UNION CHRISTIAN COLLEGE

City of San Fernando, La Union

School of Business and Sciences

Accountancy Program

MOCK BOARD EXAMINATION

SY 2019-2020

Instructions: Kindly encircle the correct letter using black or blue ball pen. Double encircling, erasures, usage of
pencil and friction pen in encircling means wrong.

1. Included in Levi Corporation’s liability account balances at December 31,2010, were the following:
14% note payable issued October 1,2009, maturing
September 30,2012 1,250,000
16% note payable issued April 1,2008, due on
April 2012 2,000,000

On December 31,2010, the company expects to refinance the P2,000,000 by the issuance of a long-term note
payable in lump sum. The refinancing of the P2,000,000 is at the discretion of the enterprise. Levi’s December
31,2010 financial statements were issued on March 31,2011. On January 15,2011, the entire P2,000,000
balance of the 16% note was refinanced by issuance of a long-term obligation payable.

On December 31,2010 balance sheet, what amount of the notes payable should Levi’s classify as short-term
obligation?
a. None
b. P1,250,000
c. P1,750,000
d. P2,000,000

2. On July 1,2010, Mark Company acquired machinery worth P2,500,000 from Julian Corporation. Terms of the
contract calls for a down-payment of P500,000 and signing a 2-year 10% note payable for the balance. Interest
is payable quarterly. The existing loan agreement does not carry a provision to refinance. During September,
Mark was experiencing financial difficulty and was unable to pay the periodic interest.

Question 1:
What total amount of current liability should Mark Company report in its December 31,2010 balance sheet
assuming Julian Company agreed at balance sheet date not to demand payment as a consequence of the
breach?
a. none
b. P50,000
c. P100,000
d. P2,100,000
Question 2:
What total amount of current liability should Mark Company report in its December 31,2010bbalance sheet
assuming Julian Company agreed to provide a grace period ending at least twelve months to rectify the
breach?
a. none
b. P50,000

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c. P100,000
d. P2,100,000

3. A new product introduced by Martin Company carries a two-year warranty against defects. The estimated
warranty costs related to sales are as follows:
Year of sales 4%
Year after sales 6%

Sales and actual warranty expenditures for the years ended December 31,2009 and 2010 are as follows:
Year Sales Actual Warranty Costs
2009 2,400,000 150,000
2010 3,000,000 220,000

What amount should Martin Company report as liability for product warranty in its December 31,2009 balance
sheet?
a. P170,000
b. P220,000
c. P240,000
d. P300,000

4. Pastels Department Store sells gifts certificates, redeemable for store merchandise that expires one year
after their issuance. Pastel has the following information pertaining to its gift certificates sales and
redemptions:
2009 sales 1,800,000
2009 sales 2,000,000
2009 redemptions 1,000,000
2010 redemptions of current-year sales 1,400,000
2010 redemptions of prior year's sale 420,000

Pastel’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31,2010
balance sheet, what amount should Pastel report as unearned revenue?
a. P400,000
b. P600,000
c. P800,000
d. P1,000,000

5. Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,2009, the
company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned
in 2009 may first be taken on January 1,2010, Information relative to these employees is as follows:
Vacations Days Earned Vacation days Used
Hourly by each employee by each employee
Year Wages
2009 P.25.80 10 0
2010 P27.00 10 8
2011 P28.50 10 10

Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in effect when
the compensated time is earned.

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Question 1:
What is the amount of the accrued relative to compensated absences that should be reported on Vargas
income statement for 2009?
a. P0
b. P68,880
c. P72,240
d. P75,600
Question 2:
What is the amount of the accrued liability for compensated absences that should be reported at December
31,2011?
a. P79,800
b. $90,720
c. P94,920
d. P95,760

6. Milder Company has guaranteed a loan of P300,000 granted to Miller Company. After the balance sheet
date of Milder Company but before the directors approved the financial statements, Milder Company receives
notice that Miller Company is in liquidation. What proper accounting should Milder Company account for the
guarantee, assuming the creditor of Miller Company will invoke the guarantee?
a. The amount of the guarantee is not accounted for in Milder’s books.
b. The amount of P300,000 should be recognized as a provision.
c. The P300,000 be recognized as a liability with necessary disclosure in the notes to financial statements
d. The contingent liability should be disclosed by way of note to the financial statements.

7. On march 1,2010, Rapture Corporation issued at 103 plus accrued interest, 1,000 of its 9%. P1,000 bonds.
The bonds are dated January 1,2010 and mature on January 1,2020. Interest is payable semi-annually on
January 1 and July 1. Rapture paid transaction costs of P5,000.
Based on the given information, how much would Rapture realize as net cash receipts from the bond issuance?
a. P1,025,000
b. P1,030,000
c. P1,040,000
d. P1,045,000

8. On January 1,2011, Cinderella Company issued 4,000 of its 8%, P1,000 bonds when the prevailing rate of
interest was 9%. The bonds are dated January 1,2011 and mature on January 1,2015. Interest is payable
annually every December 31. The following are the present value factors:

PV of 9% for an ordinary annuity of P1 after 4 years 3.2397

PV of 9% after 4 years 0.7084

What amount of proceeds did the company receive on the issue of the debt instruments?
a. P3,800,000
b. P3,870,304
c. P3,883,000
d. P3,920,000

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9. On January 1,2011, Shredder Company issued its 10% 6-year convertible debt instrument with a face
amount of P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The debt
instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt instruments is
convertible into equity from time of issue until maturity. When the debts instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 8%.

PV of 8% for an ordinary annuity of P1 after 6 periods 4.623

PV of 8% after 6 interest periods .630

On December 31,2012, Shredder Company converted at the debt instruments by issuing 30,000 ordinary
shares.
What amount should be credited to the share premium account as a result of the conversion?
a. none
b. P198,176
c. P239,052
d. P421,276

10-. On January 1,2009, Faith Company issued its 8%, 5-year convertible debt instrument with a face amount
of P8,000,000 for P7,700,000. Interest is payable every December 31 of each year. The debt instrument is
convertible into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 10%.

On December 31,2011, all the convertible debt instruments were retired for P8,000,000. The prevailing rate of
interest on a similar debt instrument as of December 31,2008 is 9% without the conversion option.

Question 1:
What is the carrying value of the debt instruments as of December 31,2011?
a. 7,393,473
b. 7,492,820
c. 7,602,102
d. 7,722,313
Question 2:
On the date of retirement, what amount of the proceeds represents the equity component?
a. 136,878
b. 140,729
c. 165,760
d. 305,760
Question 3:
a. What amount of gain or loss that should be reported in the profit or loss on the retirement of the
convertible debt instruments?
a. 136,958
b. 138,420
c. 165,760
d. 305,760

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11. As an inducement to enter a lease, Premier Arts Company, a lessor, grants Marvel Management
Corporation, a leaseholder, nine months of free rent under a five-year operating lease. The lease is effective on
February 1,2010 and provides for monthly rental P20,000 to begin November 1,2010.

Question 1:
What amount of rent expense should Marvel Co. report in its December 31,2010 income statement?
a. 204,000
b. 187,000
c. 180,000
d. 102,000
Question 2:
What amount of accrued rent should Marvel Co. report in its December 31,2010 balance sheet?
a. 0
b. 147,000
c. 187,000
d. 204,000

12. Wall Co. leased office premises to Fox Inc. for a 5-year term beginning April 1,2010. Under the terms of the
operating lease, rent for the first year is P240,000 and rent for years 2 through to 5 is P375,000 per annum.
However, as an inducement to enter the lease Fox was allowed to use the leased asset rent-free for the first six
months. In its December 31,2010 income statement, what amount should Wall report as rental income?
a. 120,000
b. 243,000
c. 243,000
d. 348,000

13. Vanity Company leased a new machine from Beagle Co. on January 1,2010, under a lease with the
following information:

Annual rental payable at beginning of each lease year 400,000

Lease term 10 years
Useful life of machine 12 years
Implicit interest rate 14%
Present value of an annuity of 1 in advance
for 10 periods at 14% 5.95
Present value of an annuity of 1 for 10 periods 5.22
Present value of 1 for 10 periods at 14% 0.27

Vanity has the option to purchase the machine on January 1,2020, by paying P200,000 which is less than the
expected fair value of the machine on the option exercise date and it is reasonably certain that the option will
be exercised. In its December 31,2010, balance sheet is the leased asset should have a book value of:
a. 2,181,667
b. 2,190,600
c. 2,231,167

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d. 2,434,000

14. Britney Company leased equipment for its nine-year useful life, agreeing to pay P500,000 at the start of the
lease term on December 31,2010 and P500,000 annually on each December 31 for the next eight years. The
present value on December 31,2010, of the nine lease payments over the lease term, using the rate implicit in
the lease which Britney knows to be 10% was P3,165,000. The December 31,2010, present value of the lease
payments using Britney’s incremental borrowing rate of 12% was P2,985,000. Britney made timely lease
payments. What amount should Britney report as finance lease liability and interest expense, respectively in
their December 31,2012 financial statements?
a. 2,431,500 and 266,500
b. 2,174,650 and 243,150
c. 2,779,650 and 266,500
d. 2,981,500 and 243,150

15. On January 1,2010, Peter Pan co. sold equipment with the carrying amount of P1,000,000 and a remaining
useful life of 12 years, to Marco Drilling for P1,600,000, Peter Pan immediately leased the equipment back
under a 10-year finance lease payment of P244,120 in December 2010. In the December 31,2010 income
statement, the realized gain on equipment sale should be:
a. 600,000
b. 560,000
c. 540,000
d. 60,000

16. The following information pertains to a sale and operating leaseback of equipment by Germanium Co. on
December 31,2010:
Sales price, P640,000; Carrying amount, P500,000; Monthly lease payment, P25,457; Estimated remaining life,
25 years; Lease term, 2 years Implicit rate, 12%; and Fair value, P540,800.

What amount of deferred gain on the sale should Germanium report at December 31,2010?
a. none
b. P40,800
c. P99,200
d. P140,000

17. On June 30,2010 Forest Co. sold equipment with an estimated useful life of 10 years and immediately
leased it back for 5 years. The equipment carrying amount was P540,000. The sales price was 516,000. The fair
value of the equipment was P558,000. The lease agreement is an operating lease.

Question 1:
What amount of deferred loss should the company recognized on June 30,2010 assuming future rental is equal
or above market rate rent?
a. 42,000
b. 24,000
c. 18,000
d. 0

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Question 2:
What amount of deferred loss should the company recognized on June 30,2010 assuming future rental is
below market rate rent?
a. 42,000
b. 24,000
c. 18,000
d. 0
18. Triad Corporation reported a pretax financial income of P5,000,000 for the year ended December 31,2010.
The following items are included in the determination of financial income:

Estimated litigation loss which will become tax deductible when settled in the future, P300,000; Revenue from
installment sale which will be recognized as taxable income as received over the next three years, P600,000;
Other unearned revenue, P150,000; dividend received, P100,000.

If the income tax rate is 33% for all years, what amount of total tax expense and current tax expense should
Triad Company report, respectively?
a. 1,617,000 and 1,567,500
b. 1,617,000 and 1,518,000
c. 1,650,000 and 1,664,000
d. 1,650,000 and 1,518,000

19. For the year ended December 31,2010, Marian Corporation reported pretax financial income of
P6,000,000. Its taxable income was P8,000,000. The difference is due to rental received in advance. Rental
income is taxable when received. The income tax rate is 32% and Marian made estimated tax payment of
P1,000,000. What should Marian report as 2010 total income tax expense and deferred tax liability?
a. 1,920,000 and 0
b. 1,920,000 and 640,000
c. 2,560,000 and 640,000
d. 2,560,000 and 0

20. Taft Company leased a facility and received P600,000 annual rental payment on June 16,2010. The
beginning of the lease was July 1,2010. Rental income is taxable when received. The income tax rate is 32%.
Taft had no other permanent or temporary differences. Taft determined that no valuation is needed.
Question 1:
Using the balance sheet liability method, what amount of deferred tax asset should Taft report in its December
31,2010 financial position?
a. 192,000
b. 204,000
c. 96,000
d. 0
Question 2:
Using the income statement liability method, what amount of deferred tax asset should Taft report in its
December 31,2010 financial position?
a. 192,000
b. 204,000
c. 96,000
d. 0

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21. On January 1,2009, Icor Company has spent P900,000 in developing a new product. These costs meet the
definition of an intangible asset under PAS 38 and have been recognized in the balance sheet. Local tax
legislation allows these costs to be deducted for tax purposes when they are incurred. On December 31,2010,
the intangible is deemed to be impaired by P75,000.
What amount of tax base related to the intangible asset as of December 31,2009?
a. zero
b. 75,000
c. 825,000
d. 900,000
22. On December 31,2010, Revelation Company granted some of its executive’s options to purchase 15,000
shares of the company’s P50 par ordinary share at the option price of P60 per share. The total compensation
expense would be P300,000 under the fair value method. The intrinsic value of the compensation which
considered tax deductible is P400,000. The options become exercisable on January 2,2012 and present
compensation for executives 2011 services. Income tax rate is 32% for all years.

What amount of the deferred tax to be reported in the 2011 profit or loss?
a. none
b. 32,000 increase
c. 96,000 increase
d. 128,000 increase

23. Titan Company issued a convertible bond on January 1,2009, that matures in five years. The bond can be
converted into ordinary shares at any time. Titan has calculated that the liability and the equity components of
the bond are P3,000,000 for the liability component and P1,000,000 for the equity component, giving a total
amount of the bond of P4,000,000. The interest rate of the bond is 6% and local tax legislation allows a tax
deduction for the interest paid in cash.

What is the deferred tax liability arising on the bond as at the year ending December 31,2009? (Tax rate is
32%)
a. none
b. 320,000
c. 960,000
d. 1,200,000

24. Turtle Company is experiencing financial difficulty and is negotiating trouble debt restricting with its
creditors to relieve its financial stress. Turtle has a P5,000,000 note payable to Metrobank. The bank is
considering acceptance of an equity interest in Turtle Company in the form of 400,000 ordinary shares with a
fair value of p12 per share. The par value of the ordinary share is P10 per share.

Question 1:
If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain to be reported
by Turtle in its profit or loss statement as a result of the restricting?
a. none
b. P200,000
c. P500,000
d. P1,000,000

Question 2:

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If the issue of equity is treated as an extinguishment of an existing debt instrument, what amount of gain or
loss should Turtle Company report in its profit or loss statement as a result of the restricting?
a. none
b. P200,000
c. P500,000
d. P1,000,000

25. In 2008, Runny Corporation acquired land by paying P2,000,000 and signing a note with a face value of
P6,000,000. On the note’s due date, which is December 31,2010, Runny owed P480,000 of accrued interest
and P6,000,000 principal on the note. Runny was in financial difficulty and was unable to make any payments.
Runny and the bank agreed to amend the note as follows:
 Extended the maturity to December 31,2012.
 The P480,000 interest due on December 31,2010 was forgiven.
 Runny would be required to make an annual interest payment of P540,000 every December 31.
 Transaction cost incurred that is directly related to the debt restricting was P16,850.

As of December 31,2010, the prevailing market rate for similar debt instrument is 9% while yield rate was
4.86%.
Question 1:
What amount Runny should report as gain, before income taxes in its 2010 income statement?
a. none
b. 80,000
c. 356,154
d. 373,004

Question 2:
What is the carrying value of the obligation should Runny Company report in its 2011 balance sheet?
a. 5,893,150
b. 6,000,000
c. 6,237,259
d. 6,463,150

26. On January 2,2010, Power Company provides for a lump sum benefit payable upon termination of
service that is equal to 10% of final each year of service. The salary in 2010 is P400,000 and is assumed to
increase at 5% compounded each year. The discount rate to be used is 10% per annum.

Power Company believes that the employee will not leave the company before the expected retirement
date of December 31,2013. Also, Power Company believes that there are no changes in actuarial
assumptions in future years.

Question 1:
What is the amount of current service cost Power Company should include it its pension expense in year
2012?
a. 34,789

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 b. 38,268
c. 42,095
d. 46,305
Question 2:
What is the present value of the defined benefit obligation as of December 31,2012?
a. 34,789
b. 76,536
c. 126,285
d. 185,220

27. On January 2,2010, Newton Company amended its pension plan to increase pension from 5% of final salary
to 8% of final salary for every year of credited service. The additional benefits are as follows:
Present value of additional benefits for employee service before year 2010:
Vested benefits 6,800,000
Non-vested benefits 4,080,000

Estimated average period until non-vested benefits would become vested is four years.

Question 1:
What amount of past service cost should be included in determining the present value of benefit obligation in
year 2010?
a. none
b. 6,800,000
c. 7,820,000
d. 10,880,000
Question 2:
What amount of past service cost should be included in the computation of net pension liability/asset during
2010?
a. 1,020,000
b. 3,060,000
c. 6,800,000
d. 7,800,000

28. On December 31,2010, Handy Company had closed down a business segment and the employees of that
segment will earn no further pension benefits. On the date of closure Handy Company provided the following
memorandum accounts related to its defined benefit pension plan. Projected benefit obligation, P7,040,000’
Unrecognized actuarial loss, P880,000; Unrecognized past service cost P440,000 and fair value of plan assets,
P5,000,000. Because of the curtailment, Handy Company determined that the projected benefit obligation will
be reduced by P704,000.

Question 1:
What amount of net gain or loss should Handy Company report as a component of pension expense as a result
of the curtailment?
a. 572,000
b. 616,000
c. 660,000
d. 704,000

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Question 2:
After the curtailment what amount of net pension liability/asset should Handy report in its 2010 balance
sheet?
a. 148,000
b. 572,000
c. 704,000
d. 720,000

29. The following information is available for the defined benefit pension plan of Fortune Company:

Expected return on plan assets 220,000

Actual return on plan assets 230,000
Benefits paid to retirees 200,000
Contributions 345,000
Present value of defined benefit obligation
January 1,2010 2,500,000
Present value of defined benefit obligation
December 1,2010 2,870,000
Current service cost 300,000
Past service cost to be recognized 40,000
Discount rate 10%

Fortune Company adopts the immediate recognition approach on its actuarial gains and losses. What amount
of net pension expense should Fortune Company report in its 2010 income statement?
a. 340,000
b. 350,000
c. 360,000
d. 370,000

30. The following date relate to the defined benefit plan of Bronson Company for the year ended December
31,2010:
Unrealized actuarial gain, January 1 825,000
Actuarial gain on obligation 200,000
Actuarial loss on plan assets 100,000
Present value of defined benefit obligation,
January 1 5,000,000
Fair value of plan assets, January 1 5,400,000
Average remaining working lives
of employees 15 years

Bronson Company uses the corridor approach on its actuarial gains and losses. What amount of unrecognized
actuarial gain or loss on December 31,2010?
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a. none
b. 706,000
c. 846,000
d. 906,000

31. Lexus Company adopts the corridor approach to account for actuarial gains and losses for its defined
benefit plan. The following data relate to 2010 defined benefit plan:

Fair value of plan assets, January 1 3,000,000

Expected return on plan assets 300,000
Actual return on plan assets 240,000
Contribution to the fund 500,000
Pension benefits paid 650,000
Present value of defined benefit obligation,
December 31 5,000,000
Unrecognized actuarial loss, December 31 200,000
Unrecognized past service cost, December 31 150,000
How much is the fair value of the plan assets on December 31,2010?
a. 3,040,000
b. 3,090,000
c. 3,150,000
d. 3,440,000

32. Portal Company has these balances relating to its defined benefit plan as of December 31,2010:

Fair value of plan assets, P37,000,000; Unrecognized actuarial losses, P3,000,000; Unrecognized past service
costs, P2,000,000; Present value of available future refunds and reduction in future contributions, P1,000,000.
Question 1:
If the present value of the obligation on 2010 December 31 is P45,000,000, what amount of pension liability
should Portal Company report in its 2010 December 31, balance sheet?
a. none
b. 2,000,000
c. 3,000,000
d. 4,000,000
Question 2:
If the present value of the obligation on 2010 December 31 is P33,000,000, what amount of pension asset
should Portal Company report in its 2010 December 31, balance sheet?
a. none
b. 3,000,000
c. 6,000,000
d. 9,000,000

33. Astronomy Inc. implemented a defined-benefit pension plan for its employees on January 2,2008. The
following data are provided for 2008 as of December 31,2010:
Present value of benefit obligation,
January 2,2010 1,000,000
Plan assets at fair value, January 2,2010 1,000,000
Net periodic pension cost during 2010 820,000

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 Employer's contribution (noncontributory) 600,000
Deferred gain (loss), January 2,2010 0
Settlement rate 11%
Rate of return on plan assets 9%
Payments of benefits during 2010 none

Astronomy Inc., uses the corridor approach

Assuming there were no deferred gain/loss on both plan assets and obligations during 2010, what is the
amount of service cost during 2010?
a. 710,000
b. 800,000
c. 820,000
d. 840,000
34. Ballistic Company issued 20,000 shares of its P10 par ordinary share and 40,000 shares of its P10
preference shares for a total amount of P1,500,000. At the date of issue, the ordinary shares had a market
value of p20 per share and the convertible preference shares are selling at P20 per share. What total amount
of share premium should be recognized on the issue of shares?

a. 300,000
b. 600,000
c. 900,000
d. 1,200,000

35. On July 1,2010, Fantastic Company has 200,000 shares of p10 par ordinary shares outstanding and the
market price is P12 per share. On the same date, Fantastic declared a 1 for 2 reverse share splits. The par of
the share was increased from P10 to P20. Immediately before the split, the total Share Premium Reserve was
P900,000.
What should be the balance in Fantastic Share Premium Reserve account after the reverse share split is
affected?

a. 0
b. 900,000
c. 1,300,000
d. 1,700,000

36. The shareholders’ equity account balances of Image Corporation as of December 31,2009 are as follows:
Ordinary share capital, P100 par, 50,000 shares
authorized; 25,000 shares issued 2,500,000
Share Premium 500,000
Accumulated Profits 1,000,000
Treasury stock, 2,000 shares at cost (320,000)
Total P3,680,000

On January 2,2010, Image sold the treasury shares on the open market at P200 per share. The entry to record
the sale on the books of Image should include a credit to;
a. gain on sale of treasury stock of P80,000
b. share premium of P80,000
c. accumulated profits of P80,000
d. share premium of P120,000
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37. On August 1,2010, Comical Company issued rights to shareholders to subscribe to additional share of its
ordinary share. A shareholder can buy one new share for every 10 rights plus P20 cash. The rights will expire
on October 1,2010. On July 31,2010, the market price of a share with the right attached was P40, while the
market price of the right alone was P4. Comical’s equity on July 31,2010, comprised of the following:

Ordinary share capital, P10 par 3,000,000

Share premium reserve 600,000
Accumulated profits 200,000

What is the effect on the shareholders’ equity if all the rights were exercised?
a. 1,200,000 increase
b. 600,000 increase
c. 120,000 increase
d. no change
38. In connection with the share option for the benefit of the key employees, Hairy Company intends to
distribute treasury shares when the options are exercised. These shares were bought in 2009 at P42 per share.
On January 1,2010, Hairy granted stock options for 10,000 shares at P38 per share as additional compensation
for services to be rendered over the next three years. The options are exercisable during a four-year period
beginning January 1,2013 by grantees still employed by the company. Market price of Hairy’s stock was P47
per share at the date of grant. No stock options were terminated during 2010. What amount should be
reported as compensation expense pertaining to the option in Hairy’s December 31,2010 income statement?

a. 0
b. 30,000
c. 40,000
d. 90,000

39. Marcus Company issues fully paid shares to 200 employees on December 31,2011. Normally shares issued
to employee’s vest over a two-year period, but these shares have been given as a bonus to the employees
because of their exceptional performance during the year. The shares have a market value of P400,000 on
December 31,2011 and an average fair market value of P450,000.

What amount would be charged against income in year 2011 related to the share-based payment transaction?
a. 200,000
b. 225,000
c. 400,000
d. 450,000

40. On January 2,2008, X Company grants 50 shares each to 400 employees, conditional upon the employee’s
remaining in the company’s employ during the vesting period. The shares will vest at the end of 2008 if the
company’s earnings increase by more than 15%; or at the end of 2009 if the earnings increased by an average
of 12% over the two-year period; or at the end of 2010 if the earnings increased by an averaged of 10% over
the three -year period. The shares have a fair value of P25 on January 2,2008, which is equal to the share price
on the grant date.

At the end of 2008, earnings had increased by 13% and 20 employees have left and the company expects that
earnings will continue to increase at a similar rate in 2009 and expects to vets in 2009. The company also
expects, on the basis of weighted average of probability, that a further 20 employees will leave during 2009.

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At the end of 2009, earnings increased by only 9% and therefore shares do not vest at the end of 2009. Also,
15 employees have left the company in 2009 but expect that 10 employees will leave the company in 2010.
The company expects that earnings will continue to increase at similar rate.

At the end of 2010, earnings increased by 9% and 5 employees have left the company in 2010.

What amount of remuneration expense should the company recognize in its December 31,2010 income
statement?
a. 70,833
b. 154,167
c. 225,000
d. 450,000

41. On January 1,2008, Color Company granted 80,000 cash shares appreciation rights to the executives on
condition that the executives remain in its employ for the next three years. The entity estimates that the fair
value of the share appreciation rights at the end of each year in which a liability exists are as follows:

Year Fair Value

2008 P15
2009 P18
2010 P20

Compensation expense relating to the plan is to be recorded over a three-year period beginning January
1,2008.

Question 1:
What amount of compensation expense should Color Company recognize for the year ended December
31,2008?
a. 240,000
b. 300,000
c. 400,000
d. 1,440,000

Question 2:
What amount of compensation expense should Color Company recognize for the year ended December
31,2009?
a. none
b. 400,000
c. 560,000
d. 960,000

42. Gallery Corporation paid dividends of P200,000 and P300,000 at the end of 2009 and 2010, respectively.
The corporation has not paid any other dividends since its organization on January 1,2008. The outstanding
shares are 20,000, 12% preference shares, par P100 and 30,000 ordinary shares, par P100.

Question 1:
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If preference shares are non-cumulative and nonparticipating, preference and ordinary, respectively will
receive in 2009;
a. P100,000 and P100,000
b. P150,000 and P50,000
c. P160,000 and P40,000
d. P200,000 and P0

Question 2:
If preference shares are cumulative and nonparticipating, preference and ordinary, respectively, will receive in
2010;
a. P150,000 and P150,000
b. P240,000 and P60,000
c. P280,000 and P40,000
d. P200,000 and P0

43. On September 30,2010, Bitter Company issued 3,000 shares of its P100 par ordinary share in connection
with a stock dividend. No entry was made on the stock dividend declaration date. The market value per share
immediately after issuance was P120. Bitter’s stockholders’ equity accounts immediately before issuance of
the stock dividend shares were as follows:
Ordinary share capital, P100 par; 50,000
shares authorized; 20,000 shares
outstanding 2,000,000
Share premium reserve 3,000,000
Accumulated profits 3,500,000

What should be the total shareholders’ equity immediately after the share dividend?
a. P8,500,000
b. P8,800,000
c. P8,860,000
d. 9,600,000

44. Purple Company had sufficient accumulated profits in 2010 as a basis for dividends but was temporarily
short of cash. Purple declared a P200,000 dividend on May 1,2010 and issued promissory notes to its
shareholders in lieu of cash. The notes which are dated May 1,2010 had a maturity date of April 30,2011 and a
12% interest rate.

How should Purple account for the scrip dividend and related interest?
a. Debit accumulate profits for P224,000 on December 31,2010
b. Debit accumulated profits for P224,000 on April 30,2011
c. Debit accumulated profits for P200,000 on May 1,2010 and debit interest expense for P16,000 on December
31,2010
d. Debit accumulated profits for P200,000 on April 30,2011 and debit interest expense for P16,000 on
December 31,2010

45. On December 31,2010, Pink Corporation reported a P3,500,000 of appropriation reserve for the
construction of a new building, which was completed in 2010 at a total cost of P3,000,000. In 2011, the
company appropriated P2,400,000 of accumulated profits for the construction of a new plant. As of 2011, the
16
plant is still undergoing construction. The company also restricted P4,000,000 of cash for the retirement of
bonds due in 2015. The bond indenture requires Pin Company to appropriate P300,000 per annum of the
accumulated profits immediately when the bonds were issued on January 2,2007 until December 31,2015.

In its 2011 balance sheet, Pink Company should report what amount of appropriation reserves?
a. 6,400,000
b. 5,900,000
c. 3,900,000
d. 2,400,000

46. Croissant Corporation has incurred losses from operations for years. At the recommendation of the newly
hired president, the board of directors voted to implement quasi-reorganization on June 30,2010. Croissant’s
balance sheet is shown below:
Current assets 5,500,000 Current liabilities 4,000,000
Property, plant & equipment 13,500,000 Non-current liabilities 2,000,000
Other assets 2,000,000 Share capital, par P10 16,000,000
Share premium reserve 30,000,000
Deficit (4,000,000)
Total Assets P21,000,000 Total equities P21,000,000

The stockholders approved the quasi-reorganization effective July 1,2010 to be accomplished by a reduction in
property, plant and equipment in the amount of P3,500,000; a reduction in other assets of P1,500,000 and a
reduction in par value by P5 per share. What is the balance of the shareholders’ equity after the quasi-
reorganization?
a. 8,000,000
b. 10,000,000
c. 16,000,000
d. 19,000,000

47. White Corporation’s December 31,2010 balance sheet reports the following shareholders’ equity:

8% Cumulative Preference share capital, P100 par value per share

10,000 shares issued and outstanding 1,000,000
Ordinary share capital, P100 par value, 50,000 shares
issued and outstanding 5,000,000
Share premium reserve 600,000
Accumulated profits 1,500,000

Dividends are in arrears for 3 years on the preference share capital. If White is to be liquidated, the preference
shareholders would receive par value plus a premium of P10 per share. The book value per share on ordinary
share is;
17
a. 133.60
b. 135.20
c. 136.80
d. 137.20

48. Blue Corporation’s December 31,2010 balance sheet reports the following shareholders’ equity:

10% Cumulative Preference share capital, P100 par value per share
15,000 shares issued and outstanding 1,500,000
Ordinary share capital, P100 par value, 50,000 shares
issued and outstanding 5,000,000
Share premium reserve 600,000
Treasury stock (ordinary) 5,000 shares at cost 650,000
Retained earnings 2,100,000

The last payment of dividend on preference was in December 31,2008. If Blue were to be liquidated, the
preference shareholders would receive par value plus a premium of P10 per share.

Question 1:
What is the book value per share on ordinary share?
a. 132.00
b. 133.00
c. 146.67
d. 147.78
Question 2:
If the preference share is participating, what is the book value per share on ordinary share?
a. 126.00
b. 137.50
c. 140.00
d. 146.00

49. The shareholders’ equity of Orange Company shows the following balances on December 31,2010:

10% Preference share capital, cumulative and nonparticipating P100

par with a liquidation value of P110, 20,000 shares 2,000,000
Ordinary share capital, P100 par value, 30,000 shares 3,000,000
Subscribed ordinary shares 1,000,000
Subscription receivable 600,000
Treasury stock 5,000 shares, at cost (common) 400,000
Share premium reserve 660,000
Retained earnings 1,360,000

What is the book value per share of ordinary share, assuming preference dividends are in arrears since 2007?
a. 115.50
b. 132.00
c. 154.00
d. 184.80

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50. Red Company had 120,000 shares of ordinary share issued and outstanding at January 1,2010. On January
2,1010, the company issued 80,000 shares of preferred stock. During the year, the company declared and aid
P420,000 cash dividend on the ordinary and P240,000 on the preference.

Net income for the year was P1,500,000. What should be the basic earnings per share in 2010?
a. 9.00
b. 10.50
c. 12.50
d. 15.75

51. Lilac Company had 200,000 shares of ordinary shares outstanding on January 1,2010. On March 31,2010,
100,000 shares of 10% convertible preference share par value of P10 were issued, the preference shares are
convertible into 50,000 shares of ordinary shares. On December 31,2010, Lilac Company reported a net income
of P1,140,000 after tax and paid dividends of P300,000 to ordinary and P100,000 to preference shareholders,
what is the diluted earnings per share?

a. 4.38
b. 4.56
c. 4.80
d.5.07

52. Gray Company has 150,000 shares outstanding, 10,000 cumulative convertible preference share with a par
value of P100 per share that are convertible into 25,000 ordinary shares and an 8% convertible bonds with a
face value of P1,000,000 which is equal to its liability component, convertible into 30,000 ordinary shares. Net
income for the year is P850,000. Income tax rate is 32%.

Question 1:
Assuming the dividend rate of the preference share is 12%, what is the diluted earnings per share?
a. 4.36
b. 4.41
c. 4.80
d. 4.86

Question 2:
Assuming the dividend rate of the preference share is 10%, what is the diluted earnings per share?
a. 4.36
b. 4.41
c. 4.80
d. 4.86

53. Information relating to the capital structure of the Magdalene Corporation at December 31,2010 is as
follows:

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 Ordinary share capital 120,000 shares
Convertible preference share capital, non-cumulative 18,000 shares
7.5% convertible bonds (liability component) 1,200,000
Stock options to purchase 20,000 shares at an option
price of P15. The average market price on December 31,2008 is
P20

The company paid dividends of P5 per share on its preference share. The preference share is convertible into
40,000 shares of ordinary share. The 7.5% convertible bonds are convertible into 35,000 shares of ordinary.
The net income for the year ended December 31,2010 is P640,000. Income tax rate is 3.2%.

What are the diluted earnings per share for the year 2010?
a. 3.51
b. 3.60
c. 4.25
d. 4.58

54. The following errors were uncovered for 209 and 2010 financial statements of Capricorn Company:
2009 2010
Understatement of Prepaid insurance 80,000 100,000
Understatement of Depreciation expense 100,000 200,000
Overstatement of Merchandise inventory, end 205,000 300,000
Understatement of Accrued rent income 90,000 100,000
Overstatement of deferred income 75,000 95,000
Question 1:
What is the net effect of the above errors in 2010 income statement?
a. 60,000 overstated
b. 245,000 overstated
c. 285,000 overstated
d. 305,000 overstated
Question 2:
By how much retained earnings should be retroactively adjusted at January 1,2011?
a. 60,000 decrease
b. 245,000 decrease
c. 285,000 decrease
d. 305,000 decrease

55. In its accrual basis income statement for the year ended December 31,2010, Holland Company reported
revenue of P3,100,000. Additional information was as follows:

Accounts receivable, December 31,2009 700,000

Accounts receivable, December 31,2010 1,100,000
Notes receivable, December 31,2009 800,000
Notes receivable, December 31,2010 600,000

Under the cash basis, how much should Holland report as revenue for 2010?

20
a. 2,500,000
b. 2,900,000
c. 3,100,000
d. 3,300,000

56. Vienna Company reported total purchases of P2,500,000 in its cash basis financial statement on December
31,2010. Additional information revealed the following:

Accounts payable, January 1,2010 600,000

Accounts payable, December 31,2010 800,000
Notes receivable, December 31,2009 300,000
Notes receivable, December 31,2010 600,000

Under the accrual basis of measuring revenues and expenses, how much is the total amount of purchases?
a. 2,000,000
b. 2,500,000
c. 2,700,000
d. 3,000,000
57. The following information were obtained from the incomplete records of Portugal related to its operating
expenses:
12/31/2009 12/31/2010
Total payments made 930,000
Total operating expenses 840,000
Prepaid operating expenses ? 300,000
Accrued operating expenses 450,000 250,000

What is the balance of the Prepaid Operating Expenses account on December 31,2010?
a. 10,000
b. 310,000
c. 410,000
d. 590,000

58. Pakistan Company is engaged in a small export business. The company maintains limited records. Most of
the company’s transactions are summarized in a cash journal; non cash transactions are recorded by making
memo entries. The following are abstracted from the company’s records.

Increase in account receivable, P370,000; decrease in notes receivable, P200,000; decrease in accounts
payable, P155,000; increase in trade notes payable, P200,000; increase in non-trade notes payable, P200,000.
Sales return (P50,000 was refunded), P80,000; sales discount, P20,000; purchase returns (P30,000 was
refunded), P80,000; purchase discounts, P35,000; accounts written off, P60,000; recovery of write-off,
P20,000; cash sales, P420,000; cash purchases, P670,000; cash received from account customers (excluding the
amount of recovery, P1,500,000 and cash payments to creditors, P1,200,000;

Question 1:
What is the amount of gross sales?
a. 1,780,000
b2,180,000

21
c. 2,200,000
d. 2,300,000

Question 2:
What is the amount of gross purchases?
a. 1,330,000
b. 1,450,000
c. 1,980,000
d. 2,000,000

59. Kamiseta Company reported net income of P3,000,000 for 2010. Changes occurred in several balance sheet
accounts during 2010 as follows:

Gain on sale of equipment 60,000

Proceeds from sale of equipment 100,000
Purchase of held to maturity security,
par value, P2,000,000 1,800,000
Amortization of bond discount 20,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury share
(carrying amount P650,000) 750,000

In 2010 statement of cash flows, the reported net cash provided by operating activities should be;
a. 2,720,000
b. 2,920,000
c. 2,780,000
d. 2,580,000

60. Options Corporation sold some of its plant assets during 2011. The original cost of the plant assets was
P600,000 and the accumulated depreciation at the date of sale was P560,000. The proceeds from the sale of
the plant assets were P85,000.

The information concerning the sale of the plant assets be shown on Option’s statement of cash flows (indirect
method) for the year ended December 31,2011 as;

a. A subtraction from net income of P45,000 and a P40,000 increase in cash flows from financing activities
b. An addition to net income of P45,000 and an P85,000 increase in cash flow from investing activities
c. A subtraction from net income of P45,000 and an P85,000 increase in cash flow from investing activities

22
d. An addition of P85,000 to net income

61. The balance sheet data of Sweet Corn Company at the end of 2009 and 2010 as follows:

2010 2011
Cash 250,000 350,000
Accounts receivable, net 600,000 450,000
Merchandise inventory 700,000 450,000
Prepaid expenses 100,000 250,000
Building and equipment 900,000 750,000
Accumulated depreciation (180,000) (80,000)
Land 900,000 400,000
TOTALS P3,270,000 P2,570,000

2010 2009
Accounts payable 680,000 550,000
Accrued expenses 120,000 180,000
Notes payable, bank (long term) 400,000
Mortgage payable 300,000
Ordinary share capital, P10 par 2,090,000 1,590,000
Accumulated Profits/Losses (deficit) 80,000 (150,000)
TOTALS P3,270,000 P2,570,000

Land was acquired for P500,000 in exchange for ordinary share, par P500,000 during the year. All equipment
purchased was for cash. Equipment costing P50,000 was sold for P20,000, with book value of P40,000. Cash
dividends of P100,000 were charged to Accumulated Profits and losses and was the only entry in this account.

In December 31,2010 statement of cash flows of the company, how much would be the net cash provided
(used) by

Question 1:
Operating activities?
a. 240,000
b. 260,000
c. 280,000
d. 330,000

Question 2:
Investing activities?
a. 130,000
b. (180,000)
c. (200,000)
23
d. (680,000)

Question 3:
Financing activities?
a. 0
b. (100,000)
c. (200,000)
d. 300,000

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