ARTS CPA Review

(Academic Review and Training School, Inc.)

2F & 3F Crème Bldg., Abella St., Naga City
Tel No.: (054) 472-9104; E-mail: artscparev@yahoo.com.

FIRST PREBOARD EXAMINATION

PRACTICAL ACCOUNTING I MICHAEL B. BONGALONTA,CPA,MICB,MBA

1. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on July
31 for oil sold between the previous December 1 and May 31. Production reports show
the following oil sales:

June 1, 1993-November 30, 1993 $300,000

December 1, 1993-December 31, 1993 50,000
December 1, 1993-May 31, 1994 400,000
June 1, 1994-November 30, 1994 325,000
December 1, 1994-December 31, 1994 70,000

What amount should Rill report as royalty revenue for 1994?

a. $140,000 c. $149,000
b. $144,000 d. $159,000

2. During 1993, Orr Co. incurred the following costs:

Research and development services performed by Key Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes and models 200,000
Testing in search for new products or process alternatives 175,000

In its 1993 income statement, what should Orr report as research and development
expense?

a. $150,000 c. $350,000
b. $200,000 d. $525,000

3. Dunne Co. sells equipment service contracts that cover a two-year period. The sales
price of each contract is $600. Dunne's past experience is that, of the total dollars spent
for repairs on service contracts, 40% is incurred evenly during the first contract year
and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly
throughout 1992. In its December 31, 1992, balance sheet, what amount should Dunne
report as deferred service contract revenue?

a. $540,000 c. $360,000
b. $480,000 d. $300,000

4. At December 31, 1988, a $1,200,000 note payable was included in Cobb Corp.'s liability
account balances. The note is dated October 1, 1988, bears interest at 15%, and is
payable in three equal annual payments of $400,000. The first interest and principal
payment was made on October 1, 1989. In its December 31, 1989 balance sheet, what
amount should Cobb report as accrued interest payable for this note?
 a. $135,000 c. $45,000
b. $90,000 d. $30,000

5. Haft Construction Co. has consistently used the percentage-of-completion method. On

January 10, 1991, Haft began work on a $3,000,000 construction contract. At the
inception date, the estimated cost of construction was $2,250,000. The following data
relate to the progress of the contract:

Income recognized at 12/31/91 $ 300,000

Costs incurred 1/10/91 through 12/31/92 1,800,000
Estimated cost to complete at 12/31/92 600,000

In its income statement for the year ended December 31, 1992, what amount of gross profit
should Haft report?
a. $450,000 c. $262,500
b. $300,000 d. $150,000

6. HYSTG Company has sustained heavy losses over a period of time and conditions
warrant that HYSTG undergo quasi-reorganization on December 31, 2011.

 Inventory with cost of P 6,500,000 was recorded on December 31, 20122 at its
market value of P 6,000,000.
 Property, plant and equipment were recorded on December 31, 2011 at P
12,000,000 net of accumulated depreciation. The sound value was P 8,000,000.
 On December 31, 2011, the share capital is P 7,000,000 consisting of 700,000
shares with par value of P 10, the share premium is P 1,600,000, and the deficit in
retained earnings is P 900,000.
 The par value of the share is to be reduces from P 10 to P5.

Immediately, after the quasi-reorganization, what is the total shareholder’s equity?

a. P 3,300,000 c. P 3,900,000
b. P 3,500,000 d. P 3,700,000

7. On January 1, 2009, the capital of console company was P1 700 000 and on December
31, 2009, the capital was P2 400 000. During the current year, console withdrew
merchandise costing P100 000 and with sales value of P180 000, and paid a P1 000 000
note payable of the business with interest of 12% for six months with check drawn on
personal checking account. What was the net income or loss on 2009?

a. 260 000 income c. 180 000 income

b. 260 000 loss d. 180 000 loss

8. Presented below are changes in the accounts of Java Company for the current year.
Increase
(Decrease)
Cash 1 500 000
Accounts receivable (net) 3 500 000
Inventory 3 900 000
Equipment (1 000 000)
 Accounts payable (800 000)
Bonds payable 2 000 000
During the year, java sold P100 000 shares with P20 par value for P30 per share and
received cash in full. Dividend of P4 500 000was paid in cash during the year. Java
borrowed P4 000 000 from the bank and maid interest payment of P600 000. Java had no
other loan payable. Interest of P400 000 was payable at December 31. Interest payable at
January 1 was P100 000. Equipment of P2 000 000 was donated by a shareholder during
the year. What was the net income for the current year?
a.9 200 000 c.4 900 000
b.4 800 000 d.4 300 000

9. Oakwood Company provided the following data for the current year:

Cash balance, beginning of the year 1,300,000

Cash flow from financing activities 1,000,000
Total shareholders’ equity, end of year 2,300,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of year 2,000,000

What is the cash balance at the end of current year?

a. 1,200,000 c. 1,400,000
b. 1,600,000 d. 1,700,000

10. Pale Company uses the direct method to prepare its statement of cash flow.

Pale had the following cash flows during 2011:

Cash receipt from issuance of bonds 800,000

Cash receipt from issuance of ordinary shares 1,400,000
Cash receipt from customers 700,000
Cash receipt from dividends on
long term investment 105,000
Cash receipt from repayment of loans made
To another company 660,000
Cash payment for wages and other
operating expenses 420,000
Cash payment for reacquisition of treasury shares 250,000
Cash payments for dividends 70,000
Cash payment for taxes 140,000
Cash payment to purchase land 280,000

What is the net cash provided (used) from financing activities?

a. 1,530,000 c. 1,880,000
b. 1,670,000 d. 1,950,000

11. The electricity account of Velvet Company for the year ended June 30, 2015 was as the
following:
 Opening balances for the electricity accrual of July 1, 2014 P 30, 000
Payments made during the year:
08/01/14- for three months to July 31, 2014 60, 000
11/01/14- for three months to October 31, 2014 72, 000
02/01/15- for three months to January 31, 2015 90, 000
06/30/15- for three months to April 30, 2015 84, 000

What amount of electricity expense should Velvet Company report in its June 30, 2015
Statement of Comprehensive Income?

a. 306, 000 c. 332, 000

b. 324, 000 d. 342, 000

12. McMaster, Inc., a nonpublic enterprise, is negotiating a loan for expansion

purposes and the bank requires audited financial statements. Before closing the
accounting records for the year ended December 31, 2007, McMaster's controller
prepared the following comparative financial statements for 2007 and 2006:

McMaster, Inc.
Balance Sheets
December 31, 2007 and 2006

2007 2006
Cash ...................................... $ 550,000  $ 300,000
Investment securities (reported at market;
cost, $142,000) ......................... 156,000 0
Accounts receivable ....................... 974,000 784,000
Allowance for doubtful accounts ........... (100,000) (64,000)
Inventories ............................... 850,000 770,000
Property and equipment .................... 620,000 434,000
Accumulated depreciation .................. (300,000) (242,000)
  Total assets ............................ $2,750,000  $1,982,000 

Accounts payable .......................... $ 180,000  $ 154,000 

Accrued expenses .......................... 160,000 40,000
Note payable, 5-year ...................... 600,000 600,000
Estimated contingent liability ............ 200,000 0
Common stock, $10 par ..................... 420,000 420,000
Additional paid-in capital ................ 260,000 260,000
Retained earnings .........................  930,000    508,000 
  Total liabilities & owners' equity ...... $2,750,000  $1,982,000 
 McMaster, Inc.
Income Statements
For the Years Ended December 31, 2007 and 2006

2007 2006
Net sales ................................. $3,160,000 $2,500,000
Operating expenses:
Cost of sales ............................. $1,510,000 $1,380,000
Selling & administrative .................. 984,000 730,000
Depreciation .............................. 58,000 36,000
Estimated loss from lawsuit ............... 200,000 0
$2,752,000 $2,146,000
Operating income .......................... $ 408,000 $ 354,000
Unrealized gain on investment securities .. 14,000 0
Net income ................................ $ 422,000 $ 354,000

During the audit, the following additional information was obtained:

(a) The investment portfolio consists of investments in trading securities with a

total market value of $156,000 at December 31, 2007. The securities were
purchased February 3, 2007, at a cost of $142,000.

(b) As a result of errors in physical count, inventories were overstated by $30,000

at December 31, 2007.
(c) On January 2, 2007, the cost of equipment purchased for $80,000 was
mistakenly charged to repairs and maintenance. McMaster depreciates this
type of equipment over a 5-year life using the straight-line method, with no
residual or salvage value.

(d) McMaster was named as a defendant in a lawsuit in October 2007. McMaster's

counsel is of the opinion that McMaster has a good defense and does not
anticipate any impairment of McMaster's assets or that any significant liability
will be incurred. However, McMaster's counsel admits that loss of the suit is
"possible." McMaster's management wished to be conservative and established
a loss contingency of $200,000 at December 31, 2007.

(e) On January 24, 2008, before the 2007 financial statements were issued,
McMaster was notified that one of its largest customers had filed for
bankruptcy as the result of a flood that destroyed a substantial portion of the
company's assets on January 16, 2008. The customer's accounts receivable
balance at December 31, 2007, was $144,000.

(f) $100,000 of 5-year notes payable will mature September 30, 2008. In view of
McMaster's plans for expansion, management is seriously considering
refinancing the notes when they become due.

The amount of current assets, current liabilities and retained earnings that
 shall be reported in the balance sheet of McMaster, Inc., as of December 31,
2007 is: (Income tax considerations should be ignored.)

a. 2,400,000; 440,000 and 1,164,000

b. 2,784,000; 940,000 and 930,000
c. 2,400,000; 440,000 and 930,000
d. 2,784,000; 440,000 and 1,164,000

13. A comparative balance sheet for Joseph Corporation is presented below:

JOSEPH CORPORATION

Comparative Balance Sheet

2002 2001

Assets

Cash $ 51,000 $ 31,000

Accounts receivable (net) 75,000 60,000

Prepaid insurance 22,000 17,000

Land 22,000 40,000

Equipment 70,000 60,000

Accumulated depreciation (20,000) (13,000)

Total Assets $220,000 $195,000

Liabilities and Stockholders' Equity

Accounts payable $ 13,000 $ 6,000

Bonds payable 30,000 19,000

Common stock 140,000 115,000

Retained earnings 37,000 55,000

Total liabilities and stockholders' equity $220,000 $195,000

Additional information:
1. Net loss for 2002 is $14,000.

2. Cash dividends of $4,000 were declared and paid in 2002.

3. Land was sold for cash at a loss of $5,000. This was the only land transaction during the
year.

4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for
$5,000 cash.

5. $14,000 of bonds were retired during the year at carrying (book) value.

6. Equipment was acquired for common stock. The fair market value of the stock at the
time of the exchange was $25,000.

Compute the net cash flow from operating, investing and financing activities as of December
31, 2002.

a. 23,000; 18,000 and 7,000

b. 5,000; 18,000 and (7,000)
c. (23,000); 18,000 and 21,000
d. (5,000); 18,000 and 7,000

14. On December 31, 2011, the cash account of Roel Company showed the following details:

Undeposited collections 60,000

Cash in bank – PCIB checking account 500,000
Cash in bank – PNB (overdraft) ( 50,000)
Undeposited NSF check receive from customer,
dated December 1, 2011 15,000
Undeposited check from a customer, dated January 15, 2012 25,000
Cash in bank – PCIB (fund for payroll) 150,000
Cash in bank – PCIB (saving deposit) 100,000
Cash in bank –PCIB (money market instrument, 90 days) 2,000,000
Cash in foreign bank (restricted) 100,000
IOUs from officers 30,000
Sinking fund cash 450,000
Listed share held as trading investment 120,000

On December 31, 2011, what total amount should be reported as “cash and cash
equivalents”?

a. 2,810,000 c. 2,910,000
b. 2,760,000 d. 2,930,000

15. The following data pertain to the cash transactions and bank account of McBride
Company for May of the current year:

Cash balance per accounting record 1,719,000

Cash balance per bank statement 3,195,000
Bank service charge 10,000
 Debit memo for the cost of printed checks delivered
By the bank; the charge has not been recorded in
The accounting record 12,000
Outstanding checks 685,000
Deposit of May 30 not recorded by bank until June 1 500,000
Proceeds of a bank loan on May 30, not recorded in
The accounting record, net of interest of P30,000 570,000
Proceeds from a customer’s promissory note, principal
Amount P800,000 collected by the bank not taken
Up in the accounting record with interest 810,000
Check No. 1086 issued to a supplier entered in yhe
Accounting records as P210,000 but deducted in the
Bank statement at an erroneous amount of 120,000
Stolen check lacking an authorized signature deducted
From Mcbride’s account by the bank in error 80,000
Customer check returned by the bank marked NSF,
Indicating that the customer’s balance was not
Adequate to cover the check; no entry has been
Made in the accounting record to record the
Returned check 77,000

What is the adjusted cash in bank?

a. 2,820,000 c. 3,195,000
b. 3,200,000 d. 3,000,000

16. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50%
of Delta's customers take advantage of the discount. Delta uses the gross method of
recording sales and trade receivables. An analysis of Delta's trade receivables balances at
December 31, 1993, revealed the following:

Age Amount Collectible

0-15 days $100,000 100%
16-30 days 60,000 95%
31-60 days 5,000 90%
Over 60 days 2,500 $500
$167,500
In its December 31, 1993, balance sheet, what amount should Delta report for allowance for
discounts?
a. $1,000 c. $1,675
b. $1,620 d. $2,000

17. On December 31, 2012, Chang Company sold a machine to Door Company in exchange for
noninterest bearing note requiring ten annual payment of P100,000. Door made the first
payment on December 31,2012The market interest rate for similar notes at date of issuance
was 8%. information on present value factor is :

Period Present value of 1 at 8% Present value of ordinary annuity of 1at 8%

9 0.50 6.25
10 0.46 6.71
 In its December 31,2012 statement of financial position, what amount should Chang report
as notes receivable?

a. 625,000 c. 460,000
b. 400,000 d. 671,000

18. Appari Bank granted loan to a borrower on January 1, 2012. The interest rate on the loan is
10% payable annually starting December 31, 2012. The loan matures in five years on
December 31, 2016. The data related to the loan are:

Principal amount 4,000,000

Direct origination cost 61,500
Origination fee received from borrower 350,000

The effective rate on the loan after considering the direct origination cost and origination fee
received is 12%. What is the carrying amount of the loan receivable on January 1, 2012?

a. 4,000,000 c. 4,411,500
b. 4,650,000 d. 3,711,500

19. Easy Company sells directly to retail customers. On Jan. 1, 2009, the balance of the account
receivable was P2,070,000 while the allowance for doubtful accounts was credit off P78,000.
The following data are gathered.

Credit sales Writeoffs Recoveries

2006 11,100,000 260,000 22,000
2007 12,250,000 295,000 37,000
2008 14,650,000 300,000 36,000
2009 15,000,000 310,000 42,000

Easy Company should record doubtful accounts expense for 2009 at:

a. 268,000 c. 300,000
b. 310,000 d. 222,000

20. Moss Co. has determined its December 31, 1992, inventory on a FIFO basis to be $400,000.
Information pertaining to that inventory follows:

Estimated selling price $408,000

Estimated cost of disposal 20,000
Normal profit margin 60,000
Current replacement cost 360,000
Moss records losses that result from applying the lower of cost or market rule. At December
31, 1992, what should be the subsequent valuation of Moss' inventory?
a. $400,000 c. $360,000
b. $388,000 d. $328,000
21. A flash flood swept through Hat, Inc.'s warehouse on May 1. After the flood, Hat's
accounting records showed the following:

Inventory, January 1 $ 35,000

Purchases, January 1 through May 1 200,000
Sales, January 1 through May 1 250,000
Inventory not damaged by flood 30,000
Gross profit percentage on sales 40%
What amount of inventory was lost in the flood?
a. $55,000 c. $120,000
b. $85,000 d. $150,000

22. Gracia Comp. uses the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below:

MARKERS PENS HIGHLIGHTERS

Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a
Percentage of selling price 25% 25% 10%

What is the measurement of the work in process inventory?

a. 720,000 c. 676,000
b. 728,000 d. 694,000

23. The measurement at the lower at cost or net realizable value shall be applied on an
individual basis or item by item.

Quarterly purchases and sales for Cater Products, Inc. for 2004 are listed below. The
Corporation began 2004 with a merchandise inventory of P 415,150. Goods have been sold
at a uniform mark up of 66-2/3% on sales.

Purchases Sales

January 1 – March 31………………………………………. P 363,000 P 431,500

April 1 – June 30……………………………………………… 279,000 516,200

July 1 –September 30…………………………………….. 438,150 665,500

October 1 – December 31………………………………. 270,000 722,750

Compute of merchandise turnover for the year based upon quarterly data.

a. 1.11
b. 1.04
c. 1.52
d. 1.09
24. The Blaze Corp. manufactures a highly flammable product. On May 31, 2005 a fire
completely destroyed its factory and all the work in process inventory therein. However,
some records were saved which showed the following inventory balances as of May 31,
2005:

Raw Materials………………………………………………………………………………. P 300,000

Finished Goods……………………………………………………………………………. 600,000

Supplies………………………………………………………………………………………. 50,000

And as of January 1, 2005 the inventories were as follows:

Raw Materials……………………………………………………………………………… . P 150,000

Work in Process………………………………………………………………………….. 500,000

Finished Goods……………………………………………………………………………. 700,000

Supplies………………………………………………………………………………………. 20,000

Sales Gross Profit

2000 P 3,000,000 P 862,000

2001 3,200,000 1,024,000
2002 3,300,000 1,089,000
2003 2,500,000 625,000
2004 2,800,000 840,000

Sales for the first five months of 2005 were P 1,500,000. Raw material purchases
were P 500,000. Freight on purchases was P 50,000. Direct labor for the five months was P
400,000. For the past five years manufacturing overhead was 50 percent of direct labor
cost. What was the value of the work- in- process inventory as of May 31, 2005?

a. P 650,000
b. P 500,000
c. P 550,000
d. P 950,000
25. The RJR EMPIRE COMPANY reported profit before taxes of P370,000 for 2009 and
P526,000 for 2010. A later audit produced the following information.

a. The ending inventory for 2009 included units erroneously priced at P5.90 per unit.
The correct cost was P9.50 per unit.

b. Merchandise costing P17,500 was shipped to the RJR Empire, FOB shipping point, on
December 26, 2009, but the merchandise was excluded from the ending inventory
because it was not received until January 4, 2010.

c. On December 28, 2009, merchandise costing P2,900 was sold for P4,000 to GMA-
CBN Corp. GMA-CBN had asked RJR Empire to keep the merchandise for it until
January 2, when it would come and pick it up. Because the merchandise was still in
the store at year-end, the merchandise was included in the inventory count. The sale
was recorded in December 2009.

d. ABS-NBN Company sold merchandise costing P1,500 to RJR Empire. The purchase
was made on December 29, 2009, and the merchandise was shipped on December
30. Terms were FOB shipping point. Because RJR Empire bookkeeper was on
vacation, neither the purchase nor the receipt of goods was recorded on the books
until January 2010.

By what amount did the total profit before taxes change for the two years combined?

a. P4,000 c. P7,200

b. P21,800 d. P0

26.The Moonlight Corporation engaged your services to audit its accounts. In your
examination of cash, you find that the Cash account represents both cash on hand and cash
in bank. You further noted that there is very poor internal control over cash. You audit cover
the period ended December 31, 2010. You made a cash count on January 15, 2011, and
cash on hand on this date was determined to be P52,000. Examination of the cash books
and other evidences of transactions disclosed the following:

1. January 1 through 15, 2011 collections per duplicated receipts, P199,000.

2. Total of duplicate deposit slips, all dated January 2 through 15, P110,000, includes a
deposit representing collections of December 31.
3. Cash book balance on December 31, 2010 is P465,000, representing both cash on
hand and cash in bank.
4. Bank statement for December shows balance of P424,000.
5. Outstanding checks at December 31:
November checks Number 183 4,500
198 16,500
December checks Number 252 6,000
254 4,000
280 50,000
301 9,000
319 25,000
6. Undeposited collections at December 31, 50,000.
 7. An amount of P19,000 representing proceeds of a customer’s note was credited by
bank, but not yet taken up in the company’s books.
8. Bank service charge for December, P1,500.

How much is the cash shortage?

a. 120,500
b. 123,000
c. 123,500
d. 114,500

27. The statement for the checking account of Cisco Systems, Inc. (CSI) showed a
December 31, 2010 balance of P1,463,212. Information that might be useful in preparing a
bank reconciliation are as follows:

1. Outstanding checks were P140,000.

2. The December 31, 2010 cash receipts of P59,500 were not deposited in the bank until
January 2, 2011.
3. One check written in payment of rent for P24,600 was correctly recorded by the bank
but was recorded by CSI as a P26,400 disbursement.
4. In accordance with prior authorization, the bank withdrew P45,000 directly from the
checking account as payment of a mortgage note payable. The interest portion of that
payment was P5,000. CSI has made no entry to record the automatic payment.
5. Bank service charge of P1,400 were listed in the bank statement.
6. A deposit of P87,500 was recorded by the bank on December 13, but it did not belong to
CSI. Further verification with the bank indicates that the deposits should have been
credited to the checking account of CIS, Inc.
7. The bank statement included a charge of P12,500 for a customer’s DAIF check. The
check was returned with the bank statement and the company will seek payment from
the customer.
8. CSI maintains a P20,000 petty cash fund that was appropriately reimbursed at the end
of December.
9. According to the instructions from CSI on December 30, the bank withdrew P1,000,000
from the account and purchased Philippine Treasury bills for CSI. CSI recorded the
transaction is its books on December 31 when it received notice from the bank. Half of
the treasury bills mature in two months and the other half in six months.

What is the cash balance per book?

a. 1,295,212
b. 1,352,312
c. 1,112,500
d. 1,463,212

28. Germany Company started its business on Jan. 1, 2009. After considering the collection
experience of other entities in the industry, Germany established an allowance for doubtful
accounts estimated at 5% credit sales. Outstanding accounts receivable recorded on Dec. 31,
2009 totaled P460,000, while the allowance for doubtful accounts had a credit balance of
P50,000 after recording estimated doubtful account expense for Dec. and after writing off
P10,000 of uncollectible accounts. Further analysis of the entities accounts should that
merchandise purchased amount to P1,800,000 and ending merchandise inventory was
P300,000. Goods were sold at 40% above cost 80% of total sales were on account. Total
collection from customers, on the other hand, excluding proceeds from cash sales, amounted to
P1,200,000. Considering the given data, the accounts receivable and allowance for doubtful
account are:

Accounts receivable Allowance for doubtful accounts

a. 10,000 understated 24,000 understated

b. 20,000 understated 34,000 understated

c. 330,000 understated 40,000 understated

d. 330,000 understated 50,000 understated

29. On December 1, 2012 Nicole Company gave Dawn Company a P200, 000, 11%
loan. Nicole paid proceeds of P 194, 000 after the deduction of a P6,000
nonrefundable loan origination fee. Principal and interest are due in sixty monthly
installments P4, 310, beginning January 1, 2013. The repayment yields an effective
interest rate of 11% at present value of P200, 000 and 12.4% at present value of
P194, 000. What amount of income from this loan should Nicole Company report in
its 2012 income statement?

a. 7,833
b. 1,833
c. 2,005
d. 0
30. The following data pertains to Tyne Co.'s investments in marketable equity securities:

Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000

What amount should Tyne report as unrealized gain (loss) in its 20X2 income statement?
a. $55,000 c. $60,000
b. $50,000 d. $65,000

31. The following data pertains to Tyne Co.'s investments in marketable equity securities:
Market value
Cost 12/31/X2 12/31/X1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000

What amount should Tyne report as net unrealized loss on available-for-sale marketable
equity securities at December 31, 20X2, in accumulated other comprehensive income on the
balance sheet?

a. $0 c. $15,000
b. $10,000 d. $20,000
32. At year-end, Rim Co. held several investments with the intent of selling them in the near
term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000,
and equity securities purchased for $35,000. At year-end, the bonds were selling on the
open market for $105,000 and the equity securities had a market value of $50,000. What
amount should Rim report as trading securities in its year-end balance sheet?
a. $50,000 c. $142,000
b. $127,000 d. $155,000

33. Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993.
Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies. During 1993, South earned $80,000 and paid
dividends of $50,000. South reported earnings of $100,000 for the six months ended June
30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant
sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on
October 1, 1994. In Grant's December 31, 1993, balance sheet, what should be the
carrying amount of this investment?
a. $200,000 c. $224,000
b. $209,000 d. $230,000

34. Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock.
Dubro's stock outstanding at December 31, 1993, is as follows:

10% cumulative preferred stock $100,000

Common stock 700,000

Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred
shareholders for the year ended December 31, 1993. How much total revenue should Moss
record due to its investment in Dubro?
a. $22,000
b. $20,000
c. $70,000
d. $50,000
35. Pear Co.'s income statement for the year ended December 31, 1992, as prepared by Pear's
controller, reported income before taxes of $125,000. The auditor questioned the following
amounts that had been included in income before taxes:

Equity in earnings of Cinn Co. $ 40,000

Dividends received from Cinn 8,000
Adjustments to profits of prior years for arithmetical errors in depreciation (35,000)

Pear owns 40% of Cinn's common stock. Pear's December 31, 1992, income statement
should report income before taxes of:
a. $85,000 c. $120,000
b. $117,000 d. $152,000

36. On January 1, 2012, Hamlet Company borrowed P6, 000, 000.00 at an annual interest
rate of 10% to finance specifically the cost of building an electric generating plant.
Construction commenced on January 1, 2012 with a cost of 6, 000, 000.00. Not all the
cash borrowed was used immediately, so interest income of P80, 000.00 was generated
by temporarily investing some of the borrowed funds prior to use. The project was
completed on November 30, 2012. What is the carrying amount of the plant on
November 30, 2012?

a. 6, 000, 000
b. 6, 470, 000
c. 6, 520, 000
d. 6, 550, 000

37. On January 1, 2011, Jobert Company received a consolidated grant of P 12M.

¾ of the grant will be utilized to purchase a college building for students from
under developed countries. The balance of the grant is the subsidizing the
tuition cost of those students for 4 years from date of grant. The building was
purchased on January 2011 and is to be depreciated using the straight-line
method over 10 years. The tuition cost paid in 2011 amounted to P600,000.
How much income from government grant should be recognized for 2011?

a. 1,200,000
b. 3,000,000
c. 1,650,000
d. 1,050,000

38. In 2008, SUNFLOWER COMPANY acquired a silver mine in Eastern Mindanao.

Because the mine is located deep in the Mindanao frontier, Sunflower was able
to acquire the mine for the low price of P50,000. In 2009, Sunflower constructed
a road to the silver mine costing P5,000,000. Improvements and other
development costs made in 2009 cost P750,000. Because of the improvements
to the mine and to the surrounding land, it is estimated that the mine can be
sold for P600,000 when mining activities are complete. During 2010, five
buildings were constructed near the mine site to house the mine workers and
their families. The total cost of the five buildings was P2,000,000. Estimated
residual value is P200,000. Geologists estimated that P4,000,000 ton of silver
ore could be removed from the mine for refining. During 2011, the first year of
operations, only, P500,000 tons of silver ore were removed from the mine.
However, in 2012, workers mined P1,000,000 tons of silver. During the same
year, geologists discovered that the mine contained P3,000,000 tons of silver
ore in addition to the original P4,000,000 tons. Development costs of
P1,300,000 were made to the mine early in 2012 to facilitate the removal of the
additional silver. Early in 2012, an additional building was constructed at a cost
of P375,000 to house the additional workers needed to excavate the added
silver. This building is not expected to have any residual value. What is the
depletion and depreciation of the buildings for 2012?
 a. 1,300,000; 450,000 c. 900,000; 300,000

b. 1,525,000; 500,000 d. 700,000; 290,000

39. In 1990, Neil Co. held the following investments in common stock:
• 25,000 shares of B & K, Inc.'s 100,000 outstanding shares. Neil's level of ownership gives
it the ability to exercise significant influence over the financial and operating policies of B &
K.
• 6,000 shares of Amal Corp.'s 309,000 outstanding shares.

During 1990, Neil received the following distributions from its common stock investments:

November 6 − $30,000 cash dividend from B & K.

November 11 − $1,500 cash dividend from Amal.
December 26 − 3% common stock dividend from Amal.

The closing price of this stock on a national exchange was $15 per share. What amount of
dividend revenue should Neil report for 1990?
a. $1,500 c. $31,500
b. $4,200 d. $34,200

40. On January 1, 2011, Alaindog company purchased as a long-terminvestment P5,000,000 face

value of Gaspitoy company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10%
interest. The bonds mature on January 1, 2016 and pay interest annually on December 31.
Alaindog uses the interest method of amortization. What is the carrying amount of the
investment (rounded to nearest P100) on December 31, 2012?

a. 4,680,000 c. 4,618,000
b. 4,662,000 d. 4,562,000

41. On January 1, 2011, Venus Company purchased 10% bonds with face value of P5,000,000 plus
transaction cost of P101,500 with a yield rate of 8%. The bonds mature on December 31, 2015.
And pay interest annually on December 31. The carrying amount of the investment on December
31, 2011 using the effective interest method is P5,333,620. What is the initial acquisition cost of
the bond investment?

a. 5,401,500 c. 5,198,500
b. 5,300,000 d. 5,398,500

42. Cart Co. purchased an office building and the land on which it is located for $750,000 cash
and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at
$960,000, 60% of which is allocated to the building. At what amount should Cart record the
building?
a. $500,000 c. $600,000
b. $576,000 d. $960,000

43. Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related
to a newly constructed building. The depreciation was computed correctly for tax purposes.
The tax rate for the current year was 40%. What was the impact of the error on Miller's
financial statements for the prior year?

a. Understatement of accumulated depreciation of $24,000.

b. Understatement of accumulated depreciation of $40,000.
c. Understatement of depreciation expense of $24,000.
d. Understatement of net income of $24,000.

44. Oak Co., a newly formed corporation, incurred the following expenditures related to land
and building:

County assessment for sewer lines $ 2,500

Title search fees 625
Cash paid for land with a building to be demolished 135,000
 Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000

At what amount should Oak record the land?

a. $138,125 c. $154,125
b. $153,500 d. $175,625

45. In January 1994, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law
to restore the land to its original condition at an estimated cost of $180,000. Vorst believes
it will be able to sell the property afterwards for $300,000. During 1994, Vorst incurred
$360,000 of development costs preparing the mine for production and removed and sold
60,000 tons of ore. In its 1994 income statement, what amount should Vorst report as
depletion?
a. $135,000 c. $150,000
b. $144,000 d. $159,000

46. Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated
at cost, consisted of the following:
12/31/92 12/31/91
Land $ 25,000 $ 25,000
Buildings 195,000 195,000
Machinery & equipment 695,000 650,000
915,000 870,000
Less accumulated depreciation 400,000 370,000
$515,000 $500,000
Weir's depreciation expense for 1992 and 1991 was $55,000 and $50,000, respectively.
What amount was debited to accumulated depreciation during 1992 because of property,
plant, and equipment retirements?
a. $40,000 c. $20,000
b. $25,000 d. $10,000

47. On January 1, 2012, Hamlet Company borrowed P6, 000, 000.00 at an annual interest rate
of 10% to finance specifically the cost of building an electric generating plant. Construction
commenced on January 1, 2012 with a cost of 6, 000, 000.00. Not all the cash borrowed
was used immediately, so interest income of P80, 000.00 was generated by temporarily
investing some of the borrowed funds prior to use. The project was completed on November
30, 2012. What is the carrying amount of the plant on November 30, 2012?

a.6, 000, 000 c.6, 520, 000

b.6, 470, 000 d.6, 550, 000

48. In 2004, Horton company purchased a tract of land as a possible future plant site. In
January, 2012, valuable sulphur deposits were discovered on adjoining property and Horton
company immediately began explorations on its property. In December, 2012 after incurring
P400, 000 in explorations costs, which were accumulated in an expense account, Horton
discovered sulphur deposits appraised at P2, 250, 000 more than the value of the land. To
record the discovery of the deposists, Horton should

a) Make no entry.

b) Debit P400,000 to an asset account

c) Debit P2,250,000 to an asset account

d) Debit P2,650,000 to an asset account

49. Cool Company owns an equipment costing P5,200,000 with original residual value of
P400,000. The life of the asset is 10 years and was depreciated using the straight line
method. The equipment has a replacement cost of P8,000,000 with residual value of
200,000. The age of the asset is 4 years. The appraisal of the equipment showed a total
revised useful life of 12 years and the entity decided to carry the equipment at revalued
amount. Ignoring the income tax, what amount should Cool Company initially report as
revaluation surplus:
a. 1,600,000 c. 1,680,000
b. 2,600,000 d. 6,680,000
50. Gei Company determined that, due to obsolescence, equipment with an original cost of
P9,000,000 and accumulated depreciation on January 1, 2011, of P4,200,000 had
suffered permanent impairment, and as a result should have a carrying amount of only
P3,000,000 as of the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 8 years to 3. In its December 31, 2011 statement of
financial position, what amount should Gei report as accumulated depreciation?
a. 1,000,000 c. 6,000,000
b. 5,200,000 d. 7,000,000

---------------------------------------------------end-----------------------------------------------
“ Dreams pass into action. From the actions stems the dream again, and this
interdependence produces the highest form of living” – Anais Nin