REVIEW 105 – DAY 20 6.

Under a sales type lease, what is the meaning of “gross investment in

the lease” on the part of the lessor?
a. Present value of minimum lease payments
TOA b. Present value of minimum lease payments and present value of unguaranteed
residual value.
c. Absolute amount of the minimum lease payments
1. The minimum lease payments under a finance lease include all of the following, d. Aggregate of minimum lease payments and unguaranteed residual value
except
a. Contingent rent and executory costs 7. Net investment in the lease is equal to the
b. Periodic rentals over the lease term a. Gross investment in the lease less unearned finance income
c. Any amount guaranteed by the lessee or by a party related to the lessee. b. Gross investment in the lease less dealer’s profit
d. Payment required to exercise an option on the part of the lessee to purchase c. Minimum lease payments
the asset at a price which is expected to be sufficiently lower than its fair value at d. Minimum lease payments less unguaranteed residual value.

a
the option exercise date.

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8. What is the treatment of unguaranteed residual value in determining the cost of
2. A lease contains a bargain purchase option. In determining the capitalized cost at sales under a sales type lease?
the beginning of the lease term, the payment called for by the bargain option would a. Ignored

d
a. Not be capitalized c. Be subtracted at its present b. Added to the cost of the leased asset

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value c. Deducted from the cost of the leased asset at absolute amount

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b. Be added at its exercise value d. Be added at its present value d. Deducted from the cost of the leased asset at present value
3. At the inception of a capital lease, the guaranteed residual value should be

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9. Initial direct costs incurred by the lessee in connection with a finance lease are
a. Included as part of minimum lease payments at present value a. Included as part of the amount recognized as an asset under the lease
b. Included as part of minimum lease payments at future value b. Expensed immediately
c. Excluded from minimum lease payments

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c. Deferred and amortized over the lease term on a straight line basis.
d. Included as part of minimum lease payments to the extent that the guaranteed d. Included in the minimum lease payments at present value.
residual value is expected to exceed estimated residual value

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10. Which statement is correct concerning a finance lease on the part of the lessor?
4. The lessee’s balance sheet liability for a capital lease would be periodically I. Initial direct costs should be recognized as expense in the income

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reduced by the statement at the inception of a sales type lease.
II. Initial direct costs incurred by the lessor in a direct financing lease are
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a. Minimum lease payment plus the amortization of the related asset
b. Minimum lease payment less the amortization of the related asset included in the net investment in the lease and will have the effect of
a. Minimum lease payment reducing the interest income from the finance lease.
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b. Minimum lease payment less the portion allocable to interest a. I only b. II only c. Both I and II d. Neither
I nor II
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5. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the 11. If the sale and leaseback transaction results in a finance lease, any gain from the
a. Useful life of the asset sale and leaseback should
b. Lease term a. Not be recognized
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c. Useful life of the asset if there is reasonable certainty that the lessee will obtain b. Be recognized as income immediately.
ownership by the end of the lease term. c. Be deferred and amortized over the lease term.
d. Lease term or useful life of the asset, whichever is shorter d. Be deferred and amortized over the useful life of the asset.
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 12. ABC Company sold its headquarters building at a gain and simultaneously 1. Accounts payable:
leased back the building. The lease was reported as a finance lease. At the time
of sale, the gain should be reported as Accounts payable per general ledger control amounted to P3,400,000, net
a. Operating income of P150,000 debit balances in suppliers’ accounts. The unpaid voucher
b. An extraordinary item file included the following items that not had been recorded as of
c. A separate component of stockholders’ equity December 31, 2005:
d. As asset valuation allowance
13. Under PAS 12, which enterprises are required to report deferred tax asset or a Earth Company – P140,000 merchandise shipped on December 31, 2005,
liability? FOB destination; received on January 10, 2006.
I. Public enterprises II. Nonpublic enterprises b Gemstone, Inc. – P120,000 merchandise shipped on December 26, 2005,
a. I only b. II only c. Both I and II d. FOB shipping point; received on January 16, 2006.
Neither I nor II

a
On December 28, 2005, a supplier authorized Danaya to return goods

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14. Temporary difference is the billed at P100,000 and shipped on December 20, 2005. The goods were
I. Difference between the tax basis of an asset or liability and its reported returned by Danaya on December 28, 2005, but the P100,000 credit
amount that will result in taxable or deductible amounts in future years memo was not received until January 6, 2006.

d
when the reported amount of the asset or liability is recovered or settled

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respectively. a. P3,670,000 b. P3,520,000 c. P3,570,000 d.

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II. Item of income or expense which is included in either financial income P3,420,000
or taxable income but will never be included in the other.

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a. I only b. II only c. Both I and II d. 2. Payroll:
Neither I nor II
Items related to Danaya’s payroll as of December 31, 2005 are:

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15. Taxable temporary difference is the
I. Temporary difference that will result in taxable amount in determining taxable Accrued salaries and wages P485,000

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income of future periods when the carrying amount of the asset or liability is Payroll deductions for:
recovered or settled. Income taxes withheld 35,000
II. Temporary difference that will result in deductible amount in determining SSS contributions 40,000

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taxable income of future periods when the carrying amount of the asset or liability Philhealth contributions 10,000
is recovered or settled.
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a. I only b. II only c. Both I and II d. Neither I nor II
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a. P485,000 b. P620,000 c. P570,000 d.
P1 P520,000
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Questions 1 to 10 are based on the following information:

3. Litigation:
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The following information relates to Danaya Company’s obligations as of December

31, 2005. For each of the numbered items, determine the amount if any, that should In May, 2005, Danaya became involved in a litigation. The suit being
be reported as current liability in Danaya’s December 31, 2005 balance sheet.
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contested, but Danaya’s lawyer believes there is reasonable possibility

that Danaya may be held liable for damages estimated in the range
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 between P2,000,000 and P3,000,000, and no amount is a better estimate Caused by temporary differences in accounting Deferred tax
of potential liability than any other amount. For gross profit on installment sales P235,000 Cr.
For depreciation on property and equipment 360,000 Cr
a. P2,000,000 b. P2,500,000 c. P3,000,000 d. P0 For product warranty expense 112,000 Dr
P483,000 Cr.
4. Bonus obligation:
a. P483,000 b. P595,000 c. P123,000 d. P0
Danaya Company’s president gets an annual bonus of 10% of net income
after bonus and income tax. Assume the tax rate of 30% and the correct 8. Product warranty:
income before bonus and tax is P6,000,000. (Ignore the effects of other
given items on net income.) Danaya has a one year product warranty on selected items in its product
line. The estimated warranty liability on sales made during 2004, which

a
a. P451,600 b. P392,500 c. P247,000 d. was outstanding as of December 31, 2004, amounted to P260,000. The

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P1,400,000 warranty costs on sales made in 2005 are estimated at P940,000. Actual
warranty costs incurred during the current 2005 fiscal year are as follows:
5. Note payable:

d
Warranty claims honored on 2004 sales P260,000

e
A note payable to the Bank of the Philippine Islands for P1,500,000 is
Warranty claims honored on 2005 sales 620,000

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outstanding on December 31, 2005. The note is dated October 1, 2004,
bears interest at 18%, and is payable in three equal annual installment of Total warranty claims honored P880,000

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P500,000. The first interest and principal payment was made on October
a. P940,000 b. P60,000 c. P320,000 d. P0
1, 2005.

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9. Premiums:
a. P67,500 b. P567,500 c. P545,000 d. P45,000

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6. Purchase commitment: To increase sales, Danaya Company inaugurated a promotional campaign
on June 30, 2005. Danaya placed a coupon redeemable for a premium in
each package of product sold. Each premium costs P100. A premium is

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During 2005, Danaya entered in a noncancellable commitment to
purchase 200,000 units of inventory at fixed price of P5 per unit, delivery
co rc offered to customers who send in 5 coupons and a remittance of P30.
to be made in 2006. On December 31, 2005, the purchase price of this The distribution cost per premium is P20. Danaya estimated that only
60% of the coupons issued will be redeemed. For the six months ended
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inventory item had fallen to P4.40 per unit. The goods covered by the
purchase contract were delivered on January 28, 2006. December 31, 2005, the following is available:
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a. P120,000 b. P1,000,000 c. P880,000 d. P0 Packages of product sold 100,000

Premiums purchased 10,000
7. Deferred taxes: Coupons redeemed 40,000
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On December 31, 2005, Danaya’s deferred income tax account has a a. P1,080,000 b. P360,000 c. P720,000 d. P1,000,000
2005 ending credit balance of P483,000, consisting of the following items:
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1 Due to Lireo Finance company:

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 Danaya’s accounting records show that as of December 31, 2005,
P800,000 was due to Lireo Finance Company for advances made against
P1,000,000 of trade accounts receivable assigned to the finance company
with recourse.
a. P1,000,000 b. P200,000 c. P800,000
11. Lin Co., a distributor of machinery, bought a machine from the
manufacturer in November 2003 for $10,000. On December 30, 2003, Lin
sold this machine to Zee Hardware for $15,000, under the following terms:
2% discount if paid within thirty days, 1% discount if paid after thirty days
13. In 2002, Super Comics Corp. sold a comic strip to Fantasy, Inc. and
will receive royalties of 20% of future revenues associated with the comic
strip. At December 31,
2003, Super reported royalties receivable of $75,000 from Fantasy. During
2004, Super received royalty payments of $200,000. Fantasy reported
d. P0 revenues of $1,500,000 in 2004 from the comic strip. In its 2004 income
statement, what amount should Super report as royalty revenue?
a. $125,000
b. $175,000
c. $200,000
d. $300,000

a
but within sixty days, or payable in full within ninety days if not paid
14. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty

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within the discount periods. However, Zee had the right to return this
machine to Lin if Zee was unable to resell the machine before expiration payments on January 31 for the oil sold between the previous June 1 and
of the ninety-day payment period, in which case Zee’s obligation to Lin November 30, and on

d
would be canceled. July 31 for oil sold between December 1 and May 31. Production reports

e
In Lin’s net sales for the year ended December 31, 2003, how much show the following oil sales:

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should be included for the sale of this machine to Zee?
a. $0 June 1, 2002 - November 30, 2002 $300,000
December 1, 2002 - December 31, 2002 50,000

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b. $14,700
c. $14,850 December 1, 2002 - May 31, 2003 400,000
d. $15,000 June 1, 2003 - November 30, 2003 325,000
December 1, 2003 - December 31, 2003 70,000

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What amount should Rill report as royalty revenue for 2003?

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12. Regal Department Store sells gift certificates, redeemable for store
merchandise, that expire one year after their issuance. Regal has the a. $140,000
following information pertaining to its gift certificates sales and b. $144,000

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redemptions: co rc c. $149,000
Unredeemed at 12/31/02 $ 75,000 d. $159,000
2003 sales 250,000
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2003 redemptions of prior year sales 25,000 15. Luge Co., which began operations on January 2, 2003, appropriately
2003 redemptions of current year sales 175,000 uses the installment sales method of accounting.
Regal’s experience indicates that 10% of gift certificates sold will not be The following information is available for 2003:
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redeemed. In its December 31, 2003 balance sheet, what amount should Installment accounts receivable, December 31, 2003 $800,000
Regal report as unearned Deferred gross profit, December 31, 2003 (before
revenue? recognition of realized gross profit for 2003) 560,000
Gross profit on sales 40%
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a. $125,000
b. $112,500 For the year ended December 31, 2003, cash collections and
c. $100,000 realized gross profit on sales should be
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d. $ 50,000 Cash collections Realized gross profit

a. $400,000 $320,000
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 b. $400,000 $240,000 b. $ 28,800
c. $600,000 $320,000 c. $144,000
d. $600,000 $240,000 d. $120,000

5. Gild Company has been offered credit terms of 3/10, net 30. Using a 365-day year, what is
MAS the nominal cost of not taking advantage of the discount if the firm pays on the 35th day
after the purchase?
1. What is the main factor that differentiates the short-run cost function from the long-run a. 14.2%
cost function? b. 32.2%
a. Nothing, the two functions are identical. c. 37.6%
b. The level of technology. d. 45.2%
c. Changes in government subsidies.

a
d. The nature of the costs. 6. Newton Corporation is offered trade credit terms of 3/15, net 45. The firm does not take

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advantage of the discount, and it pays the account after 67 days. Using a 365- day year, what
2. If consumer confidence falls, the impact upon the economy is is the nominal annual cost of not taking the discount?
a. A downturn.

d
a. 18.2%
b. An upturn. b. 21.71%

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c. No change. c. 23.48%

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d. Consumer confidence does not have an impact upon the economy. d. 26.45%

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3. A company enters into an agreement with a firm who will factor the company’s accounts 7. Which of the following is a strength of the payback method?
receivable. The factor agrees to buy the company’s receivables, which average $100,000 per a. It considers cash flows for all years of the project.
month and have an average collection period of 30 days. The factor will advance up to 80% b. It distinguishes the source of cash inflows.

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of the face value of receivables at an annual rate of 10% and charge a fee of 2% on all c. It considers the time value of money.
receivables purchased. The controller of the company estimates that the company would d. It is easy to understand.

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save $18,000 in collection expenses over the year. Fees and interest are not deducted in
advance. Assuming a 360-day year, what is the annual cost of financing? 8. Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the

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a. 10.0% co rc expectation that $20,000 per year could be saved in after-tax cash costs if the equipment
b. 14.0% were acquired. The equipment’s estimated useful life is ten years, with no residual value,
c. 16.0% and would be depreciated by the straight-line method. The payback period is
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d. 17.5% a. 4.0 years.
b. 4.4 years.
4. A company with $4.8 million in credit sales per year plans to relax its credit standards,
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c. 4.5 years.
projecting that this will increase credit sales by $720,000. The company’s average collection d. 5.0 years.
period for new customers is expected to be 75 days, and the payment behavior of the
existing customers is not expected to change. Variable costs are 80% of sales. The firm’s 9. All of the following capital budgeting analysis techniques use cash flows as the primary
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opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s basis for the calculation except for the
benefit (loss) from a. Net present value.
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the planned change in credit terms? b. Payback period.

a. $0 c. Discounted payback period.
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 d. Accounting rate of return.
15. A tool which identifies potential causes for failures or defects is
a. Control chart.
10. If a firm is offered credit terms of 2/10, net 30 on its purchases. Sound cash management b. Pareto diagram.
practices would mean that the firm would pay the account on which of the following days? c. Cause-and-effect diagram.
a. Day 2 and 30. d. Strategy map.
b. Day 2 and 10. AP
c. Day 10. You are now in the completion stage of your audit of the Merly Company’s financial
d. Day 30. statements for the year ended December 31, 2010.

The next 5 items represent various commitment and contingencies of Merly at December 31,
11. What factor explains the difference between real and nominal interest rates? 2010, and events subsequent to December 31, 2010, but prior to the authorization for issue

a
a. Inflation risk. of the 2010 financial statements. For each item, select from the ff list the reporting

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b. Credit risk. requirement.
c. Default risk.

d
d. Market risk.

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1 At December 31, 2010. Merly had outstanding purchase orders in the ordinary course
of business for purchase of a raw material to be used in its manufacturing process.

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12. Southwest Airlines benchmarked the process of turning around an airplane with the pit
stop process for formula racecars. This is an example of The market price is currently higher than the purchase price and is not anticipated to
change within the next year.

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a. Internal benchmarking.
a. Disclosure only
b. Generic benchmarking. b. Accrual only
c. Competitor benchmarking. c. Both accrual and disclosure

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d. Functional benchmarking. d. Neither accrual nor disclosure

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13. Which measures would be useful in evaluating the performance of a manufacturing 2 A government contract completed during 2010 is subject to renegotiation. Although
system? Merly estimates that it is reasonably possible that a refund of approximately P200,00-
I. Throughput time. P300,000 may be required by the government, it does not wish to publicize this

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II. Total setup time for machines/Total production time.
co rc possibility.
a Disclosure only
III. Number of rework units/Total number of units completed.
b Accrual only
a. I and II only.
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c Both accrual and disclosure
b. II and III only. d Neither accrual nor disclosure
c. I and III only.
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d. I, II, and III. 3 Merly has been notified by a governmental agency that it will be held responsible for
the cleanup of toxic materials at a site where Merly formerly conducted operations.
14. A tool which indicates how frequently each type of defect occurs is a Merly estimates that it is probable that its share of remedial action will be
a. Control chart. approximately P500,000
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b. Pareto diagram. a. Disclosure only

b. Accrual only
c. Cause-and-effect diagram. c. Both accrual and disclosure
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d. Fishbone diagram. d. Neither accrual nor disclosure

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