Practical Accounting 1 Reviewer

1. When an economy ceases to be hyperinflationary, an entity shall discontinue the preparation

and presentation of financial statements under a condition of hyperinflationary economy.
Thus the amount expressed in the measuring unit current at the end of the previous reporting
period shall be the
a. the present value amount in the subsequent financial statement
b. the carrying amount in the subsequent financial statement
c. the fair value amount in the subsequent financial statement
d. the historical value amount in the subsequent financial statement

2. Irrespective of whether there is any indication of impairment , an entity shall test a not
tangible asset with an indefinite useful life or an intangible asset not yet available for use for
impairment
a. every three years
b. annually
c. intangible assets not yet available for use, annually and not tangible assets every
three years
d. intangible assets not yet available for use, every three years and not tangible assets
annually

3. Depreciation of an asset begins when

a. It was acquired
b. It is available for use
c. It was assembled in its location
d. When the management decides to do so

4. The initial direct cost in a direct financing lease are added to the carrying amount of the
leased asset and this would effectively spread the initial direct cost over the lease term and
reduce the amount of
a. interest expense
b. interest income
c. lease expense
d. lease income

5. This is the recognition of a deferred tax asset or deferred tax liability

a. Intraperiod tax allocation
b. Interperiod tax allocation
c. None of the above
d. All of the above

6. The present value of the defined benefit obligation is the present value, without deducting any
plan assets, f expected future payments required to settle the obligation resulting from
employee service in the
a. Current periods
b. Current and prior periods
c. Current or prior periods
d. Prior periods

7. It is said that no entry is required when share warrants are issued to existing shareholders
because these warrants are issued usually
 a. with consideration
b. without consideration
c. as bonus
d. as stock dividends

8. Treasury shares may be reissued as dividends, in which case the _____ of the shares be
charged to retained earnings
a. historical value
b. cost
c. fair value
d. selling price

9. Ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares
are included from the date
a. it was converted
b. interest ceases to accrue
c. as of the balance sheet
d. prior to the date of the balance sheet

10. In the computation of cost of sales, the basic rule is all increases are added and all decreases
are deducted except the changes in
a. earned income
b. unearned income
c. withdrawals
d. expenses

11. PAS 8 provides that an entity shall correct material prior period errors retrospectively in the
first set of financial statements authorized for issue after the discovery by
a. Restating the comparative amounts for the latest period presented in which the error
was discovered.
b. Restating the opening balances of asset liabilities and equity for all prior period
presented if the error occurred before the earliest period presented
c. Restating the comparative amounts for the latest period presented in which the error
was corrected
d. Restating the opening balances of asset, liability and equity for the earliest period
presented if the error occurred before the earliest period presented

12. Preferred shares with specific redemption date and acquired before the balance sheet date
can qualify as cash equivalents
a. True
b. False, it cannot qualify as cash equivalents
c. False, it should be acquired three months before the balance sheet date
d. False, it should be acquired three months before the redemption date

13. In which circumstances that a bank overdraft is include as component of cash and cash
equivalent?
a. when it is repayable on demand
b. when it is repayable on demand or form an integral part of an entity’s cash
management
c. when it is repayable on demand and form an integral part in the entity’s cash financial
statement
 d. when it is repayable on demand and form an integral part of an entity’s cash
management

14. If the containers are not returnable, they are

a. Charged to loss
b. Charged to gain
c. Charged to the cost of the product
d. Charged as an out right expense

15. Developed goodwill is

a. recorded at fair value
b. recorded at historical value
c. recorded at present value
d. not recorded

16. In a warranty liability, any difference between estimate and actual cost is a change in
a. accounting procedure
b. accounting principle
c. accounting entity
d. accounting estimate

17. Under the effective interest method, bond issue costs must be lumped with the discount on
bonds payable and netted against the
a. selling price of the bond
b. present value of the bond
c. market value of the bond
d. premium on bonds payable

18. In the books of the lessor, using a direct financing lease, the net investment is equal to
a. cost of the lease
b. fair value of the lease
c. fair value of the asset
d. cost of the asset

19. Under the defined benefit plan the obligation of the entity is to provide the
a. benefits to current employees
b. the benefits to current and former employees
c. the agreed benefit to current employees
d. the agreed benefit to current and former employees

20. The revalued asset can only be carried at revalued amount if there is
a. An inflation in the economy
b. A deflation in the economy
c. An market value for the asset
d. An active market for the asset

21. In tangible assets with indefinite life, they are

a. Amortized for its useful life
b. Amortized for its legal life
c. Not amortized and not impaired
d. Not amortized but tested for impairment
22. If the litigation of a patent is unsuccessful, the legal cost and the remaining cost of the patent
should be written off as
a. expense
b. a deduction from the other patent
c. outright income
d. loss

23. The immaterial cost of the leasehold shall be amortized over the life
a. of the lease
b. of the leasehold or lease which ever is shorter
c. of the leasehold
d. of none, it is charged to outright expense

24. The basis of normal rate return is based on net assets meaning
a. the excess of the total assets including goodwill over total liabilities
b. the equity of the entity
c. the equity of the entity plus subsidiaries
d. total assets minus total liabilities minus goodwill

25. If there is an indication that goodwill may be impaired, recoverable amount is determined for
the cash generating unit to which
a. the impairment can be written off
b. the goodwill can be written off
c. the impairment belongs
d. the goodwill belongs
 Problems

1. Selected records from the accounting records of Malakas Company are as follows:
Net accounts receivable at Dec. 31, 2005 1,900,000
Net accounts receivable at Dec. 31, 2006 1,000,000
Account receivable turnover 5:1
Inventory at Dec. 31, 2005 1,100,000
Inventory at Dec.31, 2006 1,200,000
Inventory turnover 4:1
What is the amount of gross margin?
a. 5,000,000 b. 5,150,000 c. 5,200,000 d. 5,300,000

2. The following information for 2006 is provided by Guam Company:

Sales 50,000,000
Cost of Sales 30,000,000
Selling Expenses 5,000,000
General and Administrative Expenses 4,000,000
Interest Expense 2,000,000
Gain on early extinguishment of long term debt 500,000
Correction of Inventory error, net of income tax-credit 1,000,000
Investment Income-equity method 3,000,000
Gain on expropriation 2,000,000
Income tax expense 5,000,000
Dividends declared 2,500,000
What is the amount of finance cost?
a. 1,200,000 b. 2,000,000 c. 1,500,000 d. 1,800,000

3. Dakak Company issued bonds with a face value of P4, 000,000 and with a stated interest rate of
10% on Jan. 01, 2008. The interest is payable semiannually on June 30 and December 31. The
bonds mature on every December 31 at a rate of P2, 000,000 per year for 2 years. The prevailing
rate for the bonds is 8%. The present value of 1 at 4% is as follows:
One period 0.9615
Two periods 0.9426
Three periods 0.8990
Four periods 0.8548
What is the present value of the bonds on January 1, 2008?
a. 4,111,400 c.4,099,600
b. 4,263,400 d.4,252,580

4. On January 1, 2004, Loyal Company purchased an equipment for P8, 000,000. The equipment is
depreciated using straight line method based on a useful life of 8 years with no residual value. On
January 1, 2007, after 3 years, the equipment was revalued at a replacement cost of 12,000,000
with no change in residual value. On June 30, 2007, the equipment was sold for 10,000,000. What
is the effect of the June 30, 2007 transaction to the retained earnings?
a.2, 500,000 increase c. 5,000,000 increase
b.3,250,000 increase d. 5,750,000 increase

5. A natural resources property was purchased by Nge Wang Company for 6,000,000. The output
was estimated to be 1,500,000 tons. Nge Wang Company purchased a mining equipment at a cost
 of 8,000,000 and has a useful life of 10 years but is capable of exhausting the resource in8 years.
Production is as follows:
1st Year 150,000 tons
nd
2 Year 225,000 tons
3rd Year None
4th Year 225,000 tons
What is the carrying amount of the mining equipment at the end of four years?
a. 4,800,000 c. 4,200,000
b. 4,000,000 d. 4,500,000

6. Danhag Company has determined its 2008 Net Income is P3,000,000.In the first –time audit of
company financial statements, you determined he following errors:
 P400, 000 revenue received in advanced during 2008was credited to revenue account.P100,
000 was earned in 2008, P200,00 will be earned in 2009 and the remainder will be earned in
2010.
 A P150, 000 was recognized as a loss resulting from a change in inventory valuation method
during 2008.
What will be the adjusted net income during 2008?
a.2, 800,000 c..2, 850,000
b.3,150,000 d.2,600,000

7. Lathan Company was organized on January 1,2006 with the following capital structures:
 12% Cumulative preference share,P100 par ,with liquidation value of P120,50,000 shares
authorized, issued and outstanding 20,000 shares,P2,500,000.
 Ordinary Share Capital, par value P50, authorized 80,000 shares, issued and outstanding
20,000 shares, P1, 200,000.
The net income for the years December 31, 2006 and December 31, 2007 were P2,000,000 and
P3,000,000, respectively. No dividends were declared. What is the December 31, 2008 book
value per ordinary share?
a.256 b. 260 c.291 d.285

8. Meninqiuz Company provided the following information for the 2008:

Total Assets at December 31 4,500,000
Share Capital at December 31 2,000,000
Share Premium at December 31 200,000
Treasury Stock (at cost) 300,000
The debt-to-equity ratio is 25% at December 3, 2008. What is the retained earnings
unappropriated on December 31, 2008?
a. 1,400,000 c. 2,300,000
b. 1,100,000 d. 1,700,000

9. Felicia Co. owns 20% royalty interest in an oil well. Felicia receives royalty payments on January
31 for the oil sold between June 1 and November 30, and July 30 for oil sold between December
1 and May 31 Production report shows the following sales:
June 1, 2006-November 30, 2006 4,050,000
December1, 2006-December 31, 2006 675,000
December 1, 2006-may 31, 2007 5,400,000
 June 1, 2007-November 30, 2007 4,387,500
December 1, 2007-December31, 2007 945,000
What amount should Felicia report as royalty revenue for 2007?
a.1, 890,000 b. 1,944,000 c.2, 011,500 d.2, 146,000

10. Assume the following balances at the end of the current year:
Capital Liquidated 1,800,000
Accumulated Depletion 2,500,000
Retained Earnings 1,500,000
Depletion based on 50,000 units extracted @P20 per unit 1,000,000
Inventory of resource deposit 5,000 units
What is the maximum dividend that can be declared by the company?
a. 2,100,000 c.2, 200,000
b.2, 000,000 d.1, 500,000

11. Marie Company sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have an expiration date of two years after issuance date. Upon redemption or
expiration, Marie recognizes the unearned revenue as realized. Information for 2007 as follows:
Gift certificate payable 12/31/2006 520,000
Gift certificate payable 12/31/2007 680,000
Gift certificate redeemed 1,560,000
Expired gift certificates 80,000
Cost of goods sold 80%
How much gift certificates were sold during the year?
a. 1,800,000 c.. 1,640 ,000
b. 1,500,000 d. 1,760,000

12. Zee Company provided the following information concerning its defined benefit plan in its
memorandum records on January 1, 2007.
Fair Value of plant assets 5,100,000
Unamortized past service cost 210,000
Unrecognized actuarial loss 610,000
Projected Benefit Obligation (4,500,000)
Prepaid/Accrued benefit cost 1,410,000
During the current year, the entity determined that its Current service cost was 600,000 and the
interest cost is 10%. The expected return was 10% but the actual return was 12%. Past service
cost and any actuarial gain or loss should be amortized over 10 years. Other related
information is as follows:
Contribution to the plan 720,000
Benefits paid to retirees 900,000
Decrease in PBO due to changes in actuarial assumptions 120,000
What is the balance of prepaid/ accrue benefit cost account on December 31, 2007?
a. 1,530,000 c. 1,770,000
b. 1,560,000 d. 1,680,000

13. PRC Company began selling a new calculator that carried a two year warranty against defects in
2007.
 PRC projected the estimated warranty cost (as a percent of sales) as follows:
First year warranty 4%
Second year warranty 10%
Sales and actual warranty repairs were:
2007 2008
Sales 5,000,000 9,000,000
Actual warranty repairs 390,000 900,000
What is the estimated warranty liability on December 31, 2007?
a. 670,000 c. 700,000
b. 790,000 d. 650,000

14. On December 31, 2007 Colt Company is experiencing extreme financial pressure and is in default
in meeting interest payment on its long term note of P6, 000,000 due on December 31, 2009. The
interest rate is 12% payable every December 31.
In an agreement with the creditor, Colt obtained the following changes in the terms of note:
a. The accrued interest on December 31, 2007 is forgiven.
b. The principal is reduced by 500,000.
c. The new interest rate is 8%.
d. The new date of maturity is December 31, 2011.
The present value of 1 at12% for four periods is 0.6355 and the present value of an ordinary
annuity of 1 at 12% for four periods is 3.0373.
How much is the gain or loss on extinguishment?
a. 2,504,750 c. 1,888,338
b. 1,168,338 d. 0

15. East Company leased machinery from Chin Company on January 1, 2007 for a 10-year period
(useful life of 20 years). Equal annual payments under the lease are P200,000 and are due on
January 1 of each year starting January 1, 2007. The present value at January 1, 2007 of the lease
payments over the lease term discounted at 10% was 1,352,000. The lease was appropriately
accounted for as finance lease by East because there is a very nominal bargain purchase option.
What is interest expense for 2008?
a. 106,720 c. 200,000
b. 115,200 d. 0

16. The Cloak Corporation received the following report from its actuary at the end of the year:
01/01/06 01/31/06
Unrecognized past service cost 500,000 450,000
Accumulated benefit obligation 6,000,000 6,400,000
Fair Value of pension plan assets 5,800,000 6,276,000
Actuarial net gain 800,000 ?
Benefits paid during the year 680,000
Contribution made during the year 520,000
Current service cost 495,000
Expected rate of return 10%
Settlement rate 12%
Ave. working lives of employees 20 years

What is the amount of net benefit expense to be charged against income for the year 2006?
a. 675,000 c. 716,000
 b. 685,000 d. 875,000

17. Francisco Company was organized on January 2, 2006 with 300,000 ordinary shares with a P6
par value authorized. During 2006, Francisco had the following stock transactions:
January 2 Issued 60,000 shares at P10 per share
March 8 Issued 20,000 shares at P11 per share.
May 9 Purchased 7,500 shares at P12 per share.
July 2 Issued 15,000 shares at P13 per share.
August 17 Sold 5,000 treasury shares at P14 per share.
Francisco uses the FIFO method for purchase-sale purposes.
If Francisco uses the cost method to record treasury stock transactions, how much would be the
Share Premium at December 31, 2006?
a. 445,000 c. 465,000
b. 455,000 d. 485,000

18. Genius Company reported an Accumulated Profits balance of P300,000 at December 31,2005. In
June 2006, Genius discovered that merchandise costing P100,000 had not been included in the
inventory in its 2005 financial statements. Assume Genius has 35% tax rate. What amount should
Genius report as adjusted beginning Accumulated Profits and Losses on January 1, 2006?
a. 235,000 c. 300,000
b. 365,000 d. 400,000

19. In 2004, Power Designs Corporation sold a layout design to Mass,Inc. and will receive royalties
of future revenues associated with the said layout design. On December 31,2005, Power Designs
reported royalties receivable of P75,000 from Mass, Inc. During 2006, Power Designs received
royalty payments of P200,000. Mass,Inc. reported revenues of P1,500,000 in 2006 from the
layout design. In its 2006 Income Statement, what amount should Power Designs report as
royalty revenue?
a. 125,000 c. 200,000
b. 175,000 d. 300,000

20. The following pertains to an operating sale and leaseback of equipment by Harbor Co. on
December 31,2005:
Sales price 420,000
Carrying amount 520,000
Monthly lease payment 37,334
Present value of lease payments/Fair Market Value 420,000
Estimated remaining life 12 years
Lease term 1 year
Implicit rate 12%
What amount of deferred loss should Harbor report at December 31, 2005?
a. 0 c. 100,000
b. 37,334 d. 200,000

21. The Puncher Co. launched a sales promotional campaign on June 30, 2006. For every ten empty
packs returned to Puncher, customers will receive an attractive food container. The company
 estimates that only 30% of the packs reaching the market will be redeemed. Additional
information are as follows:
Units Amount
Sales of food packs 3,000,000 P9,000,000
Food containers purchased 60,000 180,000
Prizes distributed to customers 37,000
At the end of the year, Puncher recognized a liability equal to the estimated cost of potential
prizes outstanding.
What is the amount of this estimated liability?
a. 69,000 c. 159,000
b. 90,000 d. 180,000
22. Green Company has 2,000,000 shares of ordinary shares outstanding on December 31, 2005. An
additional 100,000 shares are issued on April 1, 2006 and 240,000 more on September 1. On
October 1, Green issued P3,000,000 of 9% convertible bonds. Each bond is convertible into 40
shares of ordinary shares. At the time of issue of the convertible bonds, the market rate of the
bonds without conversion option is equal to its nominal rate. No bonds have been converted.

The number of shares to be issued in computing basic earnings per share and diluted earnings per
share on December 31, 2006 would be:

a. 2,155,000 & 2,155,000 c. 2,155,000

b. 2.155,000 & 2,275,000 d. 2,540,000

23. Tarzana Company reported total purchases of P3,200,000 in its accrual basis financial statement
on December 31,2006. Additional information revealed the following:
Accounts Payable, December 31,2005 P 900,000
Accounts Payable, December 31,2006 1,250,000
What is the amount of purchases under the cash basis on December 31, 2006?
a. 2,850,000 c. 4,100,000
b. 3,550,000 d. 4,450,000

24. On March 31, 2005 Mr. Right Enterprise traded in an old machine having a carrying amount of
P1,600,000 and paid cash difference of P600,000 for a new machine having a total cash price of
P2,000,000. On March 31, 2005, what amount of loss should Mr. Right recognize on this
exchange?
a. P 0 c. P400,000
b. P200,000 d. P600,000

25. On April 30, 2005, Shark Corporation purchased for P 30 per share all 200,000 of Fins
Corporation’s outstanding ordinary share. On this date, Fin’s balance sheet showed net assets of
P 5,000,000. Additionally, the fair value of Fin’s identifiable assets on the same date was
P600,000 in excess of their carrying amount.
What amount should Shark report as goodwill in its April 30, 2005 consolidated balance sheet?
a. P 0 c. P600,000
b. P400,000 d. P 1,000,000

26. On September 30, LBC Delivery service had a P28,000 debit balance in Accounts Receivable.
During October, the company had sales of P137,000, which included P90,000 in credit sales.
 October collections were P91,000, and write-offs of uncollectible receivables totaled P1,010.
Other data include: September 30 credit balance in allowance of uncollectible accounts, P1,060;
Uncollectible-account expense, estimated as 2% of the credit sales. Determine the ending
balances in Accounts Receivable, Allowance for Uncollectible Accounts and Net Accounts
Receivable at October 30.

27. Khae, Inc. is a manufacturer of cosmetics, specializing in products for sensitive skin. During
2008, Mark & Yhane offered Khae products for the first time, so 2008 was the Khae’s best year
ever. Net Income reached P18M on sales of P430M, and Khae collected P440M from customers.
The increased volume sales and collections left Khae with excess cash during the year, so the
company invested P18M in 90-day BSP Treasury Bills. These were the first short term
investments in the company’s history. Khae cashed in P16M of the T-Bills during the year. At
December 31, 2008, Khae’s interest revenue for the year totaled P1.3M. of this amount, Khae
expects to collect P.30M early in 2009 when the T-bills mature. Determine the cash provided by
operating, financing & investing Activities.

28. In August 2008, JPIA Corp. purchased a trading investment some NDMU stock for P312,000.
The stock headed down, and one month later, JPIA sold the stock for P309,000. On November 16,
2008, JPIA purchased 90-day BSP Treasury bill for P380,000. JPIA intends to collect the T-bill at
its maturity value of P388,000. Another cash excess developed in December, and JPIA paid
P263,000 for some Notes Receivable that it will hold in the hope of selling them at a profit early
in January 2009. the Notes Receivable is scheduled to mature in August 2009. At December 31,
2008, the market value of these notes is P262,000, not including the accrued interest of P2,000
that was earned. How much is the interest income & purchase price of short term investments?

29. Glitters Corp. is a newly organized business for a medical practice to specialize in genecology.
Transactions for the month first month are:
a. Invested in the business of P25,000 in exchange of common stock.
b. Paid cash for land costing P15,000.
c. Purchased medical supplies for P2,000 on account.
d. Glitters treated patients and earned service revenue of P8,000, receiving cash for half the
revenue earned.
e. Business paid the following expenses: salaries P1,400, office rent P1,000,Utilities P300.
f. Business sold the supplies to another physician for cost of P500.
g. Business borrowed P10,000 signing a note payable on the bank.
h. Paid P1,500 on account.
Requirements:
1. Amount that business expects to collect from patients.
2. Amount owed by the business. Amount of Net Income or Net Loss does business
experienced.
3. The total assets of the business. (Harrison 1-5)

30. Information regarding F’s portfolio of marketable equity securities as follows:

Aggregate cost as of 12/31/08 P 340,000
Unrealized gains- 12/31/08 8,000
Unrealized Losses; 12/31/08 52,000
Net Realized gains during 2008 60,000
At December 31, 2007, F reported an allowance of P 1,500 to reduce investments to lower cost or
market. In its December 31, 2008, balance sheet, what allowance should F report?
31. Based on physical inventory taken on December 31, 2008, Adobo Co. determined its chocolate
inventory on a FIFO basis at P26,000 with a replacement cost of P20,000. Adobo estimated that,
after further processing costs of P12,000, the chocolate could be sold as finished candy bars for
P40,000. Adobo normal profit margin is 10% 0f sales. Under the lower of cost or market rule,
what amount should Adobo report as chocolate inventory in its December 31, 2008 balance
sheet?

32. Yoo Co. determined that, due to obsolescence, equipment with an original cost of P 900,000 and
accumulated depreciation at January 1, 2007 of P420,000 had suffered permanent impairment,
and as a result should have a carrying value of only P300,000 as of beginning of the year. In
addition, the remaining useful life of the equipment was reduced from 8 to 3 years. In its
December 31, 2008, balance sheet, what amount should be report as accumulated depreciation?

33. On January 8, 2008, Pagod Corp. established a noncontributory defined benefit plan covering all
employees and contributed P 1,000,000 to the plan. At December 31, 2008, Pagod determined
that the 2008 service and interest costs on the plan were P 620,000. The expected and the actual
rate of return on plan assets for 2008 was 10%. There are no other components of Pagod pension
expense. What amount should Pagod report in its December 31, 3008, balance sheet as prepaid
pension cost?

34. On July 1, 2008, after recording interest and amortization, Nah Co. converted P 2,000,000 of its
12% convertible bonds into 50,000 shares of P2 par value common stock. On the conversion date
the carrying value of the bonds was P 2,800,000, and Nah common stock was publicly trading at
P60 per share. Using the book value method, what amount of additional paid in capital should
Nah record as a result of the conversion. (5-9 from Luis Hidalgo)

35. The notes to Van Corp.’s financial statements recently reported the following data on September
30, Year 1 (the end of fiscal year):
Long-Term debt at September 30, Year 1, included the following:
6% debentures due year 20 with an effective interest rate of 9.66%,
net of unamortized discount of P58,695,000 ………………………….. P166,305,000
Other indebtedness with an interest rate of 8.30%,
due P12,108,000 in year 5 and P19,527,000 in year 6 …………………. P 31,365,000
Van amortizes discount by the effective interest method. What should be the bond’s carrying
amount? (Harrison & Horgren)

36. Kuyaw Corp. entered into a 9 year lease on a warehouse on December 31, 2007. Lease payments
of P52,000, which includes real estate taxes of P2,000 are due annually beginning on December
31, 2008, and every December 31 thereafter. Kuyaw does not know the implicit rate in the lease.
Kuyaw’s incremental borrowing rate is 9%. The rounded present value if an ordinary annuity for
nine years at 9% is 5.6. What amount should Kuyaw report as capitalized lease liability at
December 31, 2007?

37. On June 1, 2005, Mardhex, Inc. issued P500,000 of 10%, 15-year bonds at par. Interest is payable
semiannually on June 1 and December 1. Bond issue costs were P6,000. On June 1, 2010.
Mardhex retired half of the bonds at 98. What is the net amount that Mardhex should use in
computing the gain or loss on retirement debt?

38. On January 2, 2008, Marcfe Co. sold a used machine to Mardhex Inc. for P900,000, resulting in a
gain of P270,000. On that date, Mardhex paid P150,000 cash and signed a P750,000 note bearing
 interest at 10%. The note was payable in three annual installments of P250,000 beginning on
January 2, 2009. Marcfe appropriately accounted for the sale under the installment method.
Mardhex made a timely payment of the first installment on January 2, 2009, of P325,000, which
included accrued interest of P75,000. What amount of deferred gross profit should Marcfe report
at December 31, 2009?

39. KCC Mall made the following expenditures during 2007:

Costs to develop the computer software for internal
use in KCC’s general management information
system P100,000
Costs of market research activities 75,000
What amount of these expenditures should KCC report in its 2007 income statement as research
and development expenses? (hidalgo)

40. Red Company had the following balances at December 31, 2008; Cash in bank P2,250,000, Cash
on hand P125,000 & cash legally restricted for additions to plant (expected to be disbursed in
2009) P1,600,000. Cash in bank includes P600,000 compensating balance is not legally restricted
as to withdrawal by Red. In the current assets section of Red’s December 31, 2008 balance sheet,
total cash should be reported at

41. LL Inc. accepted from a customer a P40,000, a 90 day 12% interest bearing note dated August 31,
2000. On September 30, 2000, LL discounted the note at the DBP bank at 15%. However, the
proceeds were not received until October 1, 2000. In LL’s September 30, 2000 balance sheet, the
amount receivable from the bank based on a 360-day year, includes accrued interest revenue of:

42. On July 1, 2005, PP Corp. sold equipment to OO Co. for P100,000. PP accepted a 10% note
receivable for the entire sales price. This note is payable in 2 installments of P50,000 plus accrued
interest on December 31, 2005 and December 31, 2006. On July 1, 2006, PP discounted the note
at the bank at an interest rate of 12%. PP’s proceeds from the discounted note were:

43. Coca Company’s inventory at December 31, 2007 was P1,200,000 based on physical count of
goods priced at cost, and before any necessary year-end adjustments relating to the following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2007. The goods had a cost of P25,000 and were picked up by the carrier
on January 7, 2008.
 Goods shipped FOB shipping point on December 28, 2007, from a vendor to Coca were
received on January 4, 2008. The invoice cost was P60,000
What amount should Coca report as inventory in its December 31, 2007 balance sheet?

44. MC Corp. uses FIFO retail method of inventory valuation. The following information is
available:
Cost Retail
Beginning inventory P12,000 P30,000
Purchases 60,000 110,000
Net Additional Markups 10,000
Net Markdowns 20,000
Sales Revenue 90,000
If the lower of cost or market rule is disregarded, what would be the estimated cost of the ending
inventory?
 Problem 45-46 is based on the following:
During 2007, Pittoh Corp. incurred costs to develop and produce a routine, low-risk computer
software product, as follows:
Completion of detail program design P13,000
Cost incurred for coding and testing to
Establish technological feasibility 10,000
Other coding costs after establishment
Of technological feasibility 24,000
Other testing costs after establishment
Of technological feasibility 20,000
Costs of producing product masters for training materials 15,000
Duplication of computer software and training
material from product masters (1,000 units) 25,000
Packaging product 9,000
45. In Pittoh’s December 31, 2007 balance sheet, what amount should be reported in inventory?
46. In Pittoh’s December 31, 2007, balance sheet, what amount should be capitalized as software
cost, subject to amortization?

47. Marbel, Inc. purchased a machine for P450,000 0n January 2, 2007. The machine has an
estimated useful life of four years and a salvage value of P50,000. The machine is being
depreciated using sum-of-the-years’ digits method. The December 31, 2008 asset balance, net of
accumulated depreciation should be?

48. Among items reported on U-Toh Inc.’s Income Statement for year ended December 31, 2008
were the following:
Amortization of goodwill P10,000
Insurance premium on life of an officer
with U-toh as owner and beneficiary 5,000
Temporary differences amount to? 0

49. For the year ended December 31, 2007, Jasmine Corp. has a loss carryforward of P180,000
available to offset future taxable income. At December 31, 2008, realization of the tax benefit is
probable, but not assured beyond any reasonable doubt. Income tax rate is 35%. What amount of
the tax benefit should be reported in Jamine’s 2008 income statement? 0

50. CPA Corporation owns an office building and normally charges tenants P30 per square foot per
year for office space. Because the occupancy rate is low, CPA agreed to lease 10,000 square feet
to MBA at P12 per square foot for the first year of a three year operating lease. Rent for the
remaining years will be at the P30 rate. MBA moved into the building on January 1, 2007, and
paid the first year’s rent in advance. What amount of rental revenue should CPA report from
MBA in its income statement for the year ended September 30, 2007? 80,000

51. During 2007, Mer Corp. sold goods to its 80% subsidiary, Xer Corp. At December 31, 2007, ½ of
these goods were included in Xer’s ending inventory. Reported 2007 selling expenses were P
1,000,000 and P 400,000 for Mer and Xer, respectively. Pard’s selling expenses included P50,000
in freight out costs for goods sold to Xer. What amount of selling expenses should be reported in
Mer’s 2007 consolidated income statement?

52. On January 1, 2008, Pacman Corp. purchased 40% of the voting common stock of Glen, Inc and
appropriately accounts for its investment by the equity method. During 2008, Glen reported
 earnings of P225,000 and paid dividends of P75,000. Pacman assumes that all of Glen’s
undistributed earnings will be distributed as dividends in the future periods when the enacted tax
rate is 30%. Ignore the dividend-received deduction. Pacman uses the liability method to account
for temporary differences. The increase in Pacman’s deferred income tax liability for this
temporary difference is?

53. The Goat Corp. is authorized to issue 100,000 shares at P20 par ordinary share. At the beginning
of 2006, 18,000 ordinary shares were issued and outstanding. These shares had been issued at
P27 per share. During 2006, the company entered into the following transactions:

January 4 Issued 1,300 ordinary shares at P28 per share

March 19 Exchanged 12,000 ordinary shares for a machine

The ordinary shares was selling at P30 per share.

May 9 Reacquired 500 ordinary shares at P29 per share.
July 19 Accepted subscriptions for 1,000 ordinary shares at P31 per share.
The contract called for 10% down payment with the balance due on
December 1.
September 4 Sold 500 of treasury share at P32 per share.
December 1 Collected the balance due on July 1 subscriptions and issued the stock
certificate.

How much is the contributed capital for December 31, 2006? (914,900)

54. The shareholders’ equity section of Bless Corp’s balance sheet at December 31, 2005 was as
follows:
Ordinary share (P10 par value, authorized 1,000,000 shares
issued and outstanding 900,000 shares) 9,000,000
Share premium 2,700,000
Accumulated Profits and losses 1,300,000
Total shareholders' equity 13,000,000
On January 2, 2006, Bless purchased and retired 100,000 shares of its stock for
P1,800,000.

Immediately after retirement of these 100,000 shares, how much is the balance in
the Share Premium and Accumulated Profits? (Share premium 2,400,000;
Accumulated Profit 800,000)

55. Salvation Corporation had two issues of securities outstanding – ordinary share and an 8%
convertible bond issue with a face amount of P16,000,000. Interest payment dates of the bond
issue are June 30 and December 31. The conversion clause in the bond indenture entitles the
bondholders to receive forty share of P20 par value ordinary share in exchange for each P1,000
bond. On June 30, 2006, the holders of P2,400,000 face value bonds exercised the conversion
privilege. The equity component of the convertible debt at the time of issue is P950,000. The
market price of the bonds on that date was P1,100 and the market price of the ordinary share was
P35. The total unamortized bond discount at the date of the conversion was P1,000,000.

In applying the book value method, what amount should Salvation credit to the
“share premium in excess of par’ account as a result of this conversion? (472,000)
56. On January 1, 205, Elle Company granted 5,000 share options with a ten-year life to each of ten
executives. The share option will vest and become exercisable immediately if and when the
company’s share price increases from P50 to P70 and provided that the executives remain in
service until the share target is achieved.

The company applies the binomial option model, which takes into account the possibility
that the target share price will not be achieved. The company estimates that the fair value
of the options at grant date is P25 per option. From the option –pricing model, the
company determines that the mode of the distribution of possible vesting date is five
years. The most likely outcome of the market condition is that the share price target will
be achieved at the end of 2009. Therefore, Elle estimates that the expected vesting period
is five years. Elle also estimates that two executives will have left by the end of 2009 and
therefore expects that 40,000 share options will vest at the end of 2009.

Throughout 2005 to 2008, Elle continues to estimate that a total of two executives will
leave by end of 2009. However, in total, three executives had left, one each in 2007,
2008 and 2009. Another executive left in 2010 before the share price target is achieved.

What amount of remuneration expense should the company recognize in its

December 31, 2009 income statement? (75,000)

57. The shareholders’ equity of the Albert co. on June 30, 2006 was as follows:
Contributed capital:
5% preference shares,P50 par, cumulative, 30,000 shares issued,
dividends 5 years in arrears 1,500,000
Ordinary shares, P30 par, 100,000 shares issued 3,000,000
4,500,000
Deficits from operations (600,000)
Total shareholders' equity 3,900,000
On July 1, the following actions were taken:
a. Ordinary shareholders turned in their old ordinary shares and received in
exchange new ordinary shares, 1 share of the new share being exchanged for
every 4 shares of the old. New ordinary share was given a stated value of
P60 per share.
b. One-half share of the new ordinary share was issued on each share of
preference share outstanding in liquidation of dividends in arrears on
preference share.
c. The deficit from operations was applied against the share premium arising
from the ordinary share restatement.
Transactions for the remainder of 2006 affecting the shareholders’ equity were as follows:

October 1 10,000 preference shares were called at P55 plus dividends for 3 months at
5%. Share was formally retired.
November 10 60,000 new ordinary shares were sold at P65.
December 31 Net income for the 6 months ended on this date, was P400,000 (Assume that
revenues and expenses were closed to a temporary account, Income Summary.
Use this account to complete the closing process). The semi-annual dividend
was declared on preference shares, and a P0.75 dividend was declared on
ordinary shares, dividends being payable January 2, 2007.
 What would be the total Shareholders’ Equity as of December 31, 2006? (7,543,750)

58. As the beginning of the accounting year 2006, Trum has machinery with a historical cost of
P4,500,000 and accumulated depreciation of P1,500,000.

On December 31, 2006, Trum declared the machinery as dividend which has a carrying
amount at the time of P2,500,000. Trum’s policy is to measure all depreciable asset at
cost. At the time of declaration, the equipment has a fair market value of P2,000,000.

What total amount should Trum charge its accumulated profits and losses related to
the machinery during 2006? (3,000,000)

59. In 2009, The Worf Company, reported pretax financial income of P500,000. Included in that
pretax financial income was P90,000 of nontaxable life insurance proceeds received as a result of
the death of an officer; P120,000 of warranty expenses accrued but unpaid as of December 31,
2009; and P20,000 of life insurance premiums for a policy for an officer.

Assuming that no income taxes were previously paid during the year and assuming
an income tax rate of 40 percent, the amount of income taxes payable on December
31, 2009, would be (220,000)

60. The books of the Tracker Company for the year ended December 31, 2008, showed pretax
income of P360,000. In computing the taxable income for federal income tax purposes, the
following timing differences were taken into account:
Depreciation deducted for tax purposes in excess of
depreciation recorded on the books ................... P16,000
Income from installment sale reportable for tax purposes
in excess of income recognized on the books .......... 12,000

What should Tracker record as its current income tax liability at December 31,
2008, assuming a corporate income tax rate of 30 percent? (106,800)

61. Frey Corporation's income statement for the year ended December 31, 2008, shows pretax
income of P1,000,000. The following items are treated differently on the tax return and in the
accounting records:
Tax Accounting
Return Records
Rent income ........................... P 70,000 P120,000
Depreciation expense .................. 280,000 220,000
Premiums on officers' life insurance .. -- 90,000

Assume that Frey's tax rate for 2008 is 30 percent. What is the amount of income
tax payable for 2008? (294,000)

62. Inventive Corporation's income statement for the year ended December 31, 2008, shows pretax
income of P300,000. The following items are treated differently on the tax return and in the
accounting records:
 Tax Accounting
Return Records
Warranty expense ...................... P170,000 P185,500
Depreciation expense .................. 150,000 100,000
Premiums on officers' life insurance .. -- 60,000

Assume that Inventive's tax rate for 2008 is 40 percent. What is the current portion
of Inventive's total income tax expense for 2008? (130,000)

63. The following differences between financial and taxable income were reported by Dider
Corporation for the current year:

(a) Excess of tax depreciation over book depreciation .... P60,000

(b) Interest revenue on municipal bonds .................. 9,000
(c) Excess of estimated warranty expense over actual
expenditures ......................................... 54,000
(d) Unearned rent received ............................... 12,000
(e) Fines paid ........................................... 30,000
(f) Excess of income reported under percentage-of-completion accounting
for financial reporting over
completed-contract accounting used for tax reporting . 45,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities .................................... 3,000
(h) Unrealized losses on marketable securities recognized
for financial reporting .............................. 18,000

Assume that Dider Corporation had pretax accounting income [before considering items (a)
through (h)] of P900,000 for the current year. Compute the taxable income for the current
year. (903,000)

64. In 2008, Wyatt Corporation issued for P110 per share, 15,000 shares of P100 par value
convertible preferred stock. One share of preferred stock may be converted into three shares of
Wyatt's P25 par value common stock at the option of the preferred shareholder. On December 31,
2009, all of the preferred stock was converted into common stock. The market value of the
common stock at the conversion date was P40 per share.

What amount should be credited to the common stock account on December 31,
2009? (1,125,000)

65. Beldon Co. was organized on January 2, 2008, with the following capital structure:
10 percent cumulative preferred stock, par value P100,
and liquidation value P105; issued and outstanding
2,000 shares ........................................ P200,000
Common stock, par value P25; authorized 100,000 shares;
issued and outstanding 20,000 shares ................ 500,000
 Beldon's net income for the year ended December 31, 2008, was P900,000, but no
dividends were declared. Beldon's balance sheet would report Dividends Payable at
December 31, 2005, of (-0-)

66. The accounts and balances shown below were gathered from Paynter Corporation's trial balance
on December 31, 2007. All adjusting entries have been made.

Wages Payable ........................................... P 25,600

Cash .................................................... 17,700
Mortgage Payable ........................................ 151,600
Dividends Payable ....................................... 14,000
Prepaid Rent ............................................ 13,600
Inventory ............................................... 81,800
Sinking Fund Assets ..................................... 52,400
Short-Term Investments .................................. 15,200
Premium on Bonds Payable ................................ 4,600
Stock Investment in Subsidiary .......................... 102,400
Taxes Payable ........................................... 22,800
Accounts Payable ........................................ 24,800
Accounts Receivable ..................................... 36,600

The amount that should be reported as current assets on Paynter Corporation's

balance sheet is? P164,000

67. See information for Paynter Corporation above. The amount that should be reported as
current liabilities on Paynter Corporation's balance sheet is (87,200)

68. Maryk Electronics Inc. reported the following items on its December 31, 2007, trial balance:

Accounts Payable ........................................ P108,900

Advances to Employees ................................... 4,500
Unearned Rent Revenue ................................... 28,800
Estimated Liability Under Warranties .................... 25,800
Cash Surrender Value of Officers' Life Insurance ........ 7,500
Bonds Payable ........................................... 555,000
Discount on Bonds Payable ............................... 22,500
Trademarks .............................................. 3,900

The amount that should be recorded on Maryk's balance sheet as total liabilities is?
(696,000)
69. Eagle Co. prepared a draft of its 2007 balance sheet. The draft statement reported current
liabilities totaling P200,000. However, none of the following items were included in this
preliminary total at December 31, 2007:

Accounts payable ........................................ P30,000

Bonds payable, due 2008 ................................. 50,000
Discount on bonds payable, due 2008 ..................... 6,000
Dividends payable on January 31, 2008 ................... 16,000
Notes payable, due 2009 ................................. 40,000

At which amount should Eagle's current liabilities be correctly reported in the

December 31, 2007, balance sheet? (290,000)

70. The December 31, 2007, balance sheet of Madden Inc., reported total assets of P1,050,000 and
total liabilities of P680,000. The following information relates to the year 2008:

• Madden Inc. issued an additional 5,000 shares of common stock at P25 per share on
July 1, 2008.
• Madden Inc. paid dividends totaling P80,000.
• Net income for 2008 was P110,000.
• No other changes occurred in stockholders' equity during 2008.

The stockholders' equity section of the December 31, 2008, balance sheet would
report a balance of? (525,000)

71. Seahawk Company's adjusted trial balance at December 31, 2007, includes the following account
balances:

Common Stock, P3 par .................................... P300,000

Additional Paid-In Capital .............................. 400,000
Treasury Stock, at cost ................................. 25,000
Net Unrealized Holding Loss on Available-For-Sale
Securities ............................................ 10,000
Retained Earnings--Appropriated for Uninsured Earthquake
Losses ................................................ 75,000
Retained Earnings--Unappropriated ....................... 100,000

What amount should Seahawk report as total owners' equity in its December 31,
2007, balance sheet? (840,000)

72. The following expenses were recognized by Kalob Company, a retailer, during 2008:

Interest expense ..................................... P120,000

Telephone expense .................................... 95,000
Loss on sale of store equipment ...................... 47,000
Legal fees ........................................... 74,000
Officers' salaries ................................... 115,000
What should Kalob report as general and administrative expenses for 2008?
(284,000)
ANSWER KEY

Theories
1.10 B
11-25 D

Problems
1. Answer: b

Solution: (1900,000 +1,000,000) /2 =1,950,000 x 5

=9,750,000

(1,100,000 + 1,200,000)/2 =1,150,000 x 4

=4,600,000
9,750,000-4,600,000 = 5,150,000
2. Answer: c

Solution: 2,000,000 – 500,000 = 1,500,000

========
3. Answer: a
Solution: (4,000,000 x 10%)/2 = 200,000 x 0.9615 = 192,300
2,000,000 + (4,000,000 x 10%)/2 = 2,200,000 x 0.9246=2,043,120
(2,000,000 x 10%)/2 = 100,000 x 0.8990 = 89,900
2,000,000 + (2,000,000 x 10%)/2 = 2,100,000 x 0.8548 =1,795,080
4,111,400
========
4. Answer: c

Solution: Cost 8,000,000

8,000,000 x 3/8 = (300,000) 5,000,000

Replacement cost 12,000,000

12,000,000 x 3/8 = (4,500,000) 7,500,000
Revaluation Surplus 2,500,000

Depreciation 7,500,000/5 x 6/12 = 750,000

2,500,000
10,000,000 – 6,750,000 = 3,250,000
5,750,000
(750,000)
: = 5,000,000
========
5. Answer: c
Solution: 1st year (8,000,000 x 150,000)/1,500,000 = 800,000
2nd year (8,000,000 x 225,000)/1,500,000 = 1,500,000
3rd year ( 8,000,000-800,000-1,200,000)/8 = 750,000
4th year (8,00,000-800,000-1,200,000-750,000 x 225,000)/1,050,00 = 1,050,000
3,800,000
8,000,000-3,800,000 = 4,200,000
========
 6. Answer: c

Solution: Unadjusted Income 3,000,0000

Unearned Income (300,000)
Loss on Inventory 150,000

Adjusted Income 2,850,000

========
7. Answer: b
Solution: Excess Preference Ordinary
R/E 5,000,00 2,000,000 1,000,000
SP 700,000
(2,000,000 x 12% x 2) (480,000) 480,000
(20,000 x 20) (400,000)
(4,820,000) 4,820,000
0 5,820,000/20,000
= P 291
=====
8. Answer: a
Solution: 4,500,000/125% = 3,600,000
(2,000,000)
(200,000)
300,000
Total Retained Earnings 1,700,000
R/E Appropriated for T/S (300,000)
1,400,000
========
9. Answer: c
Solution: (5,400,000-675,00) x 20% = 945,000
(4,387,500+945,000 x 20% = 1,066,500
2,011,500
========
10. Answer: a
Solution: Retained Earnings 1,500,000
Accum. Depletion 2,500,000
4,000,000
Less: Capital Liquidated (1,800,000)
Inventory (15,000 x 20) (100,000)
2,100,000
=======
11. Answer: a
Solution: Gift Certificate Payable, end 680,000
Certificates Redeemed 1,560,000
Expired Certificates 80,000
Gift Certificates, beg. (520,000)
Gift Certificates Sold 1,800,000
========
12. Answer: d
Solution: Prepaid/Accrued-Debit, beg. 1,410,000
Current Service Cost 600,000
Interest ( 4,500,000 x 10%) 450,000
 Expected Return (5,100,000 x 10%) (510,000)
Past Service Cost ( 210,000/10) 21,000
Amortization ( 600,000-510,00)/10 9,000
Curtailment/ Settlement (120,000)
Benefit Expense 450,000
Prepaid/Accrued (720,000-450,000) 270,00
Total 1,680,000
=======
13. Answer: a

Solution: ( 5,000,000 + 9,000,0000) = 14,000,000

14,000,0000 x 14% = 1,960,000

(390,000)
(900,000)

670,000
======
14. Answer: c
Solution 5,500,000 x 0.6355 = 3,495,250
(5,500,000 x 8%) = 440,000x 3.0373= 1,336,412
PV of restructured liability 4,831,662

6,000,000
720,000
6,720,000
(4,831,000)

1,888,338
=======

15. Answer: a
200,000
Solution: 1,152,000 x 10% = (115,200)
84,800

(1,152,000-84,800) x 10% = 106,720

======

16. Answer: a
Solution: Current service cost 495,000
Interest (6,000,000 x 12%) 720,000
Amortization (500,000-450,000) 50,000
Amortization of he net gain (10,000)
Expected return on plan assets (580,000)
Net benefit Expense P 675,000
=======

17. Answer: b
Solution January 2 [60,000 x (P10 – P6)] 240,000
March 8 [20,000 x (P11 – P6)] 100,000
 July 2 [15,000 x (P13 – P6)] 105,000
August 17 [15,000 x (P14 – P12)] 10,000
Total Share Premium P 455,000
=======

18. Answer: c
Solution: Accumulated Profits P300,000
Understatement in Inventory for 2005
100,000 x 65% 65,0000
Adjusted January 1 2006 Accumulated ProfitsP365,000
=======
19. Answer: d
Solution: 1,500,000 x 20% P300,000
=======

20. Answer: a

21. Answer: c
Estimated no. of packs to be redeemed (3,000,000 x 30%) 900,000/10
= 90,000
-37,000
53,000
X P3
159,000
======
22. Answer: b
Solution:
Average # of shares for basic EPS

01/01/06 2,000,000 x 12/12 2,000,000

04/01/06 100,000 x 9/12 75,000
09/01/06 240,000 x 4/12 80,000
2,155,000
=======
Diluted EPS = Average # of shares issued
2,155,000
Average Ordinary shares issued as if it
converted (3,000,000 x 1,000 x 40 x 3/12) 30,000
2,185,000

23. Answer: a
Solution:
Purchases, accrual P3,200,000
Accounts Payable, December 31,2005 900,000 4,100,000
Less: Accounts Payable December 31,2006 1,250,000
P2,850,000
========

24.Answer: b
Solution:
Trade-in value/Fair value (2,000,000 – 600,000) P1,400,000
 Carrying value 1,600,000
P 200,000
=========

25. Answer: b
Solution:
Acquisition cost (200,000 x P30) P6,000,000
Less: Market value of the net assets acquired
Book value P5,000,000
Fair value of identifiable assets 600,000 5,600,000
P 400,000
========