All Board Subjects

Easy

Financial Accounting

1. Amortization of patent includes a credit to

a. The patent account

b. An accumulated amortization account
c. An accumulated depreciation account
d. An expense account

Answer: A

Amortization of patents includes a credit to the patent account. There is no accumulated amortization
account.

2. Accounts receivable hypothecated against borrowings should be

a. Excluded from the total receivables, with disclosure

b. Excluded from the total receivables, with no disclosure
c. Excluded from the total receivables and a gain or loss is recognized
d. Disclosed in the notes

Answer: D

Hypothecation is another term for pledge. Receivables pledged as collateral need to be disclosed in the
notes.

3. In a statement of cash flows, receipts from sales of property, plant and equipment should generally be
classified as cash inflows from

a. Operating activities
b. Investing activities
c. Financing activities
d. Either operating or investing activities

Answer: B

According to PAS 7, investing activities are the acquisition and disposal of long-term assets and other
investments that are not considered to be cash equivalents.

Advanced Financial Accounting

1. The standard direct material cost to produce a unit of Lemis four meters of material at P2.50 per meter.
During May 2017,4,200 meters of material costing P10,080 were purchased andused to produce 1,000
units of Lem. What was the material price variance for May 2017?

a. P400 favorable.
b. P420 favorable.
c. P 80 unfavorable.
d. P480 unfavorable.

Answer: B

The direct materials price variance is thedifference between actual unit prices and standard unit
pricesmultiplied by the actual quantity, as shown below.

AQ × AP P10,080
AQ × SP(4,200m × P2.50/m) P10,500
Material price variance, P420F

The P420 price variance is favorable because the actual purchaseprice of the material was lower than the
standard price. Since the material was purchased for only P2.40 per meter (P10,080 cost ÷ 4,200m), Lem
saved P.10 per meter compared to the standard price, for a total price savings of P420 (4,200m ×
P.10/m). Note that the standard quantity of materials is ignored in order to isolate these price differences;
differences in quantity are addressedby the materials usage variance.

2. For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost
to complete after splitoff, is assumed to be equal to the

a. Joint costs.
b. Total costs.
c. Net sales value at split-off.
d. Sales price less a normal profit margin at point of sale.

Answer: C

Joint costs may be allocated to joint products based on either sales price or some physical measure.
Methods which use estimated sales price include relative sales value at split-off, estimated net realizable
value (NRV), and constant gross margin percentage NRV. Under the sales value at split-off method, joint
costs are allocated based on the ratio of each product’s sales value at split-off to total sales value at split
off for all joint products.

3. Which of the following standard costing variances would be least controllable by a production
supervisor?

a. Overhead volume.
b. Overhead efficiency.
c. Labor efficiency.
d. Material usage.

Answer:A

The requirement is to determine the standard costing variance which would be least controllable by a
productionsupervisor. The overhead output level (volume) variance arisesbecause the actual production
volume level achieved usually does not coincide with the production level used as a denominator volume
for calculating a budgeted overhead application rate. The overhead output level variance results from
treating a fixedcost as if it were a variable cost. Answers (b), (c), and (d) are incorrect because all of
these variances arise when the quantity of actual inputs used differs from the quantity of inputs that
should have been used. A production manager would have more controlover inputs to production than
over the determination of the denominator volume.

Management Advisory Services

1. Assume a firm is expected to pay a dividend of $5.00 per share this year. The firm along with the
dividend is expected to grow at a rate of 6%. If the current market price of the stock is $60 per
share, what is the estimated cost of equity?

a. 8.3%
b. 6.0%
c. 14.3%
d. 12.0%

Answer: C

The requirement is to use the dividend-yield-plus-growth- rate approach to calculate the estimated cost of
equity. The estimated cost of equity is equal to the dividend divided by the price of the stock + the growth
rate. Accordingly, answer (c) is correct because the estimated cost of equity is equal to 14.3% [($5 ÷ $60)
+ 6%].

2. Select Co. had the following 2012 financial statement relationships:

Asset turnover 5
Profit margin on sales 0.02

What was Select’s 2012 percentage return on assets?

a. 0.1%
b. 0.4%
c. 2.5%
d. 10.0%

Answer: D

Return on assets, also referred to as return on investment (ROI), is calculated as follows:

ROI = Profit margin × Asset turnover
ROI = 0.02 × 5
ROI = 0.10, or 10%

3. In a job-costing system, issuing indirect materials to production increases which account?

a. Materials control.
b. Work in process control.
c. Manufacturing overhead control.
d. Manufacturing overhead allocated.

Answer: C

The requirement is to identify the account that is increased when indirect materials are issued to
production. Answer (c) is correct because the cost of indirect materials used increases the Manufacturing
Overhead Control account and decreases Materials Control.
Auditing

1. When performing a financial statement audit, auditors are required to explicitly assess the risk of
material misstatement due to

a. Errors.
b. Fraud.
c. Illegal acts.
d. Business risk.

Answer: B

Auditors must specifically assess the risk of material misstatements due to fraud and consider that
assessment in designing the audit procedures to be performed.

2. Audits of financial statements are designed to obtain assurance of detecting misstatement due to

Errors Fraudulent financial reporting Misappropriation of assets

a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes No

Answer: A

It is required that an audit should obtain reasonable assurance that material misstatements, whether
caused by error or fraud, be detected. Fraudulent financial reporting and the misappropriation of assets
are the two major types of fraud with which an audit is relevant.

3. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be
detected for all of the following except

a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
d. Professional skepticism.

Answer: D

While an auditor must exercise professional skepticism when performing an audit it does not represent a
limitation that makes is impossible to obtain absolute assurance

Average

Financial Accounting

1. Glydel Wholesalers stocks a changing variety of products. Which inventory costing method will be
most likely to give Glydel the lowest inventory when its product lines are subject to specific price
increase?
a. Specific identification
b. Weighted-average
c. LIFO
d. FIFO periodic
Answer C

During periods of rising prices, the inventory costing methods which will give Glydel the lowest ending
inventory balance are LIFO methods, because inventory items that were purchased at the earliest date
(when prices were lower) will remain in inventory and the most recently purchased and more expensive
items will be expensed through cost of goods sold. Any FIFO method will produce a higher ending
inventory balance during inflation since the items purchased earliest (at lower prices) will be expensed
through CGS, while the more expensive items remain in inventory. Answers (a) and (b) are incorrect
because neither will give Glydel a lower ending inventory balance than LIFO, particularly as Glydel’
inventory changes (because LIFO allows the LIFO “layers” to be made up of similar, not necessarily
identical, items).

2. Which of the following is not an objective for each entity accounting for transfers of financial assets?
a. To derecognize assets when control is gained.
b. To derecognize liabilities when extinguished.
c. To recognize liabilities when incurred.
d. To derecognize assets when control is given up.

Answer: A

To derecognize assets when control is gained is not an objective in accounting for transfers of financial
assets. When control is gained, the assets should be recognized. Answer (b) is incorrect because an
objective is to derecognize liabilities when extinguished. A liability no longer exists, and it should be
removed from the balance sheet. Answer (c) is incorrect because recognizing liabilities when incurred is
an objective. Answer (d) is incorrect because derecognizing assets when control is given up is an
objective in accounting for transfers of financial assets.

3. During year 1, Lake Co. issued 3,000 of its 9%, P1,000 face value bonds at 101 ½ . In connection
with the sale of these bonds, Lake paid the following expenses:

Promotion costs P 20,000

Engraving and printing 25,000
Underwriters’ commissions 200,000

What amount should Lake record as bond issue costs to be amortized over the term of the bonds?

a. P0

b. P220,000

c. P225,000

d. P245,000

Answer D

Engraving and printing costs, legal and accounting fees, commissions, promotion costs, and other similar
costs should be recorded as bond issue costs and amortized over the term of the bonds. All the costs
given are bond issue costs, so the amount reported as bond issue costs is P245,000 (P20,000 + P25,000
+ P200,000).
Advanced Financial Accounting

1. On December 1, 2017, Centurion Inc. authorized Cook to operate as a franchise for an initial
franchise fee of P3,400,000. P900,000 was received upon signing the contract, and the balance is to
be paid by a non-interest bearing note, due in five equal annual installments beginning December 31,
2014. Prevailing market rate is 12%. PV factor is 3.60478. The down payment is nonrefundable and it
represents a fair measure of the services already performed by Centurion, however, with regards to
the balance, substantial future services are still required. How much is the deferred franchise revenue
to be recognized as of December 31, 2017?
A. P1,802,390
B. P2,702,390
C. P2,500,000
D. P1,518,677

Answer: A
Deferred revenue:
500,000 * 3.60478 = 1,802,390

2. Hebrews Corp. was contracted by Mr. Tristan P. to construct 35 condominium units. The estimated
total cost of construction was P28,000,000. Hebrews bills its clients at 120% of total costs estimated
to complete a project. Details regarding the contract are given below:
Units finished Costs incurred to date Estimated cost at completion
2015 10 P8,412,500 P33,650,000
2016 18 P20,735,000 P31,900,000
2017 7 P31,500,000 ?

What is the RGP during 2016 using the output measures?

A. P1,105,000
B. P1,700,000
C. P1,360,000
D. P1,410,000

Answer: D
2015: Anticipated total loss 50,000
2016: 28/35 = 80% Percentage of completion
Construction price 33,600,000
Estimated total cost 31,900,000
Gross profit 1,700,000
Percentage of completion 80%
RGP to date 1,360,000
Less: RGP, 2015 (50,000)
RGP, 2016 1,410,000
3. If the price of the underlying is greater than the strike or exercise price of the underlying, the call
option is:

a. At the money.
b. In the money.
c. On the money.
d. Out of the money.

Answer: B
A call option is in the money if the price of the underlying is greater than the strike or exercise
price of the underlying. An at-the-money option is one in which the price of the underlying is equal
to the strike or exercise price. A call option is out of the money if the strike or exercise price is
greater than the price of the underlying.

Management Advisory Services

1. Lafayette Savings and Loan had the following activities, traceable costs, and
physical flow of driver units:

Traceable Physical flow of

Activities CostsDriver Units

Open new accounts P50,000 1,000 accounts

Process deposits 36,000 400,000 deposits
Process withdrawals 15,000 200,000 withdrawals
Process loan applications 27,000 900 applications

The above activities are used by the Jennings branch and the Crowley branch:

JenningsCrowley

New accounts 200 400

Deposits 40,000 20,000
Withdrawals 15,000 18,000
Loan applications 100 160

What is the cost per driver unit for new account activity?
a. P0.09 c. P30.00
b. P0.075 d. P50.00

Answer: D

P50,000 / 1,000 = P50.00 per

account

2. Hopwood Corporation bought a piece of machinery. Selected data is presented below:

Useful life 6 years
Yearly net cash inflow P45,000
Salvage value -0-
Internal rate of return 18%
Cost of capital 14%
Present value tables or a financial calculator are required.
The initial cost of the machinery was
a. P157,392.
b. P174,992.
c. P165,812.
d. impossible to determine from the information given.

Answer: A

Use PV of Annuity for 6 years and 18%

P45,000 * 3.4976 = P157,392

3. Gary Corporation has developed the following flexible budget formula for monthly overhead:

For output of less than 200,000 units: P36,600 + P.80(units)

For output of 200,000 units or more: P43,000 + P.80(units)

How much overhead should Gary expect if the firm plans to produce 200,000 units?
a. P52,600
b. P59,000
c. P196,600
d. P203,000

Answer: D

P43,000 + P0.80(200,000) = P43,000 + P160,000 =

P203,000

Auditing

1. Caleb Corporation has three financial statement elements for which the December 31, year 1
book value is different than the December 31, year 1 tax basis.

Book value Tax basis Difference

Equipment P200,000 P120,000 P80,000

Prepaid officers
insurance policy 75,000 0 75,000
Warranty liability 50,000 0 50,000

As a result of these differences, future taxable amounts are

a. P 50,000
b. P 80,000
c. P155,000
d. P205,000
Answer B
The officer insurance policy difference (P75,000) is a permanent difference which does not result in future
taxable or deductible amounts. The warranty difference (P50,000) is a temporary difference, but it results
in future deductible amounts in future years when tax warranty expense exceeds book warranty expense.
However, the equipment difference (P80,000) is a temporary difference that results in future taxable
amounts in future years when tax depreciation is less than book depreciation.

2. Ole Corp. declared and paid a liquidating dividend of P100,000. This distribution resulted in a decrease
in Ole’s

Paid-in capital Retained earnings

a. No No

b. Yes Yes

c. No Yes

d. Yes No

Answer D

Dividend not based on earnings must be a reduction of corporate paid-in capital and, to that extent, it is a
liquidating dividend. The following journal entries would be made for this situation:

At date of declaration:

Additional paid-in capital 100,000

Dividends payable 100,000

At date of payment:

Dividends payable 100,000

Cash 100,000

Thus, a liquidating dividend would decrease Ole’s paid-in capital, not its retained earnings.

3. Stephanie Seals is a CPA who is working as a controller for Brentwood Corporation. She is not in
public practice. Which statement is true?

a. She may use the CPA designation on her business cards if she also puts her employment title on
them
b. She may use the CPA designation on her business cards as long as she does not mention
Brentwood Corporation or her title as controller.
c. She may use the CPA designation on company transmittals but not on her business cards.
d. She may not use the CPA designation because she is not in public practice.

Answer A
 She may use the CPA designation on her business cards when she does not imply independence but
shows her title and her employer. Therefore, answer (b) is incorrect. Answer (c) is incorrect because
she may use the CPA designation on her business cards or company transmittals if she does not
imply independence. Answer (d) is incorrect because under the above situations, she can use the
CPA designation.

Difficult

Financial Accounting and Reporting

1. According to the IASB Framework, the two criteria required for incorporating items into the
income statement or statement of financial position are that

a. It meets the definition of relevance and faithful representation.

b. It meets the definition of an element and can be measured reliably.
c. It satisfies the criteria of capital maintenance.
d. It meets the requirements of comparability and consistency.

Answer: B
The requirement is to identify the criteria under IFRS that must be met for an item to be included
in financial statements. Answer (b) is correct because in order for an item to be recognized in the
financial statements, IFRS requires that it meet the definition of an element and can be measured
reliably.

2. The effects of a change in accounting principle should be recorded on a prospective basis when
the change is from the

a. Cash basis of accounting for vacation pay to the accrual basis.

b. Straight-line method of depreciation for previously recorded assets to the
double-declining balance method.
c. Presentation of statements of individual companies to their inclusion in consolidated
statements.
d. Completed-contract method of accounting for long term construction-type contracts to
the percentage-of completion method.

Answer: B
The requirement is to determine which accounting change should be reported on a prospective
basis. A change in depreciation method is a change in principle that is not distinguishable from a
change in estimate, and is accounted for as a change in estimate. The change is reported on a
prospective basis in the current year and future years. A change from the cash basis to the
accrual basis of accounting is a change from non-GAAP to GAAP accounted for as the correction
of an error. A change in reporting entity requires retrospective application to the earliest year
presented if practicable. A change in the method of accounting for long-term contracts requires
retrospective application to the earliest year presented if practicable.

3. If it is impracticable to determine the cumulative effect of an accounting change to any of the prior
periods, the accounting change should be accounted for

a. As a prior period adjustment.

b. On a prospective basis.
c. As a cumulative effect change on the income statement.
d. As an adjustment to retained earnings in the first period presented.
 Answer: B
If it is impracticable to determine the cumulative effect of an accounting change to any of the
prior periods, the accounting change should be accounted for on a prospective basis. Answer (a)
is incorrect because accounting changes are no longer treated as prior period adjustments.
Answer (c) is incorrect because accounting changes are no longer treated as cumulative effect
changes on the income statement. Answer (d) is incorrect because the change would not be to
retained earnings in the first period presented.

Advanced Financial Accounting and Reporting

Items 1 and 2 are based on the following information:

At December 31, 2016, the stockholders’ equity of Goshawk Corporation and its 80%-owned
subsidiary, Treetop Corporation, are as follows:

Goshawk Treetop
Common stock, ₱10 par value ₱ 20,000 ₱ 12,000
Retained earnings 8,000 6,000
Totals ₱ 28,000 ₱ 18,000
Goshawk’s investment in Treetop’s account balance is equal to the Treetop book value. Treetop
Corporation issued 225 additional shares of common stock directly to Goshawk on January 1,
2017 at ₱18 per share.

1. Compute the balance in Goshawk’s Investment in Treetop account on January 1, 2017 after the
new investment is recorded.

a. ₱17,450
b. ₱18,000
c. ₱18,150
d. ₱18,300

Answer: A

Cost of investment (₱18,000 x 80%) ₱ 14,400

Plus: Purchase of 225 Treetop
shares at ₱18 on January 1, 2017 4,050
Investment account balance` ₱ 17,450

2. Determine the goodwill (if any) from Goshawk’s new investment in the 225 Treetop shares.

a. ₱652
b. ₱405
c. ₱555
d. ₱732

Answer: A
Treetop’s stockholders’ equity at
January 1, 2017 ₱ 18,000
Plus: Additional capital from the
shares issued 4,050
Total stockholders’ equity after
issuance of the new shares ₱ 22,050
 Goshawk’s percentage
(960 + 225)/1425 = 83%
Goshawk’s share of Treetop’s
equity after issuance ₱ 18,302
Goshawk’s share of Treetop’s
equity before stock issuance 14,400
Equity acquired in the purchase 4,702
Cost of interest acquired 4,050
Positive goodwill ₱ 652

3. At the beginning of 2017, Flycatcher Corporation held a 60% interest in Lichen Corporation. The
investment account balance was ₱2,100,000, consisting of 60% of Lichen’s ₱3,226,666 of net
assets and ₱164,000 of goodwill.

During 2017, Lichen earned ₱300,000 and paid dividends of ₱110,000 on November 1. On
October 1, 2017, Flycatcher sold 10% of its investment in Lichen for ₱364,000, thereby reducing
its interest in Lichen to 54%.

Compute the gain or loss on sale.

a. ₱223,500
b. ₱210,000
c. ₱235,000
d. ₱140,500

Answer: D
Investment balance, January 1 ₱ 2,100,000
Income from Lichen (₱300,000 x
9/12 x 60%) 135,000
Book value at September 30, 2017 ₱ 2,235,000

Proceeds from sale ₱ 364,000

Book value of interest sold
(₱1,965,000 x 10%) 223,500
Gain on sale ₱ 140,500

Management Accounting

1. Whiz-by Company is in the process of setting a selling price for its newest model scooter, the Zip.
The controller of Whiz-by estimates variable cost per unit for the new model to be as follows:
Direct materials ₱30
Direct labor 26
Variable manufacturing overhead 8
Variable selling and administrative expenses 10
₱74

In addition, Whiz-by anticipates incurring the following fixed cost per unit at a budgeted sales
volume of 20,000 units:
Total Costs ÷ Budget Volume = Cost per Unit
Fixed manufacturing overhead ₱480,000 20,000 ₱24
Fixed selling and administrative expenses 520,000 20,000 26
 Fixed cost per unit ₱50

Whiz-by uses cost-plus pricing and would like to earn a 12 percent return on its investment (ROI)
of ₱500,000.

a. ₱123
b. ₱158
c. ₱127
d. ₱100

Answer: C
Compute the selling price that would provide Whiz-by a 12 percent ROI.
Variable cost per unit ₱ 74
Fixed cost per unit 50
Desired ROI per unit 3*
Target selling price ₱127
*₱50,000 × .12 = ₱60,000; ₱60,000 ÷ 20,000 = ₱3 per unit

2. Mathis Corporation manufactures automotive compact disc changers. It is a division of American

Motors, which manufactures automobiles. Mathis sells the CD changers to American, as well as
to retail stores. The following information is available for Mathis's CD changer: variable cost per
unit ₱105; fixed costs per unit ₱75; and a selling price of ₱260 to outside customers. American
currently purchases CD changers from an outside supplier for ₱240 each. Top management of
American would like Mathis to provide 50,000 changers per year at a transfer price of ₱105 each.

Compute the minimum transfer price that Mathis should accept if Mathis has sufficient excess
capacity to provide the 50,000 changers to American.

a. ₱260
b. ₱105
c. ₱115
d. ₱230

Answer: B
The minimum transfer price is ₱105, the variable cost of the changers, since Mathis has excess
capacity. However, since the market price is ₱240 (American's current cost), Mathis should be
able to negotiate a price much higher than ₱105.

3. The balance sheet for Finley Corporation at the end of the current year indicates the following:

Bonds payable, 8% ₱4,000,000

6% Preferred stock, ₱100 par 1,000,000
Common stock, ₱10 par 2,000,000

Income before income taxes was ₱480,000 and income tax expense for the current year
amounted to ₱144,000. Cash dividends paid on common stock were ₱300,000, and the common
stock was selling for ₱22 per share at the end of the year. There were no ownership changes
during the year.

Determine times that bond interest was earned.

 a. 1.5 times
b. 2.0 times
c. 2.5 times
d. 3.0 times

Answer: C
Income before income taxes and interest expense
Times interest earned = ——————————————————————
Interest expense

₱480,000 + ₱320,000
= —————————— = 2.5 times
₱320,000

Auditing

1. An auditor suspects that certain client employees are ordering merchandise for themselves over
the Internet without recording the purchase or receipt of the merchandise. When vendors’
invoices arrive, one of the employees approves the invoices for payment. After the invoices are
paid, the employee destroys the invoices and the related vouchers. In gathering evidence
regarding the fraud, the auditor most likely would select items for testing from the file of all

a. Cash disbursements.
b. Approved vouchers.
c. Receiving reports.
d. Vendors’ invoices.

Answer: A
The requirement is to determine the most likely population from which an auditor would sample
when vendors’ invoices and related vouchers relating to purchases made by employees have
been destroyed. Answer (a) is correct because the disbursement will be recorded and the auditor
may thus sample from that population. Answers (b) and (d) are incorrect because the related
vouchers and vendors’ invoices are destroyed. Answer (c) is incorrect because there is no
recording of the receipt of the merchandise.

2. Which of the following statements is correct concerning an auditor’s assessment of control risk?

a. Assessing control risk may be performed concurrently during an audit with obtaining an
understanding of the entity’s internal control.
b. Evidence about the operation of internal control in prior audits may not be considered
during the current year’s assessment of control risk.
c. The basis for an auditor’s conclusions about the assessed level of control risk need not
be documented unless control risk is assessed at the maximum level.
d. The lower the assessed level of control risk, the less assurance the evidence must
provide that the control procedures are operating effectively.

Answer: A
The requirement is to identify the correct statement concerning an auditor’s assessment of control
risk. Answer (a) is correct because AU-C 315 indicates that assessing control risk may be
performed concurrently during an audit with obtaining an understanding of internal control.
Answer (b) is incorrect because evidence about the operation of internal control obtained in prior
audits may be considered during the current year’s assessment of control risk. Answer (c) is
 incorrect because the basis for an auditor’s conclusions about the assessed level of control risk
needs to be documented when control risk is assessed at levels other than the maximum level.
Answer (d) is incorrect because a lower level of control risk requires more assurance that the
control procedures are operating effectively.

3. Which of the following is correct concerning the level of assistance auditors may provide in
assisting management with its assessment of internal control?

a. No assistance of any type may be provided.

b. No limitations on assistance exist.
c. Only very limited assistance may be provided.
d. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

Answer: C
The requirement is to identify the correct statement concerning the level of assistance that
auditors may provide in assisting management with its assessment of internal control. Answer (c)
is correct since only limited assistance may be provided so as not to create a situation in which
the auditors are auditing their own work. Answer (a) is incorrect since some assistance may be
provided. Answer (b) is incorrect because there are limitations on the level of assistance. Answer
(d) is incorrect because the tie between risk and assistance seems inappropriate and in the
wrong direction; also, this type of tradeoff between risk and assistance is not included in PCAOB
Standard 5.

All Board Subjects

Easy

Financial Accounting

1. Love Corporation paid cash of P30,000 on June 1, 2017 for one year’s rent in advance and
recorded the transaction with a debit to Prepaid Rent. The December 31, 2017 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, P12,500.
b. debit Prepaid Rent and credit Rent Expense, P17,500.
c. debit Rent Expense and credit Prepaid Rent, P17,500.
d. debit Prepaid Rent and credit Cash, P12,500.
Answer: C

P30,000 x 7/12 = P17,500.

2. On January 1, 2017, the merchandise inventory of Peace, Inc. was P1,000,000. During 2017
Peace purchased P2,000,000 of merchandise and recorded sales of P2,500,000. The gross profit
rate on these sales was 25%. What is the merchandise inventory of Peace at December 31,
2017?
a. P500,000.
b. P625,000.
c. P1,125,000.
d. P1,875,000.
Answer: C

COGS = P2,500,000 × .75 = P1,875,000

P1,000,000 + P2,000,000 – P1,875,000 = P1,125,000.

 3. During 2017, Chill Co. sold equipment that had cost P294,000 for P176,400. This resulted in a
gain of P12,900. The balance in Accumulated Depreciation—Equipment was P975,000 on
January 1, 2017, and P930,000 on December 31. No other equipment was disposed of during
2017. Depreciation expense for 2017 was
a. P45,000.
b. P57,900.
c. P85,500.
d. P175,500.
Answer: C

P930,000 – {P975,000 – [P294,000 – (P176,400 – P12,900)]} = P85,500.

Advanced Accounting

1. Popsie, Inc. owns 80% of Sonnie, Inc. During 2017, Popsie sold goods with a 40% gross profit to
Sonnie. Sonnie sold all of these goods in 2017. For 2017 consolidated financial statements, how
should the summation of Popsie and Sonnie income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.
Answer: A

When computing consolidated income, the objective is to restate the accounts as if the intercompany
transactions had not occurred. As a result of the intercompany sales, sales and cost of goods sold are
overstated and an eliminating entry is needed to reduce these accounts by the entire amount of the
intercompany sales.

2. Abnormal spoilage is
a. spoilage that is forecasted or planned.
b. spoilage that is in excess of planned.
c. accounted for as a product cost.
d. debited to Cost of Goods Sold.
Answer: B

Abnormal spoilage is a spoilage that is in excess of planned, and are treated as a loss as incurred.

3. When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest
exceeded Mill’s capital balance. Under the bonus method, the excess
a. Was recorded as goodwill.
b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.
Answer: C

Under bonus method, the excess payment to the retiring partner shall reduce the capital balances of the
remaining partners.

Management accounting

1. Wolfgang Company uses 10,000 units of a part in its production process. The costs to make a
part are: direct material, P12; direct labor, P25; variable overhead, P13; and applied fixed
 overhead, P30. Wolfgang has received a quote of P55 from a potential supplier for this part. If
Wolfgang buys the part, 70 percent of the applied fixed overhead would continue. Wolfgang
Company would be better off by
a. P50,000 to manufacture the part.
b. P150,000 to buy the part.
c. P40,000 to buy the part.
d. P160,000 to manufacture the part.
Answer: C

Cost to make: P55/unit * 10,000 units = P550,000

Cost to manufacture: P(12+25+13+9)= P59/unit
Incremental difference in favor of buying: P4/unit * 10,000 units = P40,000
2. Dawn Company produces two products from a joint process: X and Z. Joint processing costs for
this production cycle are P8,000.
Disposal
Sales price cost per Further Final sale
per yard at yard at processing price per
Yards split-off split-off per yard yard
X 1,500 P6.00 P3.50 P1.00 P 7.50
Z 2,200  9.00  5.00  3.00  11.25
If X and Z are processed further, no disposal costs will be incurred or such costs will be borne by
the buyer. Using a physical measure, what amount of joint processing cost is allocated to X
(round to the nearest peso)?
a. P4,000
b. P4,757
c. P5,500
d. P3,243
Answer: D
1,500/3,700 * P8,000 = P3,243

3. The Doll Division of Goo Goo Company had the following financial data for the year:
Assets available for use P1,000,000 Book Value
P1,500,000 Market Value
Residual income P100,000
Return on investment 15%
What was the Doll Division’s segment income?
a. P150,000
b. P100,000
c. P250,000
d. P 50,000
Answer: A
Segment Income = ROI * BV of Total Assets
= 0.15 * P1,000,000
= P150,000

Auditing

1. Occurs when a firm or a member of the assurance team could benefit from a financial interest in,
or other self-interest conflict with, an assurance client.
a. Self-interest threat
b. Advocacy threat
c. Self-review threat
d. Familiarity threat
Answer: A

Self-interest threat is the threat that a financial or other interest will inappropriately influence the
professional accountant’s judgment or behavior.

2. Independent auditing can best be described as a

a. Branch of accounting
b. Discipline that attests to the results of accounting and other operations and data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information
Answer: B

Independent auditing is a Discipline that attests to the results of accounting and other operations and
data.

3. Which of the following sampling methods is used to estimate a numerical measurement of a

population, such as a dollar value?
a. Attribute sampling.
b. Variables sampling.
c. Stop-or-go sampling
d. Random-number sampling.
Answer: B

Variable sampling is used to estimate a numerical measurement of a population, primarily used in test of
balances.

Average

Financial Accounting

1. An example of an item which is not a liability is

a. dividends payable in stock.

b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

Answer: A
Dividends payable in stock is not a liability.

2. Jamar Company purchased a depreciable asset for P225,000. The estimated salvagevalue is
P15,000, and the estimated useful life is 8 years. The double-declining balancemethod will be
used for depreciation. What is the depreciation expense for the secondyear on this asset?

a. P26,250
b. P39,375
c. P42,188
d. P56,250

Answer: C
P225,000 × [(1 ÷ 8) × 2] = P56,250
(P225,000 – P56,250) × [(1 ÷ 8) × 2] = P42,188.

3. In computing depreciation of a leased asset, the lessee should subtract

 a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.

Answer: A
In computing depreciation of leased asset, the lessee should subtract a guaranteed residual value
and depreciate over the term of lease.

Advanced Accounting

1. Which of the following is not a valid condition that will exempt an entity from
preparingconsolidated financial statements?

a. The parent entity is a wholly owned subsidiary of another entity.

b. The parent entity’s debt or equity capital is not traded on the stock exchange.
c. The ultimate parent entity produces consolidated financial statements available for public
use that comply with PFRS.
d. The parent entity is in the process of filing its financial statements with a securities
commission.

Answer: D
The parent entity is in the process of filing its financial statements with a securities commission is
not a valid condition that will exempt an entity from preparing consolidated financial statements.

2. The following statements relate to consolidated financial statements. Which statement is

incorrect?

a. A parent shall present consolidated financial statements in which it consolidates its

investments in subsidiaries.
b. Consolidated financial statements shall include all subsidiaries of the parent.
c. A subsidiary is excluded from consolidation if the investor is a venture capital
organization, mutual fund, unit trust or similar entity.
d. A subsidiary is not excluded from consolidation even if its business activities are
dissimilar from those of the other entities within the group.

Answer: C
A subsidiary is excluded from consolidation if the investor is a venture capital organization,
mutual fund, unit trust or similar entity is the incorrect statement.

3. Initially, a foreign currency transaction shall be recorded by applying to the foreign currency
amount

a. The spot exchange rate at the date of transaction.

b. The closing rate at the end of reporting period
c. The average exchange rate during the year
d. The spot exchange rate at the date of the settlement of the transaction.

Answer: A
The spot rate at the date of transaction.

Management accounting
 1. The bond-yield-plus approach to estimating the cost ofcommon equity involves adding a risk
premium of 3% to 5% tothe firm’s

a. Cost of short-term debt.

b. Cost of long-term debt.
c. Return on assets.
d. Return on equity.

Answer: B
The bond-yield-plus approach involves adding a risk premium of 3% to 5% to the interest rate of
the firm’s long-term debt.

2. A soft drink producer acquiring a bottle manufacturer is anexample of a

a. Horizontal merger.
b. Vertical merger.
c. Congeneric merger.
d. Conglomerate merger.

Answer: B
Vertical merger is a merger between a firm and one of its suppliers or customers. A bottle
manufacturer can supply bottles to be used by a soft drink producer.

3. To guide cost allocation decisions, the cause-and-effect criterion:

a. is used less frequently than the other criteria

b. is the primary criterion used in activity-based costing
c. is a difficult criterion on which to obtain agreement
d. may allocate corporate salaries to divisions based on profits

Answer: B
Cause-and-effect criterion is the primary criterion used in activity-based costing.

Auditing

For Nos. 1 to 3

The HVR Company included the following in its notes receivable as of December 31, 2015:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2015 and other information relate to the company’s notes receivable:

a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land, purchased
10 years ago, was carried on HVR’s books at P1,500,000. HVR received a noninterest-bearing note
for P2,640,000 from Triple X. The note is due on December 31, 2016. There was no established
exchange price for the land. The prevailing interest rate for this note on January 1, 2015 was 10%.

b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange for the
consultation services rendered. The note will mature on December 31, 2017, with interest receivable
 every December 31. The fair value of the services rendered is not readily determinable. The
prevailing rate of interest for a note of this type was 10% on January 1, 2015.

c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of P4,800,000,
receiving P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual
installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first
payment on December 31, 2015. There is no established market value for the equipment. The
market interest rate for similar notes was 14% on January 1, 2015.

Note: Round off present value factors to four decimal places and final answers to the nearest hundred.

1. What amount of consultation fee revenue should be recognized in 2015?

a. Php3,600,000
b. Php2,705,000
c. Php4,047,500
d. Php3,152,500

2. What amount should be reported as gain on sale of equipment?

a. Php994,800
b. Php2,400,000
c. Php1,162,700
d. Php1,237,300

3. The amount to be reported as noncurrent notes receivable on December 31, 2015 is

a. Php7,482,200
b. Php6,037,300
c. Php5,477,500
d. Php7,877,600

Answers for 1 to 3:
1. D

Present value of principal (Php3,600,000 x 0.7514) Php2,705,040

Present value of interest (Php3,600,000 x 5% x 2.4860) ____447,480
Consultation service fee revenue Php3,152,520

2. D

Interest Principal Total PVF Present Value

12/31/15 (P7.2M x 4%) P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/16 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/17 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 _1,684,800
Present value of note P6,037,258
Carrying amount of equipment _4,800,000
Gain on sale of equipment P1,237,258

Note receivable from sale of land:

Date Interest Income Carrying Amount
1/1/15 --- P2,181,960*
12/31/15 P218,196 2,400,156
12/31/16 239,844** 2,640,000
* P2,640,000 principal x 0.8265 PVF at 10% for 2 periods.
 ** P2,640,000 - P2,400,156

Note receivable from sale of equipment:

Effective Nominal Principal Carrying
Date Interest Interest Amortization Collection Amount
1/1/15 --- --- --- ---- P6,037,258
12/31/15 P845,216 P288,000 P557,216 P2,400,000 4,194,474
12/31/16 587,226 192,000 395,226 2,400,000 2,189,700
12/31/17 306,300* 96,000 210,300 2,400,000 ---

* P2,400,000 – P2,189,700 = P210,300 + P96,000 = P306,300

3. C

Note receivable from consultation P3,287,772

Note receivable from sale of equipment _2,189,700
Noncurrent notes receivable, Dec. 31, 2015 P5,477,472

Difficult

Financial Accounting

1. Sweet Corp. factored 600,000 of accounts receiv- able to Duff Corp. on October 1, 2003. Control was
surren- dered by Sweet. Duff accepted the receivables subject to recourse for nonpayment. Duff
assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Duff
charged 15% interest computed on a weighted-average time to maturity of the receivables of fifty-four
days. The fair value of the recourse obligation is 9,000. Sweet will receive and record cash of
a. 529,685

b. 538,685

c. 547,685

d. 556,685

Answer: B

Sweet will receive the value of the receivables (600,000), reduced by 30,000 for the amount of the
holdback (600,000 x .05), 18,000 withheld as fee income (600,000 x .03), and 13,315 withheld as
interest expense (600,000 x .15 x 54/365). Answer (b) is therefore correct (600,000 – 30,000 –
18,000 – 13,315).

2. Which of the following is false?

a. A servicing asset shall be assessed for impairment based on its fair value.

b. A servicing liability shall be assessed for increased obligation based on its fair value.

c. An obligation to service financial assets may result in the recognition of a servicing asset or
servicing liability.

d. A servicing asset or liability should be amortized for a period of five years.

 Answer: D

A servicing asset or liability should be amortized in proportion to and over the period of estimated net
servicing income or net servicing loss as stated in SFAS 140. Answer (a) is incorrect because a
servicing asset shall be assessed for impairment based on its fair value. Answer (b) is incorrect
because a servicing liability shall be assessed for increased obligation based on its fair value.
Answer (c) is incorrect because an obligation to service financial assets may result in the recognition
of a servicing asset or a servicing liability.

3. Under state law, Hun Love may pay 3% of eligible gross wages or it may reimburse the state directly
for actual unemployment claims. Hun Love believes that actual unemployment claims will be 2% of
eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the
first 10,000 of gross wages paid to each employee. Hun Love had five employees, each of whom
earned 20,000 during 2003. In its December 31, 2003 balance sheet, what amount should Hun
Love report as accrued liability for unemployment claims?
a. 1,000

b. 1,500

c. 2,000

d. 3,000

Answer: A

The contingent unemployment claims liability is both probable and reasonably estimable, so it must
be accrued at 12/31/03. Hun Love’s reasonable estimate of its probable liability is 2% of eligible
gross wages. Eligible gross wages are the first 10,000 of gross wages paid to each of the five
employees (5 x 10,000 = 50,000), so the accrued liability should be 1,000 (2% x 50,000). Note that
the 3% rate is not used because Hun Love has chosen the option to reimburse the state directly, and
its best estimate of this liability is based on 2%, not 3%.

Advanced Accounting

1. Cobb, Danver, and Evans each owned a one-third interest in the capital and profits of their
calendar-year partnership. On September 18, 2011, Cobb and Danver sold their partnership interests
to Frank, and immediately withdrew from all participation in the partnership. On March 15, 2012,
Cobb and Danver received full payment from Frank for the sale of their partnership interests. For tax
purposes, the partnership
a. Terminated on September 18, 2011.

b. Terminated on December 31, 2011.

c. Terminated on March 15, 2012.

d. Did not terminate.

 Answer: A

The requirement is to determine the date on which the partnership terminated for tax purposes. The
partnership was terminated on September 18, 2011, the date on which Cobb and Danver sold their
partnership interests to Frank, since on that date there was a sale of 50% or more of the total
interests in partnership capital and profit.

2. Gray is a 50% partner in Fabco Partnership. Gray’s tax basis in Fabco on January 1, 2011, was
5,000. Fabco made no distributions to the partners during 2011, and recorded the following: Ordinary
income 20,000 Tax exempt income 8,000 Portfolio income 4,000. What is Gray’s tax basis in Fabco
on December 31, 2011?
a. 21,000

b. 16,000

c. 12,000

d. 10,000

Answer: A

The requirement is to determine Gray’s tax basis for a 50% interest in the Fabco Partnership. The
basis for a partner’s partnership interest is increased by the partner’s distributive share of all
partnership items of income and is decreased by the partner’s distributive share of all loss and
deduction items. Here, Gray’s beginning basis of 5,000 would be increased by Gray’s 50% distributive
share of ordinary income (10,000), tax-exempt income (4,000), and portfolio income (2,000), resulting
in an ending basis of 21,000 for Gray’s Fabco partnership interest.

3. In 2007, Lisa Bara acquired a one-third interest in Dee Associates, a partnership. In 2012, when
Lisa’s entire interest in the partnership was liquidated, Dee’s assets consisted of the following: cash,
20,000 and tangible property with a basis of 46,000 and a fair market value of 40,000. Dee has no
liabilities. Lisa’s adjusted basis for her one-third interest was 22,000. Lisa received cash of 20,000 in
liquidation of her entire interest. What was Lisa’s recognized loss in 2012 on the liquidation of her
interest in Dee?
a. 0.

b. 2,000 short-term capital loss.

c. 2,000 long-term capital loss.

d. 2,000 ordinary loss.

Answer: C

The requirement is to determine the amount of loss recognized by Lisa on the complete liquidation of
her one-third partnership interest. A distributee partner can recognize loss only upon the complete
liquidation of the partner’s interest through receipt of only money, unrealized receivables, or inventory.
Since Lisa only received cash, the amount of recognized loss is the 2,000 difference between the
22,000 adjusted basis of her partnership interest and the 20,000 of cash received. Since a
 partnership interest is a capital asset and Lisa acquired her one-third interest in 2007, Lisa has a
2,000 long-term capital loss.

Management Accounting

1. Computer Solutions Corporation manufactures and sells various high-tech office automation products.
Two divisions of Computer Solutions Corporation are the Computer Chip Division and the Computer
Division. The Computer Chip Division manufactures one product, a "super chip," that can be used by
both the Computer Division and other external customers. The following information is available on
this month's operations in the Computer Chip Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead
pays P45 to an external supplier for the 4,000 chips it needs each month.

Two possible transfer prices (for 4,000 units) are under consideration by the two divisions: P35 and
P40. Corporate profits would be ___________ if P35 is selected as the transfer price rather than P40,
and the Computer Division purchases from the Computer Chip Division instead of from the external
supplier.
a. P 20,000 larger c. P20,000 smaller
b. P100,000 larger d. the same

ANSWER B

Purchase price P45

Less variable cost 20

Savings if acquired from within P25

x number of units 4,000

Increase in profit P100,000

2. The following information is given for the Alpha Division of Genesis Corporation.
Sales P600,000
Var. cost of goods sold 200,000
Fixed manufacturing costs 50,000
Variable selling 30,000
Fixed admin. (50% allocated) 20,000
Fixed selling (20% allocated) 50,000
Assets at cost 800,000
Accumulated depreciation 200,000

If Genesis Corporation uses ROI to evaluate division managers and uses historical cost as the
investment base, the ROI for Alpha Division is:
a. 31.25% c. 41.67%
b. 33.75% d. 45.00%

ANSWER B
 Sales P600,000
Less cost of goods sold 250,000

Gross margin P350,000

Variable selling P30,000

Fixed selling (P50,000 x 80%)40,000

Fixed admin (P20,000 x 50%) 10,000 80,000

Controllable income P270,000

÷ Assets 800,000

ROI 33.75%

3. The following year-end data pertain to Eden Corporation:

Earning before interest and taxes P 800,000
Current assets 800,000
Non-current assets 3,200,000
Current liabilities 400,000
Non-current liabilities 1,000,000

Eden Corporation pays an income tax rate of 32%. Its weighted-average cost of capital is 10%.
What is Eden Corporation’s Economic Value Added (EVA)?
a. P184,000 c. P440,000
b. P144,000 d. P400,000

 ANSWER A

After-tax operating income (P800,000 x [1 – 0.32]) P544,000

Less desired return on investment:

Total assets (P800,000 + P3,200,000)P4,000,000

Less current liabilities 400,000

Investment base P3,600,000

x Weighted-average cost of capital 10% 360,000

Economic value added P184,000

Auditing

1. At December 31, 2010, Rama Corp. had 20,000 shares of Hun Love1 par value treasury stock that
had been acquired in 2010 at Hun Love12 per share. In May 2011, Rama issued 15,000 of these
treasury shares at Hun Love10 per share. The cost method is used to record treasury stock
transactions. Rama is located in a state where laws relating to acquisition of treasury stock restrict the
availability of retained earnings for declaration of dividends. At December 31, 2011, what amount
should Rama show in notes to financial statements as a restriction of retained earnings as a result of
its treasury stock transactions?
a. Hun Love 5,000

b. Hun Love10,000
 c. Hun Love60,000

d. Hun Love90,000

Answer: C

The entry that Rama made on acquisition of treasury stock was as follows using the cost method:
Treasury stock (20,000 × Hun Love12) 240,000 Cash 240,000 When some of the shares are later
reissued, the entry is

Cash (15,000 × Hun Love10) 150,000

Retained earnings 30,000

Treasury stock (15,000 × Hun Love12) 180,000

It is assumed there was no balance in APIC—Treasury stock prior to this entry. If the problem had
stated there was a credit balance, APIC—Treasury stock would be debited before retained earnings
to the extent a credit balance existed in APIC—Treasury stock. When retained earnings are legally
restricted the restriction must be disclosed. In this case, the net treasury stock account balance is
Hun Love60,000 (Hun Love240,000 – Hun Love180,000), and this is the amount of retained earnings
that must be disclosed as legally restricted.

2. East Corp., a calendar-year company, had sufficient retained earnings in 2011 as a basis for
dividends, but was temporarily short of cash. East declared a dividend of Hun Love100,000 on April
1, 2011, and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated
April 1, 2011, had a maturity date of March 31, 2012, and a 10% interest rate. How should East
account for the scrip dividend and related interest?
a. Debit retained earnings for Hun Love110,000 on April 1, 2011.

b. Debit retained earnings for Hun Love110,000 on March 31, 2012.

c. Debit retained earnings for Hun Love100,000 on April 1, 2011, and debit interest expense for
Hun Love10,000 on March 31, 2012.

d. Debit retained earnings for Hun Love100,000 on April 1, 2011, and debit interest expense for
Hun Love7,500 on December 31, 2011.

Answer: D

The interest is not an expense or liability until incurred, thus, none of it is recorded on April 1. The April 1
entry would be

Retained earnings 100,000

Scrip dividends payable 100,000.

By December 31 (the year-end for this calendar-year company), nine months’ interest had been incurred,
which would not be paid until the maturity date of 3/31/12. The Hun Love7,500 of interest expense (Hun
Love100,000 × 10% × 9/12) must be accrued at 12/31/11 with the following entry:

Interest expense 7,500

Interest payable 7,500

3. The overall attitude and awareness of an entity’s board of directors concerning the importance of
internal control usually is reflected in its
a. Computer-based controls.

b. System of segregation of duties.

c. Control environment.

d. Safeguards over access to assets.

Answer: C

The requirement is to identify where the overall attitude and awareness of an entity’s board of directors
concerning the importance of internal control is normally reflected. Answer (c) is correct because the
control environment reflects the overall attitude, awareness, and actions of the board of directors,
management, owners, and others concerning the importance of control and its emphasis in the entity.