FAR Pre-board

Theory Portion
1. Financial accounting
a. Is the examination of financial statements by an independent CPA for the purpose of expressing an opinion
as to the fairness of the financial statements.
b. Focuses on the preparation and presentation of general purpose reports known as financial statements.
c. Has no precise coverage but is used generally to refer to services to clients on matters of accounting,
finance, business policies, organization procedures, product costs, distribution and many other phases of
business conduct and operations.
d. Is the preparation of annual income tax returns and determination of tax consequences of certain proposed
business venture
2. Gain or loss from disposal of an item of property, plant and equipment is equal to the difference between
a. Fair value of the asset on balance sheet date and its carrying amount
b. Net realizable value on balance sheet date and its carrying amount
c. Net proceeds from disposal and the cost of the asset
d. Net proceeds from disposal and the carrying amount of the asset
3. A contingent liability is (choose the incorrect one)
a. Disclosed only c. Disclosed even if remote
b. Either probable or measurable but not both d. Not recognized in the financial statements
4. Which capital maintenance concept is applied to currently reported net income and comprehensive income?
Currently reported net income Comprehensive income
a. Financial capital Physical capital
b. Physical capital Physical capital
c. Financial capital Financial capital
d. Physical capital Financial capital
5. An investor uses the equity method to account for an investment in common stock. After the date of acquisition,
the investment account of the investor would
a. Not be affected by its share of the earnings or losses of the investee
b. Not be affected by its share of the earnings of the investee but be decreased by its share of the losses of
the investee
c. Be increased by its share of the earnings of the investee but not be affected by its share of the losses of the
investee
d. Be increased by its share of the earnings of the investee and decreased by its share of the losses of the
investee
6. Receivables from officers, directors and employees for goods sold or services rendered in the ordinary course of
business
a. Are considered current if proper control is exercised in granting credit and the accounts are currently
collectible
b. Are not included in trade accounts receivable
c. Are included in current assets even if the receivables are actually loans and advances and the collection is
unlikely within a year
d. Are always classified as noncurrent
7. If the cash balance shown in a company’s accounting records is less than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the company
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the company
8. It is deferred tax consequence attributable to a taxable temporary difference.
 a. Deferred tax liability c. Deferred tax asset
b. Current liability d. Noncurrent deferred tax liability
9. Cash flows in the cash flow statement are
a. Inflows and outflows of cash
b. Inflows and outflows of cash and cash equivalents
c. Inflows of cash and cash equivalents
d. Outflows of cash and cash equivalents
10. Which statement is incorrect concerning internally generated intangible asset?
a. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise
classifies the generation of the asset into a research phase and a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs necessary to create,
produce and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.
11. The accrual basis means that
a. The effects of transactions and other events are recognized when they occur and not as cash or its
equivalent is received or paid and they are recorded in the accounting records and reported in the financial
statements of the periods to which they relate.
b. The financial statements are normally prepared on the assumption that an enterprise will continue in
operation for the foreseeable future.
c. Where parent and subsidiary relationship exists, consolidated statements for the affiliates are prepared
because the parent and the subsidiary are a “single economic entity”.
d. The financial statements should be stated in terms of a common financial denominator.
12. Qualitative characteristics
a. Are the attributes that make the information provided in financial statements useful to users.
b. Are the generally accepted accounting principles.
c. Are the basic notions and fundamental premises on which the accounting process is based.
d. Refer to the definition, recognition and measurement of the elements from which financial statements are
constructed
13. What is the appropriate presentation of a discontinued operation?
a. The amounts of revenue, expenses and pre-tax profit or loss from the activities attributable to the
discontinued operation during the current period, and the related income tax expense are presented
on the face of the income statement side by side with the continuing operation.
b. Net profit or loss from the activities of discontinued operation is treated as component of equity.
c. Net profit or loss from the activities of the discontinued operation is accounted for as a change in accounting
policy.
d. The results from the discontinued operation shall be presented as a single amount net of tax below the
income from continuing operations.
14. Which is incorrect concerning accounting changes?
a. The effect of a change in accounting estimate shall be treated currently and prospectively, if necessary.
b. The effect of a change in the expected pattern of consumption of economic benefits of a depreciable asset
should be included in the determination of income or loss of the period of change and future periods.
c. A change in accounting policy shall be accounted for retrospectively.
d. If it is difficult to distinguish between a change in accounting policy and a change in accounting estimate,
the change is treated as a change in accounting policy.
15. Enterprises are encouraged to disclose all of the following amounts, except
a. Gross carrying amount of fully depreciated property that is still in use.
b. Carrying amount of property, plant and equipment retired from active use and held for disposal.
 c. Fair value of property, plant and equipment when the fair value is not materially different from the carrying
amount.
d. Carrying amount of temporarily idle property, plant and equipment
16. A cash over or short account
a. Is not generally accepted
b. Is debited when the petty cash fund proves out over
c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash
17. A liability shall be classified as current when it satisfies any of the following criteria (choose the incorrect one)
a. It is expected to be settled in the entity’s normal operating cycle.
b. It is held primarily for the purpose of being traded.
c. It is due to be settled within twelve months after the balance sheet date.
d. The entity has an unconditional right to defer settlement of the liability for at least twelve months after the
balance sheet date.
18. Information about economic resources controlled by the enterprise and its capacity to modify these resources is
useful in predicting the
a. Ability of the enterprise to meet its financial commitments in the near term.
b. Ability of the enterprise to meet its financial commitments over a longer term.
c. Future borrowing needs and how future profits and cash flows will be distributed among interested users.
d. Ability of the enterprise to generate cash and cash equivalents in the future.
19. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an
account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income
20. Postemployment employee benefits include
a. Termination benefits
b. Short-term employee benefits
c. Equity compensation benefits
d. Retirement benefits, such as pensions
21. The credit balance that arises when a net loss in a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement
22. Use of the effective interest method in amortizing a discount on bonds payable would result in
a. A decreasing amount of discount amortization each period over the life of the bonds
b. A constant amount of discount amortization each period over the life of the bonds
c. An increasing amount of discount amortization each period over the life of the bonds
d. Cannot be determined from the information given
23. The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable
value less normal profit margin is below the original cost. Under LCM method, the inventory item should be
valued at
a. Replacement cost
b. Net realizable value
c. Net realizable value less normal profit margin
d. Original cost
24. If a company constructs a laboratory building to be used as a research and development facility, the cost of the
laboratory building is matched against earnings as
a. Research and development expense in the period of construction
 b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility
25. Which statement is incorrect with respect to inventories under PAS No. 2?
a. Inventories should be measured at the lower of cost and net realizable value.
b. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and condition.
c. The cost of inventories of a service provider consists primarily of labor and other costs of personnel directly
engaged in providing the service, including supervising personnel and attributable overhead.
d. The costs of conversion of inventories include costs directly related to the units of production such as direct
labor, and a systematic allocation of variable production overhead.
26. Which is incorrect concerning self-constructed asset?
a. The cost of self-constructed asset is determined using the same principles as for an acquired asset.
b. Any internal profits from construction are eliminated in arriving at the cost of self- constructed asset.
c. The cost of abnormal amounts of wasted material, labor or other resources incurred in the production of a
self- constructed asset is included in the cost of asset.
d. The cost of normal amounts of wasted material, labor or other resources incurred in the production of a self-
constructed asset is included in the cost of the asset.
27. Nonfinancial disclosures include all of the following, except
a. The domicile and legal form of the enterprise, its country of incorporation and the address of the registered
office.
b. A description of the nature of the enterprise’s operations and its principal activities.
c. The name of the parent and the ultimate parent of the group.
d. Contingent liabilities and unrecognized contractual commitments.
28. A company has included in its consolidated financial statements this year a subsidiary acquired several years
ago that was appropriately excluded from consolidation last year. This results in
a. Accounting change that should be reported prospectively
b. Accounting change that should be reported by restating the financial statements of all prior periods
presented
c. A correction of an error
d. Neither an accounting change nor a correction of an error.
29. Which statement is incorrect concerning revaluation of property, plant and equipment?
a. When an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs should be revalued.
b. The basis of revaluation is fair value which is usually the market value determined by appraisal undertaken
by professional qualified valuers, or depreciated replacement cost, in the absence of evidence of market
value.
c. Items of property, plant and equipment that experience significant and volatile movements in fair value
should be revalued annually.
d. Frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant
movements in fair value and instead, revaluation every five to ten years may be sufficient.
30. Interim financial reporting should be viewed primarily in which of the following ways?
a. As useful only if activity is spread evenly throughout the year
b. As if the interim period were an annual accounting period
c. As reporting under a comprehensive basis of accounting other than GAAP
d. As reporting for an integral part of an annual period
31. XYZ Company purchased a three-month Treasury bill. The company’s policy is to treat as cash equivalents all
highly liquid investments with an original maturity of three months or less when purchased. How should this
purchase be reported in the cash flow statement?
a. As an outflow from operating activities c. As an outflow from investing activities
b. As an outflow from financing activities d. Not reported
32. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other,
the range to be used is the
a. Minimum c. Midpoint
b. Maximum d. Summation of the minimum and maximum
33. Temporary difference is the
I. Difference between the tax basis of an asset or liability and its reported amount that will result in taxable
or deductible amounts in future years when the reported amount of the asset or liability is recovered or
settled respectively.
II. Item of income or expense which is included in either financial income or taxable income but will never
be included in the other.
a. I only b. II only c. Both I and II d. Neither I nor II
34. Which statement is incorrect concerning the reversal of an impairment loss?
a. The increased carrying amount due to reversal should not be more than what the depreciated historical cost
would have been if the impairment had not been recognized.
b. Reversal of an impairment loss is recognized as income in the income statement.
c. Adjust depreciation for future periods.
d. Reversal of an impairment loss for goodwill is recognized as income in the income statement.
35. An enterprise’s accounts receivable decreased from beginning to the end of the year. In the cash flow statement
using the direct method, the cash collected from customers would be
a. Sales revenue plus accounts receivable at the beginning
b. Sales revenue plus the decrease in accounts receivable
c. Sales revenue minus the decrease in accounts receivable
d. The same as sales revenue
36. How should a gain from the sale of used equipment for cash be reported in a cash flow statement using the
indirect method?
a. In investing activities as a reduction of the cash inflow from the sale
b. In investment activities as a cash outflow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income
37. Which one of the following is not a component of the cost of internally generated intangible asset?
a. Cost of materials and services used or consumed in generating the intangible asset.
b. Cost of employee benefits arising from the generation of the intangible asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.
38. Which statement is incorrect concerning the presentation of the income statement?
a. The nature of expense method means that expenses are aggregated according to their nature and are not
reallocated among various functions within the enterprise.
b. The cost of sales method means that expenses are classified according to their function as cost of sales,
distribution or administrative activities.
c. PAS 1 requires the use of the cost of sales method because this presentation often provides more relevant
information to the users than the nature of expense method.
d. The choice between the functional and natural presentation depends on historical and industry factors
and the nature of the entity.
39. The following statements pertain to the concept of income and expenses. Which statement is incorrect?
a. The definition of expenses encompasses losses as well as those expenses that arise in the course of the
ordinary activities of the enterprise.
b. Losses represent other items that meet the definition of expenses and may or may not arise in the course of
the ordinary activities of the enterprise.
c. The definition of revenue encompasses both income and gains.
d. Gains represent other items that meet the definition of income and may or may not arise in the course of the
ordinary activities of an enterprise.
40. Adjusting events after balance sheet date include all of the following, except
a. The resolution after the balance sheet date of a court case.
b. The bankruptcy of a customer which occurs after the balance sheet date resulting to a loss on a trade
receivable account.
c. The discovery of fraud or errors that show that the financial statements were incorrect.
d. Dividends to holders of equity instruments proposed or declared after balance sheet date

Problems
1. Lobo Company reported an impairment loss of P4,000,000 in its income statement for the year 2017. This loss
was related to an item of property, plant and equipment which was acquired on January 1, 2016 with cost of
P25,000,000, useful life of 10 years and no residual value. On December 31, 2017 balance sheet, Lobo
reported this asset at P16,000,000 which is the fair value on such date. On December 31, 2018, Lobo
determined that the fair value of its impaired asset had increased to P19,000,000. The straight line method is
used in recording depreciation of this asset. What amount of gain on impairment recovery should Lobo report in
its 2018 income statement?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0
2. Data pertaining to dividends from Vigan Company’s common stock investments for the year 2018 follow:
* On October 1, 2018, Vigan received P2,000,000 liquidating dividend from X Company. Vigan owns a 5%
interest in X Company.
* Vigan owns a 10% interest in Y Company which declared a P30,000,000 cash dividend on November 15, 2018
to stockholders of record on December 15, 2018 payable on January 15, 2019.
* On December 1, 2018, Vigan received from Z Company a dividend in kind of one share of V Company
common stock for every 5 Z Company common shares held. Vigan holds 200,000 Z Company shares which
have a market price of P50 per share on December 1, 2018. The market price of V Company common is P30
per share.
What amount should Vigan report as dividend income in its 2018 income statement?
a. 6,200,000
b. 4,200,000
c. 3,000,000
d. 5,000,000
3. During January 2018, Tagkawayan Company won a litigation award for P2,000,000 which was tripled to
P6,000,000 to include punitive damages. The defendant, who is financially stable, has appealed only the P4,000,000
punitive damages. Tagkawayan was awarded P1,000,000 in an unrelated suit it filed, which is being appealed by the
defendant. Counsel is unable to estimate the outcome of the appeals. In its 2018 income statement, Tagkawayan
should report what amount of pretax gain?
a. 6,000,000 c. 2,000,000
b. 4,000,000 d. 3,000,000
4. Pampanga Company’s December 31, 2018 balance sheet reported the following
current assets:
Cash 3,000,000
Accounts receivable 5,200,000
Inventory 2,000,000
Prepaid expenses 700,000
Equipment used and held for resale 100,000
 11,000,000
An analysis of the accounts receivable disclosed that accounts receivable comprised
the following:
Trade accounts receivable 4,000,000
Allowance for doubtful accounts ( 300,000)
Selling price of Pampanga Company’s unsold goods sent to XYZ
Company on consignment at 125% of cost and excluded
from Pampanga’s ending inventory 1,500,000
5,200,000
At December 31, 2018, the total current assets should be
a. P10,600,000 c. P10,700,000
b. P 9,800,000 d. P 9,900,000
5. Valenzuela Company incurred the following infrequent losses during 2018:
Loss on disposal of one of four dissimilar factories 1,000,000
Foreign exchange loss on an amount remitted by a foreign
customer due to major currency devaluation 2,000,000
Loss on worthless inventory due to a competitor’s
unexpected product innovation 5,000,000
Loss from major strike by employees 4,000,000
Loss on early extinguishment of long-term debt 1,500,000
Loss from expropriation of asset 3,000,000
In its 2018 income statement, what total amount should Valenzuela report as part of continuing operations?
a. P13,500,000 c. P12,000,000
b. P16,500,000 d. P15,500,000
6. During 2018, Angat Company decided to change from the FIFO method of inventory valuation to the weighted
average method. Inventory balances under each method were:
FIFO Weighted average
December 31, 2016 10,000,000 7,000,000
December 31, 2017 8,000,000 7,500,000
December 31, 2018 6,000,000 5,000,000
Ignoring income tax, in its 2018 statement of retained earnings, what amount should Angat report as the effect of this
accounting change?
a. P3,500,000 c. P3,000,000
b. P4,500,000 d. P 500,000
7. The transactions of Lambunao Company for the year 2018 included the following:
Cash borrowed from bank for purchase of land 6,000,000
Purchase of land for cash 6,000,000
Sale of securities for cash 1,000,000
Dividend declared (of which P2,000,000 was paid during the year) 3,000,000
Issuance of common stock for cash 7,000,000
Payment of bank loan including interest of P500,000 3,500,000
Increase in customers’ deposits 500,000
The 2018 cash flow statement should report net cash provided by financing activities at
a. P8,000,000
b. P8,500,000
c. P7,500,000
d. P7,000,000
8. On December 31, 2018, Baliuag Company had the following cash balances:
Cash in bank P15,000,000
Petty cash fund (all funds were reimbursed on December 31, 2018) 50,000
 Time deposit 5,000,000
Saving deposit 2,000,000

Cash in bank includes P500,000 of compensating balance against short term borrowing arrangement at
December 31, 2018. The compensating balance is legally restricted as to withdrawal by Baliuag. A check of
P300,000 dated January 15, 2019 in payment of accounts payable was recorded and mailed on December 31,
2018. In the current assets section of the December 31, 2018 balance sheet, what amount should be reported
as “cash and cash equivalents”?
a. P21,850,000 c. P21,800,000
b. P16,850,000 d. P14,850,000
9. Reconciliation of Malolos Corporation’s bank account at November 30, 2018 follows:
Balance per bank statement P3,150,000
Deposits in transit 450,000
Checks outstanding (45,000)
Correct cash balance P3,555,000

Balance per books P3,558,000

Bank service charge (3,000)
Correct cash balance P3,555,000
December data are as follows:
Bank Books
Checks recorded P3,450,000 P3,540,000
Deposits recorded 2,430,000 2,700,000
Collection by bank (P600,000 plus interest) 630,000 -
NSF check returned with December bank statement 15,000 -
Balances 2,745,000 2,715,000
The checks outstanding on December 31, 2018 amount to
a. P45,000 b. P135,000 c. P90,000 d. P0
10. Mangatarem Company had the following information relating to its accounts receivable for the year 2018:
Accounts receivable – January 1 P12,000,000
Credit sales 20,000,000
Collection from customers, excluding the recovery of accounts written off 17,000,000
Accounts written off as worthless 300,000
Sales returns 1,000,000
Recovery of accounts written off 100,000
Estimated future sales returns on December 31 400,000
Estimated uncollectible accounts on December 31, per aging 1,000,000
Mangatarem should report the December 31, 2018 accounts receivable, before allowance for sales returns and
uncollectible accounts, at
a. P13,700,000 c. P13,800,000
b. P12,300,000 d. P13,130,000
11. All of Urdaneta Company’s sales are on a credit basis. The following information is available for 2018:

Allowance for doubtful accounts, 1/1/2018 P1,000,000

Sales 22,000,000
Sales returns 2,000,000
Accounts written off as uncollectible 600,000
Recovery of accounts written off 200,000
 Urdaneta provides for doubtful accounts expense at the rate of 10% of net sales. At December 31, 2018, the
allowance for doubtful accounts balance should be
a. P3,200,000 c. P2,800,000
b. P2,600,000 d. P2,000,000
12. On January 1, 2014 Baggao Company purchased P8,000,000 ordinary life policy on its president. Additional data
for the year 2018 are:
Cash surrender value, January 1 100,000
Cash surrender value, December 31 120,000
Annual advance premium paid on January 1, 2018 200,000
Dividend received on July 1, 2018 10,000
Baggao Company is the beneficiary under the life insurance policy. Baggao should report life insurance expense for
2018 at
a. 200,000
b. 180,000
c. 170,000
d. 190,000
13. The work-in-process inventory of Bakun Company were completely destroyed by fire on June 1, 2018. You were
able to establish physical inventory figures as follows:
January 1, 2018 June 1, 2018
Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on
purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance adjusters than
an average gross profit rate of 35% based on cost be used and that direct labor cost was 160% of factory
overhead.
The work in process inventory destroyed as computed by the adjuster
a. P314,612 c. P185,000
b. P366,000 d. P265,000
14. Tublay uses the retail inventory method to approximate the lower of average cost or market. The following
information is available for the current year:
Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,400,000
Sales discounts 200,000
Employee discounts 600,000
What should be reported as the estimated cost of inventory at the end of the current year?
a. P3,120,000 c. P3,000,000
b. P3,200,000 d. P3,840,000
15. Lasam Company sells one product, which it purchases from various suppliers. The trial balance at December 31,
2018, included the following accounts:
Sales (100,000 units at P150) P15,000,000
 Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
Freight in 100,000
Freight out 200,000
The inventory purchases during 2018 were as follows:
Units Unit cost Total cost
Beginning inventory, January 1 20,000 P60 P 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 P10,500,000

Lasam’s accounting policy is to report inventory in its financial statements at the lower of cost or market, applied
to total inventory. Cost is determined under the first-in, first-out method.

Lasam has determined that, at December 31, 2018, the replacement cost of its inventory was P70 per unit and
the net realizable value was P72 per unit. The normal profit margin is P10 per unit.

What should Lasam report as cost of goods sold for the year 2018?
a. P6,400,000 c. P6,700,000
b. P6,600,000 d. P7,100,000
16. On November 17, 2018, Solana Airways entered in to a commitment to purchase 3,000 barrels of aviation fuel for
P9,000,000 on March 23, 2019. Solana entered into this purchase commitment to protect itself against the volatility
in the aviation fuel market. By December 31, 2018, the purchase price of aviation fuel had fallen to P2,200 per
barrel. However, by March 23, 2019, when Solana took delivery of the 3,000 barrels, the price of aviation fuel had
risen to P2,500 per barrel. How much should be recognized as loss on purchase commitment on December 31,
2018?
a. P1,500,000 c. P2,400,000
b. P 900,000 d. P 0
17. Cagayan Company included the following items under inventories:
Materials P 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retails store, including 50% profit on cost 750,000
Finished goods in hands on consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000
How much is the correct amount of inventories?
a. P5,610,000 c. P5,375,000
b. P5,500,000 d. P5,450,000
18. On December 1, 2018, Pozurrubio Company assigned on a nonnotification basis accounts receivable of
P5,000,000 to a bank in consideration for a loan of 90% of the receivables less a 5% service fee on the accounts
assigned. Pozurrubio signed a note for the bank loan. On December 31, 2018, Pozurrubio collected assigned
accounts of P3,000,000 less discount of 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 balance to the principal. The agreed interest
is 1% per month on the loan balance. In its December 31, 2018 balance sheet, Pozurrubio should report note
payable as a current liability at
a. P1,745,000 c. P1,545,000
b. P1,700,000 d. P2,250,000
19. Urdaneta Company accepted from a customer P5,000,000, 120-day, 12% note dated August 31, 2018. On
September 30, 2018, Urdaneta discounted the note at the National Bank. However, the proceeds were not received
until October 1, 2018. In the September 30, 2018 balance sheet, the amount receivable from the bank includes
accrued interest revenue of
a. P200,000 c. P44,000
b. P156,000 d. P 0
20. Balungao Company accepted a P5,000,000, 2% interest bearing note from Rosales Company on December 31,
2018, in exchange for a machine with a list price of P4,000,000 and a cash price of P3,750,000. The note is payable
on December 31, 2020. In its 2018 income statement, Balungao should report the sale at
a. P3,750,000 c. P5,000,000
b. P4,000,000 d. P5,200,000
21. Imus Company acquired two items of machinery as follows:
ii. On December 30, 2018, Imus Company purchased a machine in exchange for a noninterest bearing note
requiring three payments of P1,000,000. The first payment was made on December 30, 2018, and the
others are due annually on December 30. The prevailing rate of interest for this type of note at date of
issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 1.69 for two periods and 2.40
for three periods. The new machine was damaged during its installation and the repair cost amounted to
P50,000.
iii. On January 1, 2018, Imus Company acquired used machinery by issuing to the seller a three-year,
noninterest-bearing note for P3,000,000. In recent borrowing, Imus has paid a 12% interest for this type of
note. The present value of 1 at 12% for 3 years is 0.71.
What is the total cost of the machinery?
a. 4,820,000
b. 4,530,000
c. 4,580,000
d. 4,870,000
22. Silang Company acquired a welding machine with an invoice price of P3,000,000 subject to a cash discount of
5% which was not taken. Silang incurred freight and insurance during shipment of P50,000 and testing and
installation cost of P200,000. Silang also incurred cost of P20,000 in removing the old welding machine prior to the
installation of the new one. Welding supplies were acquired at a cost of P100,000. The VAT on the acquisition is
P300,000. The cost of the new welding machine should be
a. 3,100,000
b. 3,250,000
c. 3,220,000
d. 3,400,000
23. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company which
provided the following:
Net income Net assets
2015 1,400,000 6,000,000
2016 1,600,000 8,000,000
2017 2,000,000 8,800,000
2018 2,200,000 9,200,000
 It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on average net
assets at 15%. How much is the purchase price for Calauan Company?
a. 11,600,000
b. 10,400,000
c. 11,200,000
d. 11,000,000
24. Luzon Company purchased Jolo Company for P100,000,000. The net assets of Jolo Company on the date of
acquisition amounted to P80,000,000. Thus, there is a goodwill of P20,000,000. Jolo Company has three segments,
each of which is considered a cash generating unit. The goodwill is allocated respectively to segments One, Two and
Three, P5,000,000, P6,000,000 and P9,000,000.
On December 31, 2018, Segment One suffered significant losses and its recoverable amount is P30,000,000.
On December 31, 2018, the carrying amounts are as follows:
Segment One 28,000,000
Segment Two 50,000,000
Segment Three 67,000,000
Goodwill 20,000,000
In its 2018 income statement, Luzon Company should report impairment loss at
a. 3,000,000
b. 5,000,000
c. 2,000,000
d. 1,000,000
25. Dumalag Company provided the following information relevant to the research and development expenditures for
the year 2018:
Current period depreciation on the building housing R and D activities 1,500,000
Cost of market research study 1,000,000
Current period depreciation on a machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼ of his time overseeing
R and D activities 2,400,000
Pension costs for salary of R and D director 50,000
Pension costs for salary of Vice-President 100,000
The R and D expense for the current period should be
a. 3,875,000
b. 4,875,000
c. 5,750,000
d. 3,800,000
26. Lemery Company acquired property in 2018 which contains mineral deposit. The acquisition cost of the property was
P20,000,000. Geological estimates indicate that 5,000,000 tons of mineral may be extracted. It is further estimated that the
property can be sold for P5,000,000 following mineral extraction. For P2,000,000, Lemery is legally required to restore the
land to a condition appropriate for resale. After acquisition, the following costs were incurred:

Exploration cost 13,000,000

Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000
The company extracted 600,000 tons of the mineral in 2018 and sold 450,000 tons. In the 2018 income statement,
what amount of depletion is included in cost of sales?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000
27. To increase sales, Quezon Company inaugurated a promotional campaign on June 30, 2018. Quezon placed a
coupon redeemable for a premium in each package of cereal sold at P200. Each premium costs P100. A premium
is offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20.
Quezon estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31,
2018, the following is available:

Packages of cereal sold 100,000

Premiums purchased 10,000
Coupons redeemed 40,000
What is the estimated liability for coupons on December 31, 2018?
a. 1,080,000
b. 1,000,000
c. 720,000
d. 360,000
28. On September 1, 2017, Pagbilao Company issued a note payable to National Bank in the amount of
P10,000,000, bearing interest at 15%, and payable in five equal annual principal payments of P2,000,000. On this
date, the bank’s prime rate was 12%. The first payment for interest and principal was made on September 1, 2018.
At December 31, 2018, Pagbilao should record accrued interest payable of
a. 1,400,000
b. 1,120,000
c. 400,000
d. 320,000
29. Sariaya Company sells office equipment service contracts agreeing to service equipment for a two-year period.
Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are
charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over lives
of the contracts. Information for the year 2018 is as follows:
Unearned service contract revenue – 1/1/2018 3,000,000
Cash receipts from service contracts sold 5,000,000
Service contract revenue recognized 4,500,000
Service contract expense 2,500,000
What amount should Sariaya report as unearned service contract revenue at December 31, 2018?
a. 3,500,000 c. 2,000,000
b. 1,000,000 d. 500,000
30. La Carlota Company is determining the amount of its pretax financial income for 2018 by making adjustment to
taxable income from the company’s 2018 tax return. The tax return indicates taxable income of P15,000,000 on
which a tax liability of P4,800,000 has been recognized. Following is a list of items that may be required to determine
pretax financial income from the amount of taxable income.
Accelerated depreciation for income tax purposes was P2,000,000 and straight line financial depreciation is
P1,500,000.
Insurance premium of P100,000 on the life of an officer with La Carlota Company as beneficiary was not
included as a deduction in the tax return.
Interest on treasury bills was not included in the tax return. During the year, La Carlota received P2,500,000 on
these investments.
What was La Carlota Company’s pretax financial income?
a. P15,500,000 c. P18,000,000
b. P17,400,000 d. P17,900,000
31. Manapla Company computed a pretax financial income of P15,000,000 for the year ended December 31, 2018.
In preparing the tax return, the following differences are noted between financial income and taxable income.
Nondeductible expense 2,000,000
Nontaxable revenue 1,000,000
Estimated warranty cost that was recognized as expense
 in 2018 but deductible for tax purposes when paid 1,500,000
Excess tax depreciation over financial depreciation 500,000
What is the current tax expense for 2018 if the tax rate is 32%?
a. P5,120,000 c. P4,800,000
b. P5,440,000 d. P5,600,000
32. On October 1, 2018 Bucay Company purchased 20,000 of the P1,000 face value 12% bonds of Manabo
Company for P23,000,000 including accrued interest of P600,000. The bonds which mature on January 1, 2025, pay
interest semiannually on January 1 and July 1. Bucay used the straight line method of amortization and appropriately
recorded the bonds as a long-term investment. On the December 31, 2019 balance sheet the bonds should be
reported at
a. 22,304,000
b. 21,920,000
c. 22,880,000
d. 22,400,000
33. Laguna Company acquired three patents in January 2018. The patents have different lives as indicated in the
following schedule:
Cost Remaining useful life Remaining legal life
Patent A 2,000,000 10 8
Patent B 3,000,000 5 10
Patent C 6,000,000 Indefinite 15
Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June 2018, the
company successfully defended its right to Patent B. Legal fees of P800,000 were incurred in this action. The
company’s policy is to amortize intangible assets by the straight-line method to the nearest half year. The company
reports on a calendar-year basis. The amount of amortization that should be recognized for 2018 is
a. 1,330,000
b. 1,250,000
c. 2,050,000
d. 950,000
34. On January 1, 2016, Puntavedra Company signed an eigth-year lease for office space. Puntavedra has the
option to renew the lease for an additional six-year period on or before January 1, 2022. During January 2018,
Puntavedra incurred the following costs.
General improvements to the leased premises with useful 5,400,000
life of 10 years
Office furniture and equipment with useful life of 8 years 2,400,000
Moveable assembly line equipment with useful life of 5 years 1,800,000
At December 31, 2018, Puntavedra’s intention as to the exercise of the renewal option is uncertain. A full
depreciation of leasehold improvement is taken for year 2018. In Puntavedra’s December 31, 2018 balance sheet,
accumulated depreciation of leasehold improvement should be
a. 1,200,000
b. 1,300,000
c. 540,000
d. 900,000
35-39. The bookkeeper for Guagua Computers, Inc., reports the following balance sheet amounts as of June 30, 2018.
Current assets P2,440,500
Noncurrent assets 6,285,500
Current liabilities 1,386,000
Noncurrent liabilities 900,000
Owners’ equity 6,440,000
A review of account balances reveals the following data.
A. An analysis of current assets discloses the following:
 Cash P 422,500
Investment securities – trading 600,000
Trade accounts receivable 568,000
Inventories, including advertising supplies of P20,000 850,000
P2,440,500
B. Noncurrent assets include the following:

Property, plant and equipment:

Depreciated book value (cost P6,560,000) P5,490,000
Deposit with a supplier for merchandise ordered
for August delivery 21,500
Goodwill recorded on the books to cancel losses
incurred by the company in prior years 774,000
P6,285,500
C. Current liabilities include the following:

Payroll payable P 71,500

Taxes payable 41,500
Rent payable 114,000
Trade accounts payable
Total owed to suppliers on account P1,014,000
Less: 6-month note received from a supplier
who purchased some used equipment
on June 29, 2018 15,000 999,000
Notes payable 160,000
P1,386,000
D. Noncurrent liabilities include the following:

9% mortgage on property, plant, and equipment, payable in

semiannual installment of P90,000 through to June 30, 2023 P900,000

E. Owners’ equity Includes the following:

Preferred stock: 190,000 shares outstanding (P20 par value) P3,800,000

Common stock: 1,600,000 shares at P1 stated value 1,600,000
Additional paid-in capital 1,040,000
P6,440,000
F. Common shares were originally issued for P3,910,000, but the losses of the company for the past years
were charged against additional paid-in capital.
QUESTIONS:
Determine the adjusted amounts of the following:
35. Current assets
a. P2,462,000 b. P2,477,000 c. P2,440,500 d. P2,435,500
36. Noncurrent assets
a. P5,490,000 b. P6,560,000 c. P5,511,500 d. P6,264,000
37. Current liabilities
a. P1,401,000 b. P1,602,500 c. P1,581,000 d. P1,491,000
38. Noncurrent liabilities
 a. P720,000 b. P900,000 c. P810,000 d. P880,000
39. Owners’ equity
a. P7,710,000 b. P6,440,000 c. P8,750,000 d. P5,666,000
40-42. Presented below are the balance sheet accounts of Maasin Company:
2018 2017_
Assets
Cash 6,000,000 4,500,000
Trading securities 2,500,000 3,000,000
Accounts receivable 4,800,000 3,200,000
Allowance for doubtful accounts ( 800,000) ( 200,000)
Inventories 5,200,000 6,000,000
Property , plant and equipment 13,000,000 8,000,000
Accumulated depreciation (3,700,000) (3,200,000)
Patent, net 1,000,000 1,700,000
Total assets 28,000,000 23,000,000

Liabilities and Equity

Accounts payable 4,800,000 4,500,000
Note payable - bank 2,000,000 3,500,000
Deferred tax liability 700,000 500,000
Bonds payable 3,000,000 -
Common stock, P10 par value 12,000,000 10,000,000
Additional paid in capital 1,500,000 1,000,000
Treasury stock, at cost ( 500,000) -
Retained earnings 4,500,000 3,500,000
Total liabilities and equity 28,000,000 23,000,000

Additional information
A. The net income for 2018 is P6,000,000. Maasin paid a cash dividend of P5,000,000 on October 1, 2018.
B. During 2018, there were no transactions affecting trading securities except the change in market value.
C. On January 2, 2018, Maasin sold equipment costing P1,000,000, with a carrying amount of P600,000, for
P500,000.
D. On July 1, 2018, Maasin purchased equipment for P3,000,000 cash.
E. On December 31, 2018, Maasin purchased land by issuing bonds payable at face value of P3,000,000.
COMPUTE:
40. Net cash provided by operating activities was
a. P8,500,000
b. P7,500,000
c. P8,000,000
d. P6,000,000
41. Net cash used in investing activities was
a. P2,500,000
b. P4,000,000
c. P3,000,000
d. P3,500,000
42. Net cash used in financing activities was
a. P4,500,000
b. P4,000,000
c. P6,500,000
 d. P7,000,000
43. Candon Company owns 100,000 shares of the outstanding common stock of Bantay Company which has several
hundred thousand shares publicly traded. These 100,000 shares were purchased in 2015 for P100 per share. On
December 1, 2018, Bantay Company distributed 100,000 rights to Candon. Candon was entitled to buy one new
share of Bantay common stock for P100 and five of these rights. On December 1, 2018, each share of stock had a
market value of P135 ex-right and each right had market value of P15. On December 31, 2018, Candon exercised all
rights. What cost should be recorded for each new share that Candon acquired by exercising the rights?
a. 150
b. 100
c. 135
d. 15
44-45. Binalonan Company factored P5,000,000 of accounts receivable to ABC Company on July 1, 2018. Control
was surrendered by Binalonan. ABC assessed a fee of 5% and retains a holdback equal to 20% of the accounts
receivable. In addition ABC charged 12% computed on a weighted average time to maturity of the receivables of 30
days.
44. Binalonan Company will receive and record cash of
a. P3,700,685 c. P3,750,000
b. P3,700,000 d. P4,700,685
45. Assuming all receivables are collected, Binalonan Company’s cost of factoring the receivables would be
a. P250,000 c. P49,315
b. P299,315 d. P 0