DySAS Center for CPA Review
2F & 3F Mitra Building, San Pedro Street, Davao City Tel. No. (082) 224-43-20: E-mail Address –
[email protected] Practical Accounting 1 John C. Frivaldo, CPA, MBA FINAL PRE-BOARD EXAMINATIONS April 23, 2009 @ 1:00 – 4:00 pm ========================================================== = INSTRUCTIONS: Mark the letter of your choice with a VERTICAL LINE on the answer sheet provided. ERASURES NOT ALLOWED.
1. Eliot Corporation’s liabilities at December 31, 2007 were as follows: Accounts payable and accrued interest P200,000 12% note payable issued November 1, 2006 maturing July 1, 2007 60,000 10% debentures payable, next annual principal installment of P100,000 due February 1, 2008 700,000 On December 31, 2007, Eliot consummated a noncancelable agreement with the lender to refinance the 12% note payable on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement’s provisions. Eliot’s December 31, 2007 financial statements were issued on March 31, 2008. In its December 31, 2007 balance sheet, Eliot should report current liabilities at: (a) P200,000 (b) P260,000 (c) P300,000 (d) P360,000C Accounts payable and accrued interest P200,000 Debentures payable 100,000 Total current liabilities P300,000 2. Included in Ruth Company’s liability balances at December 31, 2008 were the following: 10% note payable issued on October 1, 2007, maturing October 1, 2009 P2,000,000 12% note payable issued on March 1, 2007, maturing on March 1, 2009 4,000,000 Ruth’s 2008 financial statements were issued on March 31, 2009. Under the loan agreement for the 10% note payable, Ruth has the discretion to refinance the obligation for at least twelve months after December 31, 2008. On December 31, 2008, the entire P4,000,000 balance of the 12% note payable was refinanced through issuance of a long-term obligation payable lump sum. What amount of the notes payable should be classified as current on December 31, 2008? (a) P6,000,000 (b) P4,000,000 (c) P2,000,000 (d) P 0 D 3. Dean, Inc. has P2,000,000 of note payable due June 15, 2008. At the financial statement date of December 31, 2007, Dean signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis. The financing agreement called for borrowings not to exceed 80% of the value of the collateral Dean was providing. At the date of issue of the December 31, 2007 financial statements, the value of the collateral was P2,400,000. Under the existing loan facility, Dean has the discretion to refinance or roll over the note payable for at least 12 months after the balance sheet date. In its December 31, 2007 balance sheet, Dean should classify note payable as: Short-term obligation Long-term obligation (a) P2,000,000 P 0 (b) 400,000 1,600,000 (c) 80,000 1,920,000 (d) 0 2,000,000 D 4. East Company has several contingent liabilities at December 31, 2008. The auditor obtained the following brief description of each liability: - In May 2008, East became involved in litigation. In December 2008, the court assessed a judgment for P1,600,000 against East. East is appealing the amount of the judgment. Its attorneys believe it is probable that they can reduce the assessment on appeal by 50%. The appeal is expected to take at least at year. - In July 2008, Davao City brought action against East for polluting the Davao River with its waste products. It is probable that Davao City will be successful but the amount of damages East might have to pay should not exceed P1,500,000.
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East has signed as guarantor for a P1,000,000 loan by First Bank to Northern Company, a principal supplier to East. At this time, there is only a remote likelihood that East will have to make payment on behalf of Northern Company. How much should be accrued as provision on December 31, 2008? (a) P1,600,000 (b) P1,500,000 (c) P3,100,000 (d) P2,300,000 D Assessment on appeal (50% x 1,600,000) 800,000 Environment cost 1,500,000 Total provision 2,300,000 5. During 2007, Day Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box contains one coupon, which entitle the customer to a baking pan upon remittance of P4.00. Day pays P5.00 per pan and P0.50 for handling and shipping. Day estimates that 80% of the coupons will be redeemed, even though only 300,000 coupons had been processed during 2007. What amount should Day report as a liability for unredeemed coupons at December 31, 2007? (a) P100,000 (b) P150,000 (c) P300,000 (d) P500,000 B Cost of baking pan Handling and shipping Total Less: Remittance from customer Net premium expense
P5.00
Coupons to be redeemed (500,000 x 80%) Less: Coupons redeemed Balance
P400,000 300,000 P100,000
0.50 P5.50 4.00 P1.50
Liability for unredeemed coupons (100,000 x 1.50) P150,000 6. In packages of its products, Care Company includes coupons that may be presented at retail stores to obtain discounts on other Care products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Care honors requests for coupon redemption by retailers up to three months after the consumer expiration date. Care estimates that 70% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Care during 2007 is as follows: Consumer expiration date December 31, 2007 Total face amount of coupons issued P600,000 Total payments to retailers as of Dec. 31, 2007 P220,000 What amount should Curran report as a liability for unredeemed coupons at December 31, 2007? (a) P 0 (b) P200,000 (c) P242,000 (d) P308,000C Total coupons issued and to be redeemed (600,000 x 70% x 110%) P462,000 Total payments to retailers (220,000) Liability for unredeemed coupons – 12/31/2000 P242,000 7. In packages of its products, Cork Company includes coupons that may be presented to grocers for discounts on certain products of Cork on or before a stated expiration date. The grocers are reimbursed when they send coupons to Cork. In Cork’s experience, 40% of the coupons are redeemed, and one month generally lapses between the date a grocer receives a coupon from a customer and the date Cork receives it. During 2007, Cork issued two series of coupons as follows: Consumer Amount disbursed Issued on Total value expiration date as of 12/31/2000 1/1/2007 P100,000 6/30/2007 P34,000 7/1/2007 120,000 12/31/2007 P40,000 Cork’s December 31, 2007 balance sheet should include a liability for unredeemed coupons of: (a) P 0 (b) P8,000 (c) P14,000 (d) P48,000 B 8. Real Company sells gift certificates, redeemable for store merchandise that expire two years after their issuance. Real has the following information pertaining to its gift certificates sales and redemptions:
Unredeemed at 12/31/2006 P75,000 2007 sales 250,000 2007 redemptions of prior year sales 25,000 2007 redemptions of current year sales 175,000 Real’s experience indicates that 10% of gift certificates sold will not be redeemed. In its December 31, 2007 balance sheet, what amount should Real report as unearned revenue? (a) P125,000 (b) P112,500 (c) P100,000 (d) P50,000 C 2007 sales (250000 x 90%) P225,000 Less: 2007 redemptions of current year sales 175,000 Unearned revenue – 12/31/2007 P 50,000 Unredeemed – 12/31/2006 P 75,000 Less: 2007 redemptions of prior year sales 25,000 Expired gift certificates P 50,000 9. On August 1, 2004, Metro Inc. leased a luxury apartment unit to Centro. The parties signed a 1-year lease beginning September 1, 2004 for a P100,000 monthly rent payable on the first day of the month. At the August 1 signing date, Metro collected P54,000 as a nonrefundable fee for allowing Centro to sign a 1-year lease (the normal lease term is 3 years) and P100,000 rent for September. Centro has made timely payments each month, but prepaid January’s rent on December 20. In Metro’s 2004 income statement, rent revenue should be reported at: (a) P400,000 (b) P418,000 (c) P454,000 (d) P518,000B Rent from Sept. 1 to Dec. 31, 2004 (100,000 x 4) P400,000 Amortization of nonrefundable fee (54,000 x 4/12) 18,000 Total rent revenue P418,000 10.On January 1, 2004, Wine Company leased a building to Brine under an operating lease for ten years at P500,000 per year, payable the first day of each lease year. Wine paid P150,000 to a real estate broker as a finder’s fee. The building is depreciated P120,000 per year. For 2004, Wine incurred insurance and property tax expense totaling P90,000. Wine’s net rental income for 2004 should be: (a) P275,000 (b) P290,000 (c) P350,000 (d) P365,000A Rent income Amortization of finder’s fee (150,000/ 10) Depreciation Insurance and property tax Net rental income
P500,000 P15,000 120,000 90,000 (225,000) P275,000
11.Rip Company leased a new machine to Lip Company on January 1, 2004. The lease expires on January 1, 2009. The annual rental is P900,000. Additionally, on January 1, 2004, Lip paid P500,000 to Rip as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease. In Rip’s income statement, the amount of rental revenue should be: (a) P1,400,000 (b) P1,250,000 (c) P1,000,000 (d) P900,000C Annual rental Amortization of lease bonus (500,000/ 5) Total rent revenue
P 900,000 100,000 P1,000,000
12.Cone Company purchased a new machine for P4,800,000 on January 1, 2004 and leased it to East the same day. The machine has an estimated 12-year life, and will be depreciated P400,000 per year. The lease if for a three-year period expiring January 1, 2007, at an annual rental of P850,000. Additionally, East paid P300,000 to Cone as a lease bonus to obtain the three-year lease. For 2004, Cone incurred insurance expense of P80,000 for the leased machine. What is Cone’s 2004 operating profit on this leased asset? (a) P670,000 (b) P550,000 (c) P470,000 (d) P370,000C Annual rental P850,000 Amortization of lease bonus (300,000/ 3) 100,000 Total P950,000 Depreciation P400,000 Insurance 80,000 (480,000)
Operating profit
P470,000
13.Kay Company, a lessor of office machines, purchased a new machine for P6,000,000 on January 1, 2004, which was leased the same day to Lee. The machine will be depreciated P550,000 per year. The lease is for a four-year period expiring January 1, 2008, and provides for annual rental payments of P1,000,000 beginning January 1, 2004. Additionally, Lee paid P640,000 to Kay as a lease bonus. In its 2004 income statement, what amount of revenue and expense should Kay report on this leased asset? Revenue Expense Revenue Expense (a) P1,000,000 P 0 (c) P1,160,000 P550,000 (b) P1,160,000 P 0 (d) P1,640,000 P550,000 C Annual rental Amortization of lease bonus (640,000/ 4) Total Depreciation Net rent revenue
P1,000,000 160,000 P1,160,000 ( 550,000) P 610,000
14.Might Company purchased a tractor on January 1, 2004 at a cost of P1,600,000 for the purpose of leasing it. The tractor is estimated to have a useful life of 5 years with scrap of P100,000. Depreciation is on a straight line basis. On April 1, 2004, Might entered into a lease contract for the lease of the tractor for a term of two years up to March 31, 2006. The lease fee is P50,000 monthly and the lessee paid P600,000, the lease for one year. Might paid P120,000 commission associated with negotiating the lease, P15,000 minor repairs, and P10,000 transportation of the tractor to the lessee during 2004. Might Company should report net rent revenue for the year 2004 at: (a) P160,000 (b) P235,000 (c) P80,000 (d) P85,000 C Rental from April 1 to December 31, 2004 (50,000 x 9) Depreciation (1,600,000 – 100,000/5) Commission (120,000/ 2 x 9/12) Repairs Transportation Net rent revenue
P450,000 (300,000) ( 45,000) ( 15,000) ( 10,000) P 80,000
15.On January 1, 2004, Glide Company leased a building to Dive Company for a tenyear term at an annual rental of P500,000. At inception of the lease, Glide received P2,000,000 covering the first two years’ rent of P1,000,000 and a security deposit of P1,000,000. This deposit will not be returned to Dive upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the P2,000,000 should be shown as a current and noncurrent liability, respectively, in Glide’s December 31, 2004 balance sheet? Current Noncurrent Current Noncurrent (a) P 0 P2,000,000 (c) P1,000,000 P1,000,000 (b) P500,000 P1,000,000 (d) P1,000,000 P 500,000 B 16.Elf Company prepared the following reconciliations of its pretax financial statement income to taxable income for the year ended December 31, 2008, its first year of operations: Pretax financial income P1,600,000 Nontaxable interest received ( 50,000) Long-term loss accrual in excess of deductible amount 100,000 Depreciation in excess of financial statement income ( 250,000) Taxable income P1,400,000 Assume the income tax is 35%, what amount should Elf report as income tax expense – current portion of its 2008 income statement?________________ P490,000 (35%) 17.On January 2, 2007, Might Company purchased machine for P1,400,000. This machine has a 5-year useful life, a residual value of P200,000, and is depreciated using the straight line method for financial statement purposes. For tax purposes, depreciation expense was P500,000 for 2007 and P400,000 for 2008. Might’s 2008
income before tax and depreciation expense was P2,000,000 and its tax rate was 35%. If Might has made no estimated tax payments during 2008, what amount of current income tax liability would Might report in its December 31, 2008 balance sheet?___________ 560,000 (35%) Net income before depreciation P2,000,000 Depreciation (1,400,000 – 200,000 / 5) ( 240,000) Net income before income tax P1,760,000 Income tax (1,600,000 x 35%) ( 560,000) Net income P1,200,000 Pretax financial income P1,760,000 Excess tax depreciation (400,000–240,000) ( 160,000) Taxable income P1,600,000 18.For calendar year 2008, B Corp. reported depreciation of P660,000 in its income statement. On its 2008 income tax return, B reported depreciation of P1,100,000. B’s income statement also included P110,000 accrued warranty expense and will be deducted for tax purposes when paid. B’s enacted tax rate is 35% for 2008 and thereafter. Taxable income is expected in all future years. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Warranty Expense Expense 2009 P176,000 P 22,000 2010 154,000 33,000 2011 110,000 55,000 P440,000 P110,000 These were B’s only temporary differences. In B’s 2008 income statement, the deferred portion of its provision for income taxes should be:__________ 115,500 (35%) Deferred tax asset (110,000 x 35%) P 38,500 Deferred tax liability (440,000 x 35%) P154,000 Net deferred tax expense (154,000-38,500)P115,500 19.R Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2008: Book income before income taxes P900,000 Add: Construction contract revenue which will reverse in 2011 120,000 Less: Depreciation expense which will reverse in equal amounts in each of the next 4 yrs (480,000) P540,000 R’s effective income tax rate is 35% for 2008. What amount should R report in its 2008 income statement as a current provision for income taxes?__________ 189,000 (35%)
20.Unity Corp. prepared the following reconciliation between pretax accounting income and taxable income for the year ended December 31, 2008: Pretax accounting income P1,500,000 Taxable income ( 900,000) Difference P 600,000 Analysis of difference: Interest on money market funds P 150,000 Excess of tax depreciation over book depreciation 450,000 P 600,000 Unity’s effective income tax rate for 2008 is 35%. The depreciation difference will reverse in equal amounts over the next three years at an enacted tax rate of 35%. In Unity’s 2008 income statement, what amount should be reported as the current portion of its provision for income taxes?____________ 315,000 (35%) 21.Time Company’s information for the year-end of 2008 follows: Deferred tax Related asset
Accelerated tax depreciation Additional cost of inventory for tax purposes
(P75,000)
Noncurrent
25,000 Current (P50,000) Time anticipates that P10,000 of the deferred tax liability will reverse in 2009. In its December 31, 2008 balance sheet, what amount should Time report as noncurrent deferred tax liability?__________________ 75,000 22.Shame began operations in 2008. Included in Shame’s 2008 financial statements were bad debt expense of P150,000 and profit from an installment sale of P250,000. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in 2008. The enacted tax rate is 35% for 2009 and future years. In its 2008 income statement, what amount should Shame report as deferred tax expense?____________ 35,000 (250,000 – 150,000 = 100,000 x 35%) 23. On January 1, 2004, Easy Company acquired 10% of Simple Corporation’s common stock for P6,000,000. Easy appropriately accounts for this investment by the cost method. Simple Corporation reported the following for the years ended December 31, 2004 and 2005: Net income Cash dividend 2004 400,000 0 2005 1,200,000 1,800,000 In its income statement for the year ended December 31, 2005, Easy Company should report dividend income at: (a) P180,000 (b) P160,000 (c) P120,000 (d) P 0 B Cash (10% x 1,800,000) P180,000 Dividend income (10% x 1,600,000) Investment in stock (10% x 200,000)
P160,000 20,000
24. On January 1, 2004, Dell Company paid P18,000,000 for 50,000 shares of Case Company’s common stock which represents a 25% investment in the net assets of Case. Dell has the ability to exercise significant influence over Case. Dell received a dividend of P35 per share from Case in 2004. Case reported net income of P9,600,000 for the year ended December 31, 2004. In its December 31, 2004 balance sheet, Dell should report the investment in Case Company at: (a) P22,150,000 (b) P20,400,000 (c) P18,650,000 (d) P18,000,000 C Cost, Jan. 1, 2004 Share in net income (25% x 9,600,000) Cash dividend received (50,000 x 35) Investment balance, Dec. 31, 2004
P18,000,000 2,400,000 ( 1,750,000) P18,650,000
25.Brink Company began operations on January 1, 2004. The following information pertains to the bank’s December 31, 2004 portfolio of equity securities: Trading Available for sale Aggregate cost 4,000,000 6,000,000 Aggregate market 3,700,000 5,500,000 Aggregate lower of cost or market applied to each security 3,500,000 5,300,000 The market declines are judged to be “other than temporary”. What amount should Brink as loss on these securities in its 2004 income statement? Trading Available for sale Trading Available for sale (a) 300,000 500,000 (c) 300,000 0 (b) 500,000 700,000 (d) 0 500,000 A Trading Available for sale Aggregate market value 3,700,000 5,500,000 Cost 4,000,000 6,000,000 Unrealized loss (300,000) (500,000) The loss on the trading securities is shown in the income statement whether the market decline is temporary or other than temporary.
26.On December 31, 2008, Black Berry Company showed the following intangible assets: Trademark P6,000,000 Goodwill 10,000,000
The trademark has 5 years remaining in its legal life. However, it is anticipated that the trademark will be routinely renewed in the future. Thus, the trademark is considered to have an indefinite life. Because of an inflationary economy, the trademark is expected to generate cash flows of just P200,000 per year. The appropriate discount rate is 10%. Mathemathically, the discounted value of a stream of indefinite annual cash flows is simply computed by dividing the annual cash flow by the discount rate. The goodwill is associated with one of the company’s cash generating unit. The carrying amounts of this cash generating unit on December 31, 2005 are: Identifiable assets P100,000,000 Goodwill 10,000,000 Liabilities 30,000,000 It is expected that this cash generating unit will generate an annual cash flow of P9,000,000 for 20 years. The appropriate discount rate is 10% and the present value of an ordinary annuity of 1 at 10% for 20 years is 8.51. How much is the amount of impairment loss? (a) P 0 (b) P3,410,000 (c) P4,000,000 (d) P7,410,000 D Present value of indefinite cash flows (200,000 / 10%) 2,000,000 Trademark 6,000,000 Impairment loss ( 4,000,000) Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) Impairment loss Trademark Goodwill
7,410,000 4,000,000 3,410,000
27.On December 31, 2007, Blitz Company had capitalized costs for a new computer software product with an economic life of 4 years. Sales for 2008 were 10% of expected total sales of the software. The pattern of future sales can be measured reliably. At December 31, 2008, the software had a net realizable value equal to 80% of the capitalized cost. The unamortized cost reported on the December 31, 2008 balance sheet should be: (a) net realizable value (c) 75% of capitalized cost (b) 90% of net realizable value (d) 90% of capitalized cost A Cannot be determined: Cost 100% Amortization: SLR (1/4) (25%) Carrying value 75% √ (lower) NRV 80% Can be determined: Cost 100% Amortization: CS ratio (10%) Carrying value 90% (lower) NRV 80% √ 28.Presented below is information related to copyrights owned by Wills Company at December 31, 2007:
Cost P8,600,000 Carrying amount 4,300,000 Present value of expected future net cash flows 3,000,000 Fair value 3,200,000 Assume that Wills Company will continue to use the copyright in the future. As of December 31, 2007, the copyright is estimated to have a remaining useful life of 10 years. The fair value of the copyright at December 31, 2008 is P3,400,000. How much is the amortization of the copyright for 2008? (a) P288,000 (b) P320,000 (c) P420,000 (d) P520,000B Dec. 31, 2004 Dec. 31, 2005 -
Impairment loss 1,100,000 Copyright 1,100,000 (4,300,000 – 3,200,000) Amortization of patent 320,000 Copyright (3,200,000/10) 320,000 Copyright 520,000 Gain on recovery of previously recognized impairment 520,000 (3,400,000 – 2,880,000)
29.X Company incurred the following expenditures on December 31, 2008: Software purchased for sale P110,000 Software held for licensing or rental to others 150,000 For own use and integral to the hardware 130,000 Inventory and payroll software costs (not integral) 120,000 Compute the total amount capitalizable as intangible assets: (a) P110,000 (b) P130,000 (c) P270,000 (d) P510,000C Software purchased for sale (inventory) For own use and integral to the hardware (PPE)
P110,000 P130,000
Software held for licensing or rental to others P150,000 Inventory and payroll software costs (not integral) 120,000 P270,000
30.Orange is new computer software company. In 2007, the firm incurred the following costs in the process of designing, developing and producing its first new software package, which it expects to begin marketing in 2008. Designing and planning costs P150,000 Additional software development costs 400,000 Cost of developing code 240,000 Testing 60,000 Production of product masters 500,000 The costs of designing and planning, code development, and testing were all incurred before the technological feasibility of the product had been established. Orange estimates that total revenues over the four year life of the product will be P2,000,000, with P800,000 in revenues expected in 2008. The pattern of future sales cannot be measured reliably. Assume that the net realizable value of the computer software costs is estimated at December 31, 2008 to be P500,000, how much is the impairment loss to be reported? (a) P 0 (b) P160,000 (c) P200,000 (d) P260,000A Computer software costs Amortization: The greater between: a. straight line method – 1/4 (400,000 x 25%)
P400,000 = 25% (100,000)
Unamortized cost Net recoverable value Thus, there is no impairment in value.
P300,000 P500,000
31.Pork Company incurred the following costs during 2008: Modification to the formulation of a chemical product P135,000 Trouble-shooting in connection with break-downs and quality control during commercial production 150,000 Design of tools, jigs, molds and dies involving new technology 170,000 Seasonal or routine or other periodic design changes to existing products 185,000 Laboratory research aimed at discover of new technology 215,000 In its income statement for the year ended December 31, 2008, Pork should report research and development expense of: (a) P520,000 (b) P470,000 (c) P385,000 (d) P335,000A Modification to the formulation of a chemical product P135,000 Design of tools, jigs, molds and dies involving new technology 170,000 Laboratory research aimed at discover of new technology 215,000 Total
P520,000
32.Grind Company incurred the following expenditures: Salaries of engineers, consultants and technicians 400,000 Cost of developing the duct and producing test model 500,000 Additional cost for revising the ducting process to ensure that product could be introduced in the market 600,000 Cost of developing the first model or prototype and testing it with air conditioners to ensure comparability 100,000 Cost of conference for the introduction of this new project 150,000 On December 31, 2008, the development phase was completed and a cash flow budget was prepared. How much of the costs incurred should be treated as research and development expense? (a) P1,600,000 (b) P1,750,000 (c) P1,500,000 (d) P1,200,000 A Salaries of engineers, consultants and technicians 400,000 Cost of developing the duct and producing test model 500,000 Additional cost for revising the ducting process to ensure that product could be introduced in the market 600,000 Cost of developing the first model or prototype and testing it with air conditioners to ensure comparability 100,000 Total 1,600,000 33.Hype Company, a developmental stage enterprise, incurred the following costs during its first year of operations: Legal fees for incorporation and other related matters P1,000,000 Underwriters’ fees for initial stock offering 500,000 Exploration costs and purchase of mineral rights 6,000,000 Hype had no revenue during its first year of operations. What amount may Hype capitalize as organization costs? (a) P6,500,000 (b) P7,000,000 (c) P1,000,000 (d) P 0 D 34.The following are some of the costs incurred in conjunction with the start-up activities of the new facility: Production equipment P8,150,000 Travel costs of salaried employees 400,000 License fees 140,000 Training of local employees for production and maintenance operations 1,200,000 Advertising costs 850,000 What portion of the organization costs will be expensed? (a) P9,750,000 (b) P1,600,000 (c) P1,390,000 (d) P 0 B
Travel costs of salaried employees Training of local employees for production and maintenance operations Total
400,000 1,200,000 1,600,000
35.The following is Mart Company’s comparative balance sheet accounts: 2005 2004 Cash 4,800,000 3,000,000 Accounts receivable 2,300,000 2,400,000 Inventories 4,000,000 3,600,000 Property, plant and equipment 12,800,000 6,000,000 Accumulated depreciation (2,300,000) (2,000,000) Investment in Max Company 5,500,000 6,000,000 Loan receivable 2,700,000 Accounts payable 2,000,000 1,800,000 Income tax payable 100,000 500,000 Dividend payable 2,000,000 3,000,000 Capital lease liability 8,000,000 Common stock 10,000,000 10,000,000 Additional paid in capital 1,000,000 1,000,000 Retained earnings 6,700,000 2,700,000 a. On December 31, 2005, Mart acquired 20% of Max Company’s common stock for P6,000,000. Max report net loss of P2,500,000 for the year ended December 31, 2005. No dividend was paid on Max’s common stock during the year. b. During 2005, Mart loaned P3,000,000 to Chase Company, an unrelated company. Chase made the first semi-annual principal repayment of P300,000 plus interest of 10% on October 1, 2005. c. On January 2, 2005, Mart sold equipment costing P1,200,000 with a carrying amount of P700,000, for P800,000 cash. d. On December 31, 2005, Mart entered into a capital lease for an office building. The present value of the annual rental payments is P8,000,000 which equals the fair value of the building. Mart made the first rental payment of P1,200,000 when due on January 2, 2006. e. Mart declared cash dividends in one year and paid the dividends in the subsequent year. Net cash provided by operating activities was: (a) P6,700,000 (b) P7,700,000 (c) P5,700,000 (d) P6,200,000 A Net income (6,700,000 + 2,000,000 – 2,700,000) P6,000,000 Investment loss (2,500,000 x 20%) 500,000 Gain on sale (800,000 – 700,000) (100,000) Depreciation (2,300,000 + 500,000 – 2,000,000) 800,000 Decrease in accounts receivable 100,000 Increase in inventories (400,000) Increase in accounts payable 200,000 Decrease in income tax payable (400,000) Net cash provided by operating activities P6,700,000 36.Kirk Company’s balance sheet accounts as of December 31, 2005 and 2004 and information relating to 2005 activities are presented below: 2005 2004 Cash 1,000,000 400,000 Short-term investments 1,200,000 Accounts receivable, net 2,000,000 2,000,000 Inventory 2,700,000 2,400,000 Long-term investments 800,000 1,200,000 Property, plant and equipment 6,800,000 4,000,000 Accumulated depreciation (1,800,000) (1,800,000) Goodwill 300,000 400,000 13,000,000 8,600,000 Accounts payable & accruals 2,400,000 2,800,000 Short-term debt 1,800,000 -
Common stock, P25 par Additional paid in capital Retained earnings
3,500,000 3,000,000 1,500,000 1,000,000 3,800,000 1,800,000 13,000,000 8,600,000 Other activities during 2005 follow: The net income was P2,900,000. There was a declaration of a cash dividend of P900,000, which was paid in 2005. A machine with a cost of P1,600,000 and a carrying amount of P600,000 was sold for P600,000. Kirk sold a long-term investment for P500,000. There were other transactions affecting long-term investments. Kirk also issued 20,000 shares of common stock for P50 per share. The short-term investments consist of treasury bills maturing on June 30, 2005. The net cash provided by Kirk’s operating activities was: (a) P2,900,000 (b) P3,200,000 (c) P3,300,000 (d) P2,200,000 B Net income 2,900,000 Depreciation (1,800,000 + 1,000,000 – 1,800,000) 1,000,000 Gain on sale (500,000 – 400,000) ( 100,000) Amortization of goodwill 100,000 Increase in inventories ( 300,000) Decrease in accounts payable & accruals ( 400,000) Net cash provided by operating activities 3,200,000 37.The 2005 net income of Cheer Company was P3,000,000. The following are the changes in balance sheet accounts during 2005: Deferred income tax liability (long-term) 36,000 increase Accumulated depreciation, due to a major repair to equipment 42,000 decrease Long-term investment (at equity) 110,000 increase Unearned interest income 28,000 decrease The reported net cash provided by operating activities in the 2005 cash flow statement should be: (a) P3,008,000 (b) P2,856,000 (c) P2,996,000 (d) P2,898,000 D Net income 3,000,000 Income tax expense 36,000 Investment income (110,000) Interest income ( 28,000) Net cash provided by operating activities 2,898,000 38.Roy’s trial balance reflected the following account balances at December 31, 2005: Accounts receivable (net) P1,600,000 Short-term investments 500,000 Accumulated depreciation on equipment and furniture 1,500,000 Cash 1,100,000 Inventory of merchandise 3,000,000 Equipment and furniture 2,500,000 Patent 400,000 Prepaid expenses 100,000 Land held for future business site 1,800,000 In Roy’s December 31, 2005 balance sheet, the current assets total is: (a) P8,100,000 (b) P7,300,000 (c) P6,700,000 (d) P6,300,000 D Accounts receivable (net) Short-term investments Cash Inventory of merchandise Prepaid expenses Total current assets
P1,600,000 500,000 1,100,000 3,000,000 100,000 P6,300,000
39.The following information pertains to Alt Company on December 31, 2005: Property, plant and equipment (net) P35,000,000 Accounts receivable 20,000,000 Prepaid insurance 2,500,000 Short-term note payable 3,000,000 Cash 5,000,000 Bonds payable 40,000,000 Total assets 101,500,000 Land 20,000,000 Accounts payable 8,000,000 Allowance for doubtful accounts 1,000,000 Merchandise inventory 13,000,000 Short-term investments 7,000,000 Wages payable 2,000,000 Total liabilities 56,000,000 Premium on bonds payable 3,000,000 The December 31 working capital is: (a) P46,500,000 (b) P33,500,000 (c) P45,500,000 (d) P35,500,000 B Current assets: Cash Short-term investments Accounts receivable Allowance for doubtful accounts Merchandise inventory Prepaid insurance
P 5,000,000 7,000,000 20,000,000 ( 1,000,000) 13,000,000 2,500,000 P46,500,000
Current liabilities: Short-term note payable Accounts payable Wages payable
P 3,000,000 8,000,000 2,000,000
Working capital
13,000,000 P33,500,000
40.Rice Company was incorporated on January 1, 2005 with P5,000,000 from the issuance of stock and borrowed funds of P1,500,000. During the first year of operations, net income was P2,500,000. On December 15, Rice paid a P500,000 cash dividend. No additional activities affected owners’ equity in 2005. At December 31, 2005, Rice’s liabilities had increased to P1,800,000. In Rice’s December 31, 2005 balance sheet, total assets should be reported at: (a) P6,500,000 (b) P9,300,000 (c) P8,800,000 (d) P6,800,000 C Liabilities P1,800,000 Capital stock 5,000,000 Retained earnings (2,500,000 – 500,000) 2,000,000 Total liabilities and stockholders’ equity P8,800,000 41.Mike, Inc. was incorporated on January 1, 2005, with proceeds from the issuance of P7,500,000 in stock and borrowed funds of P1,100,000. During the first year of operations, revenues from sales and consulting amounted to P8,200,000, and operating costs and expenses totaled P6,400,000. On December 15, Mike declared a P300,000 dividend, payable to stockholders on January 15, 2003. No additional activities affected owners’ equity in 2005. Mike’s liabilities increased to P2,000,000 by December 31, 2005. On Mike’s December 31, 2005 balance sheet, total assets should be reported at: (a) P11,000,000 (b) P11,300,000 (c) P10,100,000 (d) P12,100,000 A Consulting fees Operating costs and expenses Net income Dividend declared Retained earnings
P 8,200,000 ( 6,400,000) P 1,800,000 ( 300,000) P 1,500,000
Liabilities Capital stock Retained earnings
P 2,000,000 7,500,000 1,500,000
Total liabilities and stockholders’ equity
P11,000,000
42.The following is Gold’s June 30, 2005 trial balance: Cash overdraft P 100,000 Accounts receivable, net P 350,000 Inventory 580,000 Prepaid expenses 120,000 Land held for resale 1,000,000 Property, plant and equipment (net) 950,000 Accounts payable and accrued expenses 320,000 Common stock 250,000 Additional paid in capital 1,500,000 Retained earnings _________ 830,000 P3,000,000 P3,000,000 Checks amounting to P300,000 were written to vendors and recorded on June 29, 2005, resulting in a cash overdraft of P100,000. The checks were mailed on July 9, 2005. Land held for resale was sold for cash on July 15, 2005. Gold issued its financial statements on July 31, 2005. In its June 30, 2005 balance sheet, what amount should Gold report as current assets? (a) P2,250,000 (b) P2,050,000 (c) P1,950,000 (d) P1,250,000 A Cash Accounts receivable, net Inventory Prepaid expenses Land held for resale Total current assets
P 200,000 350,000 580,000 120,000 1,000,000 P2,250,000
43.Lia Company’s December 31, 2005 balance sheet reported the following current assets: Cash P1,400,000 Accounts receivable 2,400,000 Inventory 1,200,000 P5,000,000 An analysis of the accounts disclosed that accounts receivable comprised the following: Trade accounts P1,920,000 Allowance for uncollectible accounts ( 40,000) Selling price of Lia’s unsold goods sent to Jax on consignment at 130% of cost and not included in Lia’s ending inventory 520,000 P2,400,000 At December 31, 2005, the correct total of Lia’s current assets is: (a) P4,480,000 (b) P4,600,000 (c) P4,880,000 (d) P5,400,000 C Cash P1,400,000 Accounts receivable (2,400,000 – 520,000) 1,880,000 Inventory (1,200,000 + 400,000) 1,600,000 Total current assets P4,880,000 44.The trial balance of Mill Company included the following account balances at December 31, 2005: Accounts payable P1,500,000 Bonds payable, due 2006 2,500,000 Discount on bonds payable due 2006 300,000 Dividends payable 800,000 Notes payable, due 2007 2,000,000 What amount should be included in the current liability section of Mill’s December 31, 2005 balance sheet? (a) P4,500,000 (b) P5,100,000 (c) P6,500,000 (d) P7,800,000 A Accounts payable Bonds payable, due 2006
P1,500,000 2,500,000
Discount on bonds payable due 2006 ( 300,000) Dividends payable 800,000 Total current liabilities P4,500,000 45.The trial balance of Gar Company reflected the following liability account balances at December 31, 2005: Accounts payable P1,900,000 Bonds payable, due 2006 3,400,000 Deferred income tax payable 400,000 Dividends payable on 2/15/2006 500,000 Income tax payable 900,000 Notes payable, due January 19, 2007 600,000 Discount on bonds payable 200,000 The deferred income tax payable is based on temporary differences that will reverse in 2007 and 2008. In Gar’s December 31, 2005 balance sheet, the current liabilities total was: (a) P7,100,000 (b) P6,900,000 (c) P6,700,000 (d) P6,500,000 D Accounts payable P1,900,000 Bonds payable, due 2006 3,400,000 Discount on bonds payable due 2006 ( 200,000) Dividends payable 500,000 Income tax payable 900,000 Total current liabilities P6,500,000 46.During 2000, Burr Company had the following transactions pertaining to its new office building: Purchase price of land P60,000 Legal fees for contract to purchase land 2,000 Architect’s fees 8,000 Demolition of old building on site 5,000 Sale of scrap from old building 3,000 Construction cost of new building (fully completed) 350,000 In Burr’s December 31, 2000 balance sheet, what amounts should be reported as the costs of land and building? Land Building Land Building (a) P60,000 P360,000 (c) P64,000 P358,000 (b) 62,000 360,000 (d) 65,000 362,000 C Land Building Purchase price of land P60,000 Legal fees for contract to purchase land 2,000 Architect’s fees P 8,000 Demolition of old building on site 5,000 Sale of scrap from old building ( 3,000) Construction cost of new building 350,000 Total cost P64,000 P358,000 47.On January 1, 2000, certain accounts included in the property, plant and equipment account of Rock Company had the following balances: Land P2,200,000 Building P650,000 During 2000, the following transactions occurred: a. A piece of land was acquired for P1,500,000. To be able to acquire the land, P90,000 was paid to a real estate agent, P15,000 was incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P8,000 b. A second piece of land with a building was acquired for P300,000. The appraiser valued the land at P200,000 and the building at P100,000. Shortly after acquisition, the building was demolished at a cost of P20,000. A new building was constructed at a cost of P5,000,000 plus the following costs: Excavation fees P60,000 Building permit fee P20,000 Architectural fees 80,000 c. A third piece of land was acquired for P450,000 and was put on the market for resale. The balance sheet should show land under property, plant and equipment at a cost of:
(a) P3,907,000 B
(b) P4,117,000
(c) P2,182,000
(d)
P4,420,000
Balance of land account on Jan. 1, 2000 P2,200,000 First piece of land acquired: Cost P1,500,000 Payment to real estate agent 90,000 Cost of clearing the land 15,000 Timber and gravel recovered ( 8,000) 1,597,000 Second piece of land acquired: Cost P 300,000 Cost of demolition 20,000 320,000 Total cost of land P4,117,000 48.Baretta Company acquired land on September 1, 2000 on which a new building will be immediately constructed. The costs related to the acquisition include: Cash payment P2,000,000 Broker’s fees 50,000 Option paid for the land acquired 20,000 Option paid for an alternative land not acquired 10,000 Delinquent property taxes for 1999 assumed and paid 15,000 Property taxes for 2000 which will be paid on or before December 31, 2000 15,000 What is the proper cost of the land? (a) P2,095,000 (b) P2,105,000 (c) P2,100,000 (d) P2,110,000 A Cash payment P2,000,000 Broker’s fees 50,000 Option paid for the land acquired 20,000 Delinquent property taxes for 1999 15,000 Property taxes from Jan. 1 to Sept. 1, 2000 (15,000 x 8/12) 10,000 Total costs P2,095,000 49.Alas Company made the following expenditures in connection with the construction of its main office: Architect’s fees on new building P 100,000 Payment to building contractor 6,000,000 Payment of medical bills of employees injured while inspecting construction 10,000 Cost of paying driveway and parking lot 30,000 Cost of installing lights in parking lot 5,000 Premium on insurance during construction 25,000 Cost of open house party to celebrate opening of new building 40,000 What is the cost of the new building? (a) P6,135,000 (b) P6,125,000 (c) P6,170,000 (d) P6,210,000 B Architect’s fees on new building Payment to building contractor Premium on insurance during construction Total costs
P 100,000 6,000,000 25,000 P6,125,000
50.On January 1, 2000, ABC Company obtained a loan of P2,000,000 at an interest rate of 10% specifically to finance the construction of its new building. Availments from the loan were made quarterly in equal amounts. Total borrowing costs amounted to P125,000. Prior to their disbursements, the proceeds of the loan were temporarily invested and earned income amounting to P20,000. The building was completed on December 31, 2000. The amount of capitalizable borrowing costs is: (a) P125,000 (b) P105,000 (c) P200,000 (d) P195,000B Actual borrowing costs Interest income on temporary investment Capitalizable borrowing costs
P125,000 ( 20,000) P105,000
* end of the examination – practical accounting 1*
