REVIEW 105 – DAY 21 a.

Termination benefits
b. Short-term employee benefits
c. Equity compensation benefits
TOA d. Retirement benefits, such as pensions

1. A deferred tax liability is computed using 8. It is the increase in the present value of the defined benefit obligation
a. The current tax law, regardless of the enacted future tax law resulting from employee service in the current period.
b. Expected future tax law, regardless of whether this expected law has been a. Past service cost c. Current service cost
enacted b. Interest cost d. Current service and
c. Current tax law, unless enacted future tax law is different interest cost
d. Either current or expected future law, regardless of whether the expected law
has been enacted 9. Which statement is correct concerning past service cost ?
2. It is deferred tax consequence attributable to a taxable temporary difference. I. The past service cost should be expensed immediately when additional
a. Deferred tax liability c. Deferred tax asset benefits vest immediately.
b. Current liability d. Noncurrent deferred tax liability II. If the additional benefits are not vested, the past service cost is
amortized on a straight line basis over the period until the benefits vested.
3. It is deferred tax consequence attributable to a deductible temporary difference a. Both I and II b. Neither I nor II c. I only d.
and operating loss carry forward. II only
a. Deferred tax asset c. Deferred tax liability
b. Current tax asset d. Current tax liability
10. The vested benefits are employee
4. It is the amount of income tax paid or payable for the year as determined in a. Benefits accumulated in the hands of a trustee.
applying the provisions of the enacted tax law to the taxable income. b. Benefits that are contingent upon future employment.
a. Current tax expense c. Deferred tax expense c. Benefits that are not contingent upon future employment.
b. Deferred tax benefit d. Income tax expense d. Benefits that are to be paid to retired employees in the current period.

5. It is excess of taxable revenues over tax deductible expenses and

11. Which is incorrect concerning the concept of materiality and aggregation?
exemptions for the year as defined by the BIR.
a. Materiality depends on the size and nature of the item judged in the particular
a. Pretax financial income c. Financial income subject to tax circumstances of its omission or misstatement.
b. Gross income d. Taxable income a. Materiality provides that the specific disclosure requirements of a PFRS must
be met even if the resulting information is not material.
6. An entity shall offset deferred tax asset and deferred tax liability when b. Items of a dissimilar nature or function shall be presented separately unless
I. The deferred tax asset and deferred tax liability relate to income taxes they are immaterial.
levied by the same taxing authority c. Information is material if its nondisclosure could influence the economic
II. The entity has a legal enforceable right to set off a current tax asset decisions of users taken on the basis of the financial statements.
against a current tax liability.
a. I only b. II only c. Both I and II d. 12. An asset shall be classified as current when it satisfies any of the following
Neither I nor II criteria (choose the incorrect one).
a. It is expected to be realized in or is intended for sale or consumption in the
entity’s normal operating cycle.
7. Postemployment employee benefits include
 b. It is held primarily for the purpose of being traded. a. Zero.
c. It is expected to be realized in more than twelve months after the balance b. Lower than the cost of external common equity.
sheet date. c. Equal to the cost of external common equity.
d. It is cash or a cash equivalent which is unrestricted from being exchanged or d. Higher than the cost of external common equity.
used to settle a liability for at least twelve months after the balance sheet date.
13. The operating cycle of an enterprise 3. According to the Capital Asset Pricing Model (CAPM), the relevant risk of a security is its
a. Is set by the industry’s trade association usually on an average length of time a. Company-specific risk.
for all firms which are members of the association. b. Diversifiable risk.
b. Is the time between the acquisition of assets for processing and their c. Systematic risk.
realization in cash or cash equivalents. d. Total risk.
c. Is the period of time normally elapsed from the time the enterprise expends
cash to the time it converts trade receivables back into cash. 4. A parent company sold a subsidiary to a group of managers of the subsidiary. The
d. Causes the distinction between current and noncurrent items to depend on purchasing group invested $1 million and borrowed $49 million against the assets of the
whether they will affect cash within one year. subsidiary. This is an example of a
a. Spin-off.
14. A liability shall be classified as current when it satisfies any of the following
b. Leveraged buyout.
criteria (choose the incorrect one)
c. Joint venture.
a. It is expected to be settled in the entity’s normal operating cycle.
b. It is held primarily for the purpose of being traded. d. Liquidation.
c. It is due to be settled within twelve months after the balance sheet date.
d. The entity has an unconditional right to defer settlement of the liability for at 5. The acquisition of a retail shoe store by a shoe manufacturer is an example of
least twelve months after the balance sheet date. a. Vertical integration.
b. A conglomerate.
15. Which can be classified as current liabilities even if they are due to be settled c. Market extension.
after more than twelve months from balance sheet date? d. Horizontal integration.
a. Bank overdrafts
b. Dividends payable 6. Which of the following is an advantage of the accounting rate of return method of
c. Income taxes payable evaluating investment returns?
d. Trade payables and accruals for employee and other operating costs a. The technique considers depreciation.
b. The technique corresponds to the measure that is often used to evaluate performance.
MAS c. The technique considers the time value of money.
d. The technique considers the risk of the investment.

1. Which type of economic market structure is composed of a large number of sellers, each 7. Lin Co. is buying machinery it expects will increase average annual operating income by
producing an identical product, and with no significant barriers to entry and exit? $40,000. The initial increase in the required investment is $60,000, and the average increase
a. Monopoly. in required investment is $30,000. To compute the accrual accounting rate of return, what
b. Oligopoly. amount should be used as the numerator in the ratio?
c. Perfect competition a. $20,000
d. Monopolistic competition. b. $30,000
c. $40,000
2. When calculating the cost of capital, the cost assigned to retained earnings should be d. $60,000
 13. What is the return on investment (ROI) for the division?
8. If an investment project has a profitability index of 1.15, then the a. 10%
a. Project’s internal rate of return is 15%. b. 8%
b. Project’s cost of capital is greater than its internal rate of return. c. 4%
c. Project’s internal rate of return exceeds its net present value. d. 2%
d. Net present value of the project is positive.
14. What is the amount of residual income (RI) for the division?
a. $2,000,000
9. A soft drink producer acquiring a bottle manufacturer is an example of a b. $1,600,000
a. Horizontal merger. c. $1,000,000
b. Vertical merger. d. $ 400,000
c. Congeneric merger.
d. Conglomerate merger. 15. What is the amount of interest rate spread for the division?
a. 8%
10. A shoe manufacturing firm acquiring a brokerage house is an example of a b. 10%
a. Horizontal merger. c. 2%
b. Vertical merger. d. 20%
c. Congeneric merger.
d. Conglomerate merger.
P1
Items 11 through 15 are based on the following information:
The following is selected data for the Consumer Products division of Arron Corporations for 1. On December 31, 2002, Mill Co. sold construction equipment to Drew, Inc. for
200X: $1,800,000. The equipment had a carrying amount of $1,200,000. Drew paid
Sales $50,000,000 $300,000 cash on December 31, 2002, and signed a $1,500,000 note bearing
interest at 10%, payable in five annual installments of $300,000. Mill appropriately
Average invested capital (assets) 20,000,000
accounts for the sale under the installment method. On December 31, 2003, Drew
Net income 2,000,000
paid $300,000 principal and $150,000 interest. For the year ended December 31,
Cost of capital 8% 2003, what total amount of revenue should Mill recognize from the construction
11. What is the return on sales (ROS) for the division? equipment sale and financing?
a. 8% a. $250,000
b. 4% b. $150,000
c. 10% c. $120,000
d. 20% d. $100,000

12. What is the asset turnover ratio for the division? 2. On January 2, 2002, Blake Co. sold a used machine to Cooper, Inc. for $900,000,
a. .25 resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed
b. 10 a$750,000 note bearing interest at 10%. The note was payable in three annual
c. 2.5 installments of $250,000 beginning January 2, 2003. Blake appropriately accounted
d. 8 for the sale under the installment method. Cooper made a timely payment of the first
installment on January 2, 2003, of $325,000, which included accrued interest of
$75,000. What amount of deferred gross profit should Blake report at December 31, b. $178,000
2003? c. $150,000
a. $150,000 d. $122,000
b. $172,500
c. $180,000 6. Conn Co. reported a retained earnings balance of $400,000 at December 31,
d. $225,000 2002. In August 2003, Conn determined that insurance premiums of $60,000 for the
three-year period beginning January 1, 2002, had been paid and fully expensed in
3. Loeb Corp. frequently borrows from the bank in order to maintain sufficient 2002. Conn has a 30% income tax rate. What amount should Conn report as
operating cash. The following loans were at a 12% interest rate, with interest payable adjusted beginning retained earnings in its 2003 statement of retained earnings?
at maturity. a. $420,000
Loeb repaid each loan on its scheduled maturity date. b. $428,000
Date of loan Amount Maturity date Term of loan c. $440,000
11/1/02 $ 5,000 10/31/03 1 year d. $442,000
2/1/03 15,000 7/31/03 6 months
5/1/03 8,000 1/31/04 9 months 7. Bren Co.’s beginning inventory at January 1, 2003, was understated by $26,000,
Loeb records interest expense when the loans are repaid. As a result, interest and its ending inventory was overstated by $52,000. As a result, Bren’s cost of
expense of $1,500 was recorded in 2003. If no correction is made, by what amount goods sold for 2003 was
would 2003 interest expense be understated? a. Understated by $26,000.
a. $540 b. Overstated by $26,000.
b. $620 c. Understated by $78,000.
c. $640 d. Overstated by $78,000.
d. $720
8. On January 2, 2003, Air, Inc. agreed to pay its former president $300,000 under a
4. During 2003, Paul Company discovered that the ending inventories reported on its deferred compensation arrangement. Air should have recorded this expense in 2002
financial statements were incorrect by the following amounts: but did not do so. Air’s reported income tax expense would have been $70,000 lower
2001 $60,000 understated in 2002 had it properly accrued this deferred compensation. In its December 31,
2002 75,000 overstated 2003 financial statements, Air should adjust the beginning balance of its retained
Paul uses the periodic inventory system to ascertain year-end quantities that are earnings by a
converted to dollar amounts using the FIFO cost method. Prior to any adjustments a. $230,000 credit.
for these errors and ignoring income taxes, Paul’s retained earnings at January 1, b. $230,000 debit.
2003, would be c. $300,000 credit.
a. Correct. d. $370,000 debit.
b. $ 15,000 overstated.
c. $ 75,000 overstated. 9. On January 1, 2001, Bray Company purchased for $240,000 a machine with a
d. $135,000 overstated. useful life of ten years and no salvage value. The machine was depreciated by the
doubledeclining balance method and the carrying amount of the machine was
5. Tack, Inc. reported a retained earnings balance of $150,000 at December 31, $153,600 on December 31, 2002. Bray changed retroactively to the straight-line
2002. In June 2003, Tack discovered that merchandise costing $40,000 had not method on January 1, 2003. Bray can justify the change. What should be the
been included in inventory in its 2002 financial statements. Tack has a 30% tax rate. depreciation expense on this machine for the year ended December 31, 2003?
What amount should Tack report as adjusted beginning retained earnings in its a. $15,360
statement of retained earnings at December 31, 2003? b. $19,200
a. $190,000 c. $24,000
d. $30,720 value. On January 1, 2003, Flax determined that the machine had a useful life of six
years from the date of acquisition and will have a salvage value of $48,000. An
Items 10 and 11 are based on the following: accounting change was made in 2003 to reflect these additional data. The
On January 1, 2001, Warren Co. purchased a $600,000 machine, with a five-year accumulated depreciation for this machine should have a balance at December 31,
useful life and no salvage value. The machine was depreciated by an accelerated 2003 of
method for book and tax purposes. The machine’s carrying amount was $240,000 on a. $292,000
December 31, 2002. On January 1, 2003, Warren changed retroactively to the b. $308,000
straight-line method for financial statement purposes. Warren can justify the change. c. $320,000
Warren’s income tax rate is 30%. d. $352,000

10. In its 2003 income statement, what amount should Warren report as the 14. Oak Co. offers a three-year warranty on its products. Oak previously estimated
cumulative effect of this change? warranty costs to be 2% of sales. Due to a technological advance in production at
a. $120,000 the beginning of 2003, Oak now believes 1% of sales to be a better estimate of
b. $ 84,000 warranty costs. Warranty costs of $80,000 and $96,000 were reported in 2001 and
c. $ 36,000 2002, respectively. Sales for 2003 were $5,000,000. What amount should be
d. $0 disclosed in Oak’s 2003 financial statements as warranty expense?
a. $ 50,000
11. On January 1, 2003, what amount should Warren report as deferred income tax b. $ 88,000
liability as a result of the change? c. $100,000
a. $120,000 d. $138,000
b. $ 72,000
c. $ 36,000 15. At December 31, 2003, Off-Line Co. changed its method of accounting for demo
d. $0 costs from writing off the costs over two years to expensing the costs immediately.
Off-Line made the change in recognition of an increasing number of demos placed
12. On January 2, 2003, to better reflect the variable use of its only machine, Holly, with customers that did not result in sales. Off-Line had deferred demo costs of
Inc. elected to change its method of depreciation from the straight-line method to the $500,000 at
units of December 31, 2002, $300,000 of which were to be written off in 2003 and the
production method. The original cost of the machine on January 2, 2001, was remainder in 2004. Off-Line’s income tax rate is 30%. In its 2003 income statement,
$50,000, and its estimated life was ten years. Holly estimates that the machine’s total what amount
life is 50,000 machine hours. Machine hours usage was 8,500 during 2001 and should Off-Line report as cumulative effect of change in accounting principle?
3,500 during 2002. Holly’s income tax rate is 30%. Holly should report the accounting a. $140,000
change in its 2003 financial statements as a(n) b. $200,000
a. Cumulative effect of a change in accounting principle of $2,000 in its income c. $350,000
statement. d. $500,000
b. Adjustment to beginning retained earnings of $2,000.
c. Cumulative effect of a change in accounting principle of $1,400 in its income
statement.
d. Adjustment to beginning retained earnings of $1,400.

13. On January 1, 2000, Flax Co. purchased a machine for $528,000 and
depreciated it by the straight-line method using an estimated useful life of eight years
with no salvage