Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

SIXTH DEPARTMENTAL QUIZ

Accounting 121

Name: _______________________________, CPA Section: _________ Score:

__________

GENERAL INSTRUCTIONS. This test is composed of two parts each with their own sets of
instruction. Read them carefully before answering the questions. Erasures are strictly not
allowed. This test is good for three hours. God bless!

MULTIPLE CHOICE. Choose the best statement among the choices. Write your answer on the
space provided before each number. Each item is worth 1 point.
_______1. Goodwill arising from an investment in associate shall be:
a. Included in the carrying amount of the investment and amortized over
the useful life.
b. Separately presented from the investment account and amortized
over the useful life.
c. Included in the carrying amount of the investment and not amortized.
d. Separately presented from the investment account and not
amortized.

_______2. A debit balance in the account “Market Adjustment – Trading Securities” at

the end of a year should be interpreted as:
a. The net realized holding gain to date.
b. The net unrealized holding gain to date.
c. The net realized holding gain for that year.
d. The net unrealized holding gain for that year.

_______3. On August 1, 2011, Colorite Corporation acquired 10,000 of the outstanding

shares of Brown Company. On January 2, 2012, Colorite acquired an
additional 20,000 shares of Brown, which brought the total ownership to
30,000 shares. Using the normal guidelines for percentages of ownership
and assuming that Brown Company had 100,000 shares outstanding during
2011 and 2012, Colorite Corporation should account for the investment in
Brown Company by:
a. Using the cost method in 2011 and the equity method in 2012.
b. Using the cost method in 2011, retroactively adjusting the investment
account to the equity method at the beginning of 2012, and using the
equity method in 2012.
c. Using the equity method for 2011 and 2012.
d. Using the cost method in 2011 and 2012 for the 10,000 shares
acquired in 2011, and using the equity method in 2012 for the 20,000
shares acquired in 2012.

_______4. It Poster Inc. owns 35 percent of Elliott Corporation. During the calendar
year 2002, Elliott had net earnings of P300,000 and paid dividends of
P36,000. Poster mistakenly accounted for the investment in Elliott using the
cost method rather than the equity method of accounting. What effect would
this have on the investment account and net income, respectively?
a. Understate, understate. b. Understate, overstate.

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 c. Overstate, understate. d. Overstate, overstate.

_______5. An investor uses the cost method of accounting for its 15% ownership in an
investee. At year-end, the investor has a receivable from the investee. How
should the receivable be reported?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment
without separate disclosure.
c. 85% of the receivable should be reported separately with the balance
offset against the investee’s payable to the vendor.
d. The total receivable should be offset against the investee’s payable
to the investor.

_______6. Which of the following scenarios would not lead to the presumption that an
entity exerts significant influence?
a. Holding directly 20% or more of the voting power of the investee.
b. Holding indirectly, though a joint venture, 20% or more of the voting
power of the investee.
c. Holding indirectly, through a subsidiary, 20% or more of the voting
power of the voting power of the investee.
d. Holding directly 10% of the voting power of the investee and holding
indirectly, through a subsidiary, 10% of the voting power of the
investee.

_______7. The effective interest method of amortizing discount provides for:

a. Increasing amortization and increasing interest income.
b. Increasing amortization and decreasing interest income.
c. Decreasing amortization and increasing interest income.
d. Decreasing amortization and decreasing interest income.

_______8. Bonds usually sell at a premium when:

a. Investors are willing to invest in the bonds at the stated interest rate.
b. Investors are willing to invest in the bonds at rates that are lower than
the stated interest rate.
c. Investors are willing to invest in the bonds at rates that are higher
than the stated interest rate.
d. A capital gain is expected.

_______9. Directly attributable expenditures related to investment property include:

a. Professional fees for legal services and property and transfer taxes.
b. Start up costs.
c. Operating losses incurred before investment property achieves the
planned level of occupancy.
d. Abnormal amounts of wasted materials, labor and other resources
incurred in constructing or developing the property.

_______10. Interest in life insurance contract shall be carried at:

a. Nil.
b. Face of policy.
c. Total amount of insurance premiums paid.
d. Cash surrender value.

SHORT PROBLEMS. Determine the amounts asked by each problem. Final answers should be
written on the space provided. Solutions must be provided at the back of this questionnaire. In
all instances, assume that an income statement and a statement of comprehensive income are
separately presented. Each item is worth 2 points.
PROBLEM 1: On February 2, 2009, J Company purchased 10,000 shares of CPA Co. at P56
plus broker’s commission of P4 per share. During 2009 and 2010, the following events occurred
regarding this investment:
12/15/09 CPA Co. declares and pays a P2.20 per share dividend.
12/31/09 The market price of CPA Co. stock is P52 per share at year end.
12/01/10 CPA Co. declares and pays a P2.00 per share dividend.
12/31/10 The market price of CPA Co. stock is P55 per share at year end.
1. The unrealized gain (loss) on these investment in equity securities on December 31,
2010 is:
Answer: _____________________

Problem 2: P Company owns 1,000,000 shares of P1 Company’s 5,000,000 shares of P50 par,
10% cumulative preference shares and 500,000 ordinary shares (2%) of P1. During 2010, P1
declared and paid dividends of P40,000,000 on preference shares. No dividends had been
declared or paid during 2009. In addition, P received a 15% ordinary share dividend from P1
when the quoted market price of ordinary share was P100.
2. What amount should P report as dividend income in its 2010 income statement?
Answer: _____________________

PROBLEM 3: On January 2, 2010, T Company purchased 100,000 shares (10%) of A

company’s outstanding ordinary shares for P20,000,000. T is the largest single shareholder in A
and T’s officers are majority of A’s BOD. A reported profit of P10,000,000 and paid dividend of
P4,000,000. T Company’s ordinary shares have a fair value of P210.
3. What should be the balance in T’s investment in A Company at the end of 2010?
Answer: _____________________

PROBLEM 4: L Company acquired a 40% interest in an associate for P3,000,000. The fair
value of the interest acquired was P3,100,000. In the financial period immediately following the
date on which it became an associate, the investee took the following actions:
 Revalued assets up to fair value by P500,000.
 Generated profits of P1,600,000
 Declared a dividend of P30,000.
At year end, there were unpaid dividends on cumulative preference shares of P100,000 and on
non-cumulative shares of P120,000.
4. The balance in the investor’s account of investment in associate after equity accounting
has been applied is:
Answer: _____________________

PROBLEM 5: Panama Company is considering the appropriate classification of the following

items (assume ownership of the property by Panama if not specifically stated for):
Land held for long term capital appreciation P 3,500,000
Land held for undecided future use 2,000,000
Building leased out under an operating lease 800,000
Building leased out under a finance lease 950,000
Vacant building held to be leased out under an operating
lease 3,620,000
Property held for use in the production or supply of
goods or services 3,250,000
Property held by Puerto Rico Inc., a subsidiary of
Panama engaging in the real estate business, in the
ordinary course of business 1,850,000
Property held for administrative purposes 2,900,000
Property held for sale in the ordinary course of business 1,250,000
Property held in the process of construction or
development for sale 2,500,000
Building owned by Puerto Rico Inc. and for which it 1,500,000
provides security and maintenance services to the
 lessees.
Property being constructed or developed on behalf of
third parties 750,000
Property held for future use as owner occupied property 1,575,000
Land leased to Puerto Rico, Inc. under a finance lease
and is leased out by Puerto Rico Inc. to Peru Corp.
under an operating lease 2,325,000
Property held for future development and subsequent
use as owner occupied property 3,550,000
Property occupied by employees 1,375,000
Building leased to Puerto Rico Inc. under an operating
lease 1,750,000
Owner occupied property awaiting disposal 1,500,000
Property that is being constructed or developed for use
as an investment property 1,265,000
Existing investment property that is being redeveloped
for continuing use as investment property 1,050,000
Machinery leased out under an operating lease 625,000
Building held for administrative purposes and leased out
under an operating lease (40% is for administrative
purposes) 2,500,000
Building leased out under an operating lease (the entity
supplies security and maintenance services to the
lessees) 915,000
Land leased out under an operating lease by Puerto Rico
Inc. 650,000
5. What amount shall be presented by Panama Company as investment property in
its separate financial statements?
Answer: _____________________

6. What amount shall be presented by Puerto Rico Company as investment

property in its separate financial statements?
Answer: _____________________

PROBLEM 6: Alaminos, Inc. completed the construction of a building at the end of 2008
for a total cost of P100 million. The building is estimated to be economically useful for
25 years. The building was constructed for the purpose of earning rentals under
operating leases. The tenants began occupying the building after its completion. The
company opted to use the fair value model to measure the building. An independent
valuation expert was used by the company to estimate the fair value of the building on
an annual basis. According to the expert, the fair values of the building at the end of
2008, 2009 and 2010 were P105 million, P120 million and P118 million.
7. How much shall be recognized in profit or loss in 2008 as a result of the
completion of the building at the end of 2008?
Answer: _____________________

8. The depreciation expense in 2009:

Answer: _____________________

9. How much should be recognized in profit or loss in 2010 as a result of the fair
value changes?
Answer: _____________________

10. How much is the carrying amount of the shopping mall on December 31, 2010 if
Alaminos used the cost model?
 Answer: _____________________

PROBLEM 7: On July 1, 2010, Jennica Ventures purchased, 12%, P4,000,000 face

value bonds at 102 including accrued interest. Jennica designated such bonds as
financial assets at amortized cost. Transaction costs consisting of P50,000 financing
costs and P101,250 of commission to brokers were incurred. The bonds mature on
June 30, 2014 and pays interests every February 1 and August 1.
11. How much shall initially be recognized as investment in bonds by Jennica?
Answer: _____________________

PROBLEM 8: Bob Ong Ltd. acquired on January 1, 2010 bonds with a face value of
P5,000,000 and pays interest annually at 12% every January 1. Annual installment
payments on the bonds starting January 1, 2011 amounts to P1,000,000. The total cost
incurred on the purchase was P4,750,000. Bob Ong opted to use the bond outstanding
method in amortizing discounts and premiums.

12. What would be the carrying amount of the investment on December 31, 2013?
Answer: _____________________

13. What amount of accrued interest receivable should be presented in the

December 31, 2010 statement of financial position?
Answer: _____________________

PROBLEM 9: On January 1, 2011, Portugal Company purchased bonds with face value
of P8,000,000 for P7,500,000 as a long-term investment. The stated rate on the bonds
is 10% but the bonds are acquired to yield 12%. The bonds mature at the rate of
P2,000,000 annually every December 31 and interest is payable annually also every
December 31. The transaction cost pertaining to the bonds amounted to P179,000. The
entity uses the effective interest method in amortizing discounts and premiums.
14. What amount of interest income shall be reported in 2012?
Answer: _____________________

15. What is the carrying amount of the bonds in 2013?

Answer: _____________________

PROBLEM 10: On January 1, 2011, Venus Company purchased 10% bond with face
value of P5,000,000 plus transaction costs of P101,500 with a yield of 8%. The bonds
mature on December 31, 2015 and pay interest annually every December 31. The
carrying amount of the investment on December 31, 2012 was P5,260,310.
16. What was the initial acquisition cost of the bond investment?
Answer: _____________________

PROBLEM 11: On June 1, 2009, Pandi Corp. purchased as a long term investment,
4,000 of the P1,000 face value, 8% bonds of Violet Corporation for P3,645,328. The
bonds were purchased to yield 10% interest. Interest is payable semi-annually on
December 1 and June 1. The bonds mature on June 1, 2015. Pandi uses the effective
interest method of amortization. On November 1, 2010, Pandi sold the bonds for a total
consideration of P3,925,000.
17. How much interest income shall be reported by Pandi in 2009 pertaining to this
bond investment?
Answer: _____________________
 18. How much gain (loss) shall be recognized by Pandi on the sale of the investment
in 2010?
Answer: _____________________

PROBLEM 12: Gerona purchased some bonds from Tarlac Company. The bond
indenture and effective rate are as follows:
Face value of the bonds P 6,000,000
Issue date January 1, 2010
Maturity date December 31, 2010
Nominal rate 10%
Effective rate 8%
19. Assuming that the bonds is payable in full on maturity date, how much is the total
purchase price or market price of the bonds on January 1, 2010?
Answer: _____________________

20. Assuming that the bonds is payable in full on maturity date, how much is the total
purchase price or market price of the bonds on April 30, 2010?
Answer: _____________________

21. Assuming that the bonds is payable in full on maturity date and the interest is
compounded annually, how much is the total purchase price or market price of
the bonds on January 1, 2010?
Answer: _____________________

22. Assuming that the bond is payable in full on maturity date and the interest is
compounded quarterly, how much is the total purchase price or market price of
the bonds on April 30, 2010?
Answer: _____________________

23. Assume instead that the bonds is a serial bonds and the first payment is on
December 31, 2010 with all other data being the same, how much is the total
purchase price of the bonds on January 1, 2010?
Answer: _____________________

24. Assume instead that the bonds is a serial bonds and the first payment is on
December 31, 2010 with all other data being the same, how much is the total
purchase price of the bonds on April 30, 2010?
Answer: _____________________

PROBLEM 13: The following information is available concerning the San Carlos
Corporation’s sinking fund transactions:
January 1 Established a sinking fund to retire an outstanding bond issue by
contributing P4,250,000.
January 15 Purchased securities out of the fund’s cash for P4,000,000.
February 8 Sold securities originally at a gain of P75,000.
April 9 Contributed an additional P120,000 after withdrawing P300,000
from the fund.
July 30 Collected dividends on the remaining securities in the amount of
P490,000. Interests of P150,000 are yet to be collected.
December 31 The securities had a market value of P3,600,000 at this time.
Total administrative costs incurred from the fund amounted to
P10,000.
 25. Compute the sinking fund balance of San Carlos Co. as of December 31.
Answer: _____________________

PROBLEM 14: On January 1, 2010, Mandaue Company is currently planning the

purchase of a building in January 1, 2015. It wants to establish a fund, by depositing in
a bank, which should equal the cost of construction of the building by December 31,
2014. Data regarding the fund follows:
Cost of the building P 5,000,000
Compound interest rate on bank deposits 12%
26. Assuming that Mandaue will just contribute one lump sum amount on January 1,
2010, how much should Mandaue deposit?
Answer: _____________________

27. Assuming Mandaue will just contribute equal amounts annually with the first one
on January 1, 2010, how much should Mandaue contribute annually?
Answer: _____________________

28. Assuming Mandaue will just contribute equal amounts annually with first one on
December 31, 2010, how much should Mandaue contribute annually?
Answer: _____________________

29. Assuming Mandaue invests P1,000,000 on January 1, 2010 with the rest
contributed to the fund equally, how much should contribute annually?
Answer: _____________________

30. Assuming Mandaue will just contribute equal amounts annually with first one on
December 31, 2010, how much higher (lower) would the contribution be if the
interest is compounded quarterly instead?
Answer: _____________________

PROBLEM 15: Slovenia Company insured the life of its president for P2,000,000 with
the president’s family as the beneficiary. The annual premium is P80,000 and the policy
is dated January 1, 2008. The cash surrender values are:
December 31, 2010 P 15,000
The entity December 31, 2011 19,000 follows the
calendar year as its fiscal
period. The president died on October 1, 2011 and the policy is settled on December
31, 2011.
31. How much is Slovenia’s life insurance expense for 2010?
Answer: _____________________

PROBLEM 16: Jessica Sanchez Ltd. insures the life of its president for P3,000,000, the
corporation being named as the beneficiary. The annual premium is P60,000. The
policy is dated April 1, 2007 and carries the following cash surrender value:
April 1, 2010 P 30,000
April 1, 2011 54,000
April 1, 2012 70,000
April 1, 2013 82,000
The corporation follows the calendar year as its accounting period. The president dies
on July 1, 2012 and the face of the policy is collected on July 31, 2012.
32. What amount of life insurance expense should Jessica recognize in 2011?
Answer: _____________________
 33. At the settlement of the loan, how much gain should be reported by Jessica?
Answer: _____________________

PROBLEM 17: Urdaneta Company took out a P10,000,000 insurance policy on the life
of its president on January 2, 2008 with Urdaneta as the beneficiary. The company’s
accounting period is the calendar year. The annual premium on the policy is P160,000.
Data regarding dividends and cash surrender value are given below:
2010 2011
Dividends received P 8,000 P 10,000
Cash surrender value 84,000 ?
Life insurance 138,000
expense ?
34. Compute the life insurance expense for 2010.
Answer: _____________________

35. What is the amount of cash surrender value to be reported by Urdaneta in 2011?
Answer: _____________________