DySAS Center for CPA Review

2F & 3F Mitra Building, San Pedro Street, Davao City

Tel. No. (082) 224-43-20: E-mail Address dysasrev@yahoo.com

Practical Accounting 1 John C. Frivaldo, CPA, MBA

FINAL PRE-BOARD EXAMINATIONS April 23, 2009 @ 1:00 4:00 pm
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INSTRUCTIONS: Mark the letter of your choice with a VERTICAL LINE on the answer sheet
provided. ERASURES NOT ALLOWED.

1. Eliot Corporations 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 agreements provisions. Eliots 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 Companys 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
Ruths 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.
 - 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 P5.00

Handling and shipping 0.50
Total P5.50
Less: Remittance from customer 4.00
Net premium expense P1.50

Coupons to be redeemed (500,000 x 80%) P400,000

Less: Coupons redeemed 300,000
Balance P100,000

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 Corks
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
Corks 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
Reals 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 Januarys rent on December 20. In
Metros 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 finders fee. The building is
depreciated P120,000 per year. For 2004, Wine incurred insurance and property tax
expense totaling P90,000. Wines net rental income for 2004 should be:
(a) P275,000 (b) P290,000 (c) P350,000 (d) P365,000A

Rent income P500,000

Amortization of finders fee (150,000/ 10) P15,000
Depreciation 120,000
Insurance and property tax 90,000 (225,000)
Net rental income 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 Rips 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 P 900,000

Amortization of lease bonus (500,000/ 5) 100,000
Total rent revenue 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 Cones 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 P1,000,000

Amortization of lease bonus (640,000/ 4) 160,000
Total P1,160,000
Depreciation ( 550,000)
Net rent revenue 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) P450,000
Depreciation (1,600,000 100,000/5) (300,000)
Commission (120,000/ 2 x 9/12) ( 45,000)
Repairs ( 15,000)
Transportation ( 10,000)
Net rent revenue P 80,000

15.On January 1, 2004, Glide Company leased a building to Dive Company for a ten-
year 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 Glides 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. Mights 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 (400,000240,000) ( 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.
Bs income statement also included P110,000 accrued warranty expense and will be
deducted for tax purposes when paid. Bs 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 Bs only temporary differences. In Bs 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
Rs 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
Unitys 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 Unitys 2008 income statement, what amount should be reported as the current
portion of its provision for income taxes?____________ 315,000 (35%)

21.Time Companys information for the year-end of 2008 follows:

Deferred tax Related asset
 Accelerated tax depreciation (P75,000) Noncurrent
Additional cost of inventory for
tax purposes 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 Shames 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 Corporations 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) P160,000
Investment in stock (10% x 200,000) 20,000

24. On January 1, 2004, Dell Company paid P18,000,000 for 50,000 shares of Case Companys
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 P18,000,000

Share in net income (25% x 9,600,000) 2,400,000
Cash dividend received (50,000 x 35) ( 1,750,000)
Investment balance, Dec. 31, 2004 P18,650,000

25.Brink Company began operations on January 1, 2004. The following information pertains to
the banks 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 companys 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 7,410,000

Trademark 4,000,000
Goodwill 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 - Impairment loss 1,100,000

Copyright 1,100,000
(4,300,000 3,200,000)
Dec. 31, 2005 - 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) P110,000

For own use and integral to the hardware (PPE) 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 P400,000

Amortization:
The greater between:
a. straight line method 1/4 = 25%
(400,000 x 25%) (100,000)
 Unamortized cost P300,000
Net recoverable value P500,000
Thus, there is no impairment in value.

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 400,000
Training of local employees for production and
maintenance operations 1,200,000
Total 1,600,000

35.The following is Mart Companys 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 Companys 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 Maxs 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 Companys 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 3,500,000 3,000,000
Additional paid in capital 1,500,000 1,000,000
Retained earnings 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 Kirks 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.Roys 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 Roys 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) P1,600,000

Short-term investments 500,000
Cash 1,100,000
Inventory of merchandise 3,000,000
Prepaid expenses 100,000
Total current assets 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 P 5,000,000
Short-term investments 7,000,000
Accounts receivable 20,000,000
Allowance for doubtful accounts ( 1,000,000)
Merchandise inventory 13,000,000
Prepaid insurance 2,500,000 P46,500,000

Current liabilities:
Short-term note payable P 3,000,000
Accounts payable 8,000,000
Wages payable 2,000,000 13,000,000

Working capital 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, Rices liabilities had increased to P1,800,000. In Rices
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. Mikes liabilities increased to P2,000,000
by December 31, 2005. On Mikes 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 P 8,200,000

Operating costs and expenses ( 6,400,000)
Net income P 1,800,000
Dividend declared ( 300,000)
Retained earnings P 1,500,000

Liabilities P 2,000,000
Capital stock 7,500,000
Retained earnings 1,500,000
 Total liabilities and stockholders equity P11,000,000

42.The following is Golds 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 P 200,000
Accounts receivable, net 350,000
Inventory 580,000
Prepaid expenses 120,000
Land held for resale 1,000,000
Total current assets P2,250,000

43.Lia Companys 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 Lias unsold goods sent to
Jax on consignment at 130% of cost and
not included in Lias ending inventory 520,000
P2,400,000
At December 31, 2005, the correct total of Lias 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 Mills December
31, 2005 balance sheet?
(a) P4,500,000 (b) P5,100,000 (c) P6,500,000 (d) P7,800,000
A

Accounts payable P1,500,000

Bonds payable, due 2006 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 Gars 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
Architects 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 Burrs 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
Architects 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) P4,117,000 (c) P2,182,000 (d) P4,420,000
B

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
Brokers 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

Brokers 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:
Architects 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

Architects fees on new building P 100,000

Payment to building contractor 6,000,000
Premium on insurance during construction 25,000
Total costs 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 P125,000

Interest income on temporary investment ( 20,000)
Capitalizable borrowing costs P105,000
* end of the examination practical accounting 1*