FAR 1 Reviewer (Answers)

1.) Young Company holds the following assets at year-end and classifies as cash equivalents
everything allowed by professional standards.

Treasury bills acquired with less than 3 months before maturity P1,500,000
Treasury bills acquired with greater than 3 months before maturity 2,000,000
Commercial papers 1,200,000
Investment in marketable equity securities 1,000,000

What would be the total cash equivalents at year-end for Young Company?
A. P1,500,000
B. P4,700,000
C. P2,700,000
D. P3,700,000

2.) The cash account in the ledger of K Company shows a balance of P1,652,000 at December
31. The bank statement, however, shows a balance of P2,090,000 at the same date. The only
reconciling items consist of bank service charge of P2,000, a large number of outstanding
checks totaling P590,000 and a deposit in transit.

What is the deposit in transit in the December 31 bank reconciliation?

A. 150,000 C. 154,000
B. 440,000 D. 592,000

3.) In the December 31, 2010 statement of financial position of MM Company, the current
receivables consisted of the following:

Trade accounts receivable P 930,000

Allowance for uncollectible accounts ( 20,000)
Claim against shipper for goods lost in transit(November 2010) 30,000
Selling price of unsold goods sent by MM on consignment at 130% of cost
(not included in MM’s ending inventory) 260,000
Security deposit on lease of warehouse used for storing some inventories 300,000
Total P1,500,000

At December 31, 2010, the correct total of current net receivables was
A. 940,000 C. 1,240,000
B. 1,200,000 D. 1,500,000
4.) Rain Company accepted from a customer a P4,000,000, 90-day, 12% interest-bearing note
dated August 31, 2010. On September 30, 2010, Rain discounted the note with recourse at
the AA State Bank at 15%. However, the proceeds were not received until October 1, 2010.

The discounting with recourse is accounted for as a conditional sale with recognition of a
contingent liability.

What is the loss on note receivable discounting?

A. 40,000 C. 17,000
B. 23,000 D. 20,000

Calasiao Company is a dealer in equipment. On December 31,2009, Calasiao Company sold an

equipment in exchange for a noninterest bearing note requiring five annual payments of P500,000. The
first payment was made December 31, 2010. The market interest for similar notes was 8%. The
relevant present value factors are:

PV of 1 @ 8% for 5 periods .68

PV of an ordinary annuity of 1 @ 8% for 5 years 3.99

5.) In its December 31,2009 statement of financial position, what should Calasiao report as
notes
receivable?
A. 2,500,000 C. 1,700,000
B. 1,995,000 D. 1,495,000

6.) What interest income should be reported for 2010?

A. 505,000 C. 159,600
B. 101,000 D. 119,600

7.) In 2008, a company changed from the LIFO method of accounting for inventory to FIFO.
The company’s 2007 and 2008 comparative financial statements will reflect which method
or methods?

2007 2008
a. LIFO LIFO
b. FIFO FIFO
c. LIFO FIFO

8.) The balance in Rey Company’s accounts payable at December 31, 2010 was P4,900,000
before
the following information was considered:
  Goods shipped FOB destination on December 21, 2010 from a vendor to Rey were
lost in transit. The invoice cost of P180,000 was not recorded by Rey. On December
28, 2010, Rey notified the vendor of the lost shipment.
 Goods were in transit from a vendor to Rey on December 31, 2010. The invoice cost
was P240,000 and the goods were shipped FOB shipping point on December 28,
2010. Rey received the goods on January 6, 2011.

What amount should Rey report as accounts payable in its December 31, 2010 statement of
financial position?
A. P5,320,000 C. P5,080,000
B. P5,140,000 D. P4,900,000

9.) Green Company’s accounts payable at December 31, 2010, totaled P4,500,000 before any
necessary year-end adjustments relating to the following transactions:

 On December 27, 2010, Green wrote and recorded checks to creditors totaling
P2,000,000 causing an overdraft of P500,000 in Green’s bank account at December
31, 2010. The checks were mailed on January 10,2011.

 On December 28, 2010, Green purchased and received goods for P750,000, terms
2/10, n/30. Green records purchases and accounts payable at net amount. The invoice
was recorded and paid January 3, 2011.

 Goods shipped FOB destination on December 20, 2010 from a vendor to Green were
received January 2, 2011. The invoice cost was P325,000.

At December 31, 2010, what amount should Green report as accounts payable?
A. P7,575,000 C. P7,235,000
B. P7,250,000 D. P7,553,500

10.) Liane Company is preparing its financial statements for the year ended December 31,
2010.
Accounts payable amounted to P3,600,00 before any necessary year-end adjustment related to
the following:

 At December 31, 2010, Liane has a P500,000 debit balance in its accounts payable to
Rose, a supplier, resulting from a P500,000 advance payment for goods to be
manufactured to Liane’s specifications.

 Checks in the amount of P1,000,000 were written to vendors and recorded on

December 29, 2010. The checks were mailed on January 5, 2011.

What amount should Liane report as accounts payable in its December 31, 2010
statement of
financial position?
A. P5,100,000 C. P3,100,000
 B. P4,100,000 D. P2,100,000

11.) Kim Company’s accounts payable balance at December 31, 2010, was P2,200,000 before
considering the following data:

 Goods shipped to Kim FOB shipping point on December 22, 2010, were lost in
transit. The invoice cost of P40,000 was not recorded by Kim. On January 27, 2011,
Kim filed a P40,000 claim against the common carrier.

 On December 27, 2010, a vendor authorized Kim to return, for full credit, goods
shipped and billed at P70,000 on December 3, 2010. The returned goods were
shipped by Kim on December 28, 2010. A P70,000 credit memo was received and
recorded by Kim on January 5, 2011.

What amount should Kim report as accounts payable in its December 3, 2011 statement of
financial position?
A. P2,170,000 C. P2,230,000
B. P2,180,000 D. P2,280,000

12.) On January 1, 2009, ABC Company purchased marketable equity securities to be held as
“trading” for P5,000,000. The entity also paid commission, taxes and other transaction costs
amounting to P200,000. The securities had a market value of P5,500,000 on December 31,
2009.

No securities were sold during 2009.

What amount of unrealized gain or loss on these securities should be reported in the 2009 income
statement?
A. 500,000 unrealized gain C. 300,000 unrealized gain
B. 500,000 unrealized loss D. 300,000 unrealized loss

13.) On January 2, 2008, Handsome Company acquired an investment property and the initial
cost of
investment property was P5,000,000. On the date of acquisition, the company chooses the cost
model to account for its investment. As of December 31, 2009, it has a carrying value of
P4,900,000 and a fair value of P5,100,000. On December 31, 2010, the company decided to
transfer the investment property to owner occupied property. On this date of transfer, the fair
value of property is P5,000,000 while its carrying value was P4,800,000.

What amount of gain or loss on transfer should the company recognize on December 31,
2010?
A. No gain or loss C. P200,000 loss
B. P100,000 loss D. P300,000 loss

On January 2, 2010, Wishco Company converted its occupied property to investment property
 that is to be carried at fair value. The carrying value of the property in the company’s
books is
P4,000,000.

14.) Assuming the fair value of the property on the date of transfer or conversion is
P3,800,000, Wishco Company should recognize
A. An impairment loss of P200,000 in the income statement.
B. A P200,000 deferred loss as an asset
C. A P200,000 unrealized loss in the shareholders’ equity
D. A P4,000,000 cost of the investment property

15.) Base on the above, assuming the fair value of the property on the date of transfer or
conversion is
P4,400,000, Hope Company should recognize
A. A P400,000 unrealized gain in the income statement
B. A P400,000 revaluation surplus in the shareholders’ equity
C. A P400,000 unrealized gain in the liability section
D. A P400,000 direct credit to accumulated profits and losses

16.) On January 2, 2009, Joy Corporation acquired a track of land that is to be sold in the
ordinary
conduct of business. The purchase price of the property of P50,000,000 was paid in cash and a
total transaction costs of P500,000 related to the acquisition of the property was also paid at a
later date. The land was subdivided into 2,000 lots (200 square meters for every lot) for an
additional cost of P5,500,000. On December 31, 2009, the market value of the lot was P1,500 per
square meter.

As of December 31, 2010, only 20,000 square meters are still unsold and market value of the lot
had increased to P1,600 per square meter. On this date, Joy decided to transfer the remaining lots
into investment property that is to be carried under the fair value model. There was no additional
cost incurred on the change of intention on the property.

What amount of gain should Joy Corporation recognize as a result of the transfer?
A. P29,200,000 C. P29,475,000
B. P29,225,000 D. P29,500,000

17.) Paperdoll Company owns 20,000 shares of Sanrio Company’s 200,000 shares of P100
par, 6%
cumulative, non-participating preference share capital and 10,000 shares representing 2 %
ownership of Sanrio’s ordinary share capital. During 2010, Sanrio declared and paid preference
dividends of P2,400,000. No dividends had been declared or paid during 2009.

In addition, Paperdoll received a 5% stock dividend on ordinary share from Sanrio’s ordinary
share was P10.
What amount should Paperdoll report as dividend income in its 2010 income statement?
A. P120,000 C. P240,000
B. P125,000 D. P245,000

.
18.) On March 1, 2010, Rose Company purchased 10,000 ordinary shares of Cherry Company
at P80
per share. On September 30, 2010, Rose received 10,000 stock rights to purchase an
additional
10,000 shares at P90 per share. The stock rights had an expiration date of February 1,
2011. On
September 30, 2010, Cherry’s share had a market value ex-right of P95 and the stock
right had a
market value of P5.

What amount should Rose report in its September 30, 2010 statement of financial position for
investment in stock rights?
A. P 40,000 C. P100,000
B. P50,000 D. P150,000

19.) During 2009, Mayon Company bought the shares of Lava Company as follows:

June 1 20,000 shares @ P100 P2,000,000

December 1 30,000 shares @ P120 3,600,000
P5,600,000

The transactions for 2010 are:

January 10 Received cash dividend at P10 per share.
January 20 Received 20% stock dividend.
December 10 Sold 30,000 shares at P125 per share.

The gain on sale of the shares assuming the FIFO approach is

A. P1,150,000 C. P150,000
B. P 950,000 D. P550,000

20.) May Company owns 20,000 shares of April Company’s 200,000 shares of P100 par, 6%
cumulative, non-participating preference share capital and 10,000 shares representing 2%
ownership of April’s ordinary share capital. During 2010, April declared and paid
preference dividends of P2,400,000. No dividends had been declared or paid during 2009.

In addition, May received a 5% stock dividend on ordinary share from April when the quoted
market price of April’s ordinary share was P10.

What amount should May report as dividend income in its 2010 income statement?
A. 120,000 C. 240,000
B. 125,000 D. 245,000
 21.) . Food Company owns 30,000 ordinary shares of Beverages Company acquired on July
31, 2010,
at a total cost of P1,100,000. On December 1, 2010, Food received 30,000 stock rights
from
Beverages. Each right entitles the holder to acquire one share at P45. The market price of
Beverages’s share on this date, ex-right, was P50 and the market price of each right was P5.
Food sold its rights the same date at P5 a right less a P10,000 commission.

The gain from the sale of the rights should be reported by Food at
A. P150,000 C. P50,000
B. P140,000 D. P40,000

22.) Apple Company owns 50,000 ordinary shares of Orange Company, which has several
hundred
thousand shares publicly traded. These 50,000 shares were purchased by Apple in 2008 for P100
per share. On August 30, 2010, Orange distributed 50,000 stock rights to Apple. Apple was
entitled to buy one new share of Orange for P90 cash and two of these rights. On August 30,
2010, each share had a market value of P132 ex-right, and each right had a market value of P18.

What cost should be recorded for each new share that Apple acquired by exercising the rights?
A. P 90 C. P126
B. 114 D. P132

23.) In January 2010, Jenny Company acquired 20% of the outstanding voting ordinary shares
of Lyn
Company for P2,800,000. This investment enabled Jenny to exercise significant influence
over
Lyn. The book value of the acquired shares was P2,100,000. The excess of cost over
book value
was attributed to an identifiable intangible asset that was undervalued in Lyn’s statement of
financial position and that had a remaining useful life of 10 years.

For the year ended December 31, 2010, Lyn reported income of P630,000 and paid cash
dividend of P140,000 on its ordinary shares.

What is the proper carrying value of Jenny’s investment Lyn at December 31, 2010?
A. P2,700,000
B. P2,730,000
C. P2,800,000
D. P2,828,000

24.) On January 1, 2010, Dry Company paid P18,000,000 for 50,000 ordinary shares of Rain
Company which represent a 25% interest in the net assets of Rain. The acquisition cost is
 equal to the book value of the net assets acquired. Dry has the ability to exercise significant
influence over Rain. Dry received a dividend of P35 per share from Rain in 2009, Rain
reported net income of P9,600,000 for the year ended December 31, 2010.

In its December 31, 2010 statement of financial position, Dry should report the investment in
Rain Company at
A. P22,150,000 C. P18,650,000
B. P20,400,000 D. P18,000,000

25.) On January 1, 2010, Moon Company purchased 10% of Light Company’s outstanding
ordinary
shares for P4,000,000. Moon is the largest single shareholder in Light and Moon’s
officers are a
majority of Light’s board of directors. Light reported net income of P5,000,000 for 2010 and
paid dividends of P1,500,000.

In its December 31, 2010 statement of financial position, what amount should Moon report s
investment in Light?
A. P4,500,000 C. P4,000,000
B. P4,350,000 D. P3,850,000

26.) Red Company owns 30% of the outstanding ordinary shares and 100% of the outstanding
noncumulative nonvoting preference shares of White Company. In 2010, White declared
dividend of P1,000,000 on its ordinary share capital and P600,000 on its preference share capital.

What amount of dividend revenue should Red report in its income statement for the year ended
December 31, 2010?
A. P900,000 C. P600,000
B. P300,000 D. 0

27.) Chest Company owns 20% of Nut Company’s preference share capital and 80% of its
ordinary
share capital. Nut’s share capital outstanding at December 31, 2010 is as follows:

10% cumulative preference share capital P5,000,000

Ordinary share capital 7,000,000

Nut reported net income P3,000,000 for the year ended December 31, 2010.

What amount should Chest record as equity in earnings of Nut for the year ended December 1,
2010?
A. P2,000,000 C. P2,100,000
B. P2,400,000 D. P2,300,000
 28.) On July 1, 2010, Wonderful Company purchased as trading investment a P2,000,000 face
value
Bright Company 8% bond for P1,850,000 plus accrued interest to yield 10%. The bonds mature
on January 1, 2015, and pay interest annually on December 31. On December 31, 2010, the
bonds had a market value of P1,890,000. On February 15, 2011, Wonderful sold the bonds for
P1,900,000.

In its December 31, 2010 statement of financial position, what amount should Wonderful report
for investment in trading securities?
A. P1,850,000 C. P1,890,000
B. P1,875,000 D. P1,900,000

29.) On October 1, 2010, Micro Company purchased 4,000 of the P1,000 face value,10%
bonds of Bac Company for P4,400,000 which includes accrued interest of P100,000. The
bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1.
Micro uses the straight line method of amortization and appropriately recorded the bonds as
held to maturity.

The bonds should be shown in Micro’s December 31, 2010 statement of financial position at
A. P4,284,000 C. P4,300,000
B. P4,288,000 D. P4,400,000

30.) . Sun Company purchased bonds at a discount of P100,000. Subsequently, Sun sold
these bonds at a premium of P140,000. During the period hat Sun held this held for maturity
investment, amortization of the discount amounted to P20,000.

What amount should Sun report as gain on the sale of bonds?

A. P120,000 C. P240000
B. P220,000 D. P260,000

31.) On January 1, 2010, Mini 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% .386

Present value of 1 for 20 periods at 5% .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

The purchase price of the bonds is

A. P1,124,620 C. P1,000,000
B. P1,100,000 D. P 875,380
32.) Dream Company owns three properties which are classified as investment properties.
Details of the properties are as follows:

Initial cost Fair value at 12/31/2009 Fair value at 1/31/2010

Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,050,000 2,850,000
Property 3 3,300,000 3,850,000 3,600,000

Each property was acquired in 2006 with a useful life of 25 years. The entity’s accounting policy
is to use the fair value model for investment properties.

What is the gain or loss to be recognized for the year ended December 31,2010?
A. P189,000 loss C. P300,000 gain
B. P150,000 loss D. P450,000 loss

33.) In January 2010 Cool Company established a sinking fund in connection with its issue of
bonds due in 2012. A bank was appointed as independent trustee of the fund. On December
31, 2010, the trustee held P364,000 cash in the sinking fund account representing P300,000
in annual deposits to the fund, and P64,000 of interest earned on those deposits.

How should the sinking fund be reported in Cool’s statement of financial position at
December 31,2010?
A. No part of the sinking fund should appear in Cool’s statement of financial position
B. P64,000 should appear as a current asset
C. P364,000 should appear as a current asset
D. P364,000 should appear as a noncurrent asset

34.) In October of the current year, Everest Company exchanged an old packing machine,
which cost P1,200,000 and was 50% depreciated, for another used machine and paid a cash
difference of P160,000. The fair value of the old packaging machine was determined to be
P700,000.

What is the cost of the machine acquired in the exchange on the books of Everest Company?
A. P860,000 C. P760,000
B. P700,000 D. P540,000

On December 31, 2010, the property, plant and equipment account of Pure Company
includes the details below:

Plant assets acquired from Zip Company P7,500,000

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 P9,000,000

In exchange for the plant assets of Zip company, Pure 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 P 500,000
Building 4,000,000
Machinery 1,500,000

The Land should be reported at

A. P530,000 C. P625,000
B P500,000 D. P655,000

35.) The building should be reported at

A. P4,400,000 C. P5,600,000
B. P4,600,000 D. P5,400,000

36.) The machinery should be reported at

A. P2,300,000 C. P2,370,000
B. P2,675,000 D. P2,745,000

37.) Coco Company commenced construction of a new plant on February 1, 2010. The cost of
P18,000,000 was funded from existing general borrowings. The construction was
completed on September 30,2009. Coco Company’s borrowings during 2009 comprised of
the following:
Bank A - 6% P 8,000,000
Bank B - 6.6% 10,000,000
Bank C - 7% 30,000,000

What is the amount of borrowing costs that should be capitalized in relation to the plant?
A. P1,215,000 C. P911,250
B. P 810,000 D. P 0

38.) Pacific Company’s depreciation policy on machinery is as follows:

 A full year’s depreciation is taken in the year of an asset’s acquisition.

 No depreciation is taken in the year of an asset’s disposition.
 The estimated useful life is five years.
 The straight line method is used.
 On June 30, 2010, Pacific sold for P2,300,000 a machine acquired in 2007 for
P4,200,000. The
estimated residual value was P600,000.

How much gain on the disposal should Pacific record in

2010?
A. P140,000 C. P620,000
B. P260,000 D. P980,000

39.) Hills Company provided the following information with respect to its building.

 The building was acquired January 1, 2005 at a cost of P7,800,000 with an estimated
useful life of 40 years and residual value of P200,000. Yearly depreciation was
computed on the straight line method.
 The building was renovated on January 1, 2007 at a cost of P760,000. This was
considered as improvement. Residual value did not change.
 On January 1, 2010, the management decided to change the total life of the building
to 30 years.

What is the depreciation of the building for 2010?

A. P292,400 C. P334,400
B. P266,000 D. P294,000

40.) Euro Company purchased a machine for P4,500,000 on January 1, 2009. The machine
has an
estimated useful life of four years and a residual value of P500,000. The machine is being
depreciated using the sum of the year’s digits method.

The December 31, 2010 asset balance, net of accumulated depreciation, should be
A. P2,900,000 C. P1,700,000
B. P2,700,000 D. P1,350,000

41.) On July 1, 2009, Dagupan Company purchased factory equipment for P5,000,000.
Residual value was estimated at P20,000. The equipment is depreciated over ten years using
the double declining balance method.

Counting the year of acquisition as one half year, Dagupan should record depreciation expense
for 2010 at
A. P1,000,000 C. P768,000
B. P 900,000 D. P960,000

42.) In January 2009, Nova Company purchased equipment at a cost of P6,000,000 to be used
in its manufacturing operations. The equipment was estimated to have a useful life of eight
 years with residual value estimated at P600,000. Nova considered various methods of
depreciation and selected the sum of years’ digits method.

On December 31,2010, the accumulated depreciation should have a balance of

A. P750,000 less than under the straight line method
B. P750,000 less than under the double declining balance method
C. P900,000 greater than under the straight line method
D. P900,000 greater than under the double declining balance method

43.) At the beginning of the current year, Von Company purchased a mineral mine for
P26,400,000 with removable ore estimated at 1,200,000 tons. After it had extracted all the
ore, Von will be required by law to restore the land to its original condition at a discounted
amount of P1,800,000. Von believes it will be able to sell the property afterwards for
P3,000,000. During the current year, Von incurred P3,600,000 of development cost
preparing the mine for production and removed and sold 60,000 tons of ore.

In its income statement for the current year, what amount should Von report as depletion?
A. P1,350,000 C. P1,500,000
B. P1,440,000 D. P1,590,000

28-12. On July 1, 2010, Bohol Company, a calendar year corporation, purchased the rights to a
mine.
The total purchase price was P13,200,000, of which P400,000 was allocable to the land.
Estimated reserves were 1,600,000 tons. Bohol expects to extract and sell 25,000 tons per month.
Bohol purchased new equipment on July 1, 2010. The equipment cost P6,600,000 and had a
useful life of 8 years. However, after all the resource is removed, the equipment will be of no use
and will be sold for P200,000.

44.) . Bohol Company should record depletion for 2010 at

A. P1,200,000 C. P1,237,500
B. P2,400,000 D. P2,475,000

45.) . Bohol Company should record depreciation of the mining equipment for 2010 at
A. P400,000 C. P600,000
B. P800,000 D. P300,000

On January 1, 2010, the historical balances of the land and building of Diner Company are:

Cost Accumulated depreciation

Land P 50,000,000
Building 300,000,000 P90,000,000
 The land and building were appraised on same date and the revaluation revealed the
following:

Sound Value
Land P 70,000,000
Building 315,000,000

There were no additions or disposals during 2010. Depreciation is computed on the

straight line.
The estimated life of the building is 20 years.

46.) The depreciation of the building for 2010 should be

A. P22,500,000 C. P15,000,000
B. P25,750,000 D. P10,500,000

47.) Ignoring income tax, the December 31, 2010 statement of financial position should show
revaluation surplus at
A. P117,500,000 C. P105,000,000
B. P125,000,000 D. P119,750,000

48.) AB5. Rupert Company owns a noncurrent asset which is damaged and is to be reviewed
for
impairment. The following information relates to the noncurrent asset:

Current carrying amount P2,000,000

Fair value 2,200,000
Expected disposal costs 100,000
Value in use 2,050,000

What should be the carrying amount of the net asset after the impairment review?
A. P2,000,000
B. P2,200,000
C. P2,100,000
D. P2,050,000

49.) On January 1, 2007, Hope Company purchased patent for P7,140,000. The patent was
amortized
over its remaining life of 15 years expiring on January 1, 2022. During 2010, Hope determined
that the economic benefits of the patent would not last longer than ten years from the date of
acquisition.

What amount should be reported in the statement of financial position for the patent, net
of
accumulated amortization, at December 31, 2010?
 A. P4,284,000 C. P5,050,000
B. P4,896,000 D. P5,236,000

50.) .On January 1, 2010, Matt Company purchased Pia Company at a cost that resulted in
recognition of goodwill of P2,000,000. During the first quarter of 2010, Matt spent an
additional P800,000 on expenditures designed to develop and maintain goodwill by training
and hiring new employees. Due to these expenditures, at December 31, 2010, Matt
estimated that the benefit period of goodwill was indefinite.

In its December 31, 2010 statement of financial position, what amount should Matt report as
Goodwill?
A. P1,800,000 C. P2,000,000
B. P1,900,000 D. P2,660,000

51.) On April 1, 2011, Adel Company began offering a new product for sale under a one-year
warranty. Of the 50,000 units in inventory at April 1, 2011, 30,000 had been sold by June
30, 2011. Based on its experience with similar products, Adel estimated that the average
warranty cost per unit sold would be P80. Actual warranty costs incurred from April
through June 30, 2011 amounted to P700,000.

At June 30, 2011, what amount should Adel report as estimated warranty liability?
A. P 900,000 C. P1,700,000
B. P1,600,000 D. P3,300,000

52.) During 2010, North Company filed suit against East Company seeking damages for
patent infringement. At December 31, 2010, North legal counsel believed that it was
probable that North would be successful against East for an estimated amount of
P1,500,000. In March 2011, North was awarded P1,000,000 and received full payment
thereof.

In North’s 2010 financial statements issued February 2011, how should this award be reported?
A. As a receivable and revenue of P1,000,000.
B. As a receivable and deferred revenue of P1,000,000.
C. As a disclosure of a contingent asset of P1,000,000.
D. As a disclosure of contingent asset of P1,500,000.

53.) Doris Company has P2,000,000 of note payable due June 30,2011. At the financial
statement date of December 31, 2010. Doris signed an agreement to borrow up to
P2,000,000 to refinance the note payable on a long-term basis. The financing agreement
called for borrowing not to exceed 80% of the value of the collateral Doris was providing.
On December 31, 2010, the value of the collateral was P3,000,000. Under the existing loan
 facility, Doris has the discretion to refinance or roll over the note payable for at least twelve
months after the end of reporting period.

On December 31, 2010, What amount of the note payable should Doris report as noncurrent
liability?
A. P2,000,000 C. P3,000,000
B. P2,400,000 D. P 0

54.) On March 1, 2010, Abel Company issued at 103 plus accrued interest 4,000 of its 9%,
P1,000 face value bonds. The bonds are dated January 1, 2010 and mature on January 1,
2020. Interest is payable semiannually on January 1 and July 1. Abel paid bond issue cost of
P200,000.

Abel received net cash from the bond issuance of

A. P4,320,000 C. P4,120,000
B. P4,180,000 D. P3,980,000

55.) On June 30, 2010, Gale Company issued at 99, five thousand of its 8%, P1,000 face value
bonds. The bonds were issued through an underwriter to whom Gale paid bond issue cost of
P425,000.

On June 30, 2010, Gale should report the bond liability at

A. P4,525,000 C. P5,000,000
B. P4,950,000 D. P4,575,000

56.) On January 1, 2010, Mark Company issued 5,000 of its 9%, P1,000 face value bonds at
95. Interest is payable semiannually on January 1 and July 1. The bonds mature on January
1, 2020. Mark uses the straight line method of amortizing bond discount.

In Mark’s December 31,2010 statement of financial position, how much would be shown as the
carrying amount of the bonds payable?
A. P5,000,000
B. P4,775,000
C. P4,750,000
D. P5,225,000

57.) On January 1, 2010, Well Company issued 9% bonds in the face amount of P5,000,000,
which mature on January 1, 2020. The bonds were issued for P4,695,000 to yield 10%.
Interest is payable annually on December 31. Well uses the interest method of amortizing
bond discount.
In its December 31, 2010 statement of financial position, what amount should Well report as
bonds payable?
A. P4,695,000 C. P4,704,750
B. P4,714,500 D. P5,000,000

58.) On December 30, 2010, Faye Company issued 5,000 of its 8% 10-Year, P1,000 face
value bonds with detachable share warrants at 110. Each bond carried a detachable warrant
for ten ordinary shares of Faye Company at a specified option price of P25 per share. The
par value of the ordinary share is P20.

Immediately after issuance, the market value of the bonds without the warrants was P5,400,000
and the market value of the warrants was P600,000.

In its December 31, 2010 statement of financial position, what amount should Faye report as
bonds payable?
A. P5,000,000 C. P4,900,000
B. P4,950,000 D. P5,400,000
59.) Forex Company prepared the following reconciliation of income per book with income
per tax return for the year ended December 31, 2008:
Book income before income tax P15,000,000
Add temporary difference:
Construction contract revenue which will
reverse in 2009 2,000,000
Deduct temporary difference:
Depreciation expense which will reverse in
equal amounts in each of the next 4 years ( 8,000,000)
Taxable income P 9,000,000
If the income tax rate is 32%, what amount should Forex report in its 2008 income statement as
the current provision for income tax?
(a) P3,150,000 (b) P5,250,000 (c) P5,950,000 (d) P2,450,000

60.) . Which of the following is true regarding the lease term?

a. The lease term does not include all periods covered by bargain renewal options.
b. The lease term includes all periods for which failure to renew imposes a penalty
sufficiently high that the lessee probably will renew.
c. The lease term may extend beyond the date a bargain purchase option becomes
exercisable.
d. The lease term does not include all periods representing renewals or extensions of the
lease at the lessor's option.

61.) Which of the following would be considered an executory cost?

a. Minimum lease payments.
b. Interest expense incurred.
c. Bargain purchase option.
d. Maintenance costs.

62.) From the standpoint of the lessee, the minimum lease payment includes all of the
following except
a. the guaranteed residual value.
b. the lessee's obligation to pay executory costs.
c. the bargain purchase option.
d. any payment that the lessee must make upon failure to extend or renew the lease.

63.) Which of the following is (are) not correct regarding disclosure requirements lessees?

I. For capital leases, future minimum lease payments in the aggregate and for each of the
succeeding five years must be disclosed.
II. For operating leases with initial or remaining lease terms in excess of one year, future
minimum rental payments in the aggregate and for each of the five succeeding fiscal years must
be disclosed.
III. For capital leases, future minimum lease payments for each of the succeeding five years
must be disclosed.
IV. For operating leases with initial or remaining lease terms in excess of one year, future
minimum lease payments for each of the five succeeding fiscal years must be disclosed.

a. I only.
b. II only.
c. Both I and II.
d. Both III and IV.

64.) Which of the following is not a required disclosure for lessors?

a. Total of minimum sublease rentals to be received in the future under noncancelable
subleases.
b. Unearned interest revenue
c. Unguaranteed residual values accruing to the benefit of the lessor.
d. A general description of the lessor's leasing arrangements.

65.) In order for a lease to be considered a finance (or capital) lease, international accounting
standards require that a lease agreement
a. transfers substantially all risks and rewards incident to ownership of an asset to the
lessee.
b. contains a provision requiring transfer of title to the lessee by the end of the lease term.
c. provides that the term of the lease contract be longer than one year.
d. provides for a bargain purchase option.
66.) State Repairs acquires equipment under a noncancelable lease at an annual rental of
$45,000, payable in advance for five years. After five years, there is a bargain purchase
option of $75,000. The appropriate interest rate is 12 percent. What is the total present value
of the lease and the first year's interest expense?
a. $224,234 and $21,508
b. $224,234 and $26,908
c. $204,771 and $21,508
d. $204,771 and $19,173

67.) Stockton, Inc. leased machinery with a fair value of $250,000 from Layton Machine Co.
on December 31, 2008. The contract is a six-year noncancelable lease with an implicit
interest rate of 10 percent. The lease requires annual payments of $50,000 beginning
December 31, 2008. Stockton appropriately accounted for the lease as a capital lease.
Stockton's incremental borrowing rate is 12 percent. Assuming the present value of an
annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an annuity due
of 1 for 6 years at 12 percent is 4.6048, what is the lease liability that Stockton should report
on the balance sheet at December 31, 2008?
a. $189,540
b. $200,000
c. $230,240
d. $239,540

68.) Baxter Company leased equipment to Fritz Inc. on January 1, 2008. The lease is for an
eight-year period expiring December 31, 2015. The first of eight equal annual payments of
$900,000 was made on January 1, 2005. Baxter had purchased the equipment on December
29, 2007, for $4,800,000. The lease is appropriately accounted for as a sales-type lease by
Baxter. Assume that the present value at January 1, 2008, of all rent payments over the lease
term discounted at a 10 percent interest rate was $5,280,000. What amount of interest
revenue should Baxter record in 2009 (the second year of the lease period) as a result of the
lease?
a. $490,000
b. $480,000
c. $438,000
d. $391,800

69.) In a lease that is recorded as an operating lease by the lessee, the equal monthly rental
payments should be
a. allocated between interest expense and depreciation expense.
b. allocated between a reduction of the liability for leased assets and interest expense.
c. recorded as a reduction in the liability for leased assets.
d. recorded as a rental expense.

70.) In a lease that is recorded as a direct financing lease by the lessor, unearned revenue
a. should be amortized over the period of the lease using the interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized in full at the inception of the lease.

71.) Generally accepted accounting principles require that certain lease agreements be
accounted for as purchases. The theoretical basis for this treatment is that a lease of this type
a. effectively conveys substantially all of the rights and risks incident to the
ownership of the property.
b. is an example of form over substance.
c. provides the use of the lease asset to the lessee for a limited period of time.
d. must be recorded in accordance with the concept of cause and effect.

72.) Joy Company purchased a new machine for P4,800,000 on January 1, 2010 and leased it
to Ray the same day. The machine has an estimated 12-year life and will be depreciated
P400,000 per year. The lease is for a three-year period expiring January 1, 2013 at an
annual rental of P850,000. Additionally, Ray paid P300,000 to Joy as a lease bonus to
obtain the three-year lease. Joy incurred insurance expense of P80,000 for the leased
machine during 2010.

What is the 2010 operating profit on this leased asset?

A. P670,000 C. P470,000
B. P550,000 D. P370,000

73.) On January 1, 2010, Active Company sold a building with a book value of P4,200,000 to
another entity for P4,050,000. Active Company immediately entered into a leasing
agreement wherein Active would lease the building back for an annual payment of
P640,000. The term of the lease is 10 years, the expected remaining useful life of the
building.

The first annual lease payment is to be made immediately, and future payments will be made on
January 1 of each succeeding year. The lessor’s implicit interest rate is 12%.
How much loss on sale and leaseback should be recognized for 2010?
A. P150,000 C. P15,000
B. P135,000 D. P 0

74.) On January 1, 2011, Aim Company entered into a ten-year noncancelable lease requiring
year-end payments of P1,000,000. Aim’s incremental borrowing rate is 12%, while the
lessor’s implicit interest rate, known to Aim, is 10%. Present value factors for an ordinary
annuity for ten periods are 6.145 at 10%, and 5.650 at 12%. On same date, Aim Company
paid initial direct cost of P200,000 in negotiating and securing the leasing arrangement.
Ownership of the property remains with the lessor at expiration of the lease. There is no
bargain purchase option. The leased property has an estimated economic life of 12 years.

75.) What amount should Aim capitalize as cost of the leased property on January 1, 2011?
A. P6,145,000 C. P5,650,000
B. P6,345,000 D. P5,850,000
On January 1, Gregory Company signed a ten-year noncancelable lease for a new machine,
requiring $40,000 annual payments at the beginning of each year. The machine has a useful life
of 15 years, with no salvage value. Title passes to Gregory at the lease expiration date. Gregory
uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present
value on January 1 of $252,000, based on an appropriate rate of interest. For the first year,
Gregory should record depreciation (amortization) expense for the leased machine at
a. $40,000.
b. $25,200.
c. $16,800.
d. $14,133.

76.) Novelty 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 assets in relation to finance leases be recognized in the financial
statements of Novelty?
A. P7,500,000 C. P2,500,000
B. P5,000,000 D. 0

77.) Newlook Company entered into a nine-year finance lease on a warehouse on December
31, 2010. Lease payment of P 520,000 which includes real estate taxes and other executory
cost of P20,000, are due annually, beginning on December 31, 2011 and every December 31
thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an
ordinary annuity of 1 for nine years at 9% is 5.6.
What amount should Newlook report as lease liability at December 31, 2010?
A. P2,800,000 C. P4,500,000
B. P2,912,000 D. P4,680,000

78.) On January 1, 2010, Cane Company signed an eight-year noncancellable lease for a new
machine, requiring P150,000 annual payments at the beginning of each year. The machine
has a useful life of 12 years, with no residual value. Title passes to Cane at the lease
expiration date. Cane uses straight line depreciation for all of its plant assets. Aggregate
lease payments have a present value on January 1, 2010 of P1,080,000 based on an
appropriate rate of interest.

Cane should record depreciation expense of the leased machine for 2010 at
A. P 0 C. P135,000
B. P90,000 D. P150,000

79.) Moonlight Company leased equipment to Sunlight Company on January 1, 2010, for an
eight-year period expiring December 31, 2017. Equal payments under the lease are
P500,000 and are due on January 1 of each year. The first payment was made on January 1,
2010. The selling price of the equipment is P2,900,000 and its carrying amount on
Moonlight’ books is P2,000,000. The lease is appropriately accounted for as a sales type
lease. The present value of the lease payments at an implicit interest rate of 12% is
P2,780,000.

What amount of profit on the sale should Moonlight report for the year ended December 31,
2010?
A. P900,000 C. P240,000
B. P780,000 D. P333,600

80.) On January 1, 2010 Luzon Company, acting as a lessor, leased an equipment for ten years
at an
annual rental of P1,200,000, payable by Visayas, the lessee, at the beginning of each
year. The
equipment had a cost of P8,400,000 with an estimated life of 12 years and no residual value.
Luzon uses the straight line depreciation. The implicit rate is 9%.

What amount of interest income should be reported in 2010 by Luzon if the lease was accounted
for as a direct financing lease?
A. P500,000 C. P756,000
B. P648,000 D. P360,000

81.) Queen Company adopted a defined benefit pension plan on January 1, 2010. Queen
amortizes the past service cost over 16 years and funds past service cost by making equal
payments to the fund trustee at the end of each of the first ten years.
The current service cost is fully funded at the end of each year. The following data are available
for the current year:

Current service cost P220,000

Past service cost:
Amortized 83,400
Funded 114,400

Queen’s prepaid pension cost at December 31, 2010 is

A. P114,400 C. P31,000
B. P 83,400 D. P 0

82.) Best Company determined that it has an obligation relating to employees’ rights to
receive compensation for future absences attributed to employees’ services already
rendered. The obligation relates to rights that vest, and payment of the compensation is
probable. The amount of Best’s obligations as of December 31, 2010 are reasonably
estimated as follows:

Vacation pay P1,100,000

Sick pay 900,000

In its December 31, 2010 statement of financial position, what amount should Best report as its
liability for compensated absences?
A. P1,100,000 C. P900,000
B. P2,000,000 D. P 0

83.) On January 1, 2009, Hilander Company purchased a machine for P1,400,000. This
machine has a 5-year useful life, a residual value of P200,000, and is depreciated using the
straight line method for financial statement purposes. For tax purposes, depreciation
expense was P500,000 for 2009 and P400,000 for 2010, Hilander’s 2009 income before tax
and depreciation expense was P2,000,000 and its tax rate was 30%.

If Hilander has made no estimated tax payments during 2010, what amount of current income tax
liability would Hilander report in its December 31, 2010 statement of financial position?
A. P450,000 C. P330,000
B. P480,000 D. P600,000

84.) On June 30, 2010, Lovely Company prepaid a P1,000,000 premium on an annual
insurance policy. The premium payment was a tax deductible expense in Lovely’s 2010
cash basis tax return. The accrual basis income statement will report a P500,000 insurance
expense in 2010 and 2011. The income tax rate is 30%.
In Lovely’s December 31, 2010 statement of financial position, what amount related to the
insurance should be reported as deferred tax liability?
A. P300,000 C. P200,000
B. P150,000 D. P 0

85.) The accounts below appear in the December 31, 2010 trial balance of Moon Company:

Authorized share capital P5,000,000

Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained Earnings unappropriated 600,000
Retained Earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares at cost 100,000

In its December 31, 2010 statement of financial position, Moon should report total shareholders’
equity at
A. P5,100,000 C. P4,900,000
B. P5,500,000 D. P4,800,000

86.) Sunrise Company’s records included the following shareholders’ equity accounts?

Preference share capital, par value P15, authorized 200,000 shares P2,550,000
Share premium, preference share 150,000
Ordinary share capital, no par, P50 stated value, 100,000
Shares authorized 3,000,000

In Sunrise’s statement of shareholders’ equity, the number of issued and outstanding shares for
each class is
Ordinary Preference Ordinary Preference
A. 60,000 170,000 C. 63,000 170,000
B. 60,000 180,000 D. 63,000 180,000

87.) Ox Company was organized on January 1, 2009 at which date it issued 100,000 ordinary
shares of P10 par value at P15 per share. During the period January 1, 2009 through
December 31, 2010, Ox reported net income of P450,000 and paid cash dividend of
P230,000. On January 10, 2010, Ox Purchased 6,000 treasury shares at P12 per share. On
December 31, 2010, Ox sold 4,000 treasury shares at P8 per share and retired the remaining
treasury shares. Ox uses the cost method of accounting for treasury shares.

What is the total shareholders’ equity at December 31, 2010?

A. 1,720,000 C. 1,688,000
 B. 1,704,000 D. 1,680,000

88.) Short Company had 10,000 shares issued and outstanding at January 1, 2010. During
2010, Short took the following actions:

March 15 Declared a 2-for a share split, when the fair value of the share was P80 per share.
December 15 Declared a P5 per share cash dividend.

In Shorts statement of changes in equity for 2010, what amount should Short report as
dividends?
A. 50,000 C. 850,000
B. 100,000 D. 950,000

89.) Jen Company issued 200,000 shares of P5 par value at P10 per share. On January 1,
2010, Jen’s retained earnings amounted to P3,000,000. In March 2010 Jen reacquired
50,000 treasury shares at P20 per share. In June 2010, Jen sold 10,000 of these shares to its
corporate officers for P25 per share. Jen used the cost method to record treasury shares. Net
income for the year ended December 31, 2010 was P600,000.

On December 31, 2010, what amount should Jen report as unappropriated retained earnings?
A. 3,600,000 C. 3,750,000
B. 3,650,000 D. 2,800,000

90.) The balance in retained earnings of Magic Company at the beginning of the year was
P650,000.
During the year, Magic Company earned revenue of P4,500,000 and incurred expenses of
P3,800,000, dividend of P500,000 was declared and paid, and the balance of the cash
account
increased by P220,000.

91.) The entity’s ending balance in the retained earnings account is

A. P1,070,000
B. P 700,000
C. P 850,000
D. P 770,000
92.) Earnings per share disclosures are required only for
a. companies with complex capital structures.
b. companies that change their capital structures during the reporting period.
c. public companies.
d. private companies.
 93.) In computing the earnings per share of common stock, noncumulative preferred
dividends not declared should be
a. deducted from the net income for the year.
b. added to the net income for the year.
c. ignored.
d. deducted from the net income for the year, net of tax.

94.) Which earnings per share computation should be reported on the face of the income
statement?

Basic EPS Diluted EPS

a. Yes Yes
b. Yes No
c. No Yes
d. No No

95.) When computing earnings per share on common stock, dividends on cumulative,
nonconvertible preferred stock should be
a. deducted from net income only if the dividends were declared or paid in the
current period.
b. deducted from net income regardless of whether the dividends were not paid
or declared in the period.
c. deducted from net income only if net income is greater than the dividends.
d. ignored.

96.) In calculating diluted earnings per share, which of the following should not be
considered?
a. The weighted average number of common shares outstanding
b. The amount of dividends declared on cumulative preferred shares
c. The amount of cash dividends declared on common shares
d. The number of common shares resulting from the assumed conversion of
debentures outstanding

97.) What is the correct treatment of a stock dividend issued in mid year when computing the
weighted-average number of common shares outstanding for earnings per share purposes?
a. The stock dividend should be weighted by the length of time that the additional
number of shares are outstanding during the period.
b. The stock dividend should be included in the weighted-average number of
common shares outstanding only if the additional shares result in a decrease of 3
percent or more in earnings per share.
c. The stock dividend should be weighted as if the additional shares were issued
at the beginning of the year.
d. The stock dividend should be ignored since no additional capital was received.

98.) The EPS computation that is forward-looking and based on assumptions about future
transactions is
a. diluted EPS.
b. basic EPS.
c. continuing operations EPS.
d. extraordinary EPS.

99.) When computing diluted earnings per share, stock options are
a. recognized only if they are dilutive.
b. recognized only if they are antidilutive.
c. recognized only if they were exercised.
d. ignored.

100.) Of the following, select the incorrect statement concerning earnings per share.
a. During periods when all income is paid out as dividends, earnings per share and
dividends per share under a simple capital structure would be identical.
b. Under a simple capital structure, no adjustment to shares outstanding is
necessary for a stock split on the last day of the fiscal period.
c. During a period, changes in stock issued or reacquired by a company may affect
earnings per share.
d. During a loss period, the amount of loss attributed to each share of common stock
should be computed.