REVIEW 105 – DAY 19 b. Trademark d.

Goodwill

6. In accordance with the new international accounting standard, which

TOA statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for
1. Which of the following statements is incorrect regarding internal – use impairment at least annually.
software? a. I only b. II only c. Both I and II d. Neither I nor
a. The application and development costs of internal-use software should be II
amortized on the straight line basis unless another systematic and rational
basis is more appropriate. 7. What amount is accrued as a provision?
b. Internal-use software is considered to be software that is marketed as a a. Minimum c. Median
separate product or as part of a product or process. b. Maximum d. Best estimate
c. The costs of testing and installing computer hardware should be capitalized
as incurred. 8. Where there is a continuous range of possible outcomes, and each point in that
d. The costs of training and application maintenance should expensed as range is as likely as any other, the range to be used is the
incurred. a. Minimum c. Midpoint
b. Maximum d. Summation of the minimum and
2. Which following statements is correct regarding the treatment of start-up maximum
activities related to the opening of the new facility?
I. Cost of raising capital should be expensed as incurred. 9. At issuance date, the present value of a promissory note will be equal to its face
II. Costs of acquiring or constructing long-lived assets and getting them ready amount if the note
for their intended use should be expensed as incurred. a. Bears a stated rate of interest which is realistic.
a. I only b. II only c. Both I and II d. b. Bears a stated rate which is less than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing
Neither I nor II
market rate for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market
3. Operating losses incurred during the start up years of a new business should
rate for similar notes.
be
a. Accounted for and reported like the operating losses of any other business 10. Use of the effective interest method in amortizing a discount on bonds payable
b. Written off directly against retained earnings would result in
c. Capitalized as a deferred charge and amortized over 5 years. a. A decreasing amount of discount amortization each period over the life of the
d. Capitalized as an intangible asset and amortized over 5 years. bonds
b. A constant amount of discount amortization each period over the life of the
4. Which of the following is not a method of computing goodwill? bonds
a. Capitalize excess earnings. c. An increasing amount of discount amortization each period over the life of the
b. Discount the excess earnings for a limited number of years. bonds
c. Capitalize total average earnings and subtract the fair value of net assets. d. Cannot be determined from the information given
d. All of these are methods of computing goodwill.
11. In theory, the proceeds from the sale of a bond will be equal to the
5. Identifiable intangible assets include all of the following, except a. Face value of the bond.
a. Computer software c. Franchise
 b. Present value of the principal amount due at the end of the life of the bond 1. A polluting manufacturing firm tends, from the societal viewpoint, to
plus the present value of the interest payments made during the life of the bond. a. Price its products too low.
c. Face value of the bond plus the present value of the interest payments made b. Produce too little output.
during the life of the bond. c. Report too little profitability.
d. Face value of the bond plus the interest payments made during the life of the d. Employ too little equity financing.
bond.
12. What is the market rate of interest for a bond issue which sells for more than its 2. If the federal government regulates a product or service in a competitive market by
face value? setting a maximum price below the equilibrium price, what is the long-run effect?
a. Less than rate stated on the bond c. Equal to rate stated on the a. A surplus.
bond b. A shortage.
b. Higher than rate stated on the bond d. Independent of rate stated on the c. A decrease in demand.
bond d. No effect on the market.

13. The appropriate valuation of an operating lease is 3. To evaluate the efficiency of purchase transactions, management decides to calculate the
a. Zero economic order quantity for a sample of the company’s products. To calculate the economic
b. The absolute sum of the lease payments order quantity, management would need data for all of the following except:
c. The present value of minimum lease payments discounted at an appropriate a. The volume of product sales.
rate b. The purchase prices of the products.
d. The market value of the asset at the date of the inception of the lease c. The fixed cost of ordering products.
14. Lease payments under an operating lease should be recognized as expense d. The volume of products in inventory.
using the
a. Cash method 4. On December 31, 2003, Jet Co. received a $10,000 note receivable from Maxx, Inc. in
b. Sum of years’ digits method exchange for services rendered. Interest is calculated on the outstanding balance at the
c. Declining balance method interest rate of 3% compounded annually and payable at maturity. The note from Maxx, Inc.
d. Straight line method, unless another systematic basis is representative of the is due in five years. The market interest rate for similar notes on December 31, 2003, was
time pattern of the user’s benefit. 8%. The compound interest factors are as follows:
Future value of $1 due in nine months at 3% 1.0225
15. What is the cost basis of an asset acquired under a finance lease? Future value of $1 due in five years at 3% 1.1593
a. The sum of the minimum lease payments? Present value of $1 due in nine months at 8% .944
b. The present value of the minimum lease payments discounted at an Present value of $1 due in five years at 8% .680
appropriate rate At what amounts should this note receivable be reported in Jet’s December 31, 2003
c. The net realizable value of the asset at the inception of the lease balance sheet?
d. The present value of the market price of the asset discounted at an
a. $6,800
appropriate
b. $7,820
rate
c. $6,200
d. $7,883
MAS
5. At what stage of the capital budgeting process would management most likely apply
present value techniques?
a. Identification stage. 10. What effect would the implementation of this new credit policy have on income before
b. Search stage. taxes?
c. Selection stage. a. $2,500,000 decrease.
d. Financing stage. b. $2,166,667 decrease.
c. $ 83,334 increase.
6. How is the discounted payback method an improvement over the payback method in d. $ 33,334 increase.
evaluating investment projects?
a. It involves better estimates of cash flows. 11. If the income elasticity of demand coefficient for a particular product is 3.00, the good is
b. It considers the overall profitability of the investment. likely
c. It considers the time value of money. a. A luxury good.
d. It considers the variability of the return. b. A complementary good.
c. An inferior good.
d. A necessity.
7. The amount of inventory that a company would tend to hold in stock would increase as
the 12. Return on investment can be increased by
a. Sales level falls to a permanently lower level. a. Increasing operating assets.
b. Cost of carrying inventory decreases. b. Decreasing operating assets.
c. Variability of sales decreases. c. Decreasing revenues.
d. Cost of running out of stock decreases. d. Both (b) and (c).
8. The procedures followed by the firm for ensuring payment of its accounts receivables are 13. The following selected data pertain to the Darwin Division of Beagle Co. for 2003:
called its Sales $400,000
a. Discount policy. Net income 40,000
b. Credit policy. Capital turnover 4
c. Collection policy. Imputed interest rate 10%
d. Payables policy. What was Darwin’s 2003 residual income?
Items 47 and 48 are based on the following information: A company plans to tighten its credit
a. $0
policy. The new policy will decrease the average number of days in collection from 75 to 50 b. $ 4,000
days and reduce the ratio of credit sales to total revenue from 70 to 60%. The company c. $10,000
estimates that d. $30,000
projected sales would be 5% less if the proposed new credit policy were implemented. The
firm’s short-term interest cost is 10%. 14. What is a major disadvantage of using economic value added (EVA) alone as a
performance measure?
9. Projected sales for the coming year are $50 million. Calculate the dollar impact on a. It fails to focus on creating shareholder value.
accounts receivable of this proposed change in credit policy. Assume a 360-day year. b. It promotes the acceptance of unprofitable projects.
a. $ 3,819,445 decrease. c. It fails to reflect all of the ways that value may be created.
b. $ 6,500,000 decrease. d. It discourages cost cutting.
c. $ 3,333,334 decrease.
d. $18,749,778 increase.
15. Which of the following is not a measure of asset utilization?
a. Inventory turnover. b. P1,700,000 d. P2,250,000
b. Average accounts receivable collection period.
c. Fixed asset turnover.
d. Debt to total assets. On January 2, 2005 Tayog Company sold equipment with a carrying amount
of P6,500,000 in exchange for P8,000,000 noninterest bearing note due
January 2, 2008. There was no established exchange price for the
P1 equipment. The prevailing interest rate for this note on January 2, 2005 was
10%. The present value of 1 at 10% for three periods is 0.75.
1. On January 1, 2005 Gingoog Company had 300,000 common shares outstanding,
P100 par, or a total par value of P30,000,000. During 2005, Gingoog issued rights to 4. In the 2005 income statement, what amount should be reported as interest
acquire one common share at P100 in the ratio of one share for every 5 shares held. income?
The rights are exercised on March 31, 2005. The market value of each common a. P800,000 c. P660,000
share immediately prior to March 31, 2005 was P160. The net income for 2005 was b. P600,000 d. P740,000
P6,000,000. The 2005 income statement should report basic earnings per share at
a. 17.14 b. 16.67 c. 18.75 d. 17.39 5. In the 2005 income statement, what amount should be reported as gain or
loss on sale of equipment?
2. The following accounts were abstracted from Villasis Company’s a. P1,500,000 gain c. P500,000 gain
unadjusted trial balance at December 31, 2005: b. P 100,000 gain d. P500,000 loss
Debit Credit
Accounts receivable P20,000,000
6. You noted the following composition of Hagonoy Company’s “cash account” as of
Allowance for doubtful accounts 300,000 December 31, 2005:
Net credit sales P70,000,000
VilIasis estimates that 5% of the gross accounts receivable will become Demand deposit account P2,000,000
Time deposit – 30 days 1,000,000
uncollectible. The doubtful accounts expense for the year ended NSF check of customer 40,000
December 31, 2005 should be Money market placement (due June 30, 2006) 1,500,000
a. P1,000,000 c. P1,300,000 Savings deposit in a closed bank 100,000
b. P3,500,000 d. P 700,000 IOU from employee 20,000
Pension fund 3,000,000
3. On December 1, 2005 Pozurrubio Company assigned on a nonnotification Petty cash fund 10,000
basis accounts receivable of P5,000,000 to a bank in consideration for a loan Customer check dated January 1, 2006 50,000
of 90% of the receivables less a 5% service fee on the accounts assigned. Customer check outstanding for 18 months 40,000
Pozurrubio signed a note for the bank loan. On December 31, 2005, Total P7,760,000
Pozurrubio collected assigned accounts of P3,000,000 less discount of
Additional information follows:
P200,000. Pozurrubio remitted the collections to the bank in partial payment
for the loan. The bank applied first the collection to the interest and the  Check of P200,000 in payment of accounts payable was recorded on
balance to the principal. The agreed interest is 1% per month on the loan December 31, 2005 but mailed to suppliers on January 5, 2006.
balance. In its December 31, 2005 balance sheet, Pozurrubio should report  Check of P100,000 dated January 15, 2006 in payment of accounts payable
note payable as a current liability at was recorded and mailed on December 31, 2005.
a. P1,745,000 c. P1,545,000
  The company uses the calendar year. The cash receipts journal was held c. $185,000
open until January 15, 2006, during which time P400,000 was collected and d. $190,000
recorded on December 31, 2005.
10. All of Urdaneta Company’s sales are on a credit basis. The following
The cash and cash equivalents to be shown on the December 31, 2005 balance information is available for 2005:
sheet is
a. P3,310,000 c. P1,910,000 Allowance for doubtful accounts, 1/1/2005
b. P2,910,000 d. P4,410,000 P1,000,000
Sales
7. In its financial statements, Hila Co. discloses supplemental information on the 22,000,000
effects of changing prices in accordance with Statement of Financial Accounting Sales returns
Standards 89, Financial Reporting and Changing Prices. Hila computed the increase 2,000,000
in current cost of inventory as follows:
Accounts written off as uncollectible
Increase in current cost (nominal dollars) $15,000
Increase in current cost (constant dollars) $12,000
600,000
What amount should Hila disclose as the inflation component of the increase in Recovery of accounts written off
current cost of inventories? 200,000
a. $ 3,000
b. $12,000
Urdaneta provides for doubtful accounts expense at the rate of 10% of net
c. $15,000 sales. At December 31, 2005, the allowance for doubtful accounts
d. $27,000 balance should be
a. P3,200,000 c. P2,800,000
8. Kerr Company purchased a machine for $115,000 on January 1, 2003, the b. P2,600,000 d. P2,000,000
company’s first day of operations. At the end of the year, the current cost of the
machine was $125,000. The machine has no salvage value, a five-year life, and is 11. Enrile Company had 180,000 units of Product A on hand at January 1, 2005
depreciated by the straight-line method. For the year ended December 31, 2003, the costing P20 each. Purchases of product A during the month of January were as
amount of the current cost depreciation expense which would appear in follows:
supplementary Units Unit cost
current cost financial statements is January 5 160,000 30
a. $14,000 15 200,000 40
b. $23,000 31 140,000 50
c. $24,000
d. $25,000 A physical count on January 31, 2005 shows 200,000 units of product A
on hand. The inventory on January 31, should be
9. At December 31, 2003, Jannis Corp. owned two assets as follows:
FIFO LIFO
Equipment Inventory Current cost $100,000 $80,000
a. P9,400,000 P4,200,000
Recoverable amount $ 95,000 $90,000
b. P4,200,000 P9,400,000
Jannis voluntarily disclosed supplementary information about current cost at
c. P9,400,000 P5,800,000
December 31, 2003. In such a disclosure, at what amount would Jannis report total
d. P4,200,000 P7,000,000
assets?
a. $175,000
12. On January 1, 2003, Roem Corp. changed its inventory method to FIFO from
b. $180,000
LIFO for both financial and income tax reporting purposes. The change resulted in a
$500,000 increase in the January 1, 2003 inventory. Assume that the income tax rate c. $7,200 $300
for all years is 30%. The cumulative effect of the accounting change should be d. $7,300 $200
reported by Roem in its 2003
a. Retained earnings statement as a $350,000 addition to the beginning balance.
b. Income statement as a $350,000 cumulative effect of accounting change. AP
c. Retained earnings statement as a $500,000 addition to the beginning balance. On January 1, 2007 KUNG FU KIDS CORP. issued 3-year, 4,000 convertible bonds at face
d. Income statement as a $500,000 cumulative effect of accounting change. value of P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate
of 6%. Each bond is convertible, at the holder’s option, into 40 P10 par value ordinary shares
13. On January 1, 2003, Poe Construction, Inc. changed to the percentage-of- at any time up to maturity. On the date of issuance, the prevailing market interest rate for
completion method of income recognition for financial statement reporting but not for similar debt without the conversion privilege was 9%. On the same date, the market price of
income tax reporting. Poe can justify this change in accounting principle. As of one common share was P12.
December 31, 2002, Poe compiled data showing that income under the completed-
contract method aggregated $700,000. If the percentage-of-completion method had 1. What is the equity component of the compound instrument?
been used, the accumulated income through December 31, 2002, would have been a. 110,091 b. 211,093 c. 303,755 d. 388,766
$880,000. Assuming an income tax rate of 40% for all years, the cumulative effect of 2. What is the interest expense to be reported on Kung Fu Kids Corp.’s income
this accounting change should be reported by Poe in the 2003 statement for the year ended December 31, 2008?
a. Retained earnings statement as a $180,000 credit adjustment to the beginning a. 303,113 b. 332,662 c. 341,002 d. 350,092
balance. 3. What is the credit to share premium account assuming that 3,000 of the bonds were
b. Income statement as a $180,000 credit. converted on January 1, 2009?
c. Retained earnings statement as a $108,000 credit adjustment to the beginning a. 1,717,432 b. 1,928,525 c. 2,017,432 d. 2,289,908
balance. 4. Assuming that on the issuance date, the company paid transactions costs totaling to
d. Income statement as a $108,000 credit. P151,469, and as a result the yield rate increased by 1.5%, what is the equity
component of the compound instrument?
14. On January 1, 2000, Taft Co. purchased a patent for $714,000. The patent is a. 292,253 b. 303,755 c. 443,722 d. 315,257
being amortized over its remaining legal life of fifteen years expiring on January 1, 5. Using the assumption in number 34, and assuming all the 4,000 bonds were retired
2015. During 2003, Taft determined that the economic benefits of the patent would
on January 1, 2009 when the prevailing yield rate on the bonds was at 9%, at
not last longer than ten years from the date of acquisition. What amount should be
P4,000,000, what is the loss to be reported in the income statement?
reported in the balance sheet for the patent, net of accumulated amortization, at
a. 0 b. 52,804 c. 162,895 d. 330,275
December 31, 2003?
a. $428,400
b. $489,600
c. $504,000 The long-lived assets and related accounts of BANDILA INC. had the following balances as
d. $523,600 of January 1, 2007:

15. Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, PPE Cost Accumulated
2003, the effective date of the policy. At March 31, 2003, Roro’s unadjusted trial balance Depreciation
showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What
amounts should be reported for prepaid insurance and insurance expense in Roro’s financial Land 700,000
statements for the three months ended
March 31, 2003? Prepaid insurance Insurance expense Land Improvements, straight line, 15yrs. 360,000 120,000
a. $7,000 $300
b. $7,000 $500 Building, 150%declining balance, 20yrs. 9,000,000 2,905,316
 Machinery and equipment, SYD, 10yrs. 2,320,000 1,434,182 a. 191,048 b. 236,048 c. 281,048 d. 400,000
7. What is the gain or loss on disposal of machinery and equipment on April 5?
Automobiles, 150% declining balance, 3yrs. 1,800,000 900,000 a. 64, 363 b. 78, 545 c. 201,455 d. 215,636
8. How much is the carrying value of the Automobiles as of 2007?
a. 180,000 b. 360,000 c. 640,000 d. 750,000
INTANGIBLES Cost Accumulated 9. What is the depreciation expense on the buildings for 2007?
Depreciation a. 457,100 b. 469,101 c. 487,101 d. 492,101
10. What is the total amortization expense on the patent for the year?
Patent 960,000 120,000 a. 87,500 b. 105,000 c. 109,375 d. 102,735

Review of transactions during the period revealed the following information: You were assigned to audit the financial statements of NORTHERN LUZON MINING CORP.
for the year ended December 31, 2007. The company started its operation in 2005 when it
a. The patent was purchased for 960,000 on January 1, 2005, incurring additional acquired an undeveloped mine property at a total acquisition price of P15,000,000,
license-transfer processing fees charged to operations amounting to 40,000. On the P1,500,000 of which was attributed to the land. The company incurred exploration and
acquisition date the remaining legal life was 16 years. On January 1, 2007, the evaluation costs necessary to prove technical feasibility and viability of commercially
company determined that the useful life of the patent was only ten years from the extracting and producing minerals totaling to 4,800,000. Technical feasibility of the operations
date of acquisition. was established midyear of 2005, thus the company started developing the property and
b. On January 5, 2007, Bandila acquired a tract of land with an existing building in preparing it for mine extraction. The company incurred the following development costs which
exchange for 50,000 shares of Bandila’s P10 par value share capital that had a were accounted for as separate depreciable property and equipment:
market price of P18 per share on this date and a 5 year, P500,000, 10% face value
bonds which currently yields 12% in the market. Shortly after the acquisition, the Buildings 4,500,000
building was razed at a cost of 45,000 in anticipation of new building construction
within the year. The property was appraised by an independent appraiser at Developmental excavation 1,200,000
1,200,000.
Mining equipment 6,000,000
c. On April 5, 2007, a machine purchased for 520,000 on January 1, 2003, was sold for
120,000. It was estimated that the property contains 10M tons of mineral reserves after which
d. On June 2, 2007, the company purchased a new automobile for 920,000 cash and P800,000 is expected to be incurred to restore the land to a sellable condition (it is the
trade-in of an automobile purchased for 1,080,000 on January 1, 2006. The old company’s practice to deduct this amount from the residual value of the mine property in
automobile has a trade in value of 220,000. computing for the depletion).
e. An extensive work was done to the five-year old building during the year end was
completed by the end of August. The total cost of the work done amounted to The company reported the following information in its 2006 financial statements after 1 year
500,000 which consisted the following: of mine operations:
Repainting of ceilings and walls 50,000
Routinary repairs 150,000 Mine inventory, 200,000 tons 1,916,667
Major electrical work 300,000
Audit note: It is the company’s policy to provide full year’s depreciation on the year of Mine property 19,800,000
acquisition/addition and no depreciation on the year of disposal.
Accumulated depletion 1,719,000
6. What is the credit to the share premium account related to the acquisition of land on
January 5? Property and equipment 11,700,000
 Accumulated depreciation- building 300,000

Accumulated depreciation- developmental excavation 120,000

Accumulated depreciation- mining equipment 1,000,000

Accumulated profits 4,256,667

The company carries its inventories on a first in-first out basis. Depletion on the mine property
was made under the output method while depreciation was made based on the assumed
useful lives of the property and equipment. The depreciation on the building is allocated 60:40
to production and other operations, respectively, while depreciation on the other properties
are entirely charged to production. The company is yet to declare or distribute any dividends
to shareholders.

The operations of the company for the current year are summarized as follows:

Tons mined 940,000 tons

Tons sold 952,000 tons

Selling price per ton P15.00/ton

Direct labor P3,675,000

Overhead costs, excluding depreciation P3,150,000

Other operating expenses, excluding depreciation P1,575,000

Using the information above and as a result of your audit, answer the following:

11. What is the correct depletion on 2006?

a. 1,719,000 b. 1,827,000 c. 1,910,000 d. 2,100,000
12. What is the correct net income in 2006?
a. 4,136,000 b. 4,152,667 c. 4,175,000 d. 4,210,667
13. What is the correct inventory at the beginning of 2007?
a. 1,950,667 b. 1,936,667 c. 1,928,000 d. 1,924,000
14. What is the correct net income in 2007?
a. 4,261,400 b. 4,092,200 c. 3,718,800 d. 2,618,200
15. What is the maximum dividends the company can distribute in 2007?
a. 11,620,760 b. 11,247,360 c. 10,456,500 d. 10,146,760