CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING FEBRUARY 2021

FIRST PREBOARD EXAMINATION

SITUATION 1 – Data about four different entities.

On December 31, 2021, Ivan Company showed total current assets P7,800,000 comprising cash
P3,200,000, accounts receivable P2,500,000, inventory P2,000,000 and prepaid expenses P100,000.
The cash balance included customer postdated check P150,000, employees IOU P50,000 and cash in
bank per bank statement P3,000,000. Outstanding checks on December 31, 2021amounted to P200,000.
The accounts receivable balance included customer deposit P50,000 and allowance for doubtful accounts
P150,000.
Manchester Company provided the following information on December 31, 2021:
Employee income taxes withheld 900,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties 500,000
Estimated damages as a result of unsatisfactory performance on a contract 1,500,000
Accounts payable 3,000,000
Deferred serial bonds, issued at par and bearing interest at 12% payable in semiannual
installments of P500,000 each year, the last bond to be paid on October 1, 2027.
interest is also paid semiannually. 5,000,000
Mont Company reported total assets P8,750,000 which included treasury shares at cost P250,000, idle
machinery P100,000, trademark P150,000, allowance for inventory decline P200,000 and cumulative
translation loss P300,000.
On December 31, 2021, Ace Company had P40,000,000 note payable due on February 28, 2022. On
December 31, 2021, the entity arranged a line of credit with City Bank which allows the entity to borrow
up to P35,000,000 at one percent above the prime rate for three years. On February 15, 2022, the entity
borrowed P25,000,000 from City Bank and used P5,000,000 additional cash to liquidate P30,000,000
note payable. The financial statements were issued on March 31, 2022.

1. What total amount should Ivan report as current assets?

a. 7,600,000
b. 7,650,000
c. 7,700,000
d. 7,550,000

2. What amount should Manchester report as total current liabilities on December 31, 2021?
a. 6,800,000
b. 6,650,000
c. 7,300,000
d. 7,150,000

3. What amount should Mont report as total assets?

a. 8,500,000
b. 8,200,000
c. 8,400,000
d. 8,300,000

4. What amount of the note payable should Ace report as current liability?
a. 40,000,000
b. 10,000,000
c. 5,000,000
d. 0

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SITUATION 2 – Data about four different entities.

During 2021, Remy Company discovered that depreciation for 2020 was overstated P300,000. A
litigation settlement in 2021 resulted in a loss of P250,000. The inventory on December 31, 2019 was
overstated by P200,000. The entity disposed of a recreational division in 2021 at a loss of P600,000. The
income tax rate is 30%.

Pearl Company reported income before tax of P5,000,000 for the current year which included the
following amounts.

Equity in earnings of Cinn Company – 40% interest 1,600,000

Dividend received from Cinn Company 400,000
Credit adjustment of profit of prior year for arithmetical error in depreciation 500,000
Gain on sale of equity investment at FVOCI 1,000,000

On April 1, 2021, Brandy Company had a machine with cost of P5,000,000 and accumulated
depreciation of P3,750,000. On same date, the entity classified the machine as held for sale and decided
to sell the machine within one year. On April 1, 2021, the machine had an estimated selling price of
P500,000, estimated cost of disposal P50,000 and remaining life of 2 years. On December 31, 2021, the
estimated selling price of the machine had increased to P750,000 with estimated cost of disposal
P100,000.

In reviewing the draft financial statements for the year ended December 31, 2021, Bituin Company
decided that market conditions were such that the provision for inventory obsolescence on December
31, 2021 should be increased by P3,000,000. If the same basis of calculating inventory obsolescence had
been applied on December 31, 2020, the provision would have been P1,800,000 higher than the amount
recognized in the statement of comprehensive income for 2020.

5. What was the effect of the events on Remy Company’s net income for 2021?
a. 595,000 decrease
b. 850,000 decrease
c. 175,000 increase
d. 350,000 increase

6. What amount should Pearl report as income before tax?

a. 4,100,000
b. 3,100,000
c. 5,500,000
d. 5,100,000

7. What amount should Brandy recognize as impairment loss on April 1, 2021?

a. 800,000
b. 750,000
c. 850,000
d. 400,000

8. What amount should Brandy report as gain on reversal of impairment on December 31, 2021?
a. 425,000
b. 368,750
c. 300,000
d. 200,000

9. What adjustment to the net income of 2021 should Bituin make?

a. 3,000,000 decrease
b. 3,000,000 increase
c. 1,200,000 decrease
d. 1,200,000 increase
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SITUATION 3 – Data about three different entities.
Burma Company kept all cash in a checking account. An examination of the accounting records and
bank statement for the month of June revealed the following information:
• The cash balance per book on June 30 is P8,500,000.
• A deposit of P1,000,000 that was placed in the bank’s night depository on June 30 does not appear
on the bank statement.
• The bank statement showed on June 30 that the bank collected note for the entity and credited the
proceeds of P950,000 to the entity’s account, net of collection charge P50,000.
• Checks outstanding on June 30 amounted to P300,000 including certified check P100,000.
• The entity discovered that a check written in June for P200,000 in payment of accounts payable had
been recorded in the entity’s record as P20,000.
• Included with the Junk bank statement was NSF check for P250,000 that the entity had received
from a customer on June 26.
• The bank statement revealed P20,000 service charge for June.
On December 31, 2021, Roma Company reported cash of P3,350,000, with the following details:
Undeposited collections 60,000
Cash in bank – BDO checking account 500,000
Cash in bank – PNB (overdraft) ( 50,000)
Undeposited NSF check received from customer, dated December 1, 2021 15,000
Undeposited check from a customer, dated January 15, 2022 25,000
Cash in bank – BDO fund for payroll 150,000
Cash in bank – BDO saving deposit 100,000
Cash in bank – money market instrument, 90 days 2,000,000
Cash in foreign bank restricted 100,000
Cash in bank – BDO value added tax account 450,000
Total 3,350,000
Germany Company started business at the beginning of current year. The entity established an allowance
for doubtful accounts estimated at 5% of credit sales. During the year, the entity wrote off P50,000 of
uncollectible accounts. Further analysis showed that merchandise purchased amounted to P9,000,000
and ending merchandise inventory was P1,500,000. Goods were sold at 40% above cost. The total sales
comprised 80% sales on account and 20% cash sales. Total collections from customers, excluding cash
sales, amounted to P6,000,000.

10. What amount should Burma report as cash in bank on June 30?
a. 9,000,000
b. 8,300,000
c. 9,360,000
d. 9,180,000

11. What amount was reported as balance per bank statement on June 30?
a. 8,200,000
b. 8,300,000
c. 8,250,000
d. 8,560,000

12. On December 31, 2021, what total amount should Roma report as cash and cash equivalents?
a. 2,910,000
b. 2,810,000
c. 2,760,000
d. 3,260,000

13. What should Germany report as the net realizable value of accounts receivable at year-end?
a. 1,980,000
b. 2,350,000
c. 1,930,000
d. 2,400,000
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SITUATION 4 – Data about four different entities.

On June 1, 2021, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on account. Pitt
allowed trade discounts of 30% and 20%. On June 11, 2021, the customer paid in full. Credit terms were
2/10, n/30 and the sale was made FOB shipping point. Pitt prepaid P200,000 of delivery costs for Burr
as an accommodation.
Bakun Company began operations late in 2020. For the first quarter ended March 31, 2021, the entity
provided the following information:
Total merchandise purchased through March 31, 2021 recorded at net 4,900,000
Merchandise inventory on January 1, 2021 at selling price 1,500,000
Merchandise was acquired on credit and no payments have been made on accounts payable since the
inception of the entity. All merchandise is marked to sell at 50% above invoice cost before time discount
of 2/10, n/30. No sales were made in 2021.
Based on a physical inventory taken at year-end, Chewy Company determined the chocolate inventory
on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000. The entity estimated that after
further processing costs of P2,400,000, the chocolate could be sold as finished candy bars for
P8,000,000. The normal profit margin is 10% of sales.
Uptown Company used the perpetual method to record inventory transactions for the current year.
Inventory 1,900,000
Sales 6,500,000
Sales return 150,000
Cost of goods sold 4,600,000
Inventory losses 200,000
In the latter part of the year, the entity recorded a P150,000 credit sale of goods costing P100,000. These
goods were sold on FOB destination terms and were in transit at year-end. The goods were included in
the physical count. The inventory at year-end determined by physical count had a cost of P2,000,000
and a net realizable value of P1,700,000. Any inventory writedown is not yet recorded.

14. What amount was received by Pitt from Burr as remittance in full?
a. 2,744,000
b. 2,940,000
c. 2,944,000
d. 2,544,000

15. What amount of cash is required in order for Bakun to eliminate the current balance in accounts
payable?
a. 6,000,000
b. 5,900,000
c. 6,500,000
d. 5,750,000

16. What amount should Chewy report as chocolate inventory at year-end?

a. 5,600,000
b. 4,000,000
c. 5,200,000
d. 4,800,000

17. What amount should Uptown report as cost of goods sold for the current year?
a. 5,100,000
b. 4,800,000
c. 4,500,000
d. 5,000,000

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SITUATION 5 – Data about four different entities.

Fairy Company provided the following information:

2020 2021
Net sales 7,500,000 4,500,000
Beginning inventory 1,260,000
Purchases 6,450,000 3,200,000
Freight in 350,000 200,000
Purchase discounts 90,000 45,000
Purchase returns and allowances 140,000 55,000
Ending inventory 2,355,000 ?
Airbone Company used the average cost retail inventory method. The entity provided the following
information for the current year:
Cost Retail
Beginning inventory 1,500,000 2,200,000
Net purchases 3,875,000 4,950,000
Departmental transfer -credit 200,000 300,000
Net markup 150,000
Inventory shortage at sales price 100,000
Employee discounts 200,000
Sales, including sales of P400,000 of items which were marked down
from P500,000 4,000,000
Colombia Company is a producer of coffee. The entity is considering the valuation of harvested coffee
beans. On December 31, 2021, the entity has harvested coffee beans costing P3,000,000 and with fair
value less cost of disposal of P3,500,000 at the point of harvest. Because of long aging and maturation
process after harvest, the harvested coffee beans were still on hand on December 31, 2022. On December
31, 2022, the fair value less cost of disposal is P3,900,000 and the net realizable value is P3,200,000.

Adam Company owned 50,000 ordinary shares of Bland Company. These 50,000 shares were purchased
by Adam for P120 per share. On August 30, Bland distributed 50,000 share rights to Adam. Adam was
entitled to buy one new share of Bland Company for P90 cash and two of these rights. On August 30,
each share had a market value of P140 and each right had a market value of P10.

18. What amount should Fairy report as inventory on December 31, 2021?
a. 2,370,000
b. 2,025,000
c. 3,285,000
d. 2,505,000

19. What amount should Airborne report as cost of ending inventory?

a. 1,950,000
b. 2,600,000
c. 1,924,000
d. 2,250,000

20. What amount should Columbia report as coffee beans inventory on December 31, 2022?
a. 3,000,000
b. 3,500,000
c. 3,200,000
d. 3,900,000

21. What total cost should Adam record for the new shares acquired by exercising the rights?
a. 2,250,000
b. 2,750,000
c. 2,650,000
d. 5,000,000

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SITUATION 6 – Data about three different entities

Chur Company acquired a 40% interest in Flim Company for P1,700,000 on January 1, 2021. The
shareholders’ equity of Flim Company is presented below.

January 1 December 31
Share capital 3,000,000 3,000,000
Revaluation surplus 1,300,000
Retained earnings 1,000,000 1,500,000

On January 1, 2021, all the identifiable assets and liabilities of Flim Company were recorded at fair
value. Flim Company reported net income of P700,000, after income tax expense of P300,000 and paid
dividend of P200,000 to shareholders during the current year. The revaluation surplus is the result of the
revaluation of land recognized by Flim Company on December 31, 2021. Additionally, depreciation is
provided by Flim Company on the diminishing balance method whereas Chur Company used the straight
line. Had Flim Company used the straight line, the accumulated depreciation would be increased by
P200,000.

On January 1, 2021, Purl Company purchased as a long-term investment P5,000,000 face amount of
Shaw Company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest. The bonds
mature on January 1, 2026 and pay interest annually on December 31. Purl Company used the interest
method of amortization.

Jent Company purchased bonds at a discount of P100,000. Subsequently, Jent sold these bonds at a
premium of P140,000. During the period that Jent held this long-term investment, amortization of the
discount amounted to P20,000.

Paradise Company’s accounting policy with respect to investment property is to use the fair value model.
One investment property was measured at P8,000,000 on December 31, 2021. The property had been
acquired on January 1, 2021 for a total of P7,600,000, made up of P6,900,000 paid to the vendor,
P300,000 paid to the local authority as a property transfer tax and P400,000 paid to professional advisers.
The useful life of the property is 40 years.

22. What amount should Chur report as investment in associate on December 31, 2021?
a. 2,420,000
b. 1,700,000
c. 1,900,000
d. 2,320,000

23. What amount should Purl report as interest income for 2022?
a. 456,200
b. 461,820
c. 400,000
d. 369,456

24. What amount should Jent report as gain on the sale of bonds?
a. 120,000
b. 220,000
c. 240,000
d. 260,000

25. What amount should Paradise recognize as gain from change in fair value of the investment property
for 2021?
a. 400,000
b. 700,000
c. 800,000
d. 590,000

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SITUATION 7 – Data abouts four different entities

On December 31, 2021, Bart Company purchased a machine in exchange for a noninterest bearing note
requiring eight payments of P200,000. The first payment was made on December 31, 2021 and the others
are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of note
was 11%.

PV of an ordinary annuity of 1 at 11% for 8 periods 5.146

PV of an annuity of 1 in advance at 11% for 8 periods 5.712

At the beginning of current year, Ron Company issued 100,000 treasury shares with P25 par value for a
parcel of land to be held as investment property. The treasury shares were acquired at a cost of P30 per
share. The treasury share had a fair market value of P40 at the beginning of current year. The entity
received P50,000 from the sale of scrap when an existing structure on the site was immediately razed.

Eagle Company owns a tract of land that it purchased for P2,000,000. The land is held as a future plant
side and has a fair value of P2,800,000 on the date of exchange. Hall Company also owns a tract of land
held as a future plant site. Hall paid P3,600,000for the land upon purchase and the land has a fair value
of P3,800,000 on the date of exchange. On date of exchange, Eagle exchanged its land and paid
P1,000,000 cash for the land owned by Hall. The configuration of cash flows from land acquired is
expected to be significantly different from the configuration of cash flows of the land exchanged.

On January 1, 2021 Darwin Company purchased a plating machine for P5,400,000. The entity received
a government grant of P400,000 toward this capital cost. The machine is to be depreciated on a 20%
reducing balance basis over 10 years. The estimated residual value is P200,000. The accounting policy
is to treat the government grant as a reduction in the cost of the asset.

26. What amount should Bart record as initial cost of the machine?
a. 1,600,000
b. 1,029,200
c. 1,400,000
d. 1,142,400

27. What amount should Bart recognize as interest expense for 2022?
a. 125,664
b. 103,664
c. 113,212
d. 0

28. What amount should Ron record as initial cost of the land?
a. 4,000,000
b. 3,950,000
c. 3,000,000
d. 2,500,000

29. At what amount should Eagle record the land acquired in the exchange?
a. 2,800,000
b. 3,000,000
c. 3,200,000
d. 3,800,000

30. At what amount should Darwin report the machine on December 31, 2022?
a. 4,000,000
b. 4,040,000
c. 3,456,000
d. 3,200,000

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SITUATION 8 – Data about three different entities.

At the beginning of the current year, Leonora Company purchased a parcel of land as a factory site. An
old building on the land was demolished and construction started on a new building that was completed
at the end of current year.

Purchase price of land 3,200,000

Demolition of old building 200,000
Architect fee 300,000
Legal fee-title investigation 50,000
Construction cost 8,500,000
Imputed interest on construction cost 140,000
Landfill for building site 190,000
Clearing of trees from building site 100,000
Timber sold 30,000
Temporary building used for construction activities 290,000
Land survey 40,000
Excavation for basement 110,000

Karla Company acquired a new machine with an invoice cost of P1,600,000. The entity incurred
transportation cost P50,000 and installation cost P140,000. The terms of the acquisition include a 5%
discount if payment is made in 10 days. The entity paid beyond the discount period. The entity’s chief
engineer with monthly salary of P60,000 spent two-thirds of his time during trial run of the new machine.
The entity requested an allowance from the supplier because the machine proved to be of less than
standard performance capability. The supplier granted a cash allowance of P100,000. The cost of
removing on old machine before the new machine was installed amounted to P10,000. The operator of
the old machine who was laid off due to the acquisition of the new machine was paid a gratuity of
P30,000.

Sun Company was constructing an asset that qualified for interest capitalization. The construction cost
totaled P12,000,000 and was incurred evenly during the current year. The entity had outstanding notes
payable during the entire year of construction comprising P6,000,000 8% interest and P9,000,000 9%
interest. None of the borrowings were specified for the construction of the qualified asset.

31. What amount should Leonora capitalize as cost of the land?

a. 3,550,000
b. 3,750,000
c. 3,360,000
d. 3,660,000

32. What amount should Leonora capitalize as a cost of new building?

a. 9,400,000
b. 9,200,000
c. 9,590,000
d. 9,290,000

33. What amount should Karla record as cost of the new machine?
a. 1,650,000
b. 1,330,000
c. 1,660,000
d. 1,690,000

34. What amount should Sun capitalize as interest?

a. 480,000
b. 516,000
c. 810,000
d. 960,000

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SITUATION 9 – Data about three different entities.

On January 1 2021, Kent Company purchased a machine for P5,000,000. The entity paid shipping
expenses P50,000 as well as installation cost of P120,000. The machine was estimated to have useful
life of 10 years, an estimated residual value of P300,000 and the straight line method is used. In January
2022, additions costing P360,000 were made to the machine in order to comply with pollution control
ordinances. These additions neither prolonged the life of the machine nor did they have any residual
value.
Brandy Company has two cash generating units. At year-end, the carrying amounts of the assets of one
cash generating unit are:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Patent 850,000
Goodwill 100,000
The accounts receivable are regarded as collectible. The fair value less cost of disposal of the inventory
is equal to the carrying amount. The patent has a fair value less cost of disposal of P750,000. At
year-end, the entity undertook impairment testing of the cash generating unit and determined the value
in use of the unit at P4,050,000.
On January 1 2021, Matt Company purchased a building for P20,000,000. The building has a useful life
of 20 years and no residual value. On January 1, 2025, the entity tested the asset for impairment. The
fair value on such date is P12,000,000. On January 1, 2027. Matt Company decided to use the revaluation
model. The fair value of the asset has risen to P18,000,000 on such date.

35. What amount should Kent record as depreciation for 2022?

a. 557,000
b. 517,000
c. 487,000
d. 527,000

36. What amount of impairment loss should Brandy allocate to the plant and equipment?
a. 800,000
b. 700,000
c. 600,000
d. 560,000

37. What amount of impairment loss should Brandy allocate to patent?

a. 140,000
b. 100,000
c. 40,000
d. 0

38. What amount of gain on reversal of impairment should Matt recognize in 2027?
a. 4,000,000
b. 7,500,000
c. 3,500,000
d. 0

39. What amount of revaluation surplus should Matt recognize in 2027?

a. 4,000,000
b. 6,000,000
c. 2,000,000
d. 0

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SITUATION 10 – Data about four different entities.

At the beginning of current year, Hurf Mining Company purchased a mineral mine for P36,000,000 with
removable ore estimated by geological survey at 2,160,000 tons. The property has an estimated value of
P3,600,000 after the ore has been extracted. The entity incurred P10,800,000 of development cost
preparing the property for the extraction of ore. During the current year, 270,000 tons were removed and
240,000 tons were sold.
Gray Company was granted a patent on January 1 2018 and capitalized P450,000. The entity was
amortizing the patent over the useful life of 15 years. During 2021 the entity paid P150,000 in
successfully defending an attempted infringement of the patent. After the legal action was completed,
the entity sold the patent to plaintiff for P750,000. The policy is to take no amortization in the year of
disposal.
West Company made the following expenditures relating to product Y.
Legal cost to file a patent on Product Y. Production of the finished product would not
have been undertaken without the patent. 100,000
Special equipment to be used solely for development of Product Y. The equipment has
no other use and has an estimated useful life of four years. 600,000
Labor and material cost incurred in producing a prototype model 2,000.000
Cost of testing the prototype 800,000
Blake Company mailed coupons to consumers which may be presented at stated expiration date at retail
food stores to obtain discounts on certain Blake products. Retailers were reimbursed for the face value
of the coupons redeemed plus 10% of coupon face value as compensation for handling costs. The entity
honored requests for coupon redemption by retailers received up to three months after the expiration
date. Based on past experience, 60% of the coupons issued ultimately are redeemed. The entity provided
the following information with respect to the two separate series of coupons issued during 2021:
Series A Series B
Consumer expiration date June 30, 2021 December 31, 2021
Total face value of coupons issued 1,000,000 2,000,000
Total payments to retailers on December 31, 2021 605,000 405,000

40. What amount of depletion should Huff include in cost of goods sold for the current year?
a. 3,600,000
b. 4,050,000
c. 4,800,000
d. 5,400,000

41. What amount should Gray report as gain from sale of patent in 2021?
a. 150,000
b. 240,000
c. 270,000
d. 390,000

42. What total amount of costs should West expense when incurred?
a. 2,800,000
b. 2,950,000
c. 3,400,000
d. 3,500,000

43. What amount should Blake report as liability for unredeemed coupons on December 31, 2021?
a. 970,000
b. 915,000
c. 795,000
d. 0

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SITUATION 11 – Data about four different entities.

Dunne Company sells equipment service contracts that cover a two-year period. The sale price of
contract is P800. The entity sold 1,000 contracts evenly throughout 2021. The past experience is that, of
the total pesos spent for repairs on service contracts, 40% is incurred evenly during the first contract year
and 60% evenly during the second contract year.
Hart Company sells subscriptions to a specialized directory that is published semiannually and shipped
to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30
cut-off dates are held for the next publication. Cash from subscribers is received evenly during the year
and is credited to deferred revenue from subscriptions.
Deferred revenue from subscriptions – January 1, 2021 1,500,000
Cash receipts from subscribers during the current year 7,200,000
After three profitable years, Cairo Company decided to offer a bonus to the branch manager of 25% of
income over P1,000,000 earned by the branch. The income for the branch was P1,600,000 before tax
and before bonus for the current year. The bonus is computed on income in excess of P1,000,000 after
deducting the bonus but before deducting tax of 30%.

At the beginning of current year, Panorama Company leased a building from a lessor with the following
pertinent information:

Annual rental payable at the end of each year 1,000,000

Initial direct cost paid 400,000
Lease incentive received 100,000
Leasehold improvement 200,000
Purchase option that is reasonably certain to be exercised 500,000
Lease term 5 years
Useful life of building 8 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 of 5 periods at 10% 3.79
Preset value of 1 of 5 periods at 10% 0.62

44. What amount should Dunne report as unearned contract revenue on December 31, 2021?
a. 480,000
b. 640,000
c. 240,000
d. 560,000

45. On December 31, 2021, what amount should Hart report as deferred revenue from subscription?
a. 1,800,000
b. 3,300,000
c. 3,600,000
d. 5,400,000

46. What amount should Cairo recognize as bonus for the current year?
a. 120,000
b. 150,000
c. 250,000
d. 320,000

47. What amount should Panorama as cost of the right of use asset?
a. 4,500,000
b. 4,400,000
c. 4,700,000
d. 4,600,000

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SITUATION 12 – Data about different entities.

Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2021. Each P1,000
bond was convertible into 10 ordinary shares of P50 par value. Only July 1 2021, the interest was paid
and the bonds were converted into ordinary shares which had a fair value of P75 per share. The
unamortized premium on these bonds was P12,000 at the date of conversion. The equity component
recognized when the bonds were originally issued was P50,000.

Rapp Company leased a building to Lake Company on January 1 2021. The lease expires on January 1
2026. The annual rental is P3,000,000. Additionally, on January 1, 2021, Lake paid P500,000 to Rapp
as a lease bonus and P250,000 as a security deposit to be refunded upon expiration of the lease. Rapp
paid P150,000 to a real estate broker as finder fee. During 2021, Rapp incurred insurance and property
tax expense of P100,000. The building was depreciated P150,000 per year.

Hitech Company, a dealer in machinery and equipment, leased equipment to Quality Company on July
1, 2021. The lease is appropriately accounted for as a sale by Hitech and as a purchase by Quality. The
lease is for a ten-year period equal to the useful life of the asset expiring June 30, 2031. The first of ten
equal annual payments of P250,000 was made on July 1, 2021. Hitech had purchased the equipment for
P1,335,000 on January 1, 2021 and established a list selling price of P1,685,000 on the equipment. The
present value on July 1, 2021 of the rent payments over the lease term discounted at 12% was P1,580,000.

48. What amount should Clay credit to share premium as result of the bond conversion?
a. 312,000
b. 306,000
c. 162,000
d. 362,000

49. What amount should Rapp recognize as net rental revenue for 2021?
a. 2,820,000
b. 3,220,000
c. 2,700,000
d. 2,870,000

50. What amount should Hitech record as gain on sale and interest income, respectively for the year
ended December 31, 2021?
a. 245,000 and 159,600
b. 350,000 and 189,600
c. 245,000 and 79,800
d. 350,000 and 94,800

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THEORY
51. Certified Public Accountants are licensed by
a. PICPA
b. SEC
c. Board of Accountancy
d. The state government
52. Which is not a purpose of the Conceptual Framework?
a. To provide definitions of terms and concepts.
b. To provide specific guidelines for resolving situations not covered by existing standards.
c. To assist CPAs in selecting among alternative accounting standards.
d. To assist IASB in the standard setting process
53. Which relates to both relevance and faithful representation?
a. Comparability
b. Predictive value
c. Neutrality
d. Free from error
54. Which measurement attribute is the most relevant?
a. Present value
b. Exit value
c. Current cost
d. Historical cost
55. Reversing entries apply to all of the following, except
a. Unearned revenue
b. Accrued wages
c. Prepaid insurance
d. Depreciation
56. Conceptually, asset valuation accounts are
a. Assets
b. Neither assets nor liabilities
c. Part of shareholders’ equity
d. Liabilities
57. Which should not be considered a component of OCI?
a. Actuarial gain
b. Foreign currency translation loss
c. Revaluation surplus
d. Dividend paid to shareholders
58. Which is a characteristic of a change in accounting estimate?
a. It usually need not be disclosed
b. It does not affect financial statements of prior period.
c. It requires restatement of financial statements
d. It requires reporting of proforma amount for prior periods.
59. Which is not permitted in accounting for uncollectible accounts receivable?
a. Percentage of accounts receivable
b. Percentage of sales
c. Direct writeoff method
d. Aging of accounts receivable
60. Sales where the goods are delivered only when the buyer makes final payment are called
a. Bill and hold sales
b. Sales subject to inspection and installation
c. Consignment sales
d. Layaway sales

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61. Equity investments irrevocably accounted for at FVOCI are
a. Nontrading investments of less than 20%
b. Trading investments of less than 20%
c. Investments between 20% and 50%
d. Investments of more than 50%
62. When equity investments are accounted for at fair value, cash dividends received are recorded as
a. Dividend income
b. Addition to investor’s share of the investee’s profit
c. Deduction from investment
d. Either dividend income or deduction from investment
63. The actual interest earned by the bondholder is
a. Effective rate
b. Yield rate
c. Market rate
d. Effective rate, yield rate or market rate
64. If the present value of note issued for a plant asset is less than face amount, the difference is
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Recognized as interest expense in the year of issuance
65. Interest revenue on specific borrowing for qualifying asset
a. Reduces the cost of the asset
b. Reduces the interest expense to be reported
c. Increases the cost of the asset
d. Must be credited to interest income
66. Which statement is incorrect with regard to impairment of asset?
a. If impairment indicators are present, the entity must conduct an impairment test.
b. The impairment test compares the carrying amount of the asset with the lower between fair
value less cost of the disposal and value in use.
c. If the recoverable amount is lower than carrying amount, an impairment loss is recognized
d. If recoverable amount is higher than the carrying amount, no impairment loss is recognized
67. Amortization of an intangible asset with a finite life shall commence when
a. It is recognized as an asset
b. It is probable that it will generate future economic benefit
c. It is available for the intended use
d. The cost can be identified with reasonable certainty
68. Which is not a characteristic of a liability?
a. Present obligation
b. Arises from past event
c. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require the use of current assets
69. Bonds issued with scheduled maturities at various dates are called
a. Term bonds
b. Debenture bonds
c. Serial bonds
d. Callable bonds
70. The lessee’s lease liability under a finance lease would be periodically reduced by
a. Lease payment plus the depreciation of the asset
b. Lease payment less the depreciation of the asset
c. Lease payment less the portion allocable to interest
d. Lease payment
END
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