IST PREBOARD- JANUARY 2021

FIRST PREBOARD
DARRELL JOE O. ASUNCION, CPA, MBA

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE
LETTER OF YOUR CHOICE WITH A VERTICAL LINE ON THE ANSWER SHEET PROVIDED.
STRICTLY NO ERASURES ARE ALLOWED.

PROBLEM NO. 1

You have been assigned to the audit of DIONISIA CO., a manufacturing company. You have been
asked to summarize the transactions for the year-end December 31,2021, affecting shareholder’s
equity and other related accounts. The shareholder’s equity section of DIONISIA’s December 31,
2021 statement of financial position as follows:

Ordinary share capital, ₱2 par value 1,000,000

Shares authorized, 180,000 shares issued,
177,580 shares outstanding ₱360,000
Share premium – issuance 3,640,000
Share premium – treasury sales 45,000
Retained earnings 649,378
Cost of 2,420 treasury sales (145,200)
Total shareholder’s equity ₱4,549,178

You have extracted the ff. information from the accounting records and audit working papers.

2020

Jan 15 DIONISIA issued 1,300 treasury shares for ₱40 per share. The 2,420 treasury shares on
hand at December 31, 2019 were purchased in one block in 2018.

Feb. 1 Sold 180, ₱1,000, 9% bonds due February 1, 2020 at 103 with one detachable share
warrant attached to each bond. Interest payable annually on February 1. The fair market value of
the bonds without the share warrant is 95. The detachable warrant have a fair value of ₱50 each
and expire on February 1,2021. Each warrant entitles the holder to purchase 10 ordinary shares
at ₱40 per share.

Mar. 6 2,800 ordinary shares were subscribed for at ₱44 per share. 40% of the subscription was
collected.

March 20 The balance due on 2,400 shares was received and those shares were issued.

Nov. 1 There were 110 share warrants detached from the bonds and exercised.

DIONISIA’s net income for 2020 is ₱950,000

Based on the preceding information, determine the correct December 31,2020, balance of each
Of the following:
1. Ordinary share capital
A. ₱364,800 C. ₱372,600
B. ₱375,800 D. ₱367,000

2. Share premium-issuance
A. ₱3,827,200 C. ₱3,805,065
B. ₱3,808,200 D. ₱3,791,400

3. Share premium – treasury shares

A. ₱19,000 C. ₱187,200
B. ₱45,000 D. ₱192,800

4. Retained earnings (before appropriation for treasury shares)

A. ₱649,378 C. ₱1,599,378
B. ₱1,573,378 D. ₱1,454,178

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IST PREBOARD- JANUARY 2021

5. Treasury shares
A. ₱67,200 C. ₱93,200
B. ₱145,200 D. ₱142,600

PROBLEM NO. 2

In connection with your audit of the financial statements of the Isabela Company for the year
2021, the following financial assets at fair value through profit or loss and Dividend Income
accounts were presented to you:

Financial Assets at fair value through profit or loss:

Date Description Ref Debit Credit
1/1/2021 20,000 shares acquired in 740,000
2020 at a cost of ₱700,000,
₱40 par value Roxas Co.
3/1/2021 2 for 1 stock split when the GJ-90 900,000
market price is ₱45/share
4/3/2021 Sale of 5,000 shares at ₱50 CR-23 250,000
12/3/2021 Sale of 6,000 at ₱45 CR-55 270,000

Dividend income:
Date Description Ref Debit Credit
3/1/2021 2 for 1 stock split when the GJ-90 900,000
market price is ₱45/share
7/1/2021 Dividend income CR 45 140,000

The following was obtained during your examination:

1) From independent sources, you determine the following dividend information:
Date Date of Date of
Type declared record payment Rate
2 for 1 stock 2/1/2021 2/15/2021 3/1/2021 20,000
split shares
Cash dividend 6/1/2021 6/15/2021 7/1/2021 ₱4/ share
Cash dividend 12/1/2021 12/15/2021 1/2/2022 20%

2) Closing market quotation as of December 31, 2021:

Bid Asked
ROXAS Company common ₱43 ₱44.50

Questions:
Based on the above and the result of your audit, determine the following:
6. The gain or loss on sale on April 3, 2021
a. ₱25,000 loss c. ₱16,500 gain
b. ₱65,000 gain d. ₱25,000 gain

7. The gain or loss on sale on December 3, 2021

a. ₱24,000 loss c. ₱24,000 gain
b. ₱48,000 gain d. Nil

8. The total dividend income in 2021

a. ₱280,000 c. ₱420,000
b. ₱300,000 d. ₱256,000

9. The adjusted balance of the financial asset at fair value through profit or loss on December
31, 2021
a. ₱400,500 c. ₱387,000
b. ₱1,290,500 d. ₱1,247,000

10. The unrealized gain to be presented in the statement of financial position on December
31, 2021
a. Nil c. ₱710,500
b. ₱783,000 d. ₱739,500

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PROBLEM NO. 3
A mentally deranged employee, Mr. Arson, put a torch to a factory on February 20, 2018. The
resulting fire completely destroyed the plant and its content. Fortunately, certain accounting
records were kept in another building. They revealed the following for the period December
31,2017 to February 20,2018:

Prime cost ₱602,000

Gross profit rate on sales is 20%
Cost of good available for sale 920,000
Direct materials purchased 340,000
Work in process, December 31, 2017 68,000
Direct materials, December 31,2017 32,000
Finished goods, December 31,2017 60,000
Factory overhead is 40% of conversion cost.
Sales, 1,000,000
Direct labor 360,000

The insurance company wants to know the approximate cost of the inventories as a basis for
negotiating a settlement.

QUESTION:
Based on the above data, compute for the following on February 20, 2018:
11. Direct material used during the period.
a. ₱242,000 c. ₱360,000
b. ₱224,000 d. ₱240,000

12. Cost of goods manufactured.

a. ₱860,000 c. ₱855,000
b. ₱680,000 d. ₱861,200

13. Direct materials inventory

a. ₱103,000 c. ₱12,000
b. ₱98,000 d. ₱130,000

14. Work in process inventory

a. ₱50,800 c. ₱48,800
b. ₱50,000 d. ₱55,000

15. Finished goods inventory:

a. ₱120,000 c. ₱65,000
b. ₱60,000 d. ₱125,000

PROBLEM NO. 4
Fe Company, organized on March 1, 2021, has a very poor internal control system. The company’s
cashier is also its accountant. After 9 months of operations, the company’s manager suspects that
the cashier – accountant has been misappropriating company collections. You have been engaged
to audit the company’s accounts to determine the extent of fraud, If any.

You started the audit on November 15. On that date, the cash on hand per your surprise count
was ₱5,140. Also on that date, the bank confirmed that the balance of the company’s current
account was ₱26,328. Your examination of the records reveals that a check for ₱1,852 was
outstanding on November 15. The company’s mark up is 40% of sales

Further examination of the company’s records reveal the following balances at November 15,
2021:
Ordinary share capital ₱300,000
Share premium 20,000
Real property purchased for cash 200,000
Mortgage payable 80,000
Furniture and fixtures (of the acquisition cost,
₱6,000 remains unpaid as of Nov. 15 29,000
Notes payable - bank 32,000

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IST PREBOARD- JANUARY 2021

Accounts payable - trade 46,284

Expenses paid (excluding purchases) 60,756
Merchandise inventory at cost 93,920
Accounts receivable - trade 85,380
Total sales 340,000

16. How much was paid for inventory purchases?

a. ₱157,716 c. ₱183,636
b. ₱293,716 d. ₱251,636

17. How much was collected from customers?

a. ₱118,620 c. ₱50,620
b. ₱254,620 d. ₱340,000

18. How much is the cashier’s accountability at November 15, 2021?

a. ₱131,228 c. ₱145,228
b. ₱83,228 d. ₱151,228

19. What is the adjusted bank balance as of November 15, 2021?

a. a. ₱31,468 c. ₱29,616
b. b. ₱26,328 d. ₱23,040

20. The cash shortage as of November 15, 2021 totaled

a. ₱121,612 c. ₱127,612
b. ₱101,612 d. ₱206,992

PROBLEM NO. 5
On January 1, 2009, Jaydee Co grants 5,000 share options with a ten-year life to each of eight
senior executives. The share options will vest and become exercisable immediately if and when
the entity’s share price increases from ₱50 to ₱70, provided that the executive remains in service
until the share price target is achieved.
The entity applies a binomial option pricing model, which takes into account the possibility that
the share price target will be achieved during the ten-year life of the options, and the possibility
that the target will not be achieved. The entity estimates that the fair value of the share options at
grant date is ₱25 per option. From the option pricing model, the entity determines that the mode
of the distribution of possible vesting dates is five years. In other words, of all the possible
outcomes, the most likely outcome of the market condition is that the share price target will be
achieved at the end of 2013.

The entity also estimates that two executives will have left by the end of 2013,

Throughout years 2009-2012, the entity continues to estimate that a total of two executives will
leave by the end of 2013. However, in total three executives leave, one in each of years 2011, 2012,
2013. The share price target is achieved at the end of 2014. Another executive leaves during 2014,
before the share price target is achieved.

Required:
Compute for the following:
21. Compensation expense for 2009
a. 0 c. 25,000
b. 150,000 d. 750,000

22. Compensation expense for 2010

a. 750,000 c. 300,000
b. 150,000 d. 25,000

23. Compensation expense for 2011

a. 450,000 c. 300,000
b. 150,000 d. 750,000

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IST PREBOARD- JANUARY 2021

24. Compensation expense for 2012

a. 400,000 c. 50,000
b. 150,000 d. 40,000

25. Compensation expense for 2013

a. 750,000 c. 125,000
b. 150,000 d. 25,000

PROBLEM NO. 6
The statement of financial position of TENACIOUS Corporation reported the following long-term
receivables as of December 31, 2015:

Note receivable from sale of plant ₱7,500,000

Note receivable from officer 2,000,000

In connection with your audit, you were able to gather the following transactions during 2016
and other information pertaining to the company’s long-term receivables:

a. The note receivable from sale of plant bears interest at 9% per annum. The note is payable in
3 annual installments of ₱2,500,000 plus interest on the unpaid balance every May 1. The
initial principal and interest payment was made on May 1, 2016.

b. The note receivable from officer is dated December 31, 2015, earns interest at 8% per annum,
and is due on December 31, 2018. The 2016 interest was received on December 31, 2016.

c. The corporation sold a piece of equipment to Never Quit, Inc. on April 1, 2016, in exchange for
an ₱1,000,000 non-interest bearing note due on April 1, 2018. The note had no ready market,
and there was no established exchange price for the equipment. The prevailing interest rate
for a note of this type at April 1, 2016, was 10%. The equipment had a carrying amount of
₱380,000 on April 1, 2016.

d. A tract of land was sold by the corporation to Persistent Co. on July 1, 2016, for ₱4,000,000
under an installment sale contract. Persistent Co. signed a 4-year 10% note for ₱2,800,000
on July 1, 2016, in addition to the down payment of ₱1,200,000. The equal annual payments
of principal and interest on the note will be ₱883,320 payable on July 1, 2017, 2018, 2019,
and 2020. The land had an established cash price of ₱4,000,000, and its cost to the
corporation was ₱3,000,000. The collection of the installments on this note is reasonably
assured.

Questions:
Based on the foregoing, answer the following: (Round off present value factors to three decimal
places)
26. Noncurrent receivables as of December 31, 2016
a. ₱5,084,630 c. ₱7,584,630
b. ₱7,522,680 d. ₱7,724,630

27. Current portion of long-term receivables as of December 31, 2016

a. Nil c. ₱3,103,320
b. ₱2,500,000 d. ₱3,243,320

28. Accrued interest receivable as of December 31, 2016

a. ₱140,000 c. ₱440,000
b. ₱300,000 d. ₱903,320

29. Interest income for the year 2016

a. ₱746,950 c. ₱886,950
b. ₱791,116 d. ₱1,026,950

30. Total gain to be recognized on the sale of equipment and land

a. ₱446,000 c. ₱1,000,000

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IST PREBOARD- JANUARY 2021

b. ₱554,000 d. ₱1,446,000

PROBLEM NO. 7
You were engaged to audit the financial statements of Christine Corp. for the year ended
December 31, 2021. In connection with your examination, the following information was taken:

Dec. 31, 2021 Dec. 31, 2020

1. Account balances:
Assets:
Cash ₱6,790 ₱4,560
Accounts receivable 7,610 5,940
Merchandise inventory 10,580 9,720
Prepaid expenses 750 600
Equipment, net of depreciation 9,550 8,500
Liabilities
Accounts payable 6,990 6,330
Loan payable, bank 4,000 5,000
Accrued expenses 560 450

2. Transactions per cashbook during 2021:

Receipts:
From customers ₱69,750
From bank loan 4,000
Other income 800
Payments:
To trade creditors 53,660
To bank for loan 5,250
For expenses 9,410
To purchase equipment 2,000
To owner for drawings 2,000

3. Other information:
a. Sales returns during the year were ₱2,100. Bad debts written off directly against accounts
receivable were ₱1,080.
b. Purchase returns amounted to ₱1,300. Goods received from supplier on December 20,
2021, ₱800, were not invoiced until January, 2022.
c. The only change in the equipment was the purchase of a new typewriter on June 30, 2021.
Depreciation charges are credited to the long-lived asset account from the month
following purchase.

Required: Compute the adjusted balances of the following accounts:

31. Net Sales
a. 74,600 b. 72,500 c. 71,260 d. 69,160
32. Net Purchases
a. 55,620 b. 54,320 c. 55,120 d. 56,420
33. Depreciation expense
a. 950 b. 3,050 c. 1,050 d. 900
34. Total operating expense excluding depreciation
a. 9,410 b. 9,670 c. 9,370 d. 9,570
35. Cost of sales
a. 54,760 b. 53,460 c. 54,260 d. 55,560

PROBLEM NO. 8
BATANES-BASCO granted a loan with a face value of ₱8,000,000 to a borrower on January 1, 2020.
The interest on the loan is 12% payable annually starting December 31, 2020. The loan matures
in three years on December 31, 2022. On January 1, 2020, BATANES-BASCO received ₱100,000
direct origination fees from the borrower. Data relating to the loan follow:
Carrying amount on December 31, 2020 8,277,606
Carrying amount of Loan receivable, December 31, 2021 8,145,367

QUESTIONS:

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Based on the above data, answer the following: (Round off present value factors to four decimal
places)

36. The effective interest rate of the loan is

a. 9%. c. 11.18%.
b. 10%. d. 12%.
37. The interest income to be recognized in 2020 is
a. 753,985. c. 827,761.
b. 839,782. d. 960,000.
38. The interest income to be recognized in 2021 is
a. 753,985. c. 827,761.
b. 839,782. d. 960,000.
39. The carrying amount of the loan receivable on January 1, 2020 is
a. 8,000,000. c. 8,177,606.
b. 8,377,606. d. 8,397,824.
40. The direct origination cost incurred on January 1, 2020 is
a. 0 c. 397,824.
b. 100,000. d. 497,824.

PROBLEM NO. 9
You review the following statement of financial position in connection with your audit of
GAMU Corporation:

GAMU Corporation
Balance Sheet
December 31, 2021
Assets
Cash ₱ 40,000
Accounts receivable 80,000
Notes receivable 24,000
Inventories 200,000
Total assets ₱344,000

Liabilities and Owners’ Equity

Accounts payable ₱16,000
Notes payable 32,000
Capital stock 80,000
Retained earnings 216,000
Total liabilities and owners’ equity ₱344,000

Additional information:
• A review of the company’s books indicates that the following errors and omissions
had not been corrected during the applicable years:

2018 2019 2020 2021

Ending inventory – overstated ₱ - ₱56,000 ₱64,000 ₱ -
Ending inventory – understated 48,000 - - 72,000
Prepaid expense 7,200 5,600 4,000 4,800
Unearned income - 3,200 - 2,400
Accrued expense 1,600 600 800 400
Accrued income - 1,000 - 1,200

• In addition, a machinery purchased on January 1, 2018 with a cost of ₱55,000,

estimated salvage value of ₱5,000 and estimated useful life of 5 years was charged
entirely to repairs and maintenance expense. The straight-line method of
depreciation should have been used in the depreciation.

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• No dividends were declared during the years 2018 to 2021 and no adjustments were
made to retained earnings. The company’s books reported the following net income:
2018 ₱60,000 2020 ₱52,000
2019 44,000 2021 60,000

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted amounts of the
following: (Disregard tax implications)

41. Net income in 2018

a. ₱99,200 b. ₱113,600 c. ₱116,800 d. ₱158,600

42. Net income (loss) in 2019

a. (₱62,800) b. (₱72,,800) c. (₱59,600) d. ₱145,200

43. Net income (loss) in 2020

a. ₱60,400 b. ₱34,400 c. ₱44,400 d. (₱11,600)

44. Net income (loss) in 2021

a. (₱76,000) b. ₱194,400 c. ₱186,000 d. ₱196,000
45. Retained earnings as of December 31, 2021
a. ₱281,600 b. ₱291,200 c. ₱292,000 d. ₱306,200

END OF PREBOARD!

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