PRACTICAL ACCOUNTING 1

On December 31, a corporation had a working capital (current) ratio of 2, and reported the following
accounts:

Assets Equities

Cash P4,000 Accounts payable P2,000

Accounts receivable 13,000 Wages payable 6,000

Inventory 6,600 Interest payable 4,000

Prepaid insurance 1,000 Bonds payable 14,000

Equipment (net) 24,000 Retained earnings 2,600

Therefore, the balance in the allowance for doubtful accounts was:

(a) P600 (b) P300 (c) P200 (d) P0 A

Ode, Inc. has 5,000,000 shares of common stock outstanding on December 31, 2003. An additional
1,000,000 shares of common stock were issued on April 1, 2004, and 500,000 more on July 1, 2004. On
October 1, 2004, Ode issued 10,000 P1,000 face value, 7% convertible bonds. Each bond is convertible
into 40 shares of common stock and were considered potential common shares and no bonds were
converted into common stock in 2004. What is the number of shares to be used in computing basic
earnings per share and diluted earnings per share, respectively?

(a) 5,750,000 and 5,950,000 (c) 6,000,000 and 6,100,000

(b) 5,750,000 and 6,150,000 (d) 6,000,000 and 6,900,000 C

The following information is available for Waki Jewelry and Gift Store:

Net income P5,000

Depreciation expense 2,500

Increase in deferred tax liabilities 500

Decrease in cash 3,000

Decrease in accounts receivable 2,000

Increase in inventories 9,000

Decrease in accounts payable 5,000

Increase in accrued liabilities 1,000

 Increase in property and equipment 14,000

Increase in short-term notes payable 19,000

Decrease in long-term notes payable 4,000

What is the net cash flow from financing activities?

(a) P15,000 (b) (P15,000) (c) P17,000 (d) (P14,000) A

A company provides residential carpet cleaning at a rate of P24 per month or P250 per year if paid one
year in advance. Examination of the bank deposits revealed the following:

Accounts receivable 1/1 P12,600

Cash collected from customers (including advances) 18,000

Advances from customers 12/31 2,600

Accounts receivable 12/31 9,600

Advances from customers 1/1 2,000

Revenue for the year was:

(a) P14,400 (b) P15,600 (c) P12,600 (d) P17,400 A

The following information were found in the books of Knight Corporation:

Reconciled balance in Metrobank checking account P19,607.50

Reconciled balance in BPI checking account ( 402.00)

Balance in PNB 287,500.00

Certificate of deposit (150 days maturity) 300,000.00

Petty cash fund 5,000.00

Postage stamps 1,000.00

Employee’s IOU 1,250.00

Employees’ travel advances 16,400.00

Cash on hand (undeposited sales receipts) 31,094.00

Traveler’s checks 6,000.00

Customer’s postdated check 2,904.00

Total cash to be reported on balance sheet was:

 (a) P349,201.50 (b) P351,703.50 (c) P648,799.50 (d) P649,201.50 A

The Genuine Company requires additional cash for its business. Genuine has decided to use it accounts
receivable to raise additional cash as follows:

On June 30, 2003, it assigned P200,000 of accounts receivable of Gel Finance Company. It
received an advance from Gel of 85% of the assigned accounts receivable, less a commission on
the advance of 3%. Prior to December 31, 2003, it collected P150,000 on the assigned accounts
receivable and remitted P160,000 to Gel, P10,000 of which represented interest on the advance
from Gel.

On December 1, 2003, it sold P300,000 of net accounts receivable to the Factoring Company for
P260,000. The receivables were sold outright on a nonrecourse basis.

On December 29, 2003, it received an advance of P100,000 from the Domestic Bank by pledging
P120,000 of its accounts receivable. Its first payment to Domestic is due on January 31, 2004.

How much is the total expenses to be reported in the income statement for the year ended
December 31, 2003?

(a) P10,000 (b) P40,000 (c) P15,100 (d) P55,100 D

Based on the information:

Credit sales P172,000 credit

Collections on accounts receivable during the year 170,000 credit

Cash sales 810,000 credit

Unadjusted balance in allowance for doubtful 50 debit

Sales returns and allowances for credit sales 4,000 debit

Accounts receivable, beginning of the year 14,000 debit

If bad debts are estimated to be 1 ½% of ending accounts receivable, in the adjusting entry to
recognize bad debts, you would debit bad debt expense for:

(a) P230 (b) P190 (c) P130 (d) P180 A

Hole Company uses a perpetual inventory system. The company ’s beginning inventory of a particular
style of large screen TVs and its purchases during the month of January were as follows:

Quantity Unit Cost Total Cost

Beginning inventory (Jan. 1) 40 P200 P 8,000

Purchase (Jan. 12) 20 221 4,420

 Purchase (Jan. 28) 10 158 1,580

Total 70 P14,000

On January 15, Hole Company held its annual large screen TV Sale Day. On this day, 55 of these
TVs were sold. The remaining 15 units above remain in inventory at January 31. Assuming that Hole
uses the LIFO flow assumption, the cost of goods sold to be recorded at January 15 is:

(a) P11,420 (b) P11,000 (c) P11,315 (d) P11,460 A

On January 1, 1999, Star Company paid P1,200,000 for 40,000 shares of Comet Corporation ’s common
stock which represents a 25% investment in the net assets of Comet. Star has the ability to exercise
significant influence over Comet.

Star received a dividend of P3 per share from Comet in 1999. Comet reported net income of
P640,000 for the year ended December 31, 1999.

The balance on Star’s balance sheet account investment in Comet Corporation at December 31,
1999 should be:

(a) P1,200,000 (b) P1,240,000 (c) P1,360,000 (d) P1,480,000 B

The stockholders’ equity of Retro Company on December 31, 2002 includes the following:

12% preferred stock, 20,000 shares, P100 par value 2,000,000

14% preferred stock, 10,000 shares, P300 par value 3,000,000

Common stock, 50,000 shares, P100 par value 5,000,000

Retained earnings 2,240,000

Additional paid in capital 1,500,000

The 12% stock is cumulative and fully participating. The 14% stock is noncumulative and fully
participating. Dividends in arrears are for 3 years. What is the book value per share of common
stock?

(a) P132 (b) P126 (c) P100 (d) P112

Style Company is experiencing financial difficulty and is negotiating debt restructuring with its creditors to
relieve its financial stress. Style has a P2,500,000 note payable to United Bank. The bank is considering
acceptance of an equity interest in Style Company in the form of 200,000 shares of common stock valued
at P12 per share. The par value of common is P10 per share. How much is the gain from the debt
restructuring?

(a) P500,000 (b) P100,000 (c) P400,000 (d) P 0

On July 1, 2002, Durable Company purchased Rose Corporation 10-year, 12% bonds with face value of
P300,000 for P324,000, which included P12,000 of accrued interest. The bonds, which mature on March
1, 2009, pay interest semi-annually on March 1 and September 1. Durable appropriately uses the
straight line method of amortization. The amount of income Durable should report for the calendar year
2002 as a result of this long-term investment?

(a) P16,200 (b) P17,100 (c) P18,000 (d) P30,000

On July 1, 2002, Rey purchased P1,000,000 of West Company ’s 8% bonds due at July 1, 2012. Rey
expects to hold the bond until maturity. The bonds, which pay interest semiannually on January 1 and
July 1, were purchased for P875,000 to yield 10%. In its income statement for the year ended December
31, 2002, Rey should report interest income at:

(a) P35,000 (b) P40,000 (c) P43,750 (d) P50,000

On July 1, 2002, Roger Co. paid P1,198,000 for 10% 20-year bonds with a face amount of P1,000,000.
Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Roger uses the
effective interest method to recognize interest income from investment. What should be reported as
carrying amount of the bonds in Roger’s December 31, 2002 balance sheet?

(a) P1,207,000 (b) P1,198,000 (c) P1,195,920 (d) P1,193,050

Heart Company leased a new machine from Ash Company on December 31, 2002 under a lease with the
following pertinent information:

Lease term 8 years

Annual rental payable at beginning of each lease year P500,000

Useful life of the machine 10 years

Present value of the 8 lease payments at 12/31/2002 P2,580,000

Machine reverts to Ash at lease expiration date

The machine has a fair value of P2,800,000 at the inception of the lease. Heart uses the straight line
method of depreciation. For the year ended December 31, 2003, how much depreciation should
Heart record for the capitalized lease machine?

(a) P350,000 (b) P322,500 (c) P280,000 (d) P258,000

PRACTICAL ACCOUNTING 1

At the end of the accounting year, December 31, 2003, Jane ’s records reflected the following:

Common stock, no par, 5,000 shares issued, issue price P12 per share

Preferred stock, par P5, 1,000 shares issued and outstanding; issue price, P15 per share

Unrealized gain, securities available for sale, P18,000

Retained earnings, P20,000 (unappropriated)

 Preferred stock, par P5, subscribed (not yet issued), 400 shares; subscription price P20 per share

Subscriptions receivable on the preferred stock P5,000 to be collected on January 1, 2004

Reserve for bond sinking fund, P15,000

Treasury stock, common stock, 1,000 shares, cost P10 per share

Total stockholders’ equity is:

P120,000. c. P126,000.
P121,000. d. P125,000. C

On July 8, 2003, Geo Company issued for P525,000 a total of 5,000 shares of P100 par value, 7 percent
noncumulative preferred stock along with one detachable warrant for each shares issued. Each warrant
contains a right to purchase one share of Geo’s P10 par value common stock for P15 a share. The market
price of the rights of July 1, 2003, was P2.25 per right. On October 31, 2003, when the market price of
the common stock was P19 per share and the market value of the rights was P3 per right, 4,500 rights
were exercised. As a result of the exercise of the 4,500 rights and the issuance of the related common
stock , what journal entry would Geo make?

Debit Credit

Cash P67,500
Common stock 40,000

Additional paid-in capital 27,500

Cash 67,500
Common stock rights outstanding 9,000

Common stock 45,000

Additional paid-in capital 31,500

Cash 67,500
Common stock rights outstanding 11,250

Common stock 45,000

Additional paid-in capital 33,750

Cash 67,500
Common stock rights outstanding 10,125
 Common stock 45,000

Additional paid-in capital 32,625 D

Cute had the following shares outstanding:

Preferred stock, 6%, P50 par value, 2,000 shares

Common stock, P100 par value, 2,000 shares
The preferred stock is cumulative, fully participating; dividends are three years in arrears, excluding
the current year, dividends declared in the current year amount to P42,000. The total amount of
dividends to which common stockholders are entitled is:
a. P16,000 b. P20,000 c. P24,500 d. P26,000 A

Jar had a P5,400 temporary tax difference resulting from using an accelerated depreciation method for
tax purposes at the end of 2004. This temporary difference will reverse equally during 2005, 2006, and
2007. The currently enacted tax rates are: 2004 – 25%; 2005 – 30%; 2006 – 26%; and 2007 – 25%.
The related deferred tax liability at the end of 2004 would be:

a. P1,350 b. P1,404 c. P1,431 d. P1,458 D

Fred had a P1,200 temporary difference for deferred gross margin on installment sales at the end o 2004.
This temporary difference will reverse equally during 2005, 2006 and 2007. The enacted corporate
income tax rate is 48% and Congress is discussing a reduction in the corporate income tax rates for 2006
and 2007 to 38%. The deferred tax liability related to this temporary difference at the end of 2004 would
be:

a. P192 b. P248 c. P516 d. P576 D

Kim had taxable income of P1,500 during 2003. Kim used accelerated depreciation for tax purposes
(P2,000) and straight-line depreciation for financial accounting purposes (P800). On December 30, 2003,
Kim collected January 2004’s P600 rent on a lot it rents on a month-by-month basis to Mile. Kim ’s pretax
accounting income for 2003 would be:

a. P900 b. P2,100 c. P3,300 d. P3,700 B

On June1, Jeremiah Corporation established a defined benefit pension plan for its employees. The
following information was available on May 31, 2003:

Projected benefit obligation P 3,625,000

Accumulated benefit obligation 3,000,000
Unfunded accrued pension cost 50,000
Plan assets at fair market value 1,750,000
Unrecognized prior service cost 637,500

To report the proper pension liability in Jeremiah ’s May 31, 2003, balance sheet, what is the required
balance in additional minimum pension liability?
a. P562,500 b. P1,187,500 c. P1,200,000 d. P1,825,000 C

Oak Company sponsors a defined benefit plan covering all employees. Benefits are based on years of
service and compensation levels at the time of retirement. Oak determined that as of September 30,
2003, its accumulated benefit obligation was P380,000 and its plan assets had a P290,000 fair value.
Oak’s September 30, 2003, trial balance showed prepaid pension cost of P20,000. As of September 30,
2003, what is the balance of additional minimum pension liability?

a. P110,000 b. P360,000 c. P90,000 d. P400,000 A

The following information pertains to Prim Corporation’s defined benefit plan for 2003:

Service cost P 160,000

Actual and expected gain on plan assets 35,000
Unexpected increase in PBO incurred during 2003 40,000
Amortization of unrecognized prior service cost 5,000
Annual interest on pension obligation 50,000
What amount should Prim report as pension expense in its 2003 income statement?
a. P250,000 b. P220,000 c. P210,000 d. P180,000 D

Mike leased a new machine from Lime on July 1, 2004, under a lease with the following pertinent
information:

Lease term 10 years

Annual rental payable at the beginning of each lease year P30,000
Useful life of the machine 12 years
Implicit interest rate 14%
Present value of an annuity of P1 in advance for 10 periods at 14% 5.95
Present value of P1 for 10 periods at 14% 0.27
 Mike has the option to purchase the machine at the end of the lease term, by paying P40,000, which
approximates the expected fair value of the machine on the option exercise date. The cost of the
machine on Lime’s accounting records is P150,000. On July 1, 2004, Mike should record a net
capitalized leased asset of:
a. P150,000 b. P178,500 c. P189,300 d. P190,000 B
THEORY OF ACCOUNTS

Why does ASC warn against making comparisons of the disaggregated information disclosed by two
different companies?

the data is not an actual part of the financial statements

the identification of specific segments may be done differently by different companies

the information is not viewed in reporting trends between past and present operations

different types of revenues are included by some companies B

In the preparation of consolidated financial statements, where subsidiary is not 100% owned,
eliminations are made of the following, except:

all dividends declared by subsidiaries

intercompany open account balance

unrealized intercompany profits and losses on inventories or equipment

carrying value of the investment A

A pro-forma statement ordinarily shall be:

columnar in format

showing condensed historical statements

pro-forma adjustments

pro-forma results

Which of the above items are reflected?

a. A and B only c. A, B, C and D

b. C and D only d. A, B and D C

Consolidated financial statements will be prepared for parent and subsidiary when any of the
following, except:

control is temporary as when subsidiary must be disposed of under court

it is an issuer of registered securities, banks, finance company, investment company, investment house

the total liability of any entity in the group is more than P50 million or the total liability of the group is
more than P150 million

if parent and subsidiaries are engaged in dissimilar activities A

If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the
entire year, when should they be expensed?

in full in the first quarter

in full in the second quarter

an allocated portion in each quarter of the year

all expenses affecting more than one quarter should be recognized in the last year of the fiscal year
C

The September 30, 2003, physical inventory D Company appropriately included P3,800 of
merchandise purchased on account which was not recorded in purchases until October 2003. What
effect will this error have on September 30, 2003 assets, liabilities, retained earnings, and earning for
the year then ended, respectively?

understate, no effect, overstated, overstate

no effect, overstate, understate, understate

no effect, understate, overstate, overstate

no effect, understate, understate, overstate C

A company sold a used operational asset at a P20,000 loss. The loss should be classified on the
income statement as:

an extraordinary item c. a prior-period adjustment

an operating expense d. an unusual or infrequent item B

Reporting extraordinary items on the income statement more closely follows which concept of net
income:

all inclusive c. full disclosure principle

current operating d. multiple step A

A company has identified one of its business segments as being the production of computer software.
Which of the following should not be included in determining his segment ’s revenue for
disaggregation purposes?

interest income on intersegment loans

interest income on intersegment trade receivables

interest income on trade receivables with outside parties

interest income on loans made to outside parties A

A firm identified four business segments as reportable out of a total of 8 subunits of the firm based
on the identifiable assets criterion. Total company sales excluding intersegment sales are P2,000,000
for the year, and the sum of sales for the four identified segments is P1,300,000. Therefore, the
firm:

need not report on a segment basis for this period

must identify one or more additional segments for segmental disclosure purposes

must disclose only the four sub-units as segments

treat all sub-units of the firm as reportable B

THEORY OF ACCOUNTS

Which of the following statements is false?

segment information is not required to be disclosed in interim reports

earnings per share should be computed for each interim period presented

both dipping into the LIFO base at interim date and lower of cost or market losses at interim date can be
ignored if recovery is expected by year-end

if a company has stock traded publicly, both interim and annual financial reports must be audited
D

Minimum disclosures are not required as part of interim reporting for:

sales or gross revenue

primary and fully diluted earnings per share

contingent items

segment information D

Which of the following inventory procedures cannot be applied for interim reporting?

estimation of inventory using gross profit method

delayed recognition of permanent losses from inventory market declines

delayed recognition of temporary inventory market declines

delayed recognition of temporary LIFO liquidations B

When a segment of a business has been discontinued during the year, the gain or loss on disposal
should:

include operating losses of the current period up to the measurement date

be net of applicable income taxes

be reported as an extraordinary item

exclude operating losses during the phaseout period B

When stock rights are issued to current stockholders, the number of rights to be issued per existing
share will:

be the number of rights needed to obtain one additional share of stock multiplied by the number or
shares already held

vary depending on the number per share of stock already held, as determined and announced by the
corporation

usually be only one right per share of stock already held

depend on the number purchased by existing shareholders C

Identify the missing component (x) in the following equation:

Retained earnings, ending balance = net income to date + prior period adjustments to date –

cash and property dividends to date - x

stock dividends to date

stock dividends and splits to date

stock splits to date

net unrealized gain or loss on securities available for sale A

A lessee wants to lease an asset on a long-term noncancelable lease, but wants to avoid capitalizing
the lease. Which of the following strategies has the best chance of achieving the lessee ’s goal?

use a lessee guarantee of residual value

make it impossible for the lessee, who has a very low borrowing rate, to determine the lessor ’s implicit
rate, which is much higher than the lessee’s borrowing rate

include a bargain purchase option in the lease agreement

use a third-party guarantee of residual value D

 When a segment of a business has been discontinued during the year and is sold at the end of the
year, the income or loss from the discontinued operations, one of the two amounts typically reported
in the income statement, includes:

the income or loss from operating segment the entire year

the income or loss from operating the segment from that date the decision was made to dispose of the
segment to the end of the year

the income or loss from operating the segment from the beginning of the year to the date the decision
was made to dispose of the segment

the difference between the sales price of the segment and the segment ’s book value B

A company uses a perpetual inventory system. They discover that a P60,000 sale was recorded on
December 28, 2004, when the invoice was sent. But the item was not shipped until January, 2005.
Cost of goods sold was P42,000. The books have been closed for 2004. Which line item should
appear in the correcting entry, if any?

none, no entry needed c. credit cost of goods sold for P42,000

debit sales for P60,000 d. debit prior period adjustment for P18,000 D

10. Which of the following statements is false?

a. Adjustments for bad debts, depreciation expense, and accruals are required at each interim date.

b. The cumulative effect of change in accounting policy (net of income taxes) should be disclosed in
the first interim period, even if the change was made in the second, third, or fourth interim
period.

c. Each interim period should be viewed as a basic accounting period and the results of operations
should be determined in essentially the same way as if the interim period were an annual
accounting period.

d. Extraordinary gains and losses occurring in one interim period should not be allocated to several
interim periods. C