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CEBU CPAR CENTER

FIIRST COMPREHENSIVE EXAMINATION
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THEORY
Select the best answer from the choices given.
1. The ASC framework
a. Sets out the concepts that underlie the preparation and presentation of financial statements
for internal users.
b. Is a Philippine Accounting Standard that defines standards for a particular measurement or
disclosure issue.
c. Is concerned with special purpose reports, for example, prospectuses and computations
prepared for taxation purposes.
d. Applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public or private sector.
2. Which statement is incorrect concerning the recognition principles?
a. An asset is recognized when it is probable that future economic benefits will flow to the
enterprise and the asset has a cost or value that can be measured reliably.
b. A liability is recognized when it is possible that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation that can measured
reliably.
c. Income is recognized when an increase in future economic benefits related to an increase
in asset or a decrease in liability has arisen that can be measured reliably.
d. Expenses are recognized when a decrease in future economic benefits related to an
decrease in asset or an increase in liability has arisen that can be measured reliably.
3. 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 generate cash and cash equivalents in the future.
c. Ability of the enterprise to meet its financial commitments over a longer term.
d. Future borrowing needs and how future profits and cash flows will be distributed among
interested users.
4. Events after the balance sheet date are the events, both favorable and unfavorable, that occur
between the balance sheet date and the date
a. When the audit report is authorized for issue.
b. When financial statements are authorized for issue.
c. When financial statements are issued.
d. When the audit report is issued.
5. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as money order and
bank drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all
normal operating expenses for a period of time.
c. Restricted cash balance should be presented as noncurrent asset.
d. Compensating balances required by a bank may be included in “cash and cash equivalent”.
6. Lapping is
a. Making the financial statements indicate a more favorable position by giving effect to
transactions is a period other than that in which these actually occurred.
b. Done to inflate the cash position or cover the theft of cash by depositing at the end of the
accounting period a check drawing on one bank account in another bank account without
making the necessary deduction in the balance of the first bank.
c. An irregularity that conceals cash shortages by a delay in recording cash collections,
retaining a customer's payment on credit sales and covering up the shortage with subsequent
cash receipts.
d. A kind of fraud committed by making entry of fictitious payments or failure to enter receipts.
7. If the cash balance in a company’s bank statement is less than the correct cash balance and
neither the company nor the bank has made any errors, there must be
a. Outstanding checks
b. Bank charges not yet recorded by the company
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c. Deposits in transit
d. Deposits credited by the bank but not yet recorded by the company
8. Which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of the
fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.
9. In the case of long-term installments receivable (real estate installment sales) where a major
portion of the receivables will be collected beyond the normal operating cycle
a. The entire receivables are classified as noncurrent
b. Only the portion currently due is classified as current and the balance as noncurrent
c. The entire receivables are classified as current with disclosure of the amount not currently
due
d. The entire receivables are classified as current without disclosure of the amount not
currently due
10. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as a
a. quantity discount. b. cash discount. c. trade discount. d. size discount.
11. When the allowance method of recognizing bad debt expense is used, the entry to record the
write-off of a specific uncollectible account would decrease
a. Allowance for doubtful accounts. c. Net realizable value of accounts receivable.
b. Net income. d. Working capital.
12. At the beginning of 2003, Finney Company received a three-year interest-bearing P1,000,000
trade note. Finney reported this note as a P1,000,000 trade note receivable on its 2003 year-
end statement of financial position and P1,000,000 as sales revenue for 2003. What effect did
this accounting for the note have on Finney's net earnings for 2003, 2004, 2005, and its
retained earnings at the end of 2005, respectively?
a. Overstate, overstate, understate, no effect
b. Overstate, understate, understate, no effect
c. Overstate, understate, understate, understate
d. No effect, no effect, no effect, no effect
13. Which of the following items should be excluded from a company’s inventory at the balance
sheet date?
a. Goods in transit which were sold FOB destination.
b. Goods delivered to another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the customer’s
convenience.
d. Goods in transit which were purchased FOB shipping point.
14. The original cost of an inventory item is above both the replacement cost and net realizable
value. The net realizable value less normal profit margin is below the original cost. The
inventory item should be valued at
a. Replacement cost c. Net realizable value less normal profit margin
b. Net realizable value d. Original cost
15. Which of the following is correct?
a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.
16. Which statement is false concerning merchandising operations?
a. Cash discounts are normally reflected in the financial records but trade discounts are not.
b. A major difference between the financial statements of service firms and merchandising
firms is the inclusion of cost of goods sold in the income statement of a merchandising firm.
c. The terms “freight prepaid” and “freight collect” designate the party who is to bear the
transportation cost.
d. A firm using a periodic inventory system determines its inventory only at the end of the
period.
17. A financial instrument is any contract that gives rise to
a. A financial asset of one entity and a financial liability or equity instrument of another entity.
b. A financial asset only.
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c. A financial liability only.

d. A financial asset of one entity and a financial liability of another entity only.
18. Which statement is incorrect regarding compound financial instruments
a. Compound instruments have both a liability and an equity component from the investor’s
perspective.
b. The component parts should be accounted for and presented separately according to their
form based on the definitions of liability and equity.
c. The split is made at issuance and not revised for subsequent changes in market interest
rates, share prices, or other event that changes the likelihood that the conversion option will
be exercised.
d. When the initial carrying amount of a compound financial instrument is required to be
allocated to its equity and liability components, the liability component is assigned the
residual amount after deducting from the fair value of the instrument as a whole the amount
separately determined for the equity component.
19. Characteristic(s) common to all joint ventures include
a. Two or more venturers are bound by a contractual arrangement.
b. The contractual arrangement establishes joint control.
c. The use of proportionate consolidation.
d. Both a and b.
20. Investment property excludes
a. Land held for long-term capital appreciation.
b. Building leased out under an operating lease.
c. Property that is being redeveloped for continuing use as investment property.
d. Property that is being constructed or developed for use as an investment property.
21. Which statement is correct regarding the application of the equity method of accounting for
investments in associates?
a. The equity investment is initially recorded at cost.
b. The equity investment is increased by the investor's share of the net loss of the associate.
c. Distributions received from the investee increase the carrying amount of the investment.
d. The investor's share of profit or loss of the investee and of changes in the investee's equity
is determined on the basis of total potential ownership interests.
22. Which is incorrect concerning depreciation of PPE?
a. The depreciation method used should reflect the pattern in which the asset's economic
benefits are consumed by the enterprise.
b. The depreciation method should be reviewed at least annually and, if the pattern of
consumption of benefits has changed, the depreciation method should be changed
currently and prospectively as a change in estimate.
c. Depreciation should be charged to the income statement, unless it is included in the
carrying amount of another asset.
d. Depreciation begins when the asset is available for use and continues until the asset is
derecognized and became idle.
23. Which is correct concerning residual value of PPE?
a. The carrying value of an asset is the estimated amount an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.
b. The residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, any change is
accounted for prospectively as a change in policy.
c. Depreciation is not recognized if the fair value of the asset exceeds its carrying amount,
even if the asset’s residual value does not exceed its carrying amount.
d. The residual value of an asset may increase to an amount equal to or greater than the
asset’s carrying amount.
24. Which is incorrect concerning the revaluation model of measuring PPE subsequent to initial
recognition?
a. If a revaluation results in an increase in value, it should be credited to equity under the
heading "revaluation surplus".
b. If a revaluation results in an increase in value and it represents the reversal of a revaluation
decrease of the same asset previously recognized as an expense, it should be recognized
as income.
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c. A decrease arising as a result of a revaluation should be recognized as an expense to the

extent that it exceeds any amount previously credited to the revaluation surplus relating to
the same asset.
d. When a revalued asset is disposed of, any revaluation surplus should be transferred
directly to retained earnings; it cannot be left in equity under the heading revaluation
surplus.
25. Borrowing cost does not include
a. Amortization of discount/premium on bonds payable.
b. Amortization of bond issue costs.
c. Actual cost of equity capital.
d. Foreign exchange differences that are regarded as an adjustment of interest cost.
26. Which statement is incorrect regarding accounting for government grants?
a. A government grant is recognized only when there is reasonable assurance that the
enterprise will comply with any conditions attached to the grant and the grant will be
received.
b. The grant is recognized as income over the period necessary to match them with the
related costs, for which they are intended to compensate, on a systematic basis, and
should not to be credited directly to equity.
c. Non-monetary grants, such as land or other resources, are usually accounted for at fair
value, although recording both the asset and the grant at a nominal amount is also
permitted.
d. If there are no conditions attached to the assistance specifically relating to the operating
activities of the enterprise (other than the requirement to operate in certain regions or
industry sectors), such grants should be credited to equity.
27. Which statement is correct 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 not recognized.
c. Adjust depreciation retrospectively.
d. Reversal of an impairment loss for goodwill is recognized as income in the income
statement.
28. Which is correct concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price,
including import duties and taxes and any directly attributable expenditure of preparing the
asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is
based on its carrying value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the asset is
not recognized.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal
to the total payments over the credit period.
29. Which statement is incorrect regarding recognition of intangible assets?
a. An intangible asset should be recognized if, and only if, it is probable that the future
economic benefits that are attributable to the asset will flow to the enterprise; and the cost
of the asset can be measured reliably.
b. The recognition criteria apply only to intangible assets generated internally.
c. The probability of future economic benefits must be based on reasonable and supportable
assumptions about conditions that will exist over the life of the asset.
d. The probability recognition criterion is always considered to be satisfied for intangible
assets that are acquired separately or in a business combination.
30. 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 expenditure that can be directly
attributed or allocated on a reasonable and consistent basis to creating, producing and
preparing 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.
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PROBLEMS
1. The following data pertain to Encantadia Corporation on December 31, 2005:
Metrobank current account no. 1 P1,000,000
Metrobank current account no. 2 (100,000)
Payroll account 500,000
Foreign bank account – restricted (in equivalent pesos) 1,000,000
Postage stamps 1,000
Employee’s post dated check 4,000
IOU from controller’s sister 10,000
Credit memo from a vendor for a purchase return 20,000
Traveler’s check 50,000
Not-sufficient-funds check 15,000
Money order 30,000
Petty cash fund (P4,000 in currency and expense receipts for
P6,000) 10,000
Treasury bills, due 3/31/06 (purchased 12/01/05) 200,000
Treasury bills, due 1/31/06 (purchased 1/1/05) 300,000
Based on the above information, compute for the cash and cash equivalent that would
be reported on the December 31, 2005 balance sheet.
a. P1,784,000 c. P1,684,000
b. P1,484,000 d. P1,704,000

2. Adamya Corporation’s checkbook balance on December 31, 2005 was P8,000,000.

The same date Adamya held the following items in its safe:
A P150,000 check payable to Adamya, dated January 4, 2006, that was included in the
December 31, checkbook balance.
A P200,000 check payable to Adamya, deposited on December 10 and recorded on
the same date, that was returned by the bank on December 22 marked “NSF”. The
check was redeposited December 27, 2005, and cleared December 30, 2005. No entry
has been made by Adamya for the receipt and the redeposit.
A P500,000 check payable to a supplier and drawn on Adamya’s account, that was
dated and recorded December 31, 2005 but not mailed until January 10, 2006
In its December 31, 2005 balance sheet, Adamya should report cash at
a. P8,700,000 c. P8,350,000
b. P8,550,000 d. P8,150,000

3. Sapiro Company provided the following data for the purpose of reconciling the cash
balance per book with the balance per bank statement on December 31, 2005:
Balance per bank statement 2,000,000
Outstanding checks (including certified checks of P100,000) 500,000
Deposit in transit 200,000
December NSF checks 150,000
Proceeds of note collected by the bank for Sapiro,
net of service charge of P20,000 750,000
Erroneous bank debit to Sapiro’s account, representing
a withdrawal of Siparo Company 300,000
What was the cash balance per book on December 31, 2005?
a. P 900,000 c. P1,150,000
b. P1,500,000 d. P1,200,000

4. The LIREO Corporation started its business on January 1, 2005. After considering the
collections experience of other companies in the industry, LIREO Corporation
established an allowance for bad debts estimated to be 5% of credit sales.
Outstanding receivables recorded in the books of accounts on December 31, 2005
totaled P575,000, while the allowance for bad debts account had a credit balance of
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P62,500 after recording estimated doubtful account expense for December and after
writing off P12,500 of uncollectible accounts.
Further analysis of the company’s accounts showed that merchandise purchased in
2005 amounted to P2,250,000 and ending merchandise inventory was P375,000.
Goods were sold at 40% above cost.
80% of total sales were on account. Total collections from customers, on the other
hand, excluding proceeds from cash sales, amounted to P1,500,000.
The net realizable value of accounts receivable as of December 31, 2005 is
a. P495,000 c. P512,500
b. P993,750 d. P875,000

5. Hathoria Company began operations on January 1, 2004. On December 31, 2004,

Hathoria provided for uncollectible accounts based on 5% of annual credit sales. On
January 1, 2005, Hathoria changed its method of determining its allowance for
uncollectible accounts by applying certain percentages to the accounts aging as
follows:
Days past invoice date Percent deemed to be
uncollectible
0 – 30 5%
31 – 90 10%
91 -180 20%
Over 180 50%

In addition, Hathoria wrote off all accounts receivable that were over 1 year old. The
following additional information relates to the years ended December 31, 2005 and
2004:
2005 2004
Credit sales 10,000,000 8,000,000
Collections (excluding collections on recovery) 8,500,000 6,000,000
Accounts written off 300,000 200,000
Recovery of accounts previously written off 80,000 50,000
Days past invoice date at December 31
0 to 30 1,800,000 800,000
31 to 90 600,000 500,000
91 to 180 400,000 400,000
Over 180 200,000 100,000
What is the provision for uncollectible accounts for the year ended December 31,
2005?
a. P250,000 c. P330,000
b. P300,000 d. P380,000

6. On December 1, 2005 Pirena Company assigned on a nonnotification basis accounts

receivable of P10,000,000 to a bank in consideration for a loan of 90% of the
receivables less a 5% service fee on the accounts assigned. Pirena signed a note for
the bank loan. On December 31, 2005, Pirena collected assigned accounts of
P6,000,000 less discount of P400,000. Pirena 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, 2005 balance sheet, Pirena should report note payable as a current
liability at
a. P4,500,000 c. P3,090,000
b. P3,400,000 d. P3,490,000
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7. The following pertains to the notes receivable of Amihan Corporation for the calendar year
2005:
Notes Receivable
Date Particulars Debit Credit
Sept. 1 Michelle, 21%, due in 3 months P320,000
1 Discounted Michelle note P320,000
Oct. 1 Mabelle Co., 24%, due in 2 months 1,200,000
Nov. 1 Eleanor, 24%, due in 13 months 2,400,000
30 Rigby Co., no interest, due in one year 2,000,000
30 Discounted Rigby Co. note 2,000,000
Dec. 1 Sgt. Pepper, 18%, due in 5 months 3,600,000
1 Ms. Anna, President, 12%, due in 3 months
(For cash loan given to Ms. Anna) 4,800,000
All notes are trade notes receivable unless otherwise specified. The Michelle note was
paid on December 1 as per notification received from the bank. The Mabelle Co. note
was dishonored on the due date but the legal department has assured management of
its full collectibility.
At what amount on the current assets section of the balance sheet as of December 31,
2005 will Notes Receivable-trade be carried?
a. P3,600,000 c. P7,200,000
b. P6,000,000 d. P8,000,000

8. The Alena Corporation sold a piece of equipment to Ybarro, Inc. on April 1, 2005, in
exchange for an P800,000 non-interest bearing note due on April 1, 2007. The note
had no ready market, and there was no established exchange price for the equipment.
The prevailing interest rate for a note of this type at April 1, 2005, was 12%. The
carrying value of the note receivable on December 31, 2005 is
a. P800,000 c. P694,984
b. P620,864 d. P714,112

9. On October 15, 2005, Danaya Company purchased goods costing P4,500,000. The freight term
is FOB Destination. Some of the costs incurred with the sale and delivery of the goods were:
Packaging for shipment 200,000
Shipping 200,000
Special handling charges 100,000
These goods were received on October 17, 2005. What amount of cost for these
goods should be included in Danaya’s inventory?
a. P4,500,000 c. P4,700,000
b. P4,900,000 d. P5,000,000

10. The physical count conducted in the warehouse of Imaw Company on December 31,
2005 revealed merchandise with a total cost of P3,600,000 was on hand on that date.
However the following items were excluded from the count:
 Goods sold to a customer, which are being held for the customer to call for at the
customer’s convenience with a cost of P200,000.
 A packing case containing a product costing P80,000 was standing in the shipping
room when the physical inventory was taken. It was not included in the inventory
because it was marked “hold for shipping instructions”. Your investigation revealed
that the customer’s order was dated December 20, 2005, but that the case was
shipped and the customer billed on January 10, 2006.
 Merchandise held by Finishing Company costing P300,000 for further processing
and packaging.
The correct amount of inventory that should be reported in Imaw Company’s balance
sheet at December 31, 2005 is
a. P4,180,000 c. P3,880,000
b. P3,980,000 d. P4,100,000
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11. The records of Awoo’s Wholesale and Retail Store report the following data for the
month of January 2005:
Beginning inventory at cost 860,000 Net Additional mark up 425,000
Purchases at cost 6,550,000 Net Mark down 750,000
Freight on purchases 150,000 Sales 9,450,000
Purchase returns at cost 360,000 Sales discounts 400,000
Beginning inventory at sales price 1,200,000 Employee discounts 300,000
Purchase returns at sales price 525,000 Theft and breakage 150,000
Initial mark up on purchases 4,350,000
Using the average retail inventory method, Awoo’s cost of sales is
a. P6,390,000 c. P6,080,000
b. P6,150,000 d. P6,336,000

12. A physical inventory taken on December 31, 2005 resulted in an ending inventory of
P1,440,000. Banak Company suspects some inventory may have been taken by
employees. To estimate the cost of missing inventory, the following were gathered:
Inventory, Dec. 31, 2004 P1,280,000
Purchases during 2005 5,640,000
Cash sales during 2005 1,400,000
Shipment received on December 26, 2005, included in physical
inventory, but not recorded as purchases 40,000
Deposits made with suppliers, entered as purchases. Goods
were not received in 2005 80,000
Collections on accounts receivable, 2005 7,200,000
Accounts receivable, January 1, 2005 1,000,000
Accounts receivable, December 31, 2005 1,200,000
Gross profit percentage on sales 40%
At December 31, 2005 what is the estimated cost of missing inventory?
a. P200,000 c. P1,000,000
b. P160,000 d. P 0

13. Nakba Company installs replacement siding, windows, and louvered glass doors for
family homes. At December 31, 2005, the balance of raw materials inventory account
was P502,000, and the allowance for inventory writedown was P33,000. The inventory
cost and market data at December 31, 2005, are as follows:
Cost Replacement Sales Net Normal
Cost Price Realizable Profit
value
Aluminum siding
89,000 86,000 91,500 87,000 5,000
Mahogany siding 94,000 92,000 93,000 85,000 7,000
Louvered glass
door 125,000 135,000 129,000 111,000 10,000
Glass windows 194,000 114,000 205,000 197,000 20,000
Total 502,000 427,000 518,500 480,000 32,000
The loss on inventory write down is
a. P 8,000 c. P11,000
b. P25,000 d. P 0

14. Hagorn Company purchased 10,000 shares of Dinky Company P100 par value
common stock for P1,200,000 to be held as available for sale securities. On March 1,
2005, Hagorn received a 20% stock dividend. On June 1, 2005, Hagorn sold all the
stock dividends that were received on March 1 at P130 per share. The gain on sale of
investment be recorded by Hagorn is
a. P260,000 c. P200,000
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b. P 20,000 d. P 60,000

15. On January 1, 2004, Agana Company acquired trading securities with the following
market value on December 31, 2004:
Cost Market Value
X 4,000,000 3,700,000
Y 2,000,000 1,800,000
Z 5,000,000 4,500,000
Total 11,000,000 10,000,000
Agana sold Security Z Sept 15, 2005 for P4,800,000, while the remaining securities on
December 31, 2005 had market values of P4,200,000 for Security X and P2,300,000
for Security Y. The unrealized gain to be recognized Agana’s income statement on
December 31, 2005 is
a. P300,000 c. P1,500,000
b. P500,000 d. P1,000,000

16. On July 1, 2005, Mila Company purchased as a long term investment 50,000 shares of
Lucky Corporation common stock for P80 per share. This purchase represents a 2%
interest in Lucky. On August 1, 2005, Lucky Corporation declared its annual dividend
on its common stock of P10 per share payable on September 10 to stockholders of
record at August 31, 2005. A retirement of an issue of Mila’s serial bonds payable on
August 25, 2005 required additional working capital and Mila sold all 50,000 shares of
Lucky’s stock for P5,200,000 including the accrued dividend. For the year ended
December 31, 2005, the gain on disposal to be reported by Mila on this transaction
should be
a. P 200,000 c. P500,000
b. P1,200,000 d. P700,000

17. Mira Company received dividends from its common stock investments during the year
2005 as follows:
a. A stock dividend of 20,000 shares from A Company when the market price of A’s
shares was P30 per share.
b. A cash dividend of P2,000,000 from B Company in which Mira owns a 20%
interest.
c. A cash dividend of P500,000 from C Company in which Mira owns a 10% interest.
d. 10,000 shares of common stock of D Company in lieu of cash dividend of P20 per
share. The market price of D Company’s shares was P180. Mira holds originally
100,000 shares of D Company common stock. Mira owns 5% interest in D
Company.
What amount of dividend revenue should Mira report in its 2005 income statement?
a. P2,500,000 c. P2,300,000
b. P4,300,000 d. P 500,000

18. On January 2, 2004, Aquil Company purchased 10,000 shares of P100 par value
common stock of Diwata Corporation at P110 per share. The Diwata Corporation was
expanding and on March 2, 2005 it issued stock rights to its stockholders. Each right
entitles Aquil to purchase one fourth (¼) share of common stock at par. The market
value of the stock on that date was P140 per share. There was no quoted price for the
rights. On April 2, 2005, Aquil exercised all its stock rights. What is the total cost of the
shares acquired on April 2, 2005?
a. P323,333 c. P312,857
b. P250,000 d. P350,000

19. On January 1, 2004 Eugenie Company bought 15% of Celie Corporation common
stock for P5,000,000. During 2004, Celie reported net income of P3,000,000 and paid
no dividends on its common stock. In 2005 Celie reported net income of P5,000,000
and paid a total amount of P10,000,000 as dividends to common stockholders.
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Changes in fair value of Celie were insignificant during both years. In its income
statement for the year ended December 31, 2005, how much should Eugenie report as
income from this investment?
a. P1,500,000 c. P750,000
b. P1,200,000 d. P450,000

20. On January 1, 2005 Maria Company purchased 30% interest in Venus Company for
P5,000,000. On this date Venus’ stockholders’ equity was P10,000,000. The carrying
amounts of Venus’ identifiable net assets approximated their fair values, except for land
whose fair value exceeded its carrying amount by P4,000,000. Any implied goodwill
has an indefinite life. Venus reported net income of P3,000,000 for 2005 and paid
dividends of P1,000,000. Maria accounts for this investment using the equity method.
In its December 31, 2005 balance sheet, what amount should Maria report as
investment in associate?
a. P5,560,000 c. P5,500,000
b. P5,600,000 d. P5,540,000

21. On December 31, 2005, Frankie Company purchased as a long-term investment

P10,000,000 face amount, 10% bonds of Love Joy Corporation to yield 8% per year.
The bonds mature on January 1, 2010 and pay interest semiannually on June 30 and
December 31. The relevant present value factors are as follows:
The carrying amount of this investment on December 31, 2005 is
a. P10,872,000 c. P9,189,000
b. P10,811,000 d. P9,128,000

22. The following accounts appear in the adjusted trial balance of Vicky Company on
December 31, 2005:
Petty cash fund 20,000
Change fund 150,000
Bond sinking fund securities 1,000,000
Preferred redemption fund securities 1,500,000
Dividend receivable-sinking fund securities 100,000
Plant expansion fund 400,000
Cash surrender value 120,000
Investment property 1,200,000
Advances to subsidiary 600,000
Held to maturity securities 2,100,000
Treasury notes purchased 1 year ago, maturing on May 1, 2006 750,000
How much should be reported as long term investments on December 31, 2005?
a. P6,920,000 c. P7,070,000
b. P7,020,000 d. P7,820,000

23. Eternal Company acquired an equipment on January 1, 2005. The asset has an
estimate useful life of 5 years. An employee has prepared a depreciation schedule for
this equipment using two methods, sum-of-years digit method and double declining
balance method, as follows:
Sum-of-years digit Double declining
2005 3,000,000 4,000,000
2006 2,400,000 2,400,000
2007 1,800,000 1,440,000
2008 1,200,000 864,000
2009 600,000 296,000

What is the acquisition cost of the equipment?

a. P9,500,000 c. P10,000,000
b. P9,000,000 d. 10,500,000
 Page 11 of 13

24. The following expenditures were incurred by Gina Company in 2005:

Purchase of land 10,000,000
Land survey 500,000
Fees for title search of title for land 200,000
Building permit 250,000
Temporary quarters for construction crew 100,000
Payments of tenants of old building for vacating the premises 600,000
Payment to demolition company to raze the old building and clean up 400,000
Excavating basement 350,000
Special assessment tax for street project 60,000
Salvage value of materials from old building retained
by the demolition company 150,000
Damages awarded for injuries sustained in construction 90,000
Costs of construction 20,000,000
Cost of paving parking lot adjoining the building 180,000
Cost of shrubs, trees and other landscaping 40,000

The total costs to be capitalized as land is

a. P11,610,000 c. P11,800,000
b. 11,730,000 d. P11,650,000

25. Joan Company acquired a machine on March 1, 2003 for P8,000,000. The machine
has a 10 year useful life and a P500,000 residual value, and was depreciated using the
straight-line method. Joan records a full year’s depreciation on the year of an asset’s
acquisition and no depreciation on the year an asset is disposed of. On December 31,
2004 the machine had a significant decline in its market value. A test for recoverability
revealed the expected net future undiscounted cash flows related to the continued use
and eventual disposal of the machine total P7,200,000. The machine’s fair value on
December 31, 2004 is P6,000,000 with no salvage value while the discounted future
cash flows amounts to P6,600,000. On December 31, 2005, the machine should have
a carrying value of
a. P5,687,500 c. P5,750,000
b. P5,775,000 d. P5,250,000

26. In 2004, The Young Mining Company purchased property with natural resources for
P29,000,000. The property was relatively close to a large city and had an expected
residual value of P4,000,000. However P2,000,000 will have to be spent to restore the
land for use. The following information relates to the use of the property:
 In 2004,Young spent P3,000,000 in development costs and P1,500,000 in buildings
on the property. Young does not anticipate that the buildings will have any utility
after the natural resources are depleted. The original estimated output is 5,000,000
tons.
 In 2005 and additional P2,400,000 were spent for additional developments on the
mine.
 The tonnage mined and estimated tons remaining for years 2004 and 2005 are as
follows:
Estimated tons
Year Tons extracted remaining
2004 1,500,000 3,500,000
2005 1,200,000 1,800,000
The depletion recorded by Young Company in 2005 is
a. P8,400,000 c. P9,360,000
b. P7,200,000 d. P5,616,000

27. Essel Company uses the composite method of depreciation and has a composite rate
of 20%. During 2005, it sold assets with an original cost of P500,000 and a residual
value of P100,000 for P300,000 and eventually acquired P400,000 of new assets with
 Page 12 of 13

a residual value of P40,000. Information regarding the original group of assets as of

January 1, 2005 is presented below:
Total cost 5,000,000
Total residual value 800,000
Accumulated depreciation 1,000,000
What was the depreciation expense recorded by Essel Company in 2005?
a. P1,000,000 c. P832,000
b. P 632,000 d. P980,000

28. On January 1, 2003, Tulsa Company purchased a machine for P10,560,000 and
depreciated it by the straight line method using an estimated life of ten years with no
residual value. On January 1, 2005, Tulsa determined that the machine had a useful
life of eight years from the date of acquisition and will have a residual value of
P450,000. An accounting change was made in 2005 to reflect this additional
information. The accumulated depreciation for this machine should have a balance at
December 31, 2005 of
a. P3,445,000 c. P3,055,000
b. P3,168,000 d. P3,033,000

29. Ursula Mathey Company incurred the following costs during 2005 in connection with its
research and development activities:
Cost of equipment acquired that will have alternative uses in future
research and development projects over the next five years
(straight-line depreciation) 600,000
Materials consumed in research and development projects 150,000
Consulting fees paid to outsiders for research and
development projects 250,000
Personnel costs of persons involved in research and
development projects 80,000
Indirect costs reasonably allocable to research and
development projects 220,000
Materials purchased for future research and development projects 300,000
The amount to be reported by Ursula as research and development expense on its
income statement for 2005 is
a. P720,000 c. P1,600,000
b. P820,000 d. P1,120,000

30. Kula Company has the following information as of January 1, 2005 on its property plant
and equipment account:
Land 30,000,000
Buildings and improvements 250,000,000
Less: Accumulated depreciation . 62,500,000
Net book value 217,500,000
There were no additions or disposals during 2005. Depreciation expense is computed
on the straight-line method over 20 years for buildings and improvements. On January
1, 2005, all of Kula’s property, plant and equipment were appraised as follows:
Replacement cost
Land 50,000,000
Buildings and improvements 400,000,000
As a result of the appraisal, the buildings and improvements were also determined to
have a revised useful life of 25 years. What is the revaluation surplus that will appear
in Kula’s stockholders’ equity on December 31, 2005?
a. P132,500,000 c. P145,875,000
b. P125,000,000 d. P126,875,000
 Page 13 of 13

31. Lovable Corporation is considering the purchase of Adorable Company, whose balance
sheet as of December 31, 2005 is summarized as follows:
Current assets 800,000 Current liabilities 600,000
Fixed assets (net) 1,100,000 Long-term liabilities 700,000
Other assets 700,000 Common stock 850,000
. . Retained earnings 450,000
Total 2,600,000 Total 2,600,000
The fair market value of the current assets is P1,100,000 because of the
undervaluation of inventory. The normal rate of return on the net assets for the industry
is 15% and the average expected annual earnings for Adorable Company is P300,000.
Assuming that the excess earnings continue for the next five years and Lovable follows
the “years’ multiple of excess earnings” approach of computing goodwill, how much
would Lovable be willing to pay for the net assets of Adorable?
a. P1,900,000 c. P2,125,000
b. P2,000,000 d. P2,300,000

32. Arvak Company owns 50% of Sarrat Company’s preferred stock and 30% of its
common stock. Sarrat’s stock outstanding at December 31, 2005 includes P20,000,000
of 10% cumulative preferred stock and P50,000,000 of common stock. Sarrat reported
net income of P10,000,000 for the year 2005. What amount should Arvak report as
investment income for the year 2005?
a. P3,000,000 c. P2,400,000
b. P3,400,000 d. 4,400,000

33. On January 1, 2005, Armeo Company purchased as a long-term investment

P5,000,000 face value of 8% bonds for P4,562,000. The bonds were purchased to
yield 10% interest. The bonds pay interest annually December 31. Armeo uses the
interest method of amortization. What amount (rounded to the nearest P100) should
Armeo report on its December 31, 2005 balance sheet for this long-term investment?
a. P4,680,000 c. P4,662,000
b. P4,618,000 d. 4,562,000

34. On January 1, 2001 Apitong Company purchased P8,000,000 ordinary life policy on its
president. Additional data for the year 2005 are:
Cash surrender value, January 1 200,000
Cash surrender value, December 31 240,000
Annual advance premium paid on January 1, 2005 400,000
Dividend received on July 1, 2005 20,000
Apitong Company is the beneficiary under the life insurance policy. Apitong should
report life insurance expense for 2005 at
a. P400,000 c. P360,000
b. P340,000 d. P380,000

35. On January 1, 2005, Ynang Reyna Company received a grant of P50 million from the
British government in order to defray safety and environmental costs within the area
where the enterprise is located. The safety and environmental costs are expected to
be incurred over four years, respectively, P4 million, P8 million, P12 million and P16
million.

How much income from the government grant should be recognized in 2005?
a. P50,000,000 c. P12,500,000
b. P 5,000,000 d. P 0

- end of examination -
Good Luck