Final Pre-board in Practical Accounting 1 (Review School of Accountancy)

1. The following were taken from the incomplete financial data of Sam Company, a calendar year
merchandising corporation:
December 31, 2008 December 31, 2009
Trade Accounts Receivable 840,000 780,000
Inventory 1,500,000 1,000,000
Accounts Payable 950,000 980,000
Accrued general & administrative expenses 130,000 170,000
Prepaid selling expense 150,000 130,000
Property, plant and equipment 1,650,000 1,420,000
Patent 425,000 300,000
Investment in associate 550,000 720,000
The following additional information were made available: cash payments for selling and
administrative expenses was P900,000, payments for purchases, net of cash discounts of P70,000 was
P1,530,000. Equipment with a book value of P200,000 was sold for P250,000. There were no
acquisitions of property, plant and equipment and other transactions affecting net income during the
period. There were no acquisitions of investment during 2009. If the company reported a net income
before tax of P270,000, what is the amount of collections on trade receivables in 2009?
a. 2,425,000 c. 3,285,000
b. 2,470,000 d. 3,485,000

2. The balance sheet at December 31, 2008 of Mall Company showed a cash balance of P91,750. An
examination of the books disclosed the following:
Cash sales of P12,000 from January 1-7, 2009 were predated as of December 28-31, 2008 and
charged to the cash account. Customers checks totaling P4,500 deposited with and returned by the
bank NSF on December 27, 2008 were not recorded in the books. Checks of P5,600 in payment of
liabilities were prepared before December 31, 2008 and recorded in the books, but withheld by the
treasurer. Post-dated checks totaling P3,400 are being held by the cashier as part of cash. The
companys experience shows that post-dated checks are eventually realized. The cash account
includes P20,000 being reserved for the purchased of a mini-computer which will be delivered soon.
Personal checks of officers, P2,700, were redeemed on December 31, 2008, but returned to cashier on
January 2, 2009.
How much is the cash balance that should be shown in the December 31, 2008 balance sheet?
a. P91,750 b. P69,150 c. P54,750 d. P43,550
3. Your clients, Mills Corporation, requests your assistance in determining the amount of loss and in
filing as insurance claim in connection with a fire on June 15, 2006 that destroyed some of the
companys inventory and accounting records. You were able to obtain the following information
from available records:
The last physical inventory was taken on December 31, 2005. At the time, total inventory (at cost)
amounted to P210,798.80. Accounts payable were P110,106.42 on December 31, 2005 to the date of
the fire totaled P641,871.56. All sales are on account and accounts receivable were P135,009.18 at
December 31, 2005 and P107,145.25 at the date of the fire. Collections on receivable from December
31, 2005 to the date of fire amounted to P876,195.50. Almost all the merchandise items are sold at
approximately 30% in excess of cost. As of June 15, 2006, the total cost of the inventory items not
destroyed by the fire amounted to P144,882.33.
How much is the loss incurred by the company as a result of the fire?
a. 72,055.23 c. 216,937.56
b. 130,785.88 d. 275,668.21
4. Marcel Company purchased 5,000 shares of Boniface Co. par P100 at P120 in July 2006. Marcel
Company classified the securities as available for sale. Marcel Company received a share dividend of
1 share for every 5 owned on August 5, 2006. On September 16, 2006, the company received a cash
dividend of P10 per share on the stock and was granted to purchase 1 share at P105 for every 4 shares
held. The share had a market value ex-right of P115 and the right had a value of P5. On December
20, 2006, the company sold 2,000 rights at P7.50 and exercised the remaining rights. What is the
average unit cost of the total investment as of December 31, 2006?
a. 95.83 b. 98.70 c. 99.52 d. 105.00
5. Palm Corporation was organized on January 2, 2005. It was authorized to issue 74,000 shares of
ordinary share. On the date of organization, it sold 20,000 shares at P50 per share and gave the
remaining shares in exchange for certain land-bearing recoverable ore deposits estimated by
geologists at 900,000 tons. The property is deemed to have a value of P2,700,000 with no residual
value.
During 2005, purchases of mine buildings and equipment totaled P261,000. During the year, 75,000
tons were mined; 8,000 tons of this amounts were unsold on December 31, the balance of tonnage
being sold for cash at P17 per ton. Expenses incurred and paid during the year, exclusive of depletion
and depreciation, were as follows:
Mining P173,500
Delivery P 20,000
General and administrative P 19,500
Cash dividends of P2 per share were declared on December 31, payable January 15, 2006. It is
believed that buildings and sheds will be useful only over the life of the mine, hence, depreciation is
to be recognized in terms of mine output. How much is the net income for 2005?
a. 705,570 b. 723,630 c. 724,050 d. 765,570
6. During 2006, Rover spent P6,000,000 in its new software package. Of this amount, 60% was spent
before technological feasibility was established for the product, which is to be marketed to third
parties. The package was completed at December 31, 2006. Rover expects a useful life of 8 years
with total revenues of P20,000,000. During 2004, Rover realizes revenues of P4,000,000. Net
realizable value of the software on December 31, 2007 is 85% of cost. What amount of software
expense should be included in the December 31, 2007 income statement?
a. 300,000 b. 360,000 c. 480,000 d. 720,000
7. On January 1, 2006, Trooper Enterprises, Inc. developed a new machine that reduces the time
required to insert the fortunes into their fortune cookies. Because the process is considered very
valuable to the fortune cookie industry, Trooper had the machine patented. The following expenses
were incurred in developing and patenting the machine:
Research and development laboratory expenses P250,000
Metal used in construction of the machine 80,000
Blueprints used to design the machine 32,000
Legal expenses to obtain patent 120,000
Wages paid for the employees on the research, development and
the building of the machine; 60% of the time was spent in actual
building of the machine 150,000
Expense of drawing required by the patent office to be submitted with
the patent application 17,000
Fees paid to government patent office to process application 24,500
On January 2, 2007, Trooper Enterprises, Inc. paid P35,200 in legal fees to successfully defend the
patent against an infringement suit by Aliance Company. What is the carrying value of the patent in
December 31, 2007?
a. 142,500 b. 145,350 c. 175,500 d. 178,697
8. Pine Company offers a coffee mug as a premium for every ten P2.50 candy bar wrappers presented by
customers together with P10.00. The purchase price of each mug to the company is P8.00; in
addition, it costs P5.00 to mail each mug. The results of the premium plan for the years 2005 and
2006 are as follows (assume all purchases and sales are for cash):
2005 2006
Coffee mugs purchased 480,000 400,000
Candy bars sold 3,750,000 4,500,000
Wrappers redeemed 1,900,000 2,800,000
2005 wrappers expected to be redeemed in 2006 1,300,000
2006 wrappers expected to be redeemed in 2007 1,800,000
What is the amount of premium liability in the December 31, 2006 balance sheet?
a. 540,000 c. 990,000
b. 840,000 d. 1,380,000
9. Dreamer Corp. has an employee benefit plan for compensated absences that gives employees 10 paid
vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely.
Employees can elect to receive payment in lieu of vacation days; however, no payment is given for
sick days not taken. At December 31, 2006, Dreamers unadjusted balance of liability for
 compensated absences was P210,000. Dreamer estimated that there were 150 vacation days and 75
sick days available at December 31, 2006. Dreamers employees earn an average of P1,000 per day.
In its December 31, 2006 balance sheet, what amount of liability for compensated absences is
Dreamer required to report?
a. P360,000 b. P225,000 c. P210,000 d. P150,000
10. Baron Appliance Companys accountant has been reviewing the firms past television sales. For the
past years, Baron has been offering a special service warranty on all television sold. With the
purchase of a television, the right to purchase a 3-year service contract for an extra P800.
Information concerning past television and warranty contract sales is given below:
2006 2005
Television sales in units 1,100 920
Sales price per unit P10,000 P8,000
Number of service contracts sold 700 600
Expenses relating to television warranties P77,040 P26,800
Barons accountant has estimated from past records that the pattern of repairs has been 40% in the
year of sale, 36% on the first year after sale and 24% on 2 nd year of sale. Sales of the contracts are
made evenly during the year. How much unearned service contract would be recognized in year
2006?
a. P201,600 b. P294,400 c. P448,000 d. P649,600
Items 11 and 12 are based on the following information:
Matter Corporation is in the business of leasing new sophisticated computer systems. As a lessor of
computers, Matter purchased a new system on December 31, 2005. The system was delivered the same
day (by prior arrangement) to DOT Company, a lessee. The corporations accountant revealed the
following information relating to the lease transaction:
Cost of system to Matter P550,000
Estimated useful life and lease term 8 years
Expected residual value (unguaranteed) P40,000
Matrixs implicit rate of interest 12%
Date of first lease payment December 31, 2005
Additional information as follows:
At the end of the lease, the system will revert to Matter.
Dot is aware of Matters rate of implicit interest.
The lease rental consists of equal annual payments.
Matrix accounts for leases using the direct financing method. Dot intends to record the lease as a
finance lease. Both the lessee and the lessor report on a calendar year basis and elect to depreciate all
assets on the straight-line basis.
11. What amount of depreciation expense should the lessee recognized related to the leased asset for the
year ended December 31, 2006? (Carry present value computations up to 3 decimal places.)
a. 52,547 b. 66,730 c. 64,061 d. 119,277
12. What amount of interest expense should the lessee recognized related to the lease transaction for the
year ended December 31, 2006?
a. 52,547 b. 66,730 c. 64,061 d. 119,277
13. The following information relates to the defined benefit pension plan for the Citywide Company for
the year ending December 31, 2006:
Present value of benefit obligation, January 1 P6,900,000
Present value of benefit obligation, December 31
7,793,500
Fair value of plan assets, January 1 7,552,500
Fair value of plan assets, December 31 8,347,500
Deferred gain on plan asset during 2003 42,500
Amortization of deferred gain 48,750
Employer contribution 637,500
Benefits paid to retirees 585,000
Settlement rate 10%
How much would be the net pension cost for the year 2006?
a. 687,250 b. 729,750 c. 784,750 d. 788,500
14. Swift Company operates a defined benefit pension plan and changes it on January 1, 2006 to a
defined benefit contribution plan. The defined benefit plan still relates to past service but not future
service. The net pension liability after the plan amendment is P35,000,000 and the net pension
liability before the amendment was P50,000,000. How should the Swift Company account for this
change?
a. Swift Company recognizes a gain of P15,000,000.
b. Swift Company does not recognize a gain.
c. Swift Company recognizes a gain of P15,000,000 over the remaining service lives of the
employees.
d. Swift Company recognizes a gain but applies the 10% corridor approach to it.
15. On December 31, 2007, Woods Company changed its defined benefit pension plan to defined
contribution plan. Woods agrees with the employees to pay them P18,000,000 in total on the
introduction of a defined contribution plan. The employees forfeit any pension entitlement for the
defined benefit plan. The pension liability recognized in the balance sheet at December 31, 2007 was
P20,000,000. How would this curtailment be accounted for in the balance sheet at December 31,
2008?
a. A settlement gain of P2,000,000 should be shown.
b. The pension liability should be credited to reserves and a cash payment of P18,000,000
should be shown in expense in the income statement.
c. The cash payment should go to reserves and the pension liability should be shown as a credit
to the income statement.
d. A credit to reserves should be made of P2,000,000.
16. Adverse financial and operating circumstances warrant that Cinema Company undergoes a quasi-
organization at December 31, 2006. The following information may be relevant in accounting for the
quasi-reorganization.
Inventory with a net realizable value of P215,000 is currently recorded in the accounts at its cost of
P250,000. Equipment with a fair market value of P700,000 are currently recorded at P875,000, net of
accumulated depreciation. A creditor agrees to extend the maturity date of a loan for five years,
although interest as originally stated must continue to be paid. Individual shareholders contribute
P800,000 to create additional paid-in capital to facilitate the reorganization. No new shares of stock
are issued, although control of a majority of the companys outstanding stock passes to the companys
creditors. The par value of the ordinary share is reduced from P25 to P15. Immediately before those
events, the shareholders equity section appears as follows:
Ordinary share capital (P25 par value, 100,000 shs., authorized & outstanding) 2,500,000
Share premium reserve 1,750,000
Retained earnings (deficit) ( 750,000)
3,500,000
After the quasi-reorganization, the share premium reserve should have a balance of
a. 1,790,000 b. 2,390,000 c. 2,590,000 d. 3,350,000
17. Honey Company reported the following amounts in the stockholders equity section of its balance
sheet dated December 31, 2005:
Preference share capital (P150 par value, 20,000 shares) 3,000,000
Ordinary share capital (P37.50 par value, 100,000 shares) 3,750,000
Share premium reserve 6,000,000
Accumulated profits 4,500,000
Treasury stock, at cost (5,000 ordinary shares) 250,000
On January 2, 2006, Honey sold 20,000 additional shares of ordinary share for P90 per share.
Late in 2006, it was learned that because of mathematical error, an overstatement of depreciation
expense by P375,000 had occurred in 2005. Honey reported net income of P825,000 for 2006.
Honey declared cash dividends of P150,000 on preference share and P450,000 on the ordinary share
during 2006. All the treasury shares were re-issued for P35 per share on December 31, 2006. What
should be the accumulated profits balance on December 31, 2006?
a. 4,275,000 b. 4,980,000 c. 5,025,000 d. 5,100,000
Items 18 and 19 are based on the following information:
Data below came from the comparative trial balance of Mellow Company. The books are kept
on the accrual basis. Included in the operating expenses are depreciation of P35,000 and
amortization of P15,000.
 2006 2005
Accounts receivable 2,200,000 2,450,000
Interest receivable 8,000 17,000
2006 2005
Inventories 4,200,000 4,050,000
Prepaid insurance 50,000 20,000
Accounts payable 3,640,000 3,450,000
Other operating expenses payable 250,000 150,000
Net sales 12,000,000
Interest revenue 65,000
Cost of goods sold 8,000,000
Insurance expense 500,000
Other operating expenses 950,000

18. Cash paid for operating expenses during the year amounted to
a. 1,330,000 b. 1,380,000 c. 1,400,000 d. 800,000
19. If the companys net income was P500,000 under the accrual basis, what is the net income for the
year 2006 under the cash basis?
a. 869,000 b. 895,000 c. 919,000 d. 960,000
20. Neon Company has 110,000 ordinary shares outstanding, 10,000, 6% cumulative, P100 par
convertible preference share that are convertible into 20,000 ordinary shares and an 8% 4-year
convertible bonds with a face value of P1,000,000, convertible into 30,000 ordinary shares. The
bonds were issued on January 1 when the prevailing interest rate was 10%. The liability component
of the bonds at the time of issue is P936,600. Net income for the year is P850,000. Income tax rate is
32%. How much is the diluted earnings per share for the year?
a. P5.71 b. P5.65 c. P6.00 d. P7.18
21. Pearl Company began operations on January 1, 2005. On December 31, 2005, Pearl provided for
uncollectible accounts based on 1% of annual credit sales. On January 1, 2006, Pearl changed its
method of determining its allowance for uncollectible accounts by applying certain percentage to the
accounts receivable aging as follows:
Days past invoice date Percent deemed to be uncollectible
0 30 1
31 - 90 5
91 - 180 20
Over 180 80
In addition, Pearl wrote off all accounts receivable that were over 1 year old. The following
additional information relates to the years ended December 31, 2005 and 2006:
2006 2005
Credit sales P6,000,000 P5,600,000
Collections 5,830,000 4,800,000
Accounts written off 54,000 None
Recovery of accounts previously written off 14,000 none

Days past invoice date at December 31

0 30 600,000 500,000
31 90 160,000 180,000
91 180 120,000 90,000
Over 180 50,000 30,000
What is the provision for uncollectible accounts for the year ended December 31, 2006?
a. 22,000 b. 62,000 c. 76,000 d. 78,000
22. The Killjoy Company sells Product A. During the year, the company moved to a new location, the
inventory records for Product A were misplaced. The bookkeeper has been able to gather some
information from the sales records and gives you the data shown below:
July sales: 57,200 at P100
July purchases:
Date Quantity Unit Cost
July 5 10,000 P65.00
July 9 12,500 62.50
 July 12 15,000 60.00
July 23 14,000 62.00
On July 31, 16,000 units were on hand with a total value of P988,000. Killjoy has always used a
periodic FIFO inventory costing system. Gross profit on sales for July was P2,058,750. What is the
total cost and unit cost, respectively, of the beginning inventory?
a. 1,345,400 and 62.00 c. 1,367,100 and 63.00
b. 1,353,538 and 62.38 d. 1,450,000 and 66.82
23. Storm Company began business in May of 2005. During the year, Storm purchased the three trading
securities listed below. In its December 31, 2005 balance sheet, Storm appropriately reported a
P50,000 debit balance in its Fair Value Adjustment Trading Securities account. There was no
change during 2006 in the composition of Storms portfolio of trading securities. Pertinent data are as
follows:
Security Cost December 31, 2006
Market Value
G P 400,000 P 350,000
O 500,000 350,000
D 900,000 800,000
P1,800,000 P1,500,000
What amount of unrealized loss on these securities should be included in Storms income statement
for the year ended December 31, 2006?
a. P0 b. P300,000 c. P350,000 d. P400,000
24. Grand Company has 40,000 shares of unquoted equity instrument of Sand Corporation. These shares
were acquired at P40 per share on January 2, 2006. On December 31, 2006, Grand Company sold
30,000 shares of its investment in Sand Corporation for P50 per share. The remaining securities were
sold on December 15, 2007 for P60 per share. Market value of Sands shares is not determinable or
cannot be measured reliably. Using the cost recovery method, what amount of realized gain or loss
should Grand Company recognize in 2007 from selling those shares?
a. 100,000 b. 400,000 c. 500,000 d. 600,000
25. Thank Company purchased 40% of God Companys outstanding ordinary shares on January 2, 2006
for P8,000,000. The carrying amount of Gods net assets at the date of purchase totaled P18,500,000.
Fair values and carrying values were the same for all items except for plant and inventory for which
fair values exceeded their carrying amounts by P1,000,000 and P200,000 respectively. The plant has
a 20-year life. The entire inventory was sold during 2006. Goodwill, if any, is not to be amortized
and no impairment test has been done since the company believes that the goodwill has yet to decline
its value. During 2006, God Company reported net income of P2,400,000 and paid a P400,000 cash
dividends. What amount should Thank report in its income statement from its investment in God for
the year ended December 31, 2006?
a. 836,000 b. 844,000 c. 860,000 d. 960,000
26. The December 31, 2006 and 2005 comparative financial statements of World Gallery Company
showed equipment with an original cost P379,000 and P344,000 with accumulated depreciation of
P153,000 and P128,000, respectively. During 2006, the company purchased equipment costing
P50,000, and sold equipment with a carrying value of P9,000. What amount should the company
report as depreciation expense for 2006?
a. 19,000 b. 25,000 c. 31,000 d. 34,000
27. An intangible asset cost P300,000 on January 1, 2005. On January 1, 2006, the asset was evaluated to
determine whether it was impaired. As of January 1, 2006, the asset was expected to generate future
cash flows of P25,000 per year (at the end of the year). The appropriate discount rate is 5%. What
total amount to be charged against income in 2006, assuming that the asset was assumed to have a
total useful life of 10 years from date of acquisition?
a. 19,744 b. 92,304 c. 112,044 d. 132,334
Items 28 and 29 are based on the following:
On January 1, 2006, Belief Company issued its 9%, 4-year convertible debt instrument with a face
amount of P4,000,000 for P4,100,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 80,000 ordinary shares with a par value of P50. When the debt instruments
were issued, the prevailing market rate of interest for similar debt without conversion option is 10%. On
December 31, 2007, 1/4 of the convertible debt instruments were retired for P1,000,000. Without the
conversion option, the debt instrument can be retired at 97%.
28. On the date of issue, what amount of the proceeds represents the equity component?
a. None b. 226,800 c. 3,873,200 d. 4,100,000
29. After the retirement, what is the carrying value of the debt instruments as of December 31, 2007?
a. 2,947,929 b. 3,900,520 c. 3,930,572 d. 3,963,629
30. Selfless Company determined that, due to the obsolescence, equipment with an original cost of
P180,000 and accumulated depreciation at January 1, 2005 of P84,000 had suffered permanent
impairment, and as a result should have a fair value of only P60,000 as of the beginning of the year.
Additionally, the remaining useful life of the equipment was reduced from eight years to three years.
In its December 31, 2005 balance sheet, how much should Selfless report as accumulated
depreciation?
a. 20,000 b. 104,000 c. 120,000 d. 140,000
31. On January 2, 2005, Haven Corporation acquired a track of land that is to be sold in the ordinary
conduct of business. The purchase price of the property of P50,000,000 was paid in cash and a total
transaction costs of P500,000 related to the acquisition of the property was also paid at a later date.
The land was subdivided into 2,000 lots (200 square meters for every lot) for an additional cost of
P5,500,000. On December 31, 2005, the market value of the lot was P1,500 per square meter.
As of December 31, 2006, only 20,000 square meters are still unsold and market value of the lot had
increased to P1,600 per square meter. On this date, Haven Corporation decided to transfer the
remaining lots into investment property that is to be carried under the fair value model. There was no
additional cost incurred on the change of intention on the property.
What amount of gain should Haven Corporation recognize as a result of the transfer?
a. 29,200,000 b. 29,225,000 c. 29,475,000 d. 29,500,000
Items 32 and 33 are based on the following information:
On June 15, 2006, Valiant Company sold its investment property for P6,250,000, net of disposal cost
and other transaction costs of P150,000. This property was acquired at a historical cost of P5,120,000
including total transaction costs of P190,00 and has a fair market value of P6,200,000 as of December 31,
2005.
32. If the company uses the cost model, what amount of realized gain on sale of the investment property
should Valiant Company recognize?
a. 50,000 b. 790,000 c. 1,080,000 d. 1,130,000
33. If the company uses the fair value model, what amount of realized gain on sale of the investment
property should Valiant Company recognize?
a. 50,000 b. 790,000 c. 1,080,000 d. 1,130,000
34. The draft financial statements of Clarion Company, for the year ended December 31, 2006 are
currently under consideration by the directors. The net asset for the year is shown as P3,500,000.
Since December 31, 2006, the following events have occurred, but have not been reflected in any way
in the draft financial statements to that date.
Item 1 A substantial quantity of slow-moving inventory was sold for P320,000. The inventory had
cost P600,000 and had been valued for the accounts at December 31, 2006 at its estimated net
realizable value of P400,000
Item 2 A trade receivable paid the amount owing of P130,000 in full. At December 31, 2006, there
were doubts as to whether it would be paid, and a specific provision for the full amount had been
made in the accounts.
What is the adjusted amount of net asset should Clarion Company report in its December 31, 2006
balance sheet?
a. 3,420,000 b. 3,500,000 c. 3,550,000 d. 3,630,000
35. The following information has been extracted from the accounting records of Trend Company:
December 31, 2006 December 31, 2007
Borrowings P1,000,000 P2,000,000
Share capital 2,000,000 2,500,000
Property revaluation reserve 500,000 600,000
Retained earnings 750,000 950,000
 Additional information:
Borrowings of P200,000 were repaid during the year 2007. New borrowings include P600,000
vendor financing arising on the acquisition of a property.
The increase in share capital includes P300,000 arising from the companys dividend
reinvestment scheme.
The movement in retained earnings comprises profit for the year P900,000 and of dividends
P700,000.
There were no dividends payable reported in the balance sheet at either December 31, 2006 or
December 31, 2007.
What is the amount of financing net cash flows Trend Company should report?
a. P200,000 b. P500,000 c. P400,000 d. P700,000
36. The following information has been extracted from the accounting records of Smooth Company:
December 31, 2006 December 31, 2007
Land, at independent valuation P1,000,000 P1,500,000
Plant, at cost 2,100,000 2,550,000
Accumulated depreciation (200,000) (280,000)
Available for sale listed investments, fair value 300,000 500,000
Goodwill 250,000 200,000
Additional information:
There are no disposals of land.
There were no disposals of plant or investment.
The land revaluation reserve increment is net of deferred tax of P64,000.
The investment revaluation reserve for the year is net of deferred tax of P32,000.
What is the amount of investing cash flows should Smooth Company report?
a. P300,000 b. P750,000 c. P450,000 d. P850,000
Items 37 and 38 are based on the following information:
Zebra Co. leased equipment from Cobra Corp. on January 1, 2005 for an 8-year period expiring
December 31, 2012. Equal payments under the lease are P600,000 and are due on December 31 of each
year. The first payment was made on December 31, 2005. The rate of interest contemplated by Zebra
and Cobra is 11%. The present value of the equipment is P3,087,674. Zebra Company incurred a total
transaction costs of P64,969 to negotiate the contract of lease. If the transaction cost is deducted, the
effective yield is 11.6%.
37. If the lease is accounted as a sales type lease, what is the initial carrying value of the lease rental
receivable on December 31, 2005?
a. 2,773,339 b. 2,827,318 c. 3,022,705 d. 3,087,674
38. If the lease is accounted as a direct financing lease, what is the initial carrying value of the lease
rental receivable on December 31, 2005?
a. 2,773,339 b. 2,827,318 c. 3,022,705 d. 3,087,674
39. Marcus Company has reported a total financial liability of P15,000,000 in its accounting records as of
December 31, 2007 which include the following:
A P3,000,000 face value perpetual bond that pays 5% interest each year.
A P2,000,000 redeemable preference share that will be redeemed by Marcus at a future date
A P1,500,000 redeemable preference share redeemable at the option of the holder
A P75,000 written call option that allows the holder to purchase a fixed number of ordinary
shares from Marcus Company for a fixed amount.
What is the correct amount of financial liability that should be reported by Marcus Company in its
December 31, 2007 balance sheet?
a. P11,500,000 b. P11,925,000 c. P13,425,000 d. P14,925,000
40. Titan Company issued a convertible bond on January 1, 2006, that matures in five years. The bond
can be converted into ordinary shares at any time. Titan has calculated that the liability and the equity
components of the bond are P3,000,000 for the liability component and P1,000,000 for the equity
component, giving a total amount of the bond of P4,000,000. The interest rate of the bond is 6% and
local tax legislation allows a tax deduction for the interest paid in cash.

What is the deferred tax liability arising on the bond as at the year ending December 31, 2006? (Tax
rate is 32%)
 a. None b. P320,000 c. P960,000 d. P1,200,000
41. On January 1, 2006, Icor Company has spent P900,000 in developing a new product. These costs
meet the definition of an intangible asset under PAS 38 and have been recognized in the balance
sheet. Local tax legislation allows these costs to be deducted for tax purposes when they are incurred.
On December 31, 2007, the intangible is deemed to be impaired by P75,000. What amount of tax
base related to the intangible asset as of December 31, 2006?
a. Zero b. P75,000 c. P825,000 d. P900,000
42. Mutant Companys current liabilities include fines and penalties for environmental damage. The
fines and penalties are stated at P5,000,000. The fines and penalties are not deductible for tax
purposes. Tax rate is 32%. What is the tax base of the fines and penalties?
a. None b. P1,600,000 c. P5,000,000 d. P6,000,000
43. On January 2, 2007, Brand Company received a grant of P60,000,000 to compensate it for costs it
incurred in planting trees over a period of five years. Brand Company will incur such cost in this
manner:
Year Costs
2007 P2,000,000
2008 P4,000,000
2009 P6,000,000
2010 P8,000,000
2011 P10,000,000
Actual costs incurred in planting the trees showed P2,000,000 and P4,000,000 in years 2007 and 2008
respectively. However, in 2009 and up to year 2011, the company has stopped planting trees.
Due to the non-fulfillment of its obligation, the government is demanding an immediate repayment of
the grant in the amount of P50,000,000 which is considered reasonable.
What amount should be recognized as an expense related to the repayment of grant?
a. None b. P2,000,000 c. P44,000,000 d. P50,000,000
Items 44 to 46 are based on the following information:
On January 2, 2007, Wink Corporation received a grant of P20,000,000 to build and run a power plant in
an economically backward area. The secondary condition attached to the grant is that the entity should
directly distribute the necessary needed power to the area at a rate that is much lower than the prevailing
power rate in other advance areas. The power plant is to be depreciated using the straight-line method
over a period of 10 years.

The power plant was completed at the end of year 2007 at cost of P50,000,000 and started producing and
distributing power to the backward area at rate which is at par that the prevailing rates in other advance
areas.
On June 30, 2009, the national government demanded P15,000,000 from Wink Company the repayment
of the grant due to the non-fulfillment of the conditions. Wink Company paid the national government on
July 1, 2009.
44. What is the carrying value of the power plant as of July 1, 2009 immediately after the repayment was
made assuming at the time of initial recognition the grant received was recognized as a deferred
income?
a. P25,500,000 b. P42,500,000 c. P45,000,000 d. P50,000,000
45. What is the carrying value of the power plant as of July 1, 2009 immediately after the repayment was
made assuming at the time of initial recognition the grant received was recognized as a reduction of
the related asset?
a. P25,500,000 b. P42,500,000 c. P45,000,000 d. P50,000,000

46. What total amount of income should Wink Company recognized in 2009 assuming the grant was
treated as deferred income at initial recognition?
a. None b. P2,000,000 c. P3,000,000 d. P4,000,000
47. Camper Company acquires a subsidiary with a view to selling it. The subsidiary meets the criteria to
be classified as held for sale. At the balance sheet date, the subsidiary has not been sold and six
months have passed since its acquisition. At the balance sheet date, the carrying value of the
subsidiary is P4,500,000; its estimated selling price is P6,000,000 and estimated cost to sell is
P1,200,000. How much should the subsidiary be valued at balance sheet date?
 a. P3,300,000 b. P4,500,000 c. P4,800,000 d. P6,000,000
48. On January 31, 2006, May Company enters into a contract with April Company to receive the fair
value of 2,000 of May Companys own outstanding shares as of February 1, 2007 in exchange for a
payment of P220,000 in cash or an equivalent of P110 per share on February 1, 2007. Delivering a
fixed amount of cash and receiving a fixed number of May Companys shares will settle the contract.
At the time of the contract, the prevailing rate of interest is 10%.

At the time of the contract, shares of May Company are selling at P100 per share, the present value of
the forward contract is zero. On December 31, 2006, shares of May Company are selling at P115 and
the forward contract has a fair value of P13,800. On February 28, 2007, shares of May Company are
selling at P108 and the fair value of the forward contract is P4,000.

What amount should May Company recognize as liability on January 31, 2006?
a. None b. 200,000 c. 218,333 d. 220,000
Items 49 and 50 are based on the following information:
On February 1, 2006, Jaguar Company enters into a contract with Lynx Company that gives Lynx
Company the right to receive and Jaguar Company the obligation to pay the fair value of 2,000 of
Jaguars own ordinary shares as of January 31, 2007 in exchange for P204,000 in cash (P102 per share)
on January 31, 2007, if Lynx Company exercises the right. The contract will be settled by delivering a
fixed number of shares and receiving a fixed amount of cash. If Lynx Company does not exercise its
right, no payment will be made.

Below is pertinent relevant information:

February 1, 2006 December 31, 2006 January 31, 2007
Market value of shares P100/share P104/share P104/share
Fair value of options P10,000 P6,000 P4,000

49. What amount of shareholders equity will increase as a result of the contract on February 1, 2006?
a. None b. 4,000 c. 6,000 d. 10,000
50. What amount of shareholders equity will increase in December 31, 2006 other than the increase in
February related to the contract?
a. None b. 4,000 c. 6,000 d. 10,000