Advanced Financial Accounting and Reporting January 14, 2022

Pre Board Examination – Diagnostic Test

Instruction: Select the correct answer for each of the following questions.
Mark only one answer for each item by Shading the corresponding letter of
your choice on the answer sheet provided.

STRICTLY NO ERASURES ALLOWED. USE PENCIL NO. 2 ONLY

1. Which of the following statement is TRUE?

A. The intercompany profit in inventory transfer between affiliates is
computed by multiplying the inventory held by the buying affiliate which
was acquired from the selling affiliate by the gross profit rate based on
sales of the buying affiliate.
B. The income and expenses of a subsidiary are included in the consolidated
financial statements from the acquisition date.
C. Recognition of the realized profit in beginning inventory requires a
working paper debt to cost of goods sold.
D. The non-controlling interest in profit is affected by the bargain purchase
or gain an acquisition.

2. Which of the following statements is TRUE?

A. When a subsidiary has borrowed cash from the parent company, the related
receivable and payable are eliminated in their own set of books in
preparing a consolidated statement of financial position.
B. In purchased type of business combination, the stockholders’ equity section
of a consolidated statement of financial position for a parent and its
partially owned subsidiary consists of the parent’s stockholders’ equity
accounts only.
C. Parent company owns 75% of Subsidiary company. During 2016, Parent sold
goods with a 30% gross profit to Subsidiary, Subsidiary sold all of these
goods in 2016. For 2016 consolidated financial statements, sales and cost
of goods should be reduced by 75% of the intercompany sales.
D. Amortization of excess affects the computation of non-controlling interest
in net assets and the non-controlling interest in profit.

3. Which of the following statements is WRONG?

A. On the balance sheet date, the account Forward Contract Receivable which is
the receivable from the bank is credited to recognized foreign exchange
loss the decrease in the forward rate under a derivative instrument which
is a forward contract to purchase foreign currency.
B. A Philippine Company sold and delivered merchandise on account to a
customer in another country in 2016, the transaction is denominated in the
country’s local currency to be settled in 2017, the said transaction is not
automatically a hedge item even if the bid spot rate is decreasing.
C. On the settlement date, in the books of XYZ Company a Philippine Company
with importing transaction which is also a hedge item and a forward
contract to buy foreign currency which is also a hedging instrument the
amount of each debited is measured in pesos but dominated in a foreign
currency.
D. Assuming CG Company a Philippine Company acquired an “at the money” foreign
currency call option contract, under a fair value hedge, if the spot rate
decreases from transaction date to year-end then the intrinsic value at
year-end is also equal to the gain on derivates as to the effective portion
which affects current earnings or profit and loss.

4. Which of the following statement is wrong regarding installment sales?

A. Trade-in merchandise and repossessed merchandise are considered as part of
collections and both are included in the total goods available sale.
B. Upon repossession the defaulted account is credited while the debit
includes the true worth of the repossessed merchandise.
C. Under the installment method, the deferred gross profit account must be
set-up on the year of sale and adjusted by the portion which is realized of
the end of the year.

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 D. Gain on repossession may be recognized on the year the merchandise was
repossessed.

5. Which of the following statements is wrong regarding long-term construction

contracts?
A. The amount of expected warranty cost is part of the estimated cost at
completion.
B. If upon completion of the project the balance of Progress Billings is
greater than the balance of Construction in Progress, the excess is due to
customer which is a liability.
C. General administrative costs may be part of contract costs but would
usually be expensed.
D. The latest estimated of anticipated cost of materials, labor and
subcontracting costs and indirect cost required to complete to a project
should be used to determine the progress toward completion.

6. Which of the following statements is correct?

A. In May 2016, St. Jude purchased medical supplies from South Drugstore at a
cost of P40,000. However, South Drugstore notifies St. Jude that the
invoice was being canceled and the medical supplies were being donated to
the hospital. St. Jude should record this donation of medical supplies as
patient service revenue.
B. A storm destroyed the receiving area of the building of AB Spiritual
Center, a non-for-profit religious organization. A member of the
fellowship, renovated the are no change. In AB’s statement of activities
the construction and renovation of the said area should be reported as an
increase in both expenses and liabilities.
C. On March 23, 2016, Ms. FG, an alumnus of OP School, a private, not-for-
profit high school, contributed P100,000, with the stipulation that the
donation be used for faculty development seminar during 2017. During 2017,
OP spent all of the donation in accordance with Ms. FG’s wishes. For the
year ended December 31, 2017, restricted net assets will decrease.
D. Family Care a private not-for-profit voluntary health and welfare
organization, received the following contribution in 2016. P60,000 from
donors who stipulated that the money not be spent until 2017 and P38,000
from donors who stipulated that the contributions be used for the
acquisition of equipment, none of which was acquired in 2016. Both
contributions are classified as permanently restricted net assets for the
year ending December 31, 2016.

7. Which of the following methods of accounting for its share of each of the
joint venture's assets and liabilities are available to a venturer in a
jointly controlled entity?
1. The equity method.
2. Proportionate consolidation, combining its share of each with similar
items it controls.
3. Proportionate consolidation, showing separate line items for its share of
each.
A. Methods 2 and 3 only C. Methods 1 and 2
only
B. Methods 1 and 3 only D. Methods 1,2, and 3

8. The Flame Co. and the Tall Co. owns 60% and 40%, respectively of the equity of
the Loop Co. Flame and Tall have signed an agreement whereby all the
strategic decisions in respect of Loop are to be taken with the agreement of
them both. Are the following statements TRUE or FALSE, according to IAS 27,
Consolidated and Separate Financial Statements, IAS 28, Investment in
Associates and IAS 31, Interest in Joint Ventures?
1. Flame should classify its investment in Loop as an investment in a
subsidiary.
2. Tall should classify its investment in Loop as an investment in an
associate.
Statement 1 Statement 2
A. False False
B. False True
C. True False
D. True True

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9. Are the following statements in respect of the conditions for joint venture
TRUE or FALSE, according to IAS 31, Interest in Joint Ventures?
1. The venturers must have a contractual arrangement as to how strategic
decisions in respect of a joint venture are to be made
2. Majority voting is acceptable for strategic decisions in respect of a
joint venture.
Statement 1 Statement 2
A. False False
B. False True
C. True False
D. True True

10. The Wind Co. has correctly classified its investment in Air Co. as an
investment in a joint venmre. Wind's statement of financial position shows
debt of P500,000; Air's statement of financial position shows debt of
P700,000. Are the following statements TRUE or FALSE, according to IAS 31,
Interest in Joint Ventures?
1. Retained earnings in Wind's consolidated statement of financial position
will be the same, whether Wind uses proportionate consolidation or the
equity method to account for its interest in Air.
2. Debt in Wind's consolidated statement of financial position will be the
same, whether Wind uses proportionate consolidation or the equity method
to account its interest in Air.
Statement 1 Statement 2
A. False False
B. False True
C. True False
D. True True

11. Its main function is the availability and appropriation of funds for public
services.
A. Department of Finance. c. National Budget System.
B. Department of Treasury. d. Commission on Audit.

12.Which government body is responsible for the design and preparation of the New
Government Accounting System (NGAS)?
A. Department of Budget and Management.
B. Bureau of Treasury.
C. Commission on Audit.
D. Government Agencies.

13. The following are the systems followed in the New Government Accounting
System (NGAS), except
A. Commercial accounting. C. Responsibility accounting.
B. Double-entry bookkeeping. D. Fund accounting.

14. This is the basis of accounting under the New Government Accounting System.
A. Modified accrual. C. Accrual basis.
B. Cash basis. D. Strict accrual.

15. The financial statements under NGAS include all except

A. Statement of income and expenses.
B. Statement of operations.
C. Balance sheet.
D. Cash flow statement

Problems:
Use the following data in answering Nos. 16 to 18

Two real estate companies, R and S (the parties) set up a separate vehicle
(entity X) for the purpose of acquiring and operating a shopping centre. The
contractual arrangement between the parties establishes joint control of the
activities that are conducted by entity
X. The main feature of entity X's legal form is that the entity, not the parties,
has rights to the assets, and obligations for the liabilities, relating to the
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arrangement. These activities include the rental of the retail units, managing
the car park, maintaining the centre and its equipment, such as lifts, and
building the reputation and customer base for the centre as a whole.
The terms of the contractual arrangement are such that:
(a) entity X owns the shopping centre. The contractual arrangement does not
specify that the parties have rights to the shopping centre.
(b) the parties are not liable in respect of the liabilities of entity X.
if entity X is unable to pay any its liabilities, the liability of each to
any third party will be limited to the parties unpaid contribution.
(c) the parties have the right to sell or pledge their interests in entity
X.
(d) each party receives a share of the income from the shopping centre
(which is the rental income net of the operating costs) in accordance with
its interests in entity X.
Transactions of the contractual arrangement for 2012 and 2013 follow: 2012:
Co. R and Co. S contributed P10 Million each for a one-half interest in the
net assets of Entity X. Organization expenses incurred amounts to P100,000.
Entity X acquired land at a cost of P2 Million. Constructed a building
(shopping centre) at a cost of P15 Million. Operating expenses for the year
amounts to P1Million. Rental income collected from the tenants, P10 Million.
Net income or loss is distributed to the venturers in accordance with their
interest.
2013:

Operating expenses (including depreciation) incurred for the year, P3.5

Million Rental income collected for the year, P12 Million. Each venturer
receives a share of the income or loss from rental income net of the
operating expenses.

16. What is the interest of Co. R in the joint venture as of December 31, 2012?
A. P14M C. P15M
B. P 14.45M D. P20M

17. What is the net income (loss) of Entity X on December 31,2013?

A. P 8.5 M C. P15.5 M
B. P12 M D. P10.5 M

18. What is the interest of Co. S in the joint arrangement as of December 31,
2013?
A. P18.7M C. P10.0M
B. P14.5 M D. P14.0M

Numbers 19 to 20 are based on the following data:

A and B (the parties) are two companies whose businesses are the construction of
many types of public and private construction services. They set up a contractual
arrangement to work together for the purpose of fulfilling a contract with the
government for the construction of a motor way between two cities for P24 million
(a fixed price contract).
The contractual arrangement determines the participation shares of A and B and
establishes:
a. joint control of the arrangement;
b. the rights to all the assets needed to undertake the activities of the
arrangement are shared by the parties on the basis of their participation
shares in the arrangement;
c. the parties have joint responsibility for all operating and financial
obligations relating to the activities of the arrangement on the basis of
their participation shares in the arrangement; and
d. the profit or loss resulting from the activities of the arrangement is shared
by A and B on the basis of their participation shares in the arrangement.
In 2013, in accordance with the agreement between A and B:
• A and B each used their own equipment and employees in the construction
activityA constructed three bridges needed to cross rivers on the route at a
cost of P8million
• B constructed all of the other elements of the motorway at a cost of P10
million.A and B shares equally in the P24 million jointly invoiced to (and
received from) the government.

19. What is the gross profit earned by A in 2013?

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 A. P6 million C. P4 million
B. P14 million D P 2 million
20. What is the gross profit earned by B in 2013?
A. P 2 million C. P 7 million
B. P14 million D. P 6 million

21. On March 1,2013, Jose and Kiko decides to combine their businesses to form a
partnership. Statement of financial position on March 1 before the
formation,showed the following:

Jose Kiko
Cash P9,000 P3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixture (net)30,000 9,000
Office equipment (net)11,500 2,750
Prepaid expenses 6,375 3,000
Total PI 05,375 P51,500
Accounts payable P45/750 P18,000
Capital 59,625 33,500
Total PI 05,375 P51,500
They agreed to following adjustments before the formation:
a. Provide 2% allowance for doubtful accounts.
b. Jose's furniture should be valued at P31,000, while Kiko's office equipment
is underdepreciated by P250.
c. Rent expense incurred previously by Jose was not yet recorded amounting to
P1,000, while salary expense incurred by Kiko was not also recorded amounting to
P800.
d. The fair value of inventories amounted to P29,500 for Jose and P21,000 for
Kiko.

The net (debit) credit adjustment to partner's capital accounts are:

Jose Kiko
A. (P2,870) (P2,820)
B. P1,870 P2,820
C. P 870 (P180)
D. (P870) P 180

22. Cong and Dong have just formed a partnership. Cong contributed cash of P126,000
and computer equipment that cost P54,000. The computer had been used in his
sole proprietorship and had been depreciated to P24,000. The fair value of the
equipment is P36,000. Cong also contributed a note payable of PI2,000 to be
assumed by the partnership. Cong is to have 60% interest in the partnership.
Dong contributed only P90,000 cash.
Cong should make an additional investment (withdrawal) of:
A. P96,000 C. (P 7 6,800)
B. 84,000 D. (P15,000)

23. On June 1, 2013, May and Nora formed a partnership. May is to invest assets at
fair value which are yet to be agreed upon. She is to transfer her liabilities
and is to contribute sufficient cash to bring her total capital to P210,000
which is 70% of the total capital of the partnership.
Details regarding the book values of May's business assets and liabilities and
their corresponding valuations are:

Book Agreed
values valuations
Accounts receivable P58,000 P58,000
Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store equipment 32,000 32,000
Accumulated depreciation - Store equipment 19,000 16,400
Office equipment 27,000 27,000
Accumulated depreciation - Office equipment 14,200 8,600
Accounts payable 56,000 56,000

Nora agrees to invest cash of P42,000 and merchandise valued at current market
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 price. The value of the merchandise to be invested by Nora and the cash to be
invested by May are:
A. P 90,000 and P 62,000 respectively
B. P 252,000 and PI38,000 respectively
C. P 48,000 and PI38,000 respectively
D. P 48,000 and P 62,000 respectively

24. Peter, Queen, and Roy are partners with capital balances of P300,000,
P300,000, and P200,000, respectively; and sharing profits and losses equally.
Roy is to retire and it is agreed that he is to take certain office equipment
with second hand value of P50,000 and a note for his interest. The office
equipment carried in the books at P65,000 but brand new would cost P80,000.
Roy's acquisition of the office equipment would result in
A. Reduction in capital of P5,000 each for Peter, Queen, and Roy.
B. Reduction in capital of P7,5000 each for Peter, Queen, and Roy.
C. Reduction in capital of P15,000 for Roy.
D. Reduction in capital of P55,000 for Roy.

25. Cen, Deng and Lala are partners with capital balances on 31 December 2011
of P300,000, P300,000 and P200,000 respectively. Profit are shared equally.
Lala wishes to withdraw and it is agreed that she is to take certain furniture
and fixtures with second hand value of P50,000 and note for the balance of her
interest. The furniture and fixtures are carried in the books at P65,000. Brand
new, the furniture and fixtures may cost P80,000. Lala's acquisition of the
second-hand furniture will result to:
A. Reduction in capital of P15,000 each for Cen and Deng.
B. Reduction in capital of P10,000 for Lala.
C. Reduction in capital of P5,000 each for Cen, Deng and Lala.
D. Reduction*in capital of P7,500 each for Cen, and Deng.

Questions 26 thru 28 are based on the following:

Abenson Trading Co. sells household furniture both in cash and in installment
basis. For each installment sale, a sale contract is made whereby the
following terms are stated:
a. A down payment of 25% of the installment price is required and the
balance payable in 15 equal monthly installment.
b. Interest of 1% per month is charged on the unpaid cash sale price
equivalent at each installment.
c. The price on installment sales is 110% of the cash sales price.
For accounting purposes, installment sales are recorded at contract price.
Any unpaid balances on defaulted contracts are being charged to uncollectible
accounts expense. Sales of defaulted merchandise were credited to
uncollectible accounts expense. Interest are recognized in the period earned.
For its first year of operations ending December 31, 2009, the books of the
company show thefollowing:
Cash sales 378,000
Installment sales 794,970
Merchandise inventory, January 1 174,180
Purchases 627,891
Merchandise inventory, December 31108,630
Cash collections on installment contracts:
Down payment 198,750
Installment payments (include interest of
P27.758.52). Average 6 monthly
Installments on all contracts except on
Defaulted contracts. 238,023
A contract amounting to P3,300 was defaulted after paying three (3) monthly
installments.
26. The gross profit rate based on total sales at cash price equivalent is:
a. 33.75% c. 40.88%
b. 36.34% d. 37%
e. Answer not given
27. The total interest earned for the first four month in the defaulted contracts
is:
a. 80.85 c. 60.94
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 b. 72.07 d. 69.30
e. Answer not given
28. The realized gross profit for the year 2009 is:
a. 291,355.95 c. 249,674.52
b. 151,335.35 d. 161,789.16
e. Answer not give

Questions 29 & 30 are based on the following:

Dudong Electronics makes all of its sales on credit and accounts for them using
the installment sales method. For simplicity, assume that all sales occur on
the first day of the year and that all cash collections are made on the last
day of the year. Dudong Electronics charges 18% interest on the unpaid
installment balance Data for 2011 and 2012 are as follows:
2011 2012
Sales P100,000 P120,000
Cost of goods sold 60,000 80,000
Cash collections (principal and interest)
2011 sales 40,000 50,000
2012 sales 90,000
29. The interest income recognized in 2012 amounted to:
A. 14,040 C. 35,640
B. 21,600 D. 49,700

30. Using the same information in No. 29, compute the realized gross profit in
2012:
A. 14,384 C. 37,184
B. 22,800 D. 39,600

Questions 31 thru 33 are based on the following:

Atlas Construction Co. has used the cost-to-cost percentage method of recognizing
revenue. The following incomplete records were provided for a recently
completed building project.
2007 2008 2009
Contract price P20,000,000
Gross profit (loss) 400,000 P 1,400,000P (200,000)
Cost incurred 3,600,000 ? 8,200,000
31. How much cost was incurred in 2008?
A. 18,400,000 C. 6,600,000
B. 11,800,000 D. 1,600,000
32. What percentage (rounded) of the project was completed by the end of 2008?
A. 55% C. 65%
b. 60% D. 70%
33. What was the estimated cost to complete the project at the end of 2008?
A. 3,060,000 C. 8,200,000
B. 6,800,000 D. 9,800,000

34. Miracle Construkt, Inc. is executing a gigantic project of constructing the

tallest boarding house in the country. The project is expected to take three
years to complete.

The company has signed a fixed price contract of P12,000,000 for the
construction of this prestigious boarding house.
The details of the costs incurred to date in 2011 are:
Site labor costs P1,000,000
Costs of construction material 3,000,000
Depreciation of special plant and equipment used in
constructing to build the boarding house 500,000
Marketing and selling costs to get the boarding house
in the country the right exposure 1,000,000
Total P5,000,000
Total contract cost estimated to complete P5,500,000

Calculate the revenue costs and profit to be recognized in 2011:

Revenue Costs Gross Profit (loss)

A. P5,400,000 P4,500,000 P900.000
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 B. 5,400,000 5,500,000 (100,000)
C. 6,000,000 4,500,000 1,500,000
D. 6,000,000 5,500,000 900,000

35. Bonafe Constructors, Inc. has the following data for large jobs in its Jobs
in
Progress account (000 omitted).
Project Actual Estimated Contract Per Cent
No. Cost Total Cost Price Complete
101 P 8,756 PI 72,800 PI 92,000 5
102 11,457 14,875 17,500 75
103 53,865 61,250 87,500 80
104 22,800 39,760 49,700 55
105 44,500 122,310 151,000 35
P141,378 P410,995 P497,700
The company accounts for its large jobs by the percentage of completion
method - output measures. Billings are done as follows: (a) 20% down payment
upon contract signing, and (b) balance is billed according to percentage of
completion, less an application of the down payment which is also according
to percentage of completion.
How much (1) total billings were made, and (2) total revenue that should be
recognized for the year 2011 ?
A. (1) P203286; (2) P120,060 C. (1)P99,540; (2) P120,060
B. (1) 99,540; (2)172,910 D. (1)203,286; (2) 172,910

36. On January 1, 2011 Blue Company commenced its sales of gas stoves. Separate
accounts were set up for installment and cash sales, but perpetual inventory
record was not kept. On the installment sales a down payment of 1/3 was
required, with the balance payable in 18 equal monthly installments. The
company adjusted its records at the end of each year to the "installment
basis" by use of a deferred gross profit account. When contracts were
defaulted, the unpaid balances were charged to a bad debts expense account,
and sales of repossessed merchandise were credited to this account. At the
end of the year the expense account was adjusted to reflect the actual loss.
The transactions of the Blue Company are as follows:

2011 2012
Sales:
New gas stoves for cash P 27,000 P 37,000
New gas stoves on installment
(including the 1 /3 cash down payment) 235,000 330,000
Repossessed gas stove 750 875
Purchases 193,000 215,000
Physical inventories at December 31:
New gas stoves at cost 45,500 60,000
Repossessions at appraised value 180 200
Unpaid balances of installment contracts defaulted:
2011 sales 3,580 4,650
2012 sales - 3,750
Cash collections on installment contracts,
exclusive of down payments:
2011 sales 54,000 77,000
2012 sales - 70,000
Compute the (1) balance of Installment Accounts Receivable - 2011 on December
31, 2012, and (2) The realized gross profit for the year 2012.
a. (1) P17,437; (2) P114,880 c. (1) P22,087; (2) P131,500
b. (1) 17,437; (2) 131,530 d. (1) 22,087; (2) 114,880

37. On January 1, 2011, Janette Company sold 20,000 square meters of farmland for
P600,000 to Michelle, taking in exchange a 10% interest bearing note Janette
Company purchased the farmland in 2011 at a cost of P500,000. The note will
be paid in three installments of P241,269 including interest each on December
31, 2011, 2012, and 2013. Shortly, after the sale Janette Company learns
distressing news about Michelle's financial circumstances and because
collection is so uncertain and decides to account for the sale using the cost
recovery method.
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 Determine the Realized Gross Profit and Interest Income for the year 2012,
and Unrecovered Cost as of December 31,2012, respectively.
a. P -0- ; P -0- ; P -0-
b. P -0- ; P -0- ; P17,462
c. P -0- ; P60,000; P177,462
d. P33,233; P -0- ; P -0-

Questions 38 & 39 are based on the following:

The following data were taken from the records of Samely Company, before the
accounts are closed for the year 2012. The company sells exclusively on the
installment basis and uses the installment method of recognizing profit.
2010 2011 2012
Installment sales P400,000 P440,000 P420,000
Cost of installment sales 240,000 272,800 256,200
Operating expenses 100,000 94,000 104,000
Balances as of Dec. 31:
Inst. Contracts Rec'ble 2010220,000110,000 28,000
Inst. Contracts Rec'ble 2011 250,000 92,000
Inst. Contracts Rec'ble 2012 238,000
Deferred gross profit - 2010 44,000 44,000
Deferred gross profit - 2011 95,000 95,000
During 2012, because the customers can no longer be located, the company
wrote off P9,000 of the 2010 accounts and P2,800 of the 2011 accounts as
uncollectible, and the entry made was:
Operating expenses 11,800
Inst. contracts receivable 2010 9,000
Inst. contracts receivable 2011 2,800
Also during 2012 a customer defaulted and the company repossessed merchandise
appraised at P4,000 after costs of reconditioning estimated at P400. The
merchandise had been purchased in 2010 by a customer who still owed P5,000 at
the date of repossession. The entry made was:
Inventory of repossessed merchandise 5,000
Inst. contracts receivable 2010 5,000

38. Compute the (1) total realized gross profit on installment sales for the
year 2012, and (2) The gain (loss) on repossession:
a. (1) P57,156; (2) P(960) c. (1) P 86,176; (2) P(960)
b. (1) 70,986; (2) 600 d. (1) 157,156; (2) 600

39. Using the same information in Number 38, the correcting entry for write-offs:
a. Deferred gross profit - 2010 3,600
Deferred gross profit - 2011 1,064
Operating Expenses 4,664
b. Deferred gross profit 4,664
Operating Expenses 4,664
c. Realized gross profit 4,664
Operating Expenses 4,664
d. Operating Expenses 4,664
Deferred gross profit - 2010 3,600
Deferred gross profit - 2011 1,064

40. The Ana Motors Company makes all sales on installment contracts and
accordingly reports income on the installment basis. Installment contracts
receivables are accounted for by years. Defaulted contracts are recorded by
debiting Loss on Repossession account and crediting the appropriate
Installment Contract Receivable account for the unpaid balance at the time of
default. All repossessions and trade-ins are recorded at realizable values.
The following data relate to the transactions during 2011 and 2012.
2011 2012
Installment sales P150,000 P198,500
Installment contract receivable, 12/31
2011 sales 80,000 25,000
2012 sales 95,000
Purchases 100,000 120,000
New merchandise inventory, 12/31 at cost10,00026,000
Loss on repossessions 6,000

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 The company auditor disclosed that the inventory taken on December 31, 2012
did not include certain merchandise received as trade-in on December 2, 2012
for which an allowance was given. The appraised value of the merchandise is
P1,500 which was also the allowance on the trade-in. No entry was made to
record this merchandise on the books at the time it was received. In 2012, a
2011 contract was defaulted and the merchandise was repossessed. At the time
of default, the repossessed merchandise had an appraised value of P2,500. The
repossessed merchandise was neither recorded nor included in the physical
inventory on December 31, 2012.
Compute the (1) total realized gross profit on sales in 2012 and (2) gain
(loss) on repossession.
a. (1) P70,000; (2) P 100 c. (1) P50,400; (2) P(1,100)
b. (1) 70,000; (2) (1,100) d. (1) 19,600; (2) 3,500

41. Ruben, Inc. is to acquire James Corp. by absorbing all the assets and
assuming all the liabilities for the latter in exchange for shares of the
former's stock. Below are the balance sheets of the two companies, with the
corresponding appraised value increment for James.
Ruben James
Assets, per books P4,000,000P2,500,000
Assets, appraisal increase P300,000
Liabilities PI,500,000 P800,000
Common stock (No par; PI00 par) 2,000,000 1,000,000
Additional paid-in capital 700,000 300,000
Retained earnings (deficit) (200,000) 400,000
Total equities P4,000,000P2,500,000
The parties agree to use the appraised values, against which the fair
market value of the shares will be matched. Ruben, Inc.'s common stock is
currently selling at P100 per share.
The number of shares to be issued by Ruben, Inc. is:
a. 10,000 c. 17,000
b. 13,000 d 20,000

42. Red Corporation will ispue common shares with a par value P10 for the net
assets of Blue Company Red's common stock has a current market value of P40
per share. Blue's statement of financial position on the date of acquisition
follow:
Current assets P320,000 Common stock, P5 parP80,000
Property and equipment 880,000 Additional paid in capital
320,000
Liabilities 400,000 Retained earnings 400,000
Blue's current assets are appraised at P400,000 and the property and equipment
was also appraised at P1,600,000. Its liabilities are fairly valued.
Accordingly, Red Corporation issued shares of its common stock with a total
market value equal to that of Blue's net assets including goodwill.
To recognize goodwill of P200,000, how many shares were to be issued by Red'.
a. 45,000 c. 50,000
b. 40,000 d. 55,000

43. On May 31,2013, Dear Company has assets and liabilities with the following fair
values:
Current assets P180,000
Non-current assets 220,000
Liabilities 40,000
On June 1,2013, Love Corporation purchases the net assets of Dear Company for
P310,000 cash. In the books of Love corporation, the acquisition resulted in:
Guerrero 2013
a. Negative goodwill of P50,000. c. Reduction from current assets of
P50,000.
b. Income from acquisition of P50,000. d. Deduction from non current
assets of P50,000.

44. Diwalwal, a private limited company, has acquired Coal, a private limited
company, on January 1,2011. The fair value of the purchase consideration was
10 million ordinary shares of P1 of Diwalwal, and the fair value of the net
assets acquired was P7 million. At the time of the acquisition, the value of
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 the ordinary shares of Diwalwal and the net assets of Coal were only
provisionally determined. The value of the shares of Diwalwal (P11 million)
and the net assets of Coal (P7.5 million) on January 1, 2011, were finally
determined on November 30, 2011.
However, the directors of Diwalwal have seen the value of the company decline
since January 1,2011, and as of February 1,2012, wish to change the value of
the purchase consideration to P9 million. What value should be placed on the
purchase consideration and assets of Coal as at the date of acquisition?
a. Purchase consideration P10 million, net asset value P7 million.
b. Purchase consideration P11 million, net asset value P7.5 million.
c. Purchase consideration P9 million, net asset value P7.5 million.
d. Purchase consideration P11 million, net asset value P7 million.

45. Companies X, Y, and Z, parties to a consolidation, have the following data:

X Co. Y Co. Z Co.
Net assets P400,000 P600,000 PI,000,000
Average annual earnings 60,000 60,000 80,000
The parties collectively agreed that the new corporation, AA Co. will issue a
single class of stock based on the earnings ratio. What is the stock
distribution ratio to companies X, Y, and Z, respectively?
a. 20:30:50 c. 30:40:30
b. 30:30:40 d. 40:40:20

46. Philip Company will issue shares of its P10 par value stock for all of the
outstanding stock of the Siylay Company. Philip Company stock has a market
value of P40 per share. Siylay Company's balance sheet appears below:
Current Assets P160,000 Current LiabilitiesP 50,000
Property, plant and Long-term debt 150,000
Equipment 440,000 Common stock,
P4par 40,000
Paid-in capital in
excess of par 160,000
Retained Earnings 200,000
Total P600,000 P600,000
Philip Company estimated that the curent value of the current assets would
be P200,000 and the property, plant, and equipment, P800,000; the
liabilities were correctly stated. Accordingly, Philip Company issued
sufficient shares of its stock so that the market value of the stock issued
equalled the market value of Siylay Company's net assets.
Compute the stock exchange ratio for Philip shares to Siylay shares:
a. 1:2 c. 3:1
b. 2:1 d. 1:3

Questions 47 & 48 are based on the following:

47. Rivendell paid finder's fees of P40,000, legal fees of P13,000, audit fees
related to the stock issuance of P10,000, stock registration fees of P5,000,
and stock listing application fees of P4,000.
Based on the preceding information, under the acquisition method, what
amount relating to the business combination would be expensed?
a. 19,000 c 63,000
b. 53,000 d. 72,000

48. Using the same information in No. 47:

a. P72,000 of stock issue costs are treated as goodwill.
b. P19,000 of stock issue costs are treated as a reduction in the issue
price.
c. P19,000 of stock issue costs are expensed.
d. P72,000 of stock issue costs are expensed.

49. In a business combination accounted as purchase, Major Corp. issued non-

voting, non-convertible preferred stock with a fair value of P8,000,000 in
exchange for all of the outstanding common stock of Minor Co. On the
acquisition date, Minor had tangible net assets with a carrying amount of
P4,000,000 and a fair value of P5,000,000. In addition, Major issued
preferred stock valued at P800,000 to an individual as a finder's fee in
arranging the transaction. As a result of this transaction, Major should

11
 record an increase in net assets of
a. 4,000,000 c. 5,800,000
b. 5,000,000 d. 8,000,000

50. ABC Co. is acquiring XYZ Inc. XYZ has the following intangible asset:
• Patent on a product that is deemed to have no useful life P10,000.
• Customer list with an observable fair value of P50,000.
• A 5-year operating lease with favorable terms with a discounted present
value of P8,000.
• Identifiable R & D of P100,000.
ABC will record how much for acquired Intangible Assets from the purchase
Of XYZ Inc?
a. P168,000 c. P150,000
b. 158,000 d. 58,000

51. Roel Company acquired equipment on January 1, 2009 at a cost of P800,000,

depreciating it over 8 years with a nil residual value. On January 1, 2012.
The Muldon Company acquired 100% of Roel and estimated the fair value of the
equipment at P460,000, with a remaining life of 5 years. This fair value was
not incorporated into Roel's books and the depreciation expense continued to
be calculated by reference to original cost.

What adjustments should be made to the depreciation expense for the year and
the statement of financial position carrying amount in preparing the
consolidated financial statements for the year ended December 31, 2013?

Depreciation expense Carrying amount

a. Increase by P8,000 Increase by P24,000
b. Increase by P8,000 Decrease by P24,000
c. Decrease by P8,000 Increase by P24,000
d. Decrease by P8,000 Decrease by P24,000

52. Baiter Inc. acquired Jersey Company on January 1,2011. When the purchase
occurred Jersey Company had the following information related to fixed
assets:
Land P 80,000
Building 200,000
Accumulated Depreciation (100,000)
Equipment 100,000
Accumulated Depreciation (50,000)
The building has a 10-year remaining useful life and the equipment has a 5-
year remaining useful life. The fair values of the assets on that date were:
Land P100,000
Building 130,000
Equipment 75,000
What is the 2011 depreciation expense Baiter will record related to
purchasing Jersey Company?
a. P 8,000 c. P28,000
b.P15,000 d.P30,000

53. SS Corporation is 80 percent owned by PP Inc. On January 1,2007, SS Corporation

paid PI00,000 for a truck with an expected economic life of 10 years and no
residual values. SS Corp. sold the truck to PP Inc., on January 1,2013. During
the preparation of the consolidated working paper for 2013, the following
working paper entry was made to eliminate the effects of the intercompany
truck sale:
Truck 48,000
Gain on sale of truck 12,000
Depreciation expense 3,000
Accumulated Depreciation 57,000

What amount of depreciation expense was recorded by PP Inc. during 2013?

a. PI 0,000 c. P 5 0,000
b. PI 3,000 d. P 5,200

12
Questions 54 & 55 are based on the following:
54 Scroll, Inc. a wholly owned subsidiary of Pirn, Inc. began operations on
January 1, 2012. The following information is from the condensed 2012 income
statements of Pirn and Scroll:

Pirn Scroll
Sales to Scroll P100,000 P
Sales to others 400,000 300,000
P500,000 P300,000
Cost of goods sold:
Acquired from Pirn - 80,000
Acquired from others 350,000 190,000
Gross profit P150,000 P 30,000
Depreciation 40,000 10,000
Other expenses 60,000 15,000
Income from operations P 50,000 P5,000
Gain on sale of equipment to
Scroll 12,000
Income before income taxes P 62,000 P5,000

Additional Information:
* Sales by Pirn to Scroll are made on the same terms as those made to
third parties.
* Equipment purchased by Scroll from Pirn for P36,000 on January 1, 2012
is depreciated using the straight-line method over four-years.

For purposes of consolidation on December 31, 2012, what amount of

intercompany profit that should be eliminated from Scroll's inventory in the
consolidated financial statements?
a. P 6,000 c. P20,000
b. P10,000 d. P30,000

55. Using the same information in No. 54, the amount of depreciation expense in
the consolidated F/S?
a. P44,000 c. P50,000
b. P51,000 d. P53,000

56. Abnormal spoilage is

A. Not expected to occur when perfection standards are used.
B. Not usually controllable by the production supervisor.
C. Not expected to occur under efficient operating conditions.
D. The result of unrealistic production standards.

57. Which of the industries listed is most likely to use process costing in
accounting for production costs?
A. Road builder.
B. Electrical contractor.
C. Newspaper publisher.
D. Clothing manufacturing.

58. The cost associated with abnormal spoilage ordinarily would be charged to
A. A material variance account.
B. A special loss account.
C. Manufacturing overhead.
D. Inventory.

59. Smile Labs develops 35mm film using a four-step process that moves
progressively through four departments. The company specializes in overnight
service and has the largest drug store chain as its primary customer. Currently,
direct labor, direct materials, and overhead are accumulated by department. The
cost accumulation system that best describes the system Smile Labs is using is
A. Operation costing.
B. Activity-based costing.
C. Process costing.
D. Job-order costing.

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60. A manufacturing firm may experience both normal and abnormal spoilage in its
operations. The costs of both normal and abnormal spoilage are accounted for in
the accounting records. The costs associated with any abnormal
spoilage are
A. Assigned to the good units transferred to finished goods.
B. Charged to a special abnormal spoilage loss account.
C. Charged to the manufacturing overhead control account.
D. Allocated between the units transferred to finished goods and those remaining
in work-in-process.

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