been depreciated at a total amount of P900,000 for the year ended December 31, 2007. Questions: Based on the preceding information, determine the correct December 31, 2009, balance of each of the following: 26. Depreciation expense for 2007 on machinery and equipment a. P 5,188,750 b. P 5,275,000 c. P 5,303,750 5,303,750 27. Depreciation expense for 2007 on Delivery equipment a. P 1,020,000 b. P 1,110,000 c. P 1,200,000 1,380,000 28. Depreciation expense for 2007 on Leasehold Improvements a. P 700,000 b. P 840,000 c. P 933,333 1,050,000 29. Accumulated depreciation buildings, December 31, 2007 a. P 15,014,000 b. P 15,555,000 c. P 15,965,700 17,200,000 d. P

d.

d.

d.

30. Accumulated depreciation machinery and equipment, December 31, 2007 a. P 17,113,750 b. P 17,200,000 c. P 17,288,750 d. P 17,688,750 31. Accumulated depreciation delivery equipment, December 31, 2007 a. P 4,710,000 b. P 4,620,000 c. P 4,800,000 d. 5,430,000 32. Gain (loss) on trade-in of truck on January 2, 2007. a. P (200,000) b. P 200,000 c. P (70,000) d. P 70,000 P

33. Gain from compensation received from the insurance company. a. P 0 b. P 200,000 c. P 575,000 d. P 775,000 34. Loss on derecognition of the stolen machinery a. P 0 b. P 200,000 c. P 575,000 d. P 775,000

Test 2 Identify the principle, concept or assumption that is most clearly violated by the accounting practice described in each statement below. Do not use any answer more than once. 1. A company charges the cost of the new office equipment to expense in the year of purchase although the equipment is expected to help produce revenue for many years. 2. A company changes from weighted average method to FIFO when accounting for inventory. 3. A company that reports in the currency of a hyperinflationary economy prepared financial statements in pesos that have the same amount of purchasing power. 4. A company records sales after inventory has been produced but before it is sold. 5. A company decides to publish financial statements only in years when it has good news to report. 6. A company reports inventory, property, plant and equipment, and intangible assets at current cost on balance sheet date. 7. An electronics company owned by Sony enterprises reports the cost of Sonys swimming pool as an asset on the balance sheet date. 8. A company having 200 accounts payable list each account among the liabilities on the balance sheet. 9. A company does not report the major details about its stockholders equity. 10. A company follows a policy of recording an item as an asset when the company is in doubt whether the item is an asset or expense of the current period.