FINANCIAL ACCOUNTING AND REPORTING

Final Pre-Board

Student ID No.:_________________________________ Date_________________________

1. In the Conceptual Framework, qualitative characteristics

a. Are considered either fundamental or enhancing
b. Contribute to the decision-usefulness of financial reporting information
c. Distinguish better information from inferior information for decision-making purposes
d. All of the choices are correct

2. Which of the following is not a time when revenue may be recognized?

a. At time of sale
b. At receipt of cash
c. During production
d. All of these are possible times of revenue recognition

3. Which of the following should be defined an intentional distortions of financial statement?

a. Errors c. Errors and fraud
b. Fraud d. Neither errors nor fraud

4. Mercedes Company provided the following information on December 31, 2017:

Accounts payable, net of debit balances of P100,000 in creditors’ accounts 1,900,000
Accrued expenses 500,000
Bonds payable due December 31, 2018 3,000,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Income tax payable 700,000
Cash dividend payable 800,000
Stock dividend payable 300,000
Note payable – 6%, due March 1, 2018 1,500,000
Note payable – 8%, due October 1, 2018 1,000,000
The 2017 financial statements were issued on March 31, 2018. On March 1, 2018, the 6% note
payable was refinanced on a long-term basis. Under the loan agreement for the 8% note payable,
the entity has the discretion to refinance the obligation for at least twelve months after December
31, 2017. The deferred tax liability is based on temporary differences that will reverse in 2018. A
sinking fund of P3,000,000 was set aside to pay the bonds payable upon maturity. What amount
should be reported as total current liabilities on December 31, 2017?
a. 8,300,000 b. 9,300,000 c. 9,000,000 d. 5,500,000

5. Deposits held as compensating balance

a. Usually do not earn interest
b. If legally restricted and held against short-term credit may be included as cash
c. If legally restricted and held against long-term credit may be included among current assets
d. None of these

6. Campbell Company had the following account balances on December 31, 2017:
Petty cash fund 50,000
Cash in bank – current account 4,000,000
Cash in bank – sinking fund 2,000,000
 Cash on hand 500,000
Cash in bank – restricted amount for plant addition, expected to be disbursed
in 2018 1,500,000
Treasury bills 1,000,000

The petty cash fund included unreplenished December 2017 petty cash expense vouchers of
P10,000 and employee IOU of P5,000. The cash on hand included a P100,000 check payable to
Campbell dated January 15, 2018. In exchange for a guaranteed line of credit, the entity has
agreed to maintain a minimum balance of P200,000 in its unrestricted current bank account. The
sinking fund is set aside to settle a bond payable that is due on June 30, 2018. What total amount
should be reported as “cash and cash equivalents” on December 31, 2017?
a. 7,435,000 b. 5,435,000 c. 4,435,000 d. 5,535,000
7. On March 31, 2017, Able Company received its bank statement. However, the closing balance of
the account was unreadable. Attempts to contact the bank after hours did not secure the desired
information. The following data are available in preparing a bank reconciliation:

February 28 book balance 1,460,000

Note collected by bank 100,000
Interest earned on note 10,000
NSF check of customer 130,000
Bank service charge on NSF check 2,000
Other bank service charges 3,000
Outstanding checks 202,000
Deposit of February 28 placed in night depository 85,000
Check issued by Ale company charged to Able’s account 20,000

What is the balance per bank statement?

a. 1,435,000 b. 1,532,000 c. 1,338,000 d. 1,557,000

8. Ron Company provided the following data for the month of January of the current year:

Balance per book, January 31 3,130,000

Balance per bank statement, January 31 3,500,000
Collections on January 31 but undeposited 550,000
NSF check received from a customer returned by the bank on February 5
with the January bank statement 50,000
Checks outstanding on January 31 650,000
Bank debit memo for safety deposit box rental not recorded by depositor 5,000
A creditor’s check for P30,000 was incorrectly recorded in the depositor’s
book as 300,000
A customer’s check for P200,000 was recorded by the depositor as 20,000
The depositor neglected to make an entry in its books for a check drawn in
payment of an account payable 125,000

What is the adjusted cash in bank on January 31?

a. 3,130,000 b. 3,500,000 c. 3,400,000 d. 2,950,000

9. Oro company had the following bank reconciliation on March 31 of the current year:

Balance per bank statement, March 31 4,650,000

Add: Deposits in transit 1,000,000
 Total 5,650,000
Less: Outstanding checks 1,250,000
Balance per book, March 31 4,400,000

Data per bank statement for the month of April follow:

Deposits 6,000,000
Disbursements 5,000,000

All reconciliation items on March 31 cleared through the bank in April. Outstanding checks on
April 30 totaled P750,000 and deposits in transit amounted to P1,500,000. What is the amount of
cash receipts per book in April?
a. 5,000,000 b. 6,500,000 c. 7,500,000 d. 5,500,000

10. All of the following are required when classifying receivables, except
a. Indicate the receivables classified as current and noncurrent
b. Disclose any receivables pledged as collateral
c. Disclose all significant concentrations of credit risk arising from receivables
d. All of the choices are required when classifying receivables

11. Which of the following statements is incorrect regarding how the impairment assessment is to be
performed on receivables?
a. Receivables that are individually significant should be considered for impairment separately
or individually
b. Receivables that are not individually significant should be assessed for impairment
individually
c. Any receivables individually assessed as not impaired should be included with the other
receivables that are not individually significant and collectively assessed
d. Any receivables not individually significant should be collectively assessed for impairment

12. Harley Company provided the following information relating to current operations:
Accounts receivable, January 1 4,000,000
Accounts receivable collected 8,400,000
Cash sales 2,000,000
Inventory, January 1 4,800,000
Inventory, December 31 4,400,000
Purchases 8,000,000
Gross margin on sales 4,200,000
What is the balance of accounts receivable on December 31?
a. 8,200,000 b. 6,200,000 c. 2,000,000 d. 4,200,000

13. On January 1, 2017, Himala Company sold equipment with a carrying amount of P4,800,000 in
exchange for P6,000,000 noninterest bearing note due January 1, 2020. There was no established
exchanged price for the equipment. The prevailing interest rate for this note was 10%. The
present value of 1 at 10% for three periods is 0.75.
What amount should be reported as gain or loss on sale of equipment?
a. 1,200,000 gain c. 300,000 gain
b. 2,700,000 gain d. 300,000 loss

14. Neil Company purchased from Carmina Company a P 20,000, 8%, five-year note that required
five equal annual year-end payments of P 5,009. The note was discounted to yield a 9% rate to
 Neil Company. At the date of purchase, Neil company recorded the note at the present value of
P19,485. What is the total interest revenue earned by Neil Company over the life of this note?
a. 5,045 b. 5,560 c. 8,000 d. 9,000

15. What is imputed interest?

a. Interest based on stated interest rate
b. Interest based on implicit interest rate
c. Interest based on average interest rate
d. Interest rate based on bank prime rate

16. On December 31, 2017, Mandawe Bank has a 5-year loan receivable with a face value of
P5,000,000 dated January 1, 2016 that is due on December 31, 2020. Interest on the loan is
payable at 9% every December 31. The borrower paid the interest that was due on December 31,
2016 but informed the bank that interest accrued in 2017 will be paid at maturity date. There is a
high probability that the remaining interest payments will not be paid because of financial
difficulty. The prevailing market rate of interest on December 31, 2017 is 10%. The PV of 1 for
three periods is .772 at 9% and .751 at 10%. What is the loan impairment loss on December 31,
2017?
a. 1,242,600 b. 1,590,000 c. 1,357,050 d. 1,695,000

17. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amounts collected
d. To comply with customer agreement

18. On January 1, 2017, Kenny Company sold land with carrying amount of P4,500,000 in exchange
for a 9-month, 10% note with face value of P6,000,000. On April 1, 2017, the entity discounted
the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted
for as a conditional sale with recognition of contingent liability. On October 1, 2017, the maker
dishonored the note receivable. The entity paid the bank the maturity value of the note plus
protest fee of P50,000. On December 31, 2017, the entity collected the dishonored note in full
plus 12% annual interest on the total amount due.
What amount was received from the note discounting on April 1, 2017?
a. 6,063,000 b. 6,450,000 c. 6,150,000 d. 5,963,000
19. On June 1, 2017, Patil Company sold merchandise with a list price of P5,000,000 to a customer.
The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale
was made FOB shipping point. The entity prepaid P100,000 of delivery cost for the customer as
an accommodation. On June 11, 2017, what is the full remittance from the customer?
a. 3,600,000 b. 3,420,000 c. 3,700,000 d. 3,520,000

20. Bagshot Company used a perpetual inventory system. At the end of 2016, the inventory account
was P360,000 and P30,000 of those goods included in ending inventory were purchased FOB
shipping point and did not arrive until 2017. Purchases in 2017 were P3,000,000. The perpetual
inventory records showed an ending inventory of P420,000 for 2017. A physical count at the end
of 2017 showed an inventory of P380,000. Inventory shortages are included in cost of goods sold.
What amount should be reported as cost of goods sold for 2017?
a. 2,940,000 b. 2,980,000 c. 3,000,000 d. 3,010,000

21. LCNRV
a. Gives the lowest valuation if applied to total inventory
 b. Gives the lowest valuation if applied to major groups of inventory
c. Gives the lowest valuation if applied to individual items of inventory
d. Must be applied to major groups for tax purposes

22. Based on physical count on December 31, 2017, Goyle Company determined the chocolate
inventory on a FIFO basis at P2,600,000 with a replacement cost of P2,000,000. The entity
estimated that after processing cost of P1,500,000, the chocolate inventory could be sold as
finished candy bars for P4,000,000. The normal profit margin is 10% on sales. What amount
should be reported as chocolate inventory on December 31, 2017?
a. 2,500,000 b. 2,600,000 c. 2,100,000 d. 2,000,000

23. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a purchases account
b. Inventory records are not kept for every item
c. Cost of goods sold is recorded each time a sale is made
d. Cost of goods sold is determined as the amount of purchases less the change in inventory

24. On December 31, 2017, a fire damaged the warehouse and factory of Katrina Company,
completely destroying the work in process inventory. There was no damage to either the raw
materials or finished goods. The physical inventory revealed the following:
January 1 December 31
Raw materials 1,700,000 2,000,000
Work in process 4,300,000 0
Finished goods 6,000,000 4,500,000

The gross profit margin historically approximated 30% of sales. The sales for the year amounted
to P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year
amounted to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
What was the inventory fire loss on December 31, 2017?
a. 3,500,000 b. 3,800,000 c. 2,500,000 d. 1,500,000

25. Forester Company has reclassified certain assets as biological assets. The total value of the forest
assets is P6,000,000 which comprises:

Freestanding trees 5,100,000

Land under trees 600,000
Roads in forests 300,000
6,000,000

In the statement of financial portion, what total amount of the forest assets should be classified as
biological assets?
a. 5,100,000 b. 5,700,000 c. 5,400,000 d. 6,000,000

26. Salve Company is engaged in raising dairy livestock. Information regarding its activities relating
to the dairy livestock is as follows:

Carrying amount on January 1, 2017 5,000,000

Increase due to purchases 2,000,000
Gain arising from change in fair value less cost of disposal attributable
to price change 400,000
Gain arising from change in fair value less cost of disposal attributable
 to physical change 600,000
Decrease due to sales 850,000
Decrease due to harvest 200,000

What is the carrying amount of the biological asset on December 31, 2017?
a. 6,950,000 b. 6,000,000 c. 8,000,000 d. 7,150,000

27. Which of the following is not classified as a financial instrument?

a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable

28. During 2017, Latvia company purchased trading securities with the following cost and market
value on December 31, 2017:

Security Cost Market value

A – 1,000 shares 200,000 300,000
B – 10,000 shares 1,700,000 1,600,000
C – 20,000 shares 3,100,000 2,900,000
5,000,000 4,800,000

The entity sold 10,000 shares of Security B on January 15, 2018, for P130 per share, incurring
P50,000 in brokerage commission and taxes. What amount should be reported as loss on sale of
trading investment in 2018?
a. 450,000 b. 400,000 c. 300,000 d. 350,000

29. Faith Company owned 300,000 shares of another entity’s 1,000,000 shares of P50 par, 10%
cumulative, nonparticipating preference share capital and 200,000 shares representing 5% of the
investee’s ordinary share capital. During 2017, the investee declared and paid preference
dividends of P8,000,000. No dividends had been declared or paid during 2016. In addition, the
entity received a 10% ordinary stock dividend from the investee when quoted market price of
ordinary share was P20. What amount should be reported as dividend income for 2017?
a. 2,400,000 b. 3,000,000 c. 2,800,000 d. 0

30. Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on
February 15, 2017. Cobb Company received a stock dividend of 2,000 shares on March 31, 2017,
when the carrying amount per share was P350 and the market value per share was P400. Roe
Company paid a cash dividend of P15 per share on September 15, 2017. In the income statement
for the year ended October 31, 2017, what amount should be reported as dividend income?
a. 980,000 b. 880,000 c. 180,000 d. 150,000

31. Which statement is correct about the effective interest method of amortization?
a. The effective-interest method applied to debt investments is different from that applied to
bonds payable
b. Amortization of discount decreases from period to period
c. Amortization of premium decreases from period to period
d. The effective interest method applies the effective interest rate to the beginning carrying
amount for each interest period.
32. On January 1, 2017, Millano Company purchased ten-year bonds with a face value of P1,000,000
and a stated interest rate of 8% per year payable semiannually July 1 and January 1. The bonds
were acquired to yield 10%. Present value factors are as follows:

Present value of 1 for 10 periods at 10% 0.386

Present value of 1 for 20 periods at 5% 0.377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462

What is the purchase price of the bonds?

a. 1,124,620 b. 1,100,000 c. 1,000,000 d. 875,380

33. Parvati Company owned 100% of another entity’s preference shares and 40% of ordinary shares.
The investee’s share capital outstanding on December 31, 2017 included P5,000,000 of 10%
cumulative preference shares and P10,000,000 of ordinary shares. The investee reported net
income of P6,000,000 for 2017. No dividend was declared for both preference and ordinary share
in 2017. What amount should be reported as investment income for 2017?
a. 5,500,000 b. 2,400,000 c. 2,200,000 d. 2,700,000

34. On January 1, 2017, Tan Company bought 15% of Parr Company’s ordinary shares outstanding
for P6,000,000. Tan appropriately accounted for this investment by the cost method. The investee
reported net income of P3,000,000 for 2017 and P9,000,000 for 2018. No dividend was paid in
2017 but the investee paid dividend of P15,000,000 in 2018. What amount of dividend income
should be reported in 2018?
a. 1,350,000 b. 2,250,000 c. 1,800,000 d. 450,000

35. Salazar Company and its subsidiaries own the following properties that are accounted for in
accordance with PAS 40:

Land held by Salazar for undetermined use 5,000,000

A vacant building owned by Salazar and to be leased out under an operating lease 3,000,000
Property held by a subsidiary of Salazar, a real estate firm, in the
ordinary course of business 2,000,000

Property held by Salazar for use in production 4,000,000

Building owned by a subsidiary of Salazar and for which the subsidiary provides
security and maintenance services to the lessees 1,500,000
Land leased by Salazar to a subsidiary under an operating lease 2,500,000
Property under construction for use as investment property 6,000,000
Land held for future factory site 3,500,000
Machinery leased out by Salazar to an unrelated party under an operating lease 1,000,000

What is the total investment property that should be reported in the consolidated statement of
financial position of the parent and its subsidiaries?
a. 12,000,000 b. 15,500,000 c. 10,500,000 d. 9,500,000

36. Godric Company owned a single investment property which had an original cost of P5,800,000
on January 1, 2015. On December 31, 2017, the fair value was P6,000,000 and on December 31,
2018, the fair value was P5,900,000. On acquisition, the property had a useful life of 40 years.
 What is the expense to be recognized in profit or loss for the year ended December 31, 2018
under the fair value model and cost model?
Fair value model Cost model Fair value model Cost model
a. 147,500 145,000 c. 145,000 100,000
b. 100,000 145,000 d. 100,000 147,500

37. Ponoma Company provided the following information related to a noncurrent investment placed
in trust as required by the underwriter of the bonds:
Bond sinking fund – January 1, 2017 450,000
2017 additional investment 90,000
Dividends on investment 15,000
Interest revenue 30,000
Administration costs 5,000
Carrying amount of bonds payable 1,025,000

What is the bond sinking fund on December 31, 2017?

a. 585,000 b. 580,000 c. 575,000 d. 540,000
38. On January 1, 2014, Peeves Company purchased P2,000,000 ordinary life policy on its president.
The entity reported the following data for 2017:
Cash surrender value, January 1 50,000
Cash surrender value, December 31 60,000
Annual advance premium paid on January 1 100,000
Dividend received on July 1 5,000

The entity is the beneficiary under the life insurance policy. What amount should be reported as
life insurance expense for 2017?
a. 100,000 b. 95,000 c. 85,000 d. 90,000

39. All of the following statements regarding accounting for derivatives are correct, except
a. The derivatives should be recognized as assets and liabilities
b. The derivatives should be reported at fair value
c. Gains and losses resulting from speculation should be deferred
d. Gains and losses resulting from the hedge transactions are reported in different ways,
depending upon the type of hedge

40. On January 1, 2017, Nott Company received a four-year P5,000,000 loan with interest payments
occurring at the end of each year and the principal to be repaid on December 31, 2020. The
interest for 2017 is the prevailing market rate of 10% on January 1, 2017, and the market interest
rate every January 1 resets the variable rate of interest for that year. The “underlying” fixed
interest rate is 10%. In conjunction with the loan, the entity entered into a “receive variable, pay
fixed” interest rate swap agreement as cash flow hedge. The interest swap payment will be made
on December 31 of each year. The market rate of interest is 6% on January 1, 2018. The PV of an
ordinary annuity of 1 at 6% for three periods is 2.67 and the PV of 1 at 6% is 0.84 for three
periods. What is the derivative asset or liability on December 31, 2017?
a. 600,000 asset b. 600,000 liability c. 534,000 asset d. 534,000 liability

41. On December 31, 2017, Bart Company purchased a machine in exchange for a noninterest
bearing note requiring eight payments of P200,000. The first payment was made on December
 31, 2017, and the others are due annually on December 31. At date of issuance, the prevailing rate
of interest for this type of note was 11%. Round off present value factors to three decimal places.
What amount should be recorded as initial cost of the machine?
a. 1,600,000 b. 1,029,200 c. 1,400,000 d. 1,142,400

42. At the beginning of the current year, Winn Company traded in an old machine having a carrying
amount of P1,680,000 and paid a cash difference of P600,000 for a new machine having a cash
price of P2,050,000. What amount of loss should be recognized on the exchange?
a. 600,000 b. 230,000 c. 270,000 d.0

43. Betty Company purchased a jewel polishing machine for P3,600,000 on January 1, 2017 and
received a government grant of P500,000 toward the capital cost. The accounting policy is to treat
the grant as a reduction in the cost of the asset. The machine is to be depreciated on a straight line
basis over 8 years and estimated to have a residual value of P50,000 at the end of this period.
What is the depreciation of the machine for 2017?
a. 387,500 b. 762,500 c. 443,750 d. 381,250

44. Zephyr Company is provided a grant by a foreign government for the purpose of acquiring land
for a building site. The grant is a zero-interest loan for 5 years evidenced by a promissory note.
The loan was granted on January 1, 2017 for P8,000,000. The market rate of interest is 6%.
Round off present value factors to four decimal places. What is the carrying amount of the note
payable on December 31, 2018?
a. 8,000,000 b. 6,337,104 c. 6,717,330 d. 6,787,040

45. On January 1, 2017, Cagayan Company took out a loan of P24,000,000 in order to finance
specifically the renovation of a building. The renovation work started on the same date. The loan
carried annual interest at 10%. Work on the building was substantially complete on October 31,
2017. The loan was repaid on December 31, 2017 and P200,000 investment income was earned in
the period to October 31 on those parts of the loan not yet used for the renovation. What is the
amount of borrowing cost to be included in the cost of the building?
a. 2,400,000 b. 2,200,000 c. 2,000,000 d. 1,800,000

46. On January 1, 2017, Gemini Company contracted with a contractor to construct a building for
P20,000,000. Gemini is required to make five payments in 2017 with the last payment scheduled
on the date of completion. The building was completed on December 31, 2017. The entity made
the following payments during 2017:

January 1 2,000,000
March 31 4,000,000
June 30 6,100,000
September 30 4,400,000
December 31 3,500,000
20,000,000

The entity had the following debt outstanding on December 31, 2017:
- 12% 4-year note dated 1/1/2017, with interest compounded quarterly,
both principal and interest due 12/31/2020, relating specifically to the
building project 8,500,000
- 10% 10-year note dated 12/31/2013 with simple interest and interest
 payable annually on December 31 6,000,000
- 12% 5-year note dated 12/31/2014 with simple interest and interest
payable annually on December 31 7,000,000

What total amount of interest should be capitalized as cost of the building on December 31,
2017? (Round off rates to two decimal points)
a. 1,066,750 b. 1,138,770 c. 2,506,750 d. 1,092,020

47. Rolex Company, a newly formed entity, incurred the following expenditures related to land and
building:

Cash paid for land and dilapidated building 1,000,000

Removal of old building 50,000
Payment to tenants for vacating old building 15,000
Architect fee for new building 200,000
Building permit for new construction 30,000
Fee for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by city for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Driveways and walks to new building from street (part of building plan) 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building more energy efficient 50,000
Cost of windows broken by vandals 25,000
Cost of trees, shrubs and other landscaping 70,000
New fence surrounding the building 200,000

What is the cost of land improvement? (Use the old interpretation)

a. 270,000 b. 200,000 c. 310,000 d. 240,000

48. On December 31, 2017, the property, plant and equipment of Pearl Company included the
following:
Plant assets acquired from Zee Company 7,500,000
Repairs made on building prior to occupancy 200,000
Special tax assessment 30,000
Construction of platform for machinery 70,000
Remodeling of office space in building including new partitions and walls 400,000
Purchase of new machinery 800,000
Total property, plant and equipment 9,000,000
 In exchange for the plant assets of Zee Company, Pearl Company issued 50,000 shares with P100
par value. On the date of purchase, the share had a quoted price of P150 and the plant assets had
the following fair value:
Land 500,000
Building 4,000,000
Machinery 1,500,000
What is the total property, plant, and equipment?
a. 9,000,000 b. 7,500,000 c. 6,500,000 d. 6,000,000

49. Turtle Company purchased equipment on January 1,2015 for P5,000,000. The equipment had an
estimated 5-year service life. The depreciation policy for 5-year assets is to use the 200% double
declining balance method for the first two years and then switch to the straight line depreciation
method. In the December 31, 2017 statement of financial position, what amount should be
reported as accumulated depreciation for the equipment?
a. 3,000,000 b. 3,800,000 c. 3,920,000 d. 4,200,000

50. On January 1, 2017, London Company purchased a large quantity of personal computers. The
cost of these computers was P6,000,000. On the date of purchase, the management estimated that
the computers would last approximately 4 years and would have a residual value at that time of
P600,000. The entity used the double declining balance method. During January 2018, the
management realized that technological advancements had made the computers virtually obsolete
and that they would have to be replaced. Management proposed changing the remaining useful
life of the computers to 2 years. What is the depreciation expense for 2018?
a. 3,000,000 b. 2,400,000 c. 1,500,000 d. 1,200,000

51. In 2017, Lara Company purchased property with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the entity is required to restore the property to its
original condition at a discounted amount of P2,000,000. In 2017, the entity spent P1,000,000 in
development cost and P3,000,000 in building. In 2018, an amount of P4,000,000 was spent for
additional development on the time

Production began in 2018 and the tons extracted totaled 3,000,000 in 2018 and 2,500,000 in 2019.
The tons remaining totaled 7,000,000 and 3,500,000, respectively on December 31, 2018 and
December 31, 2019. What amount of depletion should be recognized in 2019?
a. 10,500,000 b. 12,250,000 c. 9,000,000 d. 8,750,000

52. In 2015, Newton Company paid P1,000,000 to purchase land containing total estimated 160,000
tons of extractable mineral deposits. The estimated value of the property after the mineral has
been removed is P200,000. Extraction activities began in 2016, and by the end of the year, 20,000
tons had been removed and sold. In 2017, geological studies indicated that the total amount of
mineral deposits had been underestimated by 25,000 tons. During 2017, 30,000 tons were
extracted and 28,000 tons were sold. What is the depletion rate per ton in 2017?
a. 4.24 b. 4.32 c. 4.85 d. 5.19

53. On January 1, 2012, Raven Company acquired a building at cost of P5,000,000. The building has
been depreciated on the basis of a 20-year life. On January 1, 2017, an appraisal of the building
showed its replacement cost at P8,000,000 with no change in useful life. What is the revaluation
surplus that should be reported in the December 31, 2017 statement of financial position?
a. 2,100,000 b. 2,250,000 c. 1,850,000 d. 2,800,000
54. London Company owned a building on January 1, 2017 with historical cost of P40,000,000. The
property is depreciated over 40 years on a straight line basis with no residual value. The entity
adopted a policy of revaluation of property. The building has so far been revalued twice at fair
value as follows:

January 1, 2018 46,800,000

January 1, 2020 55,500,000

What is the increase in revaluation surplus to be recognized as component of other

comprehensive income on January 1, 2020?
a. 15,500,000 b. 11,100,000 c. 8,700,000 d. 9,900,000

55. Scarbrough Company had purchased equipment for P2,800,000 on January 1, 2014. The
equipment had an 8-year life and residual value of P400,000. The entity depreciated the
equipment using the straight line method. In August 2017, the entity questioned the recoverability
of the carrying amount of this equipment. On August 31, 2017, the undiscounted expected net
future cash inflows related to the continued use and eventual disposal of the equipment amounted
to P1,600,000. The equipment’s fair value on August 31, 2017 is P1,500,000. After any loss on
impairment has been recognized, what is the carrying amount of the equipment?
a. 1,600,000 b. 1,700,000 c. 1,500,000 d. 1,300,000

56. On January 1, 2013, Walton Company purchased a machine for P2,000,000 and established an
annual straight line depreciation rate of 10%, with no residual value. During 2017, the entity
determined that the machine will not be economically useful in production process after
December 31, 2017. The entity estimated that the machine had no residual value on December 31,
2017 and would be disposed of in early 2018 at a cost of P50,000. In the income statement for the
year ended December 31, 2017, what amount of impairment loss should be reported for the
machine?
a. 1,250,000 b. 1,000,000 c. 1,050,000 d. 50,000

57. Entities should evaluate indefinite life intangible assets at least annually for
a. Recoverability
b. Amortization
c. Impairment
d. Estimated useful life

58. Zamboanga Company acquired three patents in January 2013.

Cost Remaining useful life Remaining legal life

Patent X 1,200,000 10 8
Patent Y 2,000,000 5 10
Patent Z 3,000,000 6 15

In June 2017, the entity successfully defended its right to Patent Y and incurred legal fees of
P450,000. What total amount of amortization should be recognized for 2017?
 a. 1,050,000 b. 1,100,000 c. 1,095,000 d. 1,020,000

59. Which of the following is not one of the criteria which must be met before development costs can
be capitalized?
a. The entity has sufficient financial resources to complete the project
b. The entity intends to complete the project and either use or sell the intangible asset
c. The entity can reliably identify the research costs incurred to bring the project to economic
feasibility
d. The project has achieved technical feasibility

60. Brill Company made the following expenditures during the year:
Costs to develop computer software for internal use in
Brill’s general management information system 1,000,000
Cost of market research activities 750,000
What is the research and development expense?
a. 1,750,000 b. 1,000,000 c. 750,000 d. 0

61. During 2016, Ron Company introduced a new product carrying a two-year warranty against
defects. The estimated warranty costs related to peso sales are 4% within 12 months following
sale and 6% in the second 12 months following sale

Sales Actual expenditures

2016 5,000,000 150,000

2017 6,000,000 550,000
On December 31, 2017, what amount should be reported as estimated warranty liability?
a. 360,000 b. 400,000 c. 240,000 d. 50,000

62. Marie Hotel collects 15% in city sales taxes on room rentals, in addition to a P200 per room, per
night, occupancy tax. Sales taxes for each month are due at the end of the following month, and
occupancy taxes are due fifteen days after the end of each calendar quarter. On January 3, 2017,
the entity paid the November 2016 sales taxes and the fourth quarter 2016 occupancy taxes.
Additional information for the fourth quarter of 2016 is as follows:

Room rentals Room nights

October 1,000,000 1,100

November 1,100,000 1,200
December 1,500,000 1,800

What amount should be reported respectively as sales taxes payable and occupancy taxes payable
on December 31, 2016?
a. 390,000 and 600,000 c. 540,000 and 600,000
b. 390,000 and 820,000 d. 540,000 and 820,000

63. During the current year, Beholden Company issued 3,000 of 9% P1,000 face value bonds at 102.
In connection with the sale of the bonds, the entity paid the following costs:
 Promotion cost 20,000
Engraving and printing cost 25,000
Underwriters’ commission 200,000
Legal fees 100,000
Fees paid to accountants for registration 55,000

What total amount should be recorded as bond issue costs to be amortized over the term of the
bonds?
a. 400,000 c. 300,000
b. 380,000 d. 0

64. On January 1, 2017, Arlene Company issued convertible bonds with a face value of P5,000,000
for P6,000,000. The bonds have a 5-year life with 10% stated interest rate payable annually every
December 31. The fair value of the convertible bonds without conversion option is computed at
P5,399,300 on January 1, 2017. On December 31, 2019, the convertible bonds were not converted
but fully paid for P5,500,000. On such date, the fair value of the bonds without conversion
privilege is P5,400,000 and the carrying amount is P5,178,300. What is the loss on the
extinguishment of the convertible bonds on December 31, 2019?
a. 221,700 c. 150,000
b. 371,700 d. 0

65. If the sale and leaseback transaction results in an operating lease and the sale price is below fair
value that is compensated by future rental at below market value, any indicated loss on sale is
a. Recognized immediately in profit or loss
b. Recognized in other comprehensive income
c. Deferred and amortized in proportion to the lease payments over the period for which the asset
is expected to be used
d. Not recognized

66. On January 1, 2017, Hooks Oil Company sold equipment with a carrying amount of P1,000,000
and a remaining useful life of 10 years to Maco Drilling for P1,500,000. Hooks immediately
leased the equipment back under a 10-year finance lease with a present value of P1,500,000 and
will depreciate the equipment using the straight line method. Hooks made the first annual lease
payment of P244,120 on December 31, 2017. The implicit interest rate in the lease is 10%. In
Hooks’ December 31, 2017 statement of financial position, what amount should be reported as
unearned gain on equipment sale?
a. 500,000 b. 450,000 c. 255,880 d. 0

67. One of the four determinative criteria for a finance lease specifies that the lease term be equal to
or greater than
a. The estimated economic life of the property
b. 90% of the estimated economic life of the property
c. 75% of the estimated economic life of the property
d. 50% of the estimated economic life of the property

68. Casanova Company leased a warehouse with adjoining land for a period of 15 years. The fair
values of the leasehold interests in the land and the warehouse are P5,000,000 and P2,500,000
respectively. The land has an indefinite economic life whereas the warehouse has a useful life of
 15 years. Title to the land is not expected to pass at the end of the lease. At what amount should
the asset in relation to finance lease be recognized in the financial statements of the lessee?
a. 7,500,000 b. 5,000,000 c. 2,500,000 d. 0

69. The sales revenue recognized at the commencement of the lease by a manufacturer or dealer
lessor is the
a. Fair value of the asset
b. Present value of the minimum lease payments
c. Fair value of the asset or present value of the minimum lease payments, whichever is lower
d. Fair value of the asset or present value of the minimum lease payments, whichever is higher

70. Lyle Company entered into a finance lease on January 1, 2017. A third party guaranteed the
residual value of the asset under the lease estimated to be P120,000 on January 1, 2022, the end
of the lease term. Annual lease payments are P100,000 due each December 31, beginning
December 31, 2017. The last payment is due December 31, 2021. Both the lessor and lessee used
10% as the interest rate. The remaining useful life of the asset was six years at the
commencement of the lease.

The PV of 1 at 10% for 5 periods is .62, and the PV of an ordinary annuity of 1 at 10% for 5
periods is 3.79. What is the lease receivable of the lessor and lease liability of the lessee at the
commencement of the lease?
Lease receivable Lease Liability
a. 453,400 453,400
b. 379,000 379,000
c. 453,400 379,000
d. 379,000 453,400

71. Fastidious Company offered a contest in which the winner would receive P1,000,000, payable
over twenty years. On December 31, 2017, the entity announced the winner of the contest and
signed a note payable to the winner for P1,000,000, payable in P50,000 installments every
January 1. Also on December 31, 2017, the entity purchased an annuity for P418,250 to provide
the P950,000 prize remaining after the first P50,000 installment, which was paid on January 1,
2018. On December 31, 2017, what amount should be reported as note payable, net of current
portion?
a. 368,250 b. 418,250 c. 900,000 d. 950,000

72. Hull Company is indebted to Apex under a P5,000,000, 12%, three-year note dated December 31,
2015. Because of Hull’s financial difficulties developing in 2017, Hull owed accrued interest of
P600,000 on the note on December 31, 2017. Under a debt restructuring on December 31, 2017,
Apex agreed to settle the note and accrued interest for a tract of land having a fair value of
P4,500,000. Hull’s carrying amount of the land is P3,600,000. Ignoring income tax, what amount
of gain on extinguishment should Hull report as component of income from continuing operations
in 2017?
a. 2,000,000 b. 1,400,000 c. 1,100,000 d. 900,000

73. In computing the change in deferred tax asset or liability, which of the following tax rate is used?
a. Current tax rate c. Enacted future tax rate
b. Estimated future tax rate d. Past years’ tax rate

74. Reylisa Company, organized on January 1, 2017, had pretax accounting income of P500,000 and
taxable income of P800,000 for the year ended December 31, 2017. The only temporary
 difference is accrued product warranty costs that are expected to be paid in 2018 P100,000, 2018
P50,000, 2020 P50,000 and 2021 P100,000. The entity has never had any net operating losses and
does not expect any in the future. The enacted income tax rates are 35% for 2014, 30% for 2018
through 2020, and 25% for 2021. On December 31, 2017, what amount should be reported as
deferred tax asset?
a. 105,000 b. 70,000 c. 85,000 d. 60,000

75. The return on plan assets

a. Is equal to the change in the fair value of the plan assets during the year
b. Includes interest, dividends and changes in the fair value of the fund assets
c. Is equal to the expected rate of return times the beginning fair value of the plan assets
d. All of these

76. Silay Company has established a defined benefit pension plan for the employees. Annual
payments under the pension plan are equal to 3% of an employee’s highest lifetime salary
multiplied by the number of years with the entity. An employee’s salary in 2017 was P500,000.
The employee is expected to retire in 10 years, and the salary increases are expected to average
4% per year during that period. On December 31, 2017, the employee has worked for 15 years.
The future value of 1 at 4% for 10 periods is 1.48. What is the annual pension payment that
should be used in computing the projected benefit obligation on December 31, 2017?
a. 555,000 b. 375,000 c. 333,000 d. 225,000

77. The entry to record the issuance of share capital for fully paid share subscriptions is
a. A memorandum entry
b. Debit: Share capital subscribed; Credit: Share premium
c. Debit: Share capital subscribed; Credit: Subscription receivable
d. Debit: Share capital subscribed; Credit: Share Capital

78. During 2017, Brad Company issued 5,000 convertible preference shares of P100 par value for
P110 per share. One preference share can be converted into three ordinary shares of P25 par value
at the option of the preference shareholder. On December 31, 2017, when the market value of the
ordinary share was P40, all of the preference shares were converted. What amount should be
credited to ordinary share capital and share premium as a result of the conversion, respectively?
a. 375,000 and 175,000 c. 500,000 and 50,000
b. 375,000 and 225,000 d. 600,000 and 0

79. Many shares and most share options are not traded in an active market. Therefore, it is often
difficult to arrive at a fair value of the equity instrument being issued. Which of the following
option valuation techniques should not be used as a measure of fair value in the first instance?
a. Black-Scholes Model
b. Binomial Model
c. Monte-Carlo Model
d. Intrinsic Value

80. On June 30, 2017, Newman Company granted compensatory share options for 30,000 P20 par
value ordinary shares to certain key employees. The market price of the share on that date was
P36 and the option price was P30. The Black-Scholes option pricing model measured the total
compensation expense to be P5,400,000. The options are exercisable beginning January 1, 2020,
provided the key employees are still in entity’s employ at the time the options are exercised. The
 options expire on June 30, 2021. On January 15, 2020, when the market price of the share was
P42, all 30,000 options were exercised. What is the compensation expense for 2019?
a. 2,160,000 b. 2,700,000 c. 5,400,000 d. 0

81. Which of the following is not a legal restriction related to profit distribution?
a. The amount distributed must be in compliance with the laws governing corporations
b. The amount distributed can never exceed the net income reported for the year
c. Profit distribution must be formally approved by the board of directors
d. Dividends must be in full agreement with the capital contracts as to preferences and
participation

82. At the beginning of the current year, Flash Company had retained earnings of P4,000,000. During
the year, the entity reported net income of P2,000,000, sold treasury shares at a “gain” of
P720,000, declared a cash dividend of P1,200,000, and declared and issued a small share
dividend of 60,000 shares with P10 par value when the fair value of the share was P20. What is
the amount of retained earnings available for dividends at the end of the current year?
a. 3,600,000 b. 4,200,000 c. 4,320,000 d. 4,920,000

83. Baker Company had 5,000 ordinary shares of P500 par value outstanding and 500 preference
shares of P1,000 par value outstanding. The current market price of the ordinary share is P1,200
and total equity amounts to P3,600,000. The preference shareholders have a liquidation
preference of P1,400 per share and no dividends are in arrears. What is the book value per
ordinary share?
a. 510 b. 520 c. 580 d. 818

84. Wendy Company had outstanding 300,000 ordinary shares of P20 par and 60,000 preference
shares no-par 8% with a stated value of P50. The preference shares are cumulative and
nonparticipating. Dividends have been paid in every year except the past two years and the
current year. The entity paid dividend of P500,000 in the current year. What is the dividend
payable to the preference shareholders in the current year?
a. 500,000 b. 480,000 c. 240,000 d. 720,000

85. In computing Diluted EPS, Dividends on Convertible Cumulative Preference Shares shall be
a. Ignored
b. Deducted from Net Income, whether declared or not
c. Deducted from Net Income, only when declared
d. Added to Net Income, net of tax

86. On January 1, 2017, Kate Company had 500,000 ordinary shares outstanding. On October 1,
2017, an additional 100,000 ordinary shares were issued. In addition, the entity had P20,000,000
of 6% convertible bonds outstanding on January 1, 2017 which are convertible into 225,000
ordinary shares. No bonds were converted in 2017. The net income for 2017 was P6,000,000. The
income tax rate was 30%. What amount should be reported as diluted earnings per share?
a. 10.00 b. 9.60 c. 9.12 d. 8.00

87. An entity shall measure a noncurrent asset or disposal group classified as held for sale at
a. Carrying amount
b. Fair value less cost of disposal
c. Lower of carrying amount and fair value less cost of disposal
d. Higher of carrying amount and fair value less cost of disposal
88. Vincent Company accounted for noncurrent assets using the revaluation model. On October 1,
2017, the entity classified a land as held for sale. At that time, the carrying amount of the land
was P5,000,000 and the balance in the revaluation surplus was P1,500,000. At same date, the fair
value of the land was estimated at P5,500,000 and the cost of disposal at P100,000. The land was
sold on January 31, 2018 for P6,000,000. What amount should be reported as gain on disposal of
land in 2018?
a. 1,000,000 b. 2,600,000 c. 500,000 d. 600,000

89. Which is true concerning the 75% overall size test for operating segments?
a. The total external and internal revenue of all reportable segments is 75% or more of the
entity’s external revenue
b. The total external revenue of all reportable segments is 75% or more of the entity’s external
and internal revenue
c. The total external revenue of all reportable segments is 75% or more of the entity’s external
revenue
d. The total internal revenue of all reportable segments is 75% or more of the entity’s internal
revenue

90. The financial statements of Stella Company were authorized for issue on March 31, 2018 and the
end of the reporting period is December 31, 2017.

On December 31, 2017, the entity had an account receivable of P3,000,000 from a customer. On
February 1, 2018, the liquidator of the said customer advised the entity in writing that the
customer was insolvent and that only P1,000,000 would be paid on December 31, 2018. The
entity had reported a contingent liability on December 31, 2017 related to a court case. On March
1, 2018, the judge handed down a decision against the entity for damages amounting to
P2,500,000. What total amount should be reported as “adjusting events” on December 31, 2017?
a. 4,500,000 b. 2,500,000 c. 5,500,000 d. 2,000,000

91. Total net income over the life of an entity is

a. Higher under the cash basis than under the accrual basis
b. Lower under the cash basis than under the accrual basis
c. The same under the cash basis as under the accrual basis
d. Not susceptible to measurement

92. Splendid Company reported the following balances for the current year:

December 31 January 1
Inventory 2,600,000 2,900,000
Accounts payable 750,000 500,000

The entity paid suppliers P4,900,000 during the current year. Under accrual basis, what amount
should be reported as cost of goods sold for the current year?
a. 5,450,000 b. 4,950,000 c. 4,850,000 d. 4,350,000

93. Querulous Company reported shareholders’ equity of P8,000,000 on December 31, 2017. Equity
transactions during the year were:
 An adjustment of retained earnings for 2016 overdepreciation 200,000
Gain on sale of treasury shares 500,000
Dividend declared, of which P400,000 was paid 1,400,000
Net income for 2017 2,000,000
The share capital balance of P5,000,000 remained unchanged during the year. What is the balance
of retained earnings on January 1, 2017?
a. 2,200,000 b. 1,700,000 c. 2,100,000 d. 2,600,000

94. Rudimentary Company reported beginning and ending total liabilities of P4,200,000 and
P5,000,000, respectively. At year-end, shareholders’ equity was P13,000,000 and the amount of
total assets was P1,000,000 larger than at the beginning of the year. During the year, the proceeds
from the issuance of new shares exceeded dividends paid by P2,200,000. What is the net income
or loss for the current year?
a. 2,000,000 loss b. 2,000,000 income c. 2,400,000 income d. 2,400,000 loss
95. Which of the following is a counter-balancing error?
a. Understated depletion expense
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expense

96. On December 31, 2017, Utmost Company sold merchandise for P3,000,000. The terms of the sale
were net 30, FOB shipping point. The merchandise was shipped on December 31, 2017, and
arrived on January 5, 2018. Due to a clerical error, the sale was not recorded until January 2018
and the merchandise sold at a 25% mark up on cost was included in the inventory on December
31, 2017. What is the effect on the cost of goods sold for 2017?
a. Understated by P3,000,000 c. Understated by P2,400,000
b. Overstated by P3,000,000 d. Overstated by P2,400,000

97. In a hyperinflationary economy, monetary items

a. Are not restated because they are already expressed in terms of the measuring unit
current at the end of the reporting period
b. Are not restated because they do not represent money held and items to be received or paid in
money
c. Are restated applying the General Price Index
d. Are restated applying the Specific Price Index

98. Could current cost financial statements report holding gains for which of the following?
a. Goods sold during the year
b. Inventory at year-end
c. Both goods sold during the period and inventory at year-end
d. Neither goods sold during the period nor inventory at year-end

99. Which classification of the cash flow arising from the disposal proceeds of a major item of plant
would be most appropriate?
a. Cash flows from operating activities c. Cash flows from financing activities
 b. Cash flows from investing activities d. Does not appear in the statement of cash flows

100. Zany Company provided the following data for the current year:

Dividend received 500,000

Dividend paid 1,000,000
Cash received from customers 9,000,000
Cash paid to suppliers and employees 6,000,000
Interest received 200,000
Interest paid on long-term debts 400,000
Proceeds from issuing share capital 1,500,000
Proceeds from sale of long-term investments 2,000,000
Income taxes paid 300,000
What is the net cash provided by operating activities?
a. 3,300,000 b. 3,000,000 c. 2,500,000 d. 5,500,000

“Intelligence plus character – that is the goal of true education”

Martin Luther King Jr.

Prepared by:

FELIX GEORGE S. LAGGUI, CPA, MBA