MIDTERM EXAM – COURSE AUDIT

INSTRUCTIONS: Select the correct answer for each of the following questions.
STRICTLY NO ERASURES ALLOWED.

I. True or False (Taxation)

1. As a rule, contest awards and prizes are subject to 20% final tax if they
amount to more than P 10,000, otherwise they will be part of taxable
income. T
2. Exclusive property of the surviving spouse is not part of the gross
estate of the decedent. T
3. Medical expenses, to be deductible, must be incurred by the decedent
within one year after his death. F
4. The amount of funeral expense that may be deducted from the gross
estate is 5% of the gross estate or the actual funeral expense or P
200,000 whichever is the highest. F
5. The family home includes the house and the lot where the house
stands. T
6. Unless stipulated, the property relations shall be governed by conjugal
partnership of gains for marriages celebrated on or before August 3,
1988. F
7. A died giving B power to appoint a person who will inherit A’s house
and lot. B however can only choose among C, D, E, F. B decided to
transfer the property to C, in B’s will when he was old already. The
transfer from B to C is subject to estate tax. F
8. The donation of an immovable property shall be made in a public
instrument. T
9. Dowries or gifts made on account of a family celebration, on or before
its celebration, or within one year thereafter, by parents to each of
their legitimate, recognized natural or adopted children, to the extent
of the first P10,000 shall be exempt from donor’s tax. –F
10. For donor’s tax purposes, the grandfather of the mother of your
grandmother is stranger to you. F
11. As a rule, donation between husband and wife during the
marriage is void. T
12. A corporation files a quarterly income tax return within 30 days
after the end of each of the first 3 quarters. F
13. A corporation organized and created under the laws of foreign
country and is authorized to do business/ trade in the Philippines is a
resident foreign corporation. T
14. Separation pay due to resignation is included in taxable income.
T
15. Hazard pay is not part of taxable income. T

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 16. Generally, proceeds from life insurance is not part of gross
income. T
17. Cash allowance of P125 per month given to Central Bank
employees to cover the medical expenses of their dependents shall be
excluded from gross compensation income. T
18. Only VAT Registered persons can claim input tax. T
19. Franchise grantees of a city gas and water utilities is subject to
franchise tax of 2%. T
20. Amounts received for overseas dispatch, message or
conversation originating from the Philippines are subject to 10%
overseas communication tax. T

II. True of False (Theory of Accounts)

1. The cost of an inexpensive office equipment which has a life of three

years is charged to expense pertains to the concept of going concern
principle. F
2. Under PAS 11 Construction Contracts, when it is probable that total
contract costs on a fixed price contract will exceed total contract
revenue, the expected loss should be recognized as an expense
immediately. T
3. According to PAS 38 Intangible Assets, the cost of an asset should
include the amount of any cash or cash equivalents paid to acquire the
asset. T
4. Under PAS 22 Business Combinations, if an intangible asset is acquired
in a business combination that is an acquisition, the cost of that
intangible asset is based on its fair value at the date of the acquisition.
T
5. To be classified as an “asset held for sale”, the sale must be expected
to be completed even after 12 months at the end of financial year. F
6. A reversal of impairment loss cannot be charged to Goodwill. T
7. An asset should be classified as held for sale when the sale is highly
probable, for immediate sale in present condition and the market is
readily observable. F
8. The liability is payable to a specifically identified payee is an essential
characteristics for an item to be reported as a liability on the balance
sheet. F
9. An interim financial report may consist of a complete set of financial
statements. T
10. It is necessary to count inventories in FULL at the end of each
interim accounting period. F

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 III. Multiple Choice (Management Advisory Services)
1. A manufacturer can sell its single product for P660. Below are the cost
data fro the product:

Direct Materials P 170

Direct Labor 225
Manufacturing Overhead 90
The relevant margin amount when beginning a theory of constraint (TOC)
analysis is

A. P175 B. P265 C. P345 D. 490

2. The following information related to Snowball Corporation:

Sales at the break-even point P312,500
Total fixed expenses P250,000
Net Operating Income P150,000
What is Snowball’s margin of safety?

A. P62,500 B. P 187,500 C. P100,000 D. 212,500

Items 3-6 are based on the following information:

CabB Co. is considering a project that would have a ten year life and
would require a P1,000,000 investment in equipment. At the end of ten
years, the project would terminate and the equipment would have no
salvage value. The project would provide annual income of P200,000, as
computed as follows:

Sales P2,000,000
Variable Costs 1,400,000
Contribution Margin 600,000
Fixed Costs 400,000
Income 200,000

All of the above items, except for depreciation of P100,000 per year,
represent cash flows. The depreciation expense is included in the fixed costs.
The company’s required rate of return is 12%.

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 3. What is the project’s net present value?
A. P650,000 C. P1,300,000
B. P695,000 D. 700,000

4. What is the project’s internal rate of return?

A. 25.5% C. 27.30%
B. 23.78% D. 12.50%

5. What is the project’s payback period?

A. 3.33 years C. 4.33 years
B. 2.75 years D. 3 years

6. What is the project’s simple rate of return?

A. 15.0% C. 18.0%
B. 17.5% D. 20.0%

Items 7-8 are based on the following items:

The following information is available for Armstrong Enterprises for 2013:

Net operating profit (income) after taxes P 36,000,000

Depreciation expense 15,000,000
Change in net working capital 10,000,000
Capital expenditures 12,000,000
Invested capital (total assets-current liabilities) 100,000,000
Weighted average cost of capital 10%

7. What is the amount of economic value added (EVA)

A. P20,000,000 C. P15,000,000
B. P26,000,000 D. 36,000,000

8. What is the free cash flow for 2013?

A. P36,000,000 C. P29,000,000
B. P30,000,000 D. P26,000,000

9. Ebony Company has the following expected pattern of collections on

credit sales: 70 percent collected in the month of sale, 15 percent in
the month after the month of sale and 14 percent in the second month
after the month of sale. The remaining 1 percent is never collected. At
the end of May, Ebony Company has the following accounts receivable
balances:
From April Sales P 21,000
From May Sales 48,000

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 Ebony’s expected sales for June are P 150,000. What were total sales
for April?
A. P150,000 C. P70,000
B. P72,414 D. 140,000

Items 10-14 are based on the following items:

The Mishtree Company makes 27,000 units of a certain component

each year for use on its production line. The cost per unit of the component
at this level of activity is as follows:
Direct Materials P4.20
Direct Labor 12.00
Variable factory overhead 5.80
Fixed factory overhead 6.50

Mishtree has received an offer from an outside supplier who is willing

to provide 27,000 units of this component each year at a price of P25 per
component.

10. Assume that there is no other use for the facilities now being
used to produce the component. If Mishtree continues to make the
components, how much higher or lower will net income be than if the
components are purchased from the outside supplier?

A. P94,000 lower C. P237,600 higher

B. P81,000 higher D. P124,000 lower

11. Assume that the facilities now being used to make the
components could be rented to another company for P64,800 per year
if the component were purchased from the outside supplier. Under
these conditions, if Mishtree continued to make the components, how
much higher or lower would net income be than if the component were
purchased from the outside supplier?
A. P29,700 lower C. P16,200 higher
B. P21,500 lower D. 18,100 higher

12. Suppose the conditions are the same as in Item 11, at what price
per unit charged by the outside supplier would Mishtree be
economically indifferent between making the component or buying if
from outside?

A. P24.40 B. P22.50 C. P25.00 D. 19.60

13. Assume that if the component is purchased from the outside
supplier, P35,100 of annual fixed overhead could be avoided and the
facilities now being used to make the component could be rented to

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 another company for P64,800 per year. If Mishtree chooses to buy the
component from the outside supplier under these circumstances, then
the change in annual net income due to accepting the offer is
A. P18,900 decrease C. P21,400 decrease
B. P18,900 increase D. P21,400 increase

14. Suppose the conditions are the same as in Item 13 and the
number of units of this component used each year can change. What
would be the quantity of units of this component used per year that
would make Mishtree economically indifferent between making or
buying the component?
A. 21,600 units C. 28,500 units
B. 27,000 units D. 33,300 units

15. At the end of 2014, Gabbuat Company’s total asset was

P500,000. In 2015, it earned net income of P30,000 and paid dividends
of P10,000. What is the company’s internal growth rate?
A. 1% C. P5%
B. 4% D. 9%

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