PRACTICE EXAMINATION 3 PROBLEM I On January 1, 2007, Eritrea Co.

signs a 10-year noncancelable lease agreement to lease a storage building from Storage Company. The following information pertains to this lease agreement: a. The agreement requires equal rental payments of P720,000 beginning on January 1, 2007. b. The fair value of the building on January 1, 2007, is P4,400,000. c. The building has an estimated economic life of 12 years, with an unguaranteed residual value of P100,000. Eritrea depreciates similar buildings on the straight-line method. d. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. e. Eritreas incremental borrowing rate is 12% per year. The lessors implicit rate is not known by Eritrea. f. The yearly rental payment includes P24,705.10 of executory costs related to taxes on the property. The following present value factors are for 10 periods at 12% annual interest rate: Present value of an annuity due of 1 Present value of an ordinary annuity of 1 Present value of 1 6.32825 5.65022 0.32197

1. What is the amount of the lease liability that should be recognized at the inception of the lease? a. P4,432,197 b. P4,556,340 c. d. P4,400,000 P3,928,570

2. What is the book value of the leased storage building at December 31, 2008? a. P3,520,000 b. P3,540,000 c. d. P3,142,856 P3,645,072

3. Which of the following should be shown under current liabilities in the balance sheet of Eritrea Company at December 31, 2008? a. b. Lease Liability P280,818 P695,295 Interest Payable P414,477 P414,477

c. d.

P280,818 P695,295

P444,565 P444,565

4. What is the noncurrent portion of the lease liability on December 31, 2008? a. P3,704,705 b. P4,400,000 c. d. P3,453,975 P3,173,157

5. What is the amount of interest expense that should be recognized for the year ended December 31, 2007? a. P444,565 b. P414,477 c. d. P859,042 P0

PROBLEM II Dominica Corporation reported the following amounts of net income for the years ended December 31, 2005, 2006, and 2007. 2005 2006 2007 P127,000 150,000 128,500

You are performing the audit for the year ended December 31, 2007. During your examination, you discover the following errors: a) As a result of errors in the physical count, ending inventories were misstated as follows: December 31, 2006 December 31, 2007 P14,000 23,000 Understated Overstated

b) On December 29, 2007, Dominica recorded as a purchase, merchandise in transit which cost P15,000. The merchandise was shipped FOB Destination and had not arrived by December 31. The merchandise was not included in the ending inventory. c) Dominica records sales on the accrual basis but failed to record sales on account made near the end of each year as follows: 2005 2006 2007 P4,000 5,000 3,500

d) The company failed to record accrued office salaries as follows: December 31, 2005 December 31, 2006 P10,000 14,000

e) On March 1, 2006, a 10% stock dividend was declared and distributed. The par value of the shares amounted to P10,000 and market value was P13,000. The stock dividend was recorded as follows: Miscellaneous expense 13,000 Common stock 10,000 Retained earnings 3,000 f) On July 1, 2006, Dominica acquired a three-year insurance policy. The three-year premium of P6,000 was paid on that date, and the entire premium was recorded as insurance expense. g) On January 1, 2007, Dominica retired bonds with a book value of P120,000 for P106,000. The gain was incorrectly deferred and is being amortized over 10 years as a reduction of interest expense on other outstanding obligations. 6. What is the adjusted net income for the year ended December 31, 2005? a. P133,000 b. P117,000 c. d. P121,000 P113,000

7. What is the adjusted net income for the year ended December 31, 2006? a. P159,000 b. P187,000 c. d. P178,000 P179,000

8. What is the adjusted net income for the year ended December 31, 2007? a. P129,600 b. P131,000 c. d. P104,400 P139,600

9. What adjusting entry should be made on December 31, 2007, to correct the error described in item B? a. Accounts payable Purchases Purchases Accounts payable Accounts payable Cash No adjusting journal entry is necessary. 15,000 15,000 15,000 15,000 15,000 15,000

b.

c.

d.

10. The adjusting entry on December 31, 2006, to correct the error described in item E should include a debit to a. Common stock for P10,000

b. Retained earnings for P16,000 c. Additional paid in capital for P3,000 d. Miscellaneous expenses for P3,000

PROBLEM III Presented below are Comoros Companys comparative balance sheets and income statements: Comoros Company COMPARATIVE BALANCE SHEETS December 31, 2007 and 2006 2007 2006 Assets: Current assets: Cash P119,000 P 98,000 Accounts receivable 312,000 254,000 Inventory 278,000 239,000 Prepaid expenses 35,000 21,000 Total current assets 744,000 612,000 Available-for-sale securities Property, plant, and equipment Accumulated depreciation Total assets Liabilities and Stockholders Equity Current liabilities: Accounts payable Accrued expenses Dividends payable Total current liabilities Notes payable due 2009 Total liabilities Stockholders equity Common stock Retained earnings Total stockholders equity Total liabilities and stockholders equity 59,000 --536,000 409,000 (76,000) (53,000) 519,000 356,000 P1,263,000 P968,000

P 212,000 P198,000 98,000 76,000 40,000 --350,000 274,000 125,000 --475,000 274,000 600,000 550,000 188,000 144,000 788,000 694,000 P1,263,000 P968,000

Comoros Company CONDENSED COMPARATIVE INCOME STATEMENTS For the Years ended December 31, 2007 and 2006 2007 2006 P3,561,000 P3,254,000 2,789,000 2,568,000 772,000 686,000 521,000 486,000 P 251,000 P 200,000

Net sales Cost of goods sold Gross profit Expenses Net income Additional information for Comoros:

(a) All accounts receivable and accounts payable relate to trade merchandise. (b) The proceeds from the notes payable were used to finance plant expansion. (c) Capital stock was sold to provide additional working capital. Compute the following for 2007: 11. Cash collected from accounts receivable, assuming all sales are on account a. P3,619,000 b. P3,503,000 c. d. P3,561,000 P3,249,000

12. Total purchases, assuming all purchases of inventory are on account a. P2,828,000 b. P2,789,000 c. d. P2,550,000 P2,750,000

13. Cash payments made on accounts payable to suppliers a. P2,630,000 b. P2,842,000 14. Dividends declared a. P63,000 b. P 0 15. Cash payments for dividends a. P211,000 b. P 0 c. d. P207,000 P167,000 c. d. P207,000 P107,000 c. d. P2,828,000 P2,814,000

16. Cash receipts not provided by operations a. P175,000 c. P50,000

b. P177,000

d.

P125,000

17. Cash payments for assets that were not reflected in operations a. P125,000 b. P186,000 c. d. P184,000 P127,000

18. Net cash provided by operating activities a. P689,000 b. P191,000 c. d. P222,000 P199,000

19. Net cash provided by financing activities a. P175,000 b. P8,000 20. Cash payments for expenses a. P490,000 b. P513,000 c. d. P506,000 P529,000 c. d. P125,000 P42,000

PROBLEM IV You have been asked by the proprietor of the Somalia Co. to verify the accountability of the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago. A. The bank reconciliation statements prepared by the cashier-bookkeeper are presented below: November 30, 2007 Balance per bank statement Cash on hand Total Outstanding checks: No. 2520 2521 2522 Erroneous bank charge Erroneous bank credit Book balance December 31, 2007 Balance per bank statement Cash on hand P135,000 6,300 P21,500 500 22,000 P2,000 1,400 1,900

(3,300) 2,000 (500) P20,200

Total Outstanding checks: No. 2674 2675 2676 Erroneous bank charge Erroneous bank credit Book balance

141,300 P31,000 10,300 5,000

(41,300) 3,000 (600) P102,400

B. The Cash in Bank account in the general ledger shows the following debits and credits during December: Cash in Bank Dec. P20,200 1 Checks issued 4,500 5 Checks issued 5,000 14 Checks issued

Dec. 1 Balance 2 Received from customers Received from customers

P 2,000 5,200 31,000

7 12 17 23 27 31

Received from customers Received from customers Received from customers Received from customers Received from customers Total

20,000 30,000 9,000 70,000 48,500 P198,200

24 Checks issued 28 Checks issued

46,000 7,600

31 Balance Total

102,400 P198,200

C. The following summarized transactions were taken from the bank statement for the month of December 2007: Balance, December 1, 2007 Total deposits Total deposits per bank statement include: a. Collection of notes receivable P 16,500 P173,700 P5,000

b. Correction of November erroneous bank charge c. December 10 deposits of Lava, Inc. credited in error to Somalia Total Total checks Total check per bank statement include: a. Correction of November erroneous bank credit b. December check of Nile Co. charged in error to Somalia Total

2,000 600 P7,600 P65,200 P 500 3,000 P3,500

D. Cash on hand per count in the morning of January 2, 2008 amounted to P6,300. E. Before leaving his company for a one-week vacation, the proprietor had left several signed bank checks that the cashier-bookkeeper had cashed for his personal use. 21. What is the cash shortage as of November 30, 2007? a. P5,000 b. P7,000 c. d. P33,000 P13,000

22. What is the adjusted cash balance on November 30, 2007? a. P16,500 b. P13,200 c. d. P20,200 P14,500

23. The amount of unaccounted receipts in December is a. P11,000 b. P13,200 c. d. P9,000 P15,100

24. The amount of unrecorded/unsupported disbursements in December is a. P15,100 b. P10,900 c. d. P7,000 P5,000

25. What is the total cash shortage as of December 31, 2007? a. P26,000 b. P15,100 c. d. P33,000 P7,000

26. What is the adjusted cash balance on December 31, 2007? a. P102,400 b. P125,000 c. d. P87,400 P111,400

PROBLEM V Amazon Company purchased 250,000 shares of Kabalega Corp. common stock on July 1, 2006, at P16.50 per share, which reflected book value as of that date. At the time of the purchase, Kabalega had 1,000,000 common shares outstanding. Amazon had no ownership interest in Kabalega prior to this purchase. Kabalega reported net income of P840,000 for the six months ended June 30, 2006. Amazon received a dividend of P105,000 from Kabalega on August 1, 2006. Kabalega reported net income of P1,800,000 for the year ended December 31, 2006, and again paid Amazon Company dividends of P105,000. On January 1, 2007, Amazon sold 100,000 shares of Kabalega Corp. common stock for P17 per share and reclassified the remaining stock as noncurrent. Kabalega reported net income of P1,860,000 for the year ended December 31, 2007, and paid Amazon Company dividends of P60,000. 27. What is the investment balance on December 31, 2006? a. P4,125,000 b. P4,155,000 c. d. P4,140,000 P4,260,000

28. What is the gain or loss on sale of 100,000 shares on January 1, 2007? a. P50,000 b. P38,000 c. d. P44,000 P0

29. The cumulative effect of the change from the equity method to the cost method of accounting for the investment in common stock that should be reported in the statement of changes in equity of Amazon for the year ended December 31, 2007, is a. P30,000 credit b. P240,000 debit c. d. P30,000 debit P0

30. The share in net income of Kabalega to be recognized by Amazon in its income statement for 2007 should be a. P219,000 b. P60,000 c. d. P279,000 P0

31. What is the investment balance of Amazon on December 31, 2007? a. P2,763,000 b. P4,125,000 c. d. P2,493,000 P4,155,000

PROBLEM VI

The stockholders equity section of Ethiopia Corporation on January 1, 2007, showed the following: Common stock, P100 par, 50,000 shares authorized, 25,000 shares issued Additional paid in capital Retained earnings During 2007, Ethiopia had the following transactions: On February 12, Ethiopia reacquired 3,000 shares for P90 per share. On June 5, Ethiopia sold 1,500 shares of its treasury stock for P120 per share. On September 5, each stockholder was issued for each share held one stock right to purchase two additional shares of common stock for P140 per share. The rights expire on December 31, 2007. On October 20, 5,000 stock rights were exercised when the market value of the common stock was P150 per share. On December 15, 2007, Ethiopia declared its first cash dividend to stockholders of P20 per share, payable on January 10, 2008, to stockholders of record on December 31, 2007. On December 21, 2007, Ethiopia formally retired 1,000 treasury shares. Net income for 2007 was P270,000. Appropriated retained earnings equal to the cost of treasury stock. 32. The common stock account balance at December 31, 2007, should be a. P3,355,000 b. P3,400,000 c. d. P3,500,000 P3,410,000

P2,500,000 200,000 750,000

33. The total APIC at December 31, 2007, should be a. P200,000 b. P610,000 c. d. P655,000 P645,000

34. The unappropriated retained earnings balance at December 31, 2007, should be a. P80,000 b. P35,000 c. d. P350,000 P305,000

35. The amount of cash dividend declared on December 15, 2007, is a. P640,000 b. P470,000 c. d. P700,000 P670,000

36. The total stockholders equity at December 31, 2007, should be a. P4,360,000 b. P4,315,000 c. d. P4,090,000 P4,405,000

PROBLEM VII In 2003, Congo Corporation acquired a silver mine in Eastern Alaska. Because the mine is located deep in the Alaskan frontier, Congo was able to acquire the mine for the low price of P500,000. In 2004, Congo constructed a road to the silver mine costing P50,000,000. Improvements to the mine made in 2004 cost P7,500,000. Because of the improvements to the mine and to the surrounding land, it is estimated that the mine can be sold for P6,000,000 when mining activities are complete. During 2005, five buildings were constructed near the mine site to house the mine worker and their families. The total cost of the five buildings was P15,000,000. Estimated residual value is P2,500,000. In 2003, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2006, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2007, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 million tons of silver ore in addition to the original 4 million tons. Improvements of P2,750,000 were made to the mine early in 2007 to facilitate the removal of the additional silver. Early in 2007, and additional building was constructed at a cost of P2,250,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value. In 2008, 2.5 million tons of silver were mined and costs of P11,000,000 were incurred at the beginning of the year for improvements to the mine. 37. What is the depreciation for 2006? a. P17,850 b. P8,950 38. What is the depletion for 2006? a. P37,150 b. P41,450 39. What is the depreciation for 2007? a. P2,100,000 b. P2,110,000 40. What is the depletion for 2007? a. P7,810,000 b. P7,830,000 41. What is the depreciation for 2008? c. d. P8,680,000 P7,820,000 c. d. P335,600 P2,460,000 c. d. P72,500 P65,000 c. d. P15,600 P18,750

a. P5,275,000 b. P6,150,000 42. What is the depletion for 2008? a. P19,550,000 b. P24,125,000

c. d.

P5,350,000 P5,250,000

c. d.

P32,150,000 P19,550,000

PROBLEM VIII Mozambique Corporation, a manufacturer of steel products, began operations on October 1, 2005. The accounting department of Mozambique has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the companys records and personnel: a. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition. b. Land A and Building A were acquired from a predecessor corporation. Mozambique paid P820,000 for the land and building together. At the time of acquisition, the land had an appraised value of P90,000, and the building had an appraised value of P810,000. c. Land B was acquired on October 2, 2005, in exchange for 2,500 newly issued shares of Mozambiques common stock. At the date of acquisition, the stock had a par value of P5 per share and a fair value of P30 per share. During October 2005, Mozambique paid P16,000 to demolish an existing building on this land so it could construct a new building. d. Construction of Building B on the newly acquired land began on October 1, 2006. By September 30, 2007, Mozambique had paid P320,000 of the estimated total construction costs of P450,000. It is estimated that the building will be completed and occupied by July 2008. e. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at P30,000 and the salvage value at P3,000. f. Machinery As total cost of P164,900 includes installation expense of P600 and normal repairs and maintenance of P14,900. Salvage value is estimated at P6,000. Machinery A was sold on February 1, 2007.

g. On October 1, 2006, Machinery B was acquired with a down payment of P5,740 and the remaining payments to be made in 11 annual installments of P6,000 each beginning October 1, 2006. The prevailing interest rate was 8%.

The following data were abstracted from present value tables (rounded): Present value of an ordinary annuity of P1.00 at 8% 10 years 6.710 11 years 7.149 15 years 8.559

Present value of P1.00 at 8% 10 years 0.463 11 years 0.429 15 years 0.315

Mozambique Corporation FIXED ASSET AND DEPRECIATION SCHEDULE For Fiscal Years Ended September 30, 2006, and September 30, 2007
Dep. Expense Year Ended Acquisition Date 10/01/05 10/01/05 10/02/05 Under Construction to date 10/02/05 10/02/05 10/01/06 Depreciation Method N/A Straight-line N/A Straight-line Estimated Life in Years N/A ? N/A 30

Assets Land A Building A Land B Building B

Cost ? ? ? 320,000

Salvages N/A P40,000 N/A --

2006 N/A P17,450 N/A --

2007 N/A ? N/A ?

Donated equipment Machinery A Machinery B

? ? ?

3,000 6,000 --

Declining balance Sum-of-theYear-digits Straight-line

10 8 20

? ? --

? ? ?

43. What is the cost of Land A? a. P810,000 b. P738,000 c. d. P90,000 P82,000

44. What is the estimated useful life of Building A? a. 2 years b. 40 years 45. What is the cost of Land B? a. P28,500 b. P12,500 c. d. P75,000 P91,000 c. d. 44 years 3 years

46. What is the depreciation expense on Building B for the year ended September 30, 2007? a. P7,000 b. P30,000 c. d. P8,000 P0

47. What is the depreciation expense on the donated equipment for the year ended September 30, 2007? a. P3,825 b. P4,500 48. What is the cost of Machinery A? a. P149,400 b. P164,300 c. d. P150,000 P164,900 c. d. P4,800 P0

49. What is the depreciation expense on Machinery A for the year ended September 30, 2007? a. P11,667 b. P9,722 50. What is the cost of Machinery B? a. P71,740 b. P52,000 c. d. P48,574 P30,776 c. d. P28,000 P9,333