PROBLEM 1

In its financial statements for the year ended December 31, 2018 ABRI-CARI SEA AIR

COMPANY reported P73,500 revenue, P53,500 cost of goods sold, P6,000 income tax

expense, P20,000 retained earnings at January 1, 2018 and P34,000 retained earnings at

December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, ABRI-CARI SEA AIR

COMPANY discovered that some products sold in 2018 were incorrectly included in inventories

at 31 December 2018 at their cost—P6,500.

In 2019, ABRI-CARI SEA AIR COMPANY changed its accounting policy for the measurement of

Investment property after initial recognition from the cost model to the fair value model. It

acquired its only investment for P3,000 many years ago. The fair value of the investment was

determined to be P25,000 at December 31, 2019 (2018: P20,000 and 2017: P18,000).

At 31 December 2019, as a result of the invention of improved lubricants, ABRI-CARI SEA AIR

COMPANY reassessed the useful life of Machine A from four years to seven years. Machine A

is depreciated on the straight-line method with no residual value. It was acquired for P6,000 on

January 1, 2017. Inventories of the type manufactured by Machine A were immaterial at the end

of each reporting period.

ABRI-CARI SEA AIR COMPANY’s accounting records for the year ended 31 December 2019,

before accounting for the change in accounting policy and before accounting for the change in

accounting estimate, record P104,000 revenue, P86,500 cost of goods sold and P5,250 income

tax expense.

ABRI-CARI SEA AIR COMPANY presents financial statements with one year of comparative

information.

For simplicity, the tax effect of all items of income and expenses should be assumed to be

30%.

1. The correct cost of goods sold in 2018 is

a.

b. P 53,500

c. P 60,000

d. P 58,050

e. P 47,000

2. The correct cost of goods sold in 2019 is:

a.

b. P 79,100
c. P 78,500

d. P 80,900

e. P 86,500

3. The correct retained earnings at December 31, 2018 is:

a.

b. P 41,350

c. P 46,250

d. P 30,500

e. P 20,000

CRC-ACE/AP: FINAL PRE-BOARD EXAMINATIONS (MAY 2015 BATCH) PAGE 2

4. The correct retained earnings at December 31, 2019 is:

a.

b. P 62,280

c. P 57,730

d. P 34,000

e. P 75,350

5. In which of the following will a professional accountant most likely observe the principle of

confidentiality?

a. When disclosure is authorized.

b. When disclosure is required byl aw.

c. When there is a professional duty or right to disclose.

d. When a colleague asked advice on similar cases.

6. Which of the following is false regarding competence?

a. Professional accountants should not portray themselves as having experience they do

not possess.

b. A CPA may claim expertise on specific practices if he possesses the same.

c. Professional accountants should portray themselves as having experience they do not

possess.

d. A CPA shall not undertake any engagement or accept any employment which he cannot

reasonably expect to complete or discharge.

7. An auditor most likely would issue a disclaimer of opinion because of:

a. Inadequate disclosure of material information.

b. The omission of the statement of cash flows.

c. A material departure from generally accepted accounting principles.

d. Management’s refusal to furnish written representation.

PROBLEM 2

Among the account balances of Kamville Corporation at December 31, 2017 are the following:

Patent, net P2,450,000

Installment contract receivable 7,200,000

Relevant transactions and other information for 2018 were as follows:

a) The patent was purchased from Sy Company for P3,150,000 on September 1, 2010. On

that date, the remaining legal life was fifteen years, which was also determined to be the

useful life.

b) The installment contract receivable represents the balance of the consideration received

from the sale of a factory building to Oz Company on March 31, 2017, for P12,000,000. Oz

made a P3,000,000 down payment and signed a five-year 13% note for the P9,000,000

balance. The first of equal annual principal payments of P1,800,00 was received on March

31, 2017 together with interest to that date. The note is collateralized by the factory building

with a fair value of P10,000,000 at December 31, 2018. The 2018 payment was received on

time.

c) On January 2, 2018 Kamville purchased a trademark from Cool Corporation for P2,500,000.

Kamville considers the life of the trademark to be indefinite.

d) On May 1, 2017, Kamville sold the patent to Smile Company in exchange for a P5,000,000,

non-interest bearing note due on May 1, 2021. There was no established exchange price for

the patent, and the note had no ready market. The prevailing rate of interest for a note of

this type at May 1, 2018 was 14%. The present value of 1 for three periods at 14% is 0.675.

The collection of the note receivable from Smile is reasonably assured.

e) On July 1, 2018, Kamville paid P18,800,000 for 750,000 ordinary shares of Safe

Corporation, which represented a 25% investment in Safe. The fair value of all of Safe’s

identifiable assets net of liabilities equals their carrying amount of P64,000,000. The market

price of Safe’s ordinary share on December 31, 2018 was P26.00 per share.

f) Safe reported profit and paid dividends of

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Profit Dividends per share

Six months ended 6/30/18 P 5,760,000 None

Six months ended 12/31/18 7,040,000 P2.00

Dividend was paid on November 30, 2018.

Questions:

Based on the above and the result of your audit, compute the following:

8. Gain on sale of patent

a. P2,620,000 c. P 925,000

b. P 995,000 d. P1,078.125

9. Total interest income for 2018

a. P 760,500 c. P1,233,000

b. P1,251,000 d. P1,075,500

10. Noncurrent portion of the installment contract receivable as of December 31, 2018

a. P5,400,000 c. P1,800,000

b. P3,600,000 d. P7,200,000

11. Carrying amount of the note receivable from sale of patent as of December 31, 2018

a. P5,000,000 c. P3,375,000

b. P3,690,000 d. P3,847,500

12. The carrying amount of the investment in Safe Corporation as of December 31, 2018

a. P18,800,000 c. P19,060,000

b. P19,025,000 d. P19,500,000

13. The completeness assertion would be violated if:

a. Fictitious sales transactions were included in accounts receivable.

b. The allowance for doubtful accounts was understated.

c. Unbilled shipments had occurred during the period.

d. Disclosure in the statements of pledged receivables was inadequate.

14. If an auditor, planning to use statistical sampling is concerned with the number of a client’s

sales invoices that contain mathematical errors, the auditor would most likely utilize:

a. Random sampling with replacement.

b. Sampling for attributes.

c. Sampling for variables.

d. Stratified random sampling.

PROBLEM 3

On January 1, 2017, Proctor & Gamble, Corp. issued P 100,000, 10% 10 year bonds when the
market rate of interest was 8%. Interest is payable on June 30 and December 31. The following

financial information is available

Sales

Cost of sales

Gross profit

Interest expense

Depreciation expense

Other expenses

Net income

P 300,000

180,000

120,000

(14,500)

(82,000)

Accounts receivable

Inventory

Accounts payable

December 31, 2017

P 55,000

87,000

60,000

January 1, 2017

P 48,000

93,000

58,000

All purchases of inventory are on account. Other expenses are paid for in cash.

15. What is the carrying value of the bonds on December 31, 2017

a. P 100,000 b. P 112,233 c. P 112,661 d. P 113,592

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16. How much was paid for inventory purchases

a. P 172,000 b. P 174,000 c. P 184,000 d. P 186,000

17. What is Proctor & Gamble net income for 2017

a. P 13,500 b. P 14,431 c. P 14,859 d. P 23,000

18. How much was received from customers in 2017

a. P 245,000 b. P 283,000 c. P 293,000 d. P 307,000