7 Cpa Board Subjects

MANAGEMENT ADVISORY SERVICES 1.

(MAS-EASY) When estimating cash flow for use in capital budgeting, depreciation is: a. Included as a cash or other cost. b. Excluded for all purposes in the computation. c. Utilized to estimate the salvage value of an investment. d. Utilized in determining the tax costs or benefit.

D

2.

(MAS-EASY) In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable? a. p-value. b. R-squared. c. Standard error. d. t-statistic.

B

3.

(MAS-EASY) Which of the following phrases defines the internal rate of return on a project? a. The number of years it takes to recover the investment. b. The discount rate at which the net present value of the project equals zero. c. The discount rate at which the net present value of the project equals one. d. The weighted-average cost of capital used to finance the project.

B

4.

(MAS-EASY) Which of the following is an assumption in a perfectly competitive financial market? a. No single trader or traders can have a significant impact on market prices. b. Some traders can impact market prices more than others. c. Trading prices vary based on supply only. d. Information about borrowing/lending activities is only available to those willing to pay market prices.

A

5.

(MAS-EASY) Which of the following terms best describes a payroll system? a. Database management system (DBMS). b. Transaction processing system (TPS). c. Decision support system (DSS). d. Enterprise resource planning (ERP) system.

B

6.

(MAS-AVERAGE) The full-employment gross domestic product is P1.3 trillion, and the actual gross domestic product is P1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?

C

Solution: P20 billion Spending/(1 - MPC) = Change in GDP Spending/(1 - 0.8) = P100,000,000,000 Spending = P100,000,000,000 x (1 - 0.8) Spending = P20,000,000,000

7.

(MAS-AVERAGE) Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of P25 per unit. Unit variable costs were the following: Variable manufacturing costs Variable selling and administrative costs Total

C

P9 6 P15

Total fixed costs were P250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional P15,000 on advertising, then sales would have increased by P30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit? Solution: (P3,000) or P3,000 decrease Compute contribution margin in total: Selling – variable = contribution price costs margin P25 – P15 = P10

x x

units sold (sales / selling price) 1,200 units (P30,000 / P25)

Less: Additional advertising costs Decrease in pretax profit

8.

(MAS-AVERAGE) Selected costs associated with a product are as follows:

= =

Total contribution margin P12,000 (15,000) (P3,000)

B

Total standard hours for units produced Total actual direct labor cost Actual per hour labor rate Standard per hour labor rate

5,000 P111,625 P23.50 P24

What amount is the total direct labor price variance? Solution: P2,375 Favorable LPV=AHxAR-AHxSR LPV=4,750 hours x P23.50 – 4,750 hours x P24.00 LPV= P111,625 – P114,000 LPV= P(2,375) Favorable

9.

(MAS-AVERAGE) A hospital is comparing last year's emergency rescue services expenditures to those from 10 years ago. Last year's expenditures were P100,500. Ten years ago, the expenditures were P72,800. The CPI for last year is 168.5 as compared to 121.3 ten years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?

C

Solution: 0.6% or 0.6209% Base year – emergency rescue service Current year costs times the ratio of base to current year indices: P100,500 x 121.3/168.5 = Difference (decrease)

72,800 72,348 (452)

The percentage change in the expenses is simply the change divided by the base year computed as follows: (452)/ 72,800 = .6% decrease.

10 .

(MAS-AVERAGE) The following information is available on market interest rates: The risk-free rate of interest 2% Inflation premium 1% Default risk premium 3% Liquidity premium 2% Maturity risk premium 1% What is the market rate of interest on a one-year U.S. Treasury bill? Solution: 3% The market rate of interest on a one year U.S. Treasury bill is comprised of the risk free rate of return and an inflation premium. The fact pattern gives this information as follows: Risk free rate of interest Inflation premium Market rate of interest on one-year T-bill

11 .

2% 1% 3%

(MAS-DIFFICULT) Bethard Corporation produces and sells a single product. Data concerning that product appear below:

Selling price Variable expenses Contribution margin

Per Unit P120 24 P 96

Percent of Sales 100% 20% 80%

Fixed expenses are P354,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by P8 and increase the advertising budget by P23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change? Solution: (P10,200) or P10,200 decrease New selling price (P120 − P8)........................................................... New contribution margin (P112 − P24).............................................. New unit monthly sales (5,000 units + 600 units)..............................

P112 P88 5,600

A

New total contribution margin: 5,600 units × P88 per unit................. Present total contribution margin: 5,000 units × P96 per unit............ Change in total contribution margin................................................... Less increase in advertising budget.................................................. Change in net operating income........................................................

12 .

P492,800 480,000 12,800 23,000 (P10,200)

(MAS-DIFFICULT) Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:    

  

Sales are budgeted at P330,000 for November, P300,000 for December, and P320,000 for January. Collections are expected to be 85% in the month of sale, 14% in the month following the sale, and 1% uncollectible. The cost of goods sold is 60% of sales. The company purchases 80% of its merchandise in the month prior to the month of sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase. Other monthly expenses to be paid in cash are P21,200. Monthly depreciation is P21,000. Ignore taxes. Statement of Financial Position October 31 Assets: Cash Accounts receivable (net of allowance for uncollectible accounts) Inventory Property, plant and equipment (net of P594,000 accumulated depreciation) Total assets

1,004,000 P1,267,400

Liabilities and Stockholders’ Equity: Accounts payable Common stock Retained earnings Total liabilities and stockholders’ equity

P 196,000 620,000 451,400 P1,267,400

P

22,000 83,000 158,400

Given the above data, excess (deficiency) of cash available over disbursements for the month of December is equal to? Solution: P96,400 (excess)

Cash receipts................................................... Cash disbursements: Disbursements for merchandise................... Other monthly expenses.............................. Total cash disbursements............................. Excess (deficiency) of cash available over disbursements.............................................

13 .

November P363,500

December P301,200

196,000 21,200 217,200

183,600 21,200 204,800

P146,300

P 96,400

(MAS-DIFFICULT) Ulrich Company has a Castings Division which does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 20,000 special castings each year on a continuing basis. The special casting would require P12 per unit in variable production costs. In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting - the RB4 which it presently is producing. The RB4 sells for P40 per unit, and requires P18 per unit in variable production costs. Boxing and shipping costs of the RB4 are P6 per unit. Boxing and shipping costs for the new special casting would be only P1 per unit, thereby saving the company P5 per unit in cost. The company is now producing and selling 100,000 units of the RB4 each year. Production and sales of this casting would drop by 25 percent if the new casting is produced. Some P240,000 in fixed production costs in the Castings Division are now being covered by the RB4 casting; 25 percent of these costs would have to be covered by the new casting if it is produced and sold to the Machine Products Division. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

Solution: P33 Transfer Price = Variable cost + Lost contribution margin per unit on outside sales Variable costs: Variable production costs.................................... Boxing and shipping........................................... Total....................................................................

P12 1 P13

Lost contribution margin on outside sales: RB4 selling price per unit.................................... Variable costs per unit (P18 + P6)...................... Contribution margin per unit............................... Loss in production (100,000 × 0.25)................... Total lost contribution margin..............................

P40 24 P16 × 25,000 P400,000

P400,000 ÷ 20,000 new castings = P20 per casting. Therefore, the lower limit on the transfer price should be: Transfer price = P13 + P20 = P33 per casting.

14 .

(MAS-DIFFICULT) (Ignore income taxes in this problem.) The management of an amusement park is considering purchasing a new ride for P60,000 that would have a useful life of 15 years and a salvage value of P8,000. The ride would require annual operating costs of P26,000 throughout its useful life. The company's discount rate is 10%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment? Solution: P33,367

Cost of asset.......................... Annual operating costs.......... Salvage value........................ Net present value...................

Years Now 1-15 15

Amount P(60,000) P(26,000) P8,000

10%Factor 1.000 7.606 0.239

Present Value (P 60,000) ( 197,756) 1,912 (P255,844)

P255,844 ÷ 7.606 = P33,637 additional revenue per year would be necessary to justify the investment. This much additional revenue would result in a zero net present value. Any less than this and the net present value would be negative. Any more than this and the net present value would be positive.

15 .

(MAS-DIFFICULT) The following information relates to Konbu Corporation for last year: Price earnings ratio............ Dividend payout ratio......... Earnings per share............

15 30 % P5

What is Konbu's dividend yield ratio for last year? Solution: 2% PE=Market Price/EPS 15=MP/P5 MP=P15 x P5 MP=P75 DY=Payout/MP DY=P1.5/P75 DY=.02 or 2%

AUDITING THEORY 1.

(AT-EASY) Which of the following is a factor in the control environment? a. Segregation of duties. b. Information processing. c. Performance reviews. d. Management's philosophy and operating style.

D

2.

(AT-EASY) Which of the following documents the procedures that are applied and the conclusions reached in an audit engagement? a. Management representation letter. b. Audit guide. c. Auditor's report. d. Working papers.

D

3.

(AT-EASY) An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the following management assertions is supported by this test? a. Valuation and allocation. b. Completeness. c. Rights and obligations. d. Presentation and disclosure.

B

4.

(AT-EASY) Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been: a. Authorized. b. Implemented. c. Tested. d. Monitored.

B

5.

(AT-EASY) Which of the following services, if any, may an accountant who is not independent provide? a. Compilations, but not reviews. b. Reviews, but not compilations. c. Both compilations and reviews. d. No services.

A

6.

(AT-AVERAGE) When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should: a. Not refer to the change in the auditor's report.

A

b. Refer to the note in the financial statements that discusses the change. c. Refer to the change in an emphasis-of-matter paragraph. d. Explicitly state whether the change conforms with GAAP. 7.

(AT-AVERAGE) An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the: a. Notes to the financial statements. b. Auditor's engagement letter. c. Management representation letter. d. Introductory paragraph of the auditor's report.

A

8.

(AT-AVERAGE) Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? a. Disagreements between the predecessor auditor and management as to significant accounting policies and principles. b. The predecessor auditor's understanding of the reasons for the change of auditors. c. Facts known to the predecessor auditor that might bear on the integrity of management. d. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

D

9.

(AT-AVERAGE) Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling.

C

10 .

(AT-AVERAGE) Which of the following circumstances would be inappropriate for the auditor to communicate to those charged with governance? a. A material misstatement was noted by the auditor and corrected by management. b. No significant deficiencies in internal control exist that would affect the financial statements. c. The auditor is requesting representations regarding the financial statements from management. d. Management has consulted with other accountants about accounting and auditing matters during the period under audit.

B

11 .

(AT-DIFFICULT) On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account in bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by: a. examining the composition of deposits in both bank A and bank B subsequent to year-end. b. examining paid checks returned with the bank statement of the next account period after yearend. c. preparing, from the cash disbursements records, a summary of bank transfers for one week prior to and subsequent to year-end. d. comparing the detail of cash receipts as shown by the client’s cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.

B

12 .

(AT-DIFFICULT) Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? a. The cycle basis is used for physical counts. b. Supplies of relatively little value are expensed when purchased. c. Perpetual inventory records are maintained only for items of significant value. d. The storekeeper is responsible for maintenance of perpetual inventory records.

D

13 .

(AT-DIFFICULT) The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency is that the: a. beta risk may be completely ignored. b. variability of the populations of differences or ratios is less than that of the populations of book values or audited values. c. number of members of the populations of differences or ratios is smaller than the number of members of the population of book values. d. calculations required in using difference or ratio estimation are less arduous and fewer than those required when using direct estimation.

B

14

(AT-DIFFICULT) Which of the following types of evidence is not available when using substantive

B

.

tests of transactions? a. Documentation. b. Confirmation. c. Inquiries of the client. d. Reperformance.

15 .

(AT-DIFFICULT) For effective internal control purposes, the vouchers payable department generally should: a. obliterate the quantity ordered on the receiving department copy of the purchase order. b. stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. c. establish the agreement of the vendor’s invoice with the receiving report and purchase order. d. ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.

C

THEORY OF ACCOUNTS 1.

(TOA-EASY) Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization? a. Reliability. b. Timeliness. c. Neutrality. d. Relevance.

D

2.

(TOA-EASY) When purchasing a bond, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond? a. Price. b. Par. c. Yield. d. Interest.

A

3.

(TOA-EASY) According to the conceptual framework, which of the following correctly pairs a primary qualitative characteristic of accounting information with one of its components? a. Relevance and Timeliness. b. Relevance and Verifiability. c. Reliability and Predictive Value. d. Reliability and Feedback Value.

A

4.

(TOA-EASY) How should operating expenses for a nongovernmental not-for-profit organization be

B

reported? a. Change in temporarily restricted net assets. b. Change in unrestricted net assets. c. Change in permanently restricted net assets. d. Contra-account to associated revenues. 5.

(TOA-EASY) Which of the following not-for-profit entities is required to prepare a statement of functional expense? a. An art museum. b. A shelter for the homeless. c. A private foundation. d. A public golf course.

B

6.

(TOA-AVERAGE) Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill? a. Enterprise. b. Permanent. c. Special revenue. d. Internal service.

A

7.

(TOA-AVERAGE) Blythe Corp. is a defendant in a lawsuit. Blythe's attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency? a. Accrued and disclosed. b. Accrued but not disclosed. c. Disclosed but not accrued. d. No disclosure or accrual.

C

8.

(TOA-AVERAGE) The funded status of a defined benefit pension plan for a company should be reported in a. The income statement. b. The statement of cash flows. c. The statement of financial position. d. The notes to the financial statements only.

C

9.

(TOA-AVERAGE) Which of the following transactions qualify as a discontinued operation? a. Disposal of part of a line of business. b. Planned and approved sale of a segment. c. Phasing out of a production line. d. Changes related to technological improvements.

B

10 .

(TOA-AVERAGE) Pann, a nongovernmental not-for-profit organization, provides food and shelter to the homeless. Pann received a P15,000 gift with the stipulation that the funds be used to buy beds. In which net asset class should Pann report the contribution? a. Endowment. b. Temporarily restricted. c. Permanently restricted d. Unrestricted.

B

11 .

(TOA-DIFFICULT) Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except: a. Quoted prices for identical assets and liabilities in markets that are not active. b. Quoted prices for similar assets and liabilities in markets that are active. c. Internally generated cash flow projections for a related asset or liability. d. Interest rates that are observable at commonly quoted intervals.

C

12 .

(TOA-DIFFICULT) Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company report the error? a. The financial statements for years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the Year 3 financial statements.

D

b. The financial statements for Years 1 and 2 should not be restated; financial statements for Year 3 should disclose the fact that the error was made in prior years. c. The financial statements for Years 1 and 2 should not be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3. d. The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3. 13 .

(TOA-DIFFICULT) Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated? a. The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation. b. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation. c. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. d. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

C

14 .

(TOA-DIFFICULT) A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an): a. Component of income from continuing operations, net of applicable income taxes. b. Extraordinary item, net of applicable income taxes. c. Component of income from continuing operations, but not net of applicable income taxes. d. Extraordinary item, but not net of applicable income taxes.

C

15 .

(TOA-DIFFICULT) Neely Co. disclosed in the notes to its financial statements that a significant number of its unsecured trade account receivables are with companies that operate in the same industry. This disclosure is required to inform financial statement users of the existence of: a. Concentration of credit risk. b. Concentration of market risk. c. Risk of measurement uncertainty. d. Off-balance sheet risk of accounting loss.

A

PRACTICAL ACCOUNTING 1 1.

(P1-EASY) Sun Inc. factors P2,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at P100,000. What would be recorded as a gain (loss) on the transfer of receivables? Solution: (P160,000) or P160,000 loss

Finance charge Recourse liability Loss on sale

2.

P 60,000 (P2,000,000 x 3%) 100,000 P 160,000

(P1-EASY) Bell Inc. took a physical inventory at the end of the year and determined that P475,000 of goods were on hand. In addition, the following items were not included in the physical count. Bell, Inc. determined that P60,000 of goods were in transit that were shipped f.o.b. destination (goods were actually received by the company three days after the inventory count).The company sold P25,000 worth of inventory f.o.b. destination. What amount should Bell report as inventory at the end of the year? Solution: P 500,000 P475,000 + P25,000 = P500,000

3.

(P1-EASY) Wilson Co. purchased land as a factory site for P600,000. Wilson paid P60,000 to tear down two buildings on the land. Salvage was sold for P5,400. Legal fees of P3,480 were paid for title investigation and making the purchase. Architect's fees were P31,200. Title insurance cost P2,400, and liability insurance during construction cost P2,600. Excavation cost P10,440. The contractor was paid P2,200,000. An assessment made by the city for pavement was P6,400. Interest costs during construction were P170,000. Solution: P 666,880 P600,000 + P60,000 – P5,400 + P3,480 + P2,400 + P6,400 = P666,880

4.

(P1-EASY) MaBelle Corporation incurred the following costs in 2010: Acquisition of R&D equipment with a useful life of 4 years in R&D projects Start-up costs incurred when opening a new plant Advertising expense to introduce a new product Engineering costs incurred to advance a product to full production stage

P600,000 140,000 700,000 400,000

What amount should MaBelle record as research & development expense in 2010? Solution: P 550,000 (P600,000 ÷ 4) + P400,000 = P550,000

5.

(P1-EASY) Warranty4U provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the current year, Warranty4U provided 21,000 such warranty contracts at an average price of P81 each. Related to these contracts, the company spent P200,000 servicing the contracts during the current year and expects to spend P1,050,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts? Solution: P 367,000 [(21,000 × P81) x 3 yrs.] – P200,000 = P367,000

6.

(P1-AVERAGE) Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For a recent shipment, the company paid P3,000 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell for P0.25 each. Group 2 consists of 5,500 pieces that are expected to sell for 0.60 each. Group 3 consists of 500 pieces that are expected to sell for P1.20 each. Using the relative sales value method, what is the cost per item in group 3? Solution: P 0.796 (2,500 × P0.25) + (5,500 × P0.60) + (500 × P1.20) = P4,525; [(500 × P1.20) ÷ P4,525] × P3,000 = P398 ÷ 500 = P0.796

7.

(P1-AVERAGE) Ebert Inc. owns the following assets: Asset Cost A P140,000

Salvage P14,000

Estimated Useful Life 10 years

B C

75,000 164,000

7,500 8,000

5 years 12 years

What is the composite life of Ebert's assets? Solution: 8.9 years

(P126,000 + P67,500 + P156,000) P39,100(from #92) = 8.9 yrs 8.

(P1-AVERAGE) On January 1, 2004, Hernandez Corporation issued P4,500,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2010, when the fair market value of the bonds was 96, Hernandez repurchased P1,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2010. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as Solution:P 49,000



 $135,000



10

 $4,500,000x1.03  

 

 7

 

 2/9

= P1,009,000 (CV of retired bonds) P1,009,000 – (P1,000,000  .96) = P49,000

9.

(P1-AVERAGE) On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of P20 on 60,000 SARs. Current market prices of the stock are as follows: January 1, 2010 December 31, 2010 December 31, 2011 December 31, 2012

P35 per share 38 per share 30 per share 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2010. On December 31, 2012, 16,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2012? Solution: P 285,000 (P33 – P20) × 60,000 × .75 = P585,000; P585,000 – P300,000 = P285,000

10 .

(P1-AVERAGE) Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 con- tained the following errors: Dec. 31, 2010 Dec. 31, 2011 Ending inventory P132,000 too high P156,000 too low Depreciation expense 84,000 too high — Insurance expense 60,000 too low 60,000 too high Prepaid insurance 60,000 too high — In addition, on December 31, 2011 fully depreciated equipment was sold for P28,800, but the sale was not recorded until 2012. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by Solution: P 268,800 P156,000 (u) + P84,000 (u) – P60,000 (o) + P60,000 (u) + P28,800 (u) = P268,800 (u)

11 .

(P1-DIFFICULT) You gathered the following November 30 bank reconciliation from the cash records of the Conrad Company in connection with your audit of the company’s financial statements for the year 2006: Balance per bank Deposits in transit

P 560,000 123,200

Outstanding checks Balance per books

(160,000) P 523,200

Results for the month of December follow: Balance December 31 December deposits December note collected (not included in deposits) December bank service charge December NSF check, returned by the bank (recorded by bank as a charge)

Bank P692,000 400,000

Books P740,000 464,800

80,000 1,200

-

26,800

-

Based on the above and the result of your audit, answer the following. The outstanding checks as of December 31, 2006 is Solution: P88,000

12 .

(P1-DIFFICULT) Duncan Company is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers. An interim physical count was made on May 31, 2007. The following was obtained from the general ledger. Inventory, July 2006 875,000 Physical inventory, May 31, 2007 950,000 Sales for 11 months ended May 31, 2007 8,400,000 Sales for year ended June 30, 2007 9,600,000 Purchases for 11 months ended May 31, 2007 (before adjustments) 6,750,000 Purchases for year ended June 30, 2007 (before adjustments) 8,000,000 Additional Information: • Shipments received in May and included in the physical inventory but recorded as June purchases 75,000 • Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not received nor had chargebacks to vendors been recorded: Total at May 31, 2007 10,000 Total at June 30, 2007 (including the May unrecorded chargebacks) 15,000 • Deposits made with vendor and charged to purchases in April 2007. Product was shipped in July 2007 20,000 • Deposits made with vendor and charged to purchases in May 2007. Product was shipped FOB destination on May 29, 2007 and was included in May 31, 2007 physical inventory as goods in transit. 55,000 • Through the carelessness of the receiving department, a June shipment was damaged by rain. This shipment was later sold in June at its cost of 100,000 What is the Cost of goods sold during the month of June 2007 using the gross profit method? Solution: P 980,000 B = 875 + 6,740 – 895 = 6,720; 8,400 – 6,720= 1,680 / 8,400= 20% A = 9,600 – 100 = 9,500 x 80% = 7,600 +100 = 7,700 – 6,720 = 980

13 .

(P1-DIFFICULT) Hetfield has a herd of 15 3 year old cattle at January 1, 2008. Two animals were born during the year, one on April 1, 2008 and one on September 30, 2008. Three animals with ages of 3, 2.5 and 2 were purchased on July 1, 2008 for P5,000, P4,500 and P4,000, respectively. One animal was sold on March 1, 2008 for P4,500. Per-unit fair values less cost to sell are as follows. 3 year old animal at January 1, 2008 Newborn animal at April 1, 2008

P 4,000 1,100

3 year old animal at July 1, 2008 2.5 year old animal at July 1, 2008 2 year old animal at July 1, 2008 Newborn animal at October 1, 2008 Newborn animal at 31 December 2008 0.25 year old animal at December 31, 2008 0.5 year old animal at December 31, 2008 0.75 year old animal at December 31, 2008 2 year old animal at December 31, 2008 2.5 year old animal at December 31, 2008 3 year old animal at December 31, 2008 3.5 year old animal at December 31, 2008 4 year old animal at December 31, 2008

5,000 4,500 4,000 1,200 1,200 1,250 1,350 1,450 4,500 5,000 5,500 6,000 6,200

How much is the increase in fair value less estimated cost to sell due to physical change? Solution: P 13,900 A (15–1sold) 3yr/4yr x (6,200 – 5,500); 1 3yr/3.5 x (6,000 – 5,500); 1 new/.75 x (1,450 – 1,200); 1 new/.25 x (1,250 – 1,200); 1 2.5/3yr x (5,500 – 5,000); 1 2/2.5yr x (5,000 – 4,500)+ 2 newly born 1,100 + 1,200 = 13,900

14 .

(P1-DIFFICULT) Buswang Beach Bank loaned Boracay Company P7,500,000 on January 1, 2004. The terms of the loan were payment in full on January 1, 2009 plus annual interest payment at 11%. The interest payment was made as scheduled on January 1, 2005. However, due to financial setbacks, Boracay was unable to make its 2006 interest payment. Buswang Beach considers the loan impaired and projects the cash flows from the loan as of December 31, 2006. Assume that the bank accrued the interest at December 31, 2005, but did not continue to accrue interest due to the impairment of the loan. The projected cash flow are: Date of cash flow Amount projected as of December 31, 2006 December 31, 2007 December 31, 2008 December 31, 2009 December 31, 2010

500,000 1,000,000 2,000,000 4,000,000

How much is the loan impairment loss on December 31, 2006? Solution: P 2,965,000

15 .

(P1-DIFFICULT) After a year of operations, an entity is calculating the value in use of one of its cash-generating unit at the beginning of 2009. Data is shown below. Year 2009 2010 2011 2012 2013

Future Cash Flows P 230 253 273 290 304

The appropriate discount rate was determined to be 15%. Projections of future cash flows should be extended up to 11 years. The long-term growth rates were determined as 3%, -2%, -6%, -15%, -25% and - 67% from year 2014 up to year 2019. How much is the value in use? Solution: P 1,360 or P 1,360.97 Compute for the present value of cash flow each year. Use P 304 as the base figure in determining cash flows for years 2014 to 2019 and compute present value each year. (e.g., cash flow for 2019 = 304 x 1.03 x . 98 x .94 x .85 x .75 x .33). Add the computed present values to arrive at the answer.

TAXATION 1.

(TAX-EASY) The following taxes paid or incurred within the taxable year in connection with the taxpayer’s trade or business are not deductible for income tax purposes, except: a. Philippine income tax b. Foreign income tax, if taxpayer avails of the Foreign Tax Credit (FTC) c. Estate tax d. Documentary stamp tax

D

2.

(TAX-EASY)) The following are exempt from the imposition of Improperly Accumulated Earnings Tax (IAET) except: a. General professional partnerships b. Insurance companies c. Branches of a foreign corporation or a resident foreign corporations d. All of the above

D

3.

(TAX-EASY) The lease of property, real or personal, is subject to:

D

I. 5% gross receipts tax if the lessor is a bank. II. 12% VAT if the lessor is not a bank. a. Yes to I and II. b. Yes to I, No to II. c. No to I and II. d. No to I, Yes to II. 4.

(TAX-EASY) Rentals, charters and other fees derived by a non-resident lessor of aircraft, machineries and other equipment is subject to what percent of final withholding tax? a. 4.5% b. 5% c. 10% d. 7.5%

D

5.

(TAX-EASY) This Act amends the National Internal Revenue Code (NIRC) and is otherwise known as the “Tax Reform Act of 1997” a. R.A. No. 8424 b. R.A. No. 1158 c. R.A. No. 8337 d. R.A. No. 9339

A

6.

(TAX-AVERAGE) Jay Corporation is registered under the laws of the Virgin Islands. It has extensive operations in Southeast Asia. In the Philippines, its products are imported and sold at a mark-up by its exclusive distributor, Roxy’s Trading, Inc. The BIR compiled a record of all the imports of Roxy from Jay and imposed a tax on Jay’s net income derived from its exports to Roxy. Is the BIR correct? a. Yes. Jay is a non-resident foreign corporation engaged in trade or business in the Philippines. b. No. The tax should have been computed on the basis of gross revenues and not net income. c. No. Jay is a non-resident foreign corporation not engaged in trade or business in the Philippines. d. Yes. Jay is doing business in the Philippines through its exclusive distributor Roxy’s Trading, Inc.

C

7.

(TAX-AVERAGE) Joyce Resources Corporation, a corporation registered in Norway, has a 50 MW electric power plant in San Jose, Batangas. Aside from Joyce’s income from its power plant, which among the following is considered as part of its income from sources within the Philippines? a. Gains from the sale to an Ilocos Norte power plant of generators bought from the United States. b. Interests earned on its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit System. c. Dividends from a two-year old Norwegian subsidiary with operations in Zambia but derives 60% of its gross income from the Philippines. d. Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers. ` (TAX-AVERAGE) The following are allowed to be credited against income tax due, except: a. Withheld taxes, whether these are VAT or income taxes, for the given and corresponding taxable period or year b. Quarterly income tax payments credited against the income tax due of the taxpayer for the year c. Any excess of MCIT over the normal income tax in the prior year/s d. Excess MCIT from the previous taxable year/s to be credited against the annual MCIT due

A

9.

(TAX-AVERAGE) The following transactions are not VAT-exempt transactions, except: a. Importation of Mr. H, a horse owner, of thorough-bred horses to join at the Presidential Gold Cup Stakes race. b. Sales of Biogesic by PSG Hospital, a VAT-registered entity, to patient M, who is currently residing in Room 143 of PSG Hospital. c. Both a and b d. None of the above

B

10 .

(TAX-AVERAGE) Which of the following properties may be classified as part of conjugal or community property at the time of decedent’s death: a. Property transferred as a legacy or devise to the government; b. Paraphernal or capital property; c. Property inherited by the decedent before marriage; d. Property received as gift by the decedent during marriage.

C

11 .

(TAX-DIFFICULT) Runneth sold her rest house in Tagaytay City to Mycah her new best friend. It cost her PhP 400,000 when she bought this property a year ago from her ex-best friend AJ. As a consideration for the sale, Runneth received the following from Mycah:

8.

Year 1: Cash (down payment) Fair market value of a diamond ring received as part of the consideration for the sale Installments received: Year 1: Cash Year 2: Notes Receivable Year 3: Notes Receivable Mortgage assumed by Mycah

PhP

100,000 500,000 500,000 500,000

Based on the given facts, which of the following statements is false? a. The amount selling price is PhP 2,000,000. b. The amount of initial payments is PhP 500,000. c. The capital gains tax due for year 3 is PhP 0. d. The amount of contract price is PhP 1,600,000. Solution: B Down payments: Cash received by the seller

PhP

100,000 300,000

100,000

D

Fair market value of property received Installments received: Year 1: Cash Year 2: Notes Receivable Year 3: Notes Receivable Mortgage assumed by Mycah Selling Price Less: Cost to the seller Contract Price Initial Payments: Cash received by the seller Fair market value of property received Installment payment in Year 1 Excess of Mortgage assumed by buyer over cost to seller (500,000-400,000) Initial Payments Capital gains tax due for year 3 Capital gains tax due cannot be paid in installments since the total initial payments exceeds 25% of the selling price.

12 .

300,000

PhP PhP

100,000 500,000 500,000 500,000 2,000,000 (400,000) 1,600,000

PhP

100,000 300,000 100,000 100,000

PhP

600,000

PhP 600,000/ PhP 2,0000,000 = 30%

(TAX-DIFFICULT) The lease dated January 1, 200B provided for construction of improvements at the cost of the lessee, and the ownership will belong to the lessor at the end of 5-year lease contract. The construction of improvements which was completed at the end of the 3rd month of the contract amounted to PhP 240,500. The improvement has an economic life of 8 years and estimated scrap value of PhP 560. The rent income on improvements for year 1 under each method is: Outright Spread-out a. PhP 240,500 PhP 19,672 b. PhP 147,620 PhP 22,143 c. PhP 239,940 PhP 14,754 d. PhP 240,500 PhP 15,479 Solution: D Year 1 Outright method Year 1 Spread-out method Value of investment Less: Accum. depreciation [(PhP 240,500 - PhP 560)/8 yrs] x 4.75 yrs Book value, end of lease Divided by remaining years of contract Annual income from improvement Multiplied by months in a year Year 1 spread-out – rent income on improvement

Outright PhP 240,500

Spread-out

PhP240,500.00 142,464.37 PhP 98,035.63 4.75 PhP 20,639 9/12 PhP 15,479

13 .

(TAX-DIFFICULT) In 2012, Leo has made the following gifts:

On June 1, 2012, to Byut-Byut, his legally adopted daughter, on account of her marriage celebrated on December 28, 2011 On July 3, 2012, to Ferdy, his half-blood brother on account of his marriage on July 1, 2012 On September 20, 2012, to Monggy, his friend, a parcel of land, subject to the condition that Monggy will assume the mortgage indebtedness of Leo in the amount of PhP 200,000 On October 4, 2012, to Rencie, mother of his wife, on the account of her birthday

PhP 500,000 450,000 FMV 600,000 ZV 500,000

300,000

Compute for the donor’s tax payable on July 3, 2012 Donor’s Tax Rates Over

PhP

But Not Over

The Tax Shall be

Plus

Of the Excess Over

PhP

PhP 100,000

Exempt

100,000

200,000

0

2%

200,000

500,000

2,000

4%

200,000

500,000

1,000,000

14,000

6%

500,000

1,000,000

3,000,000

44,000

8%

1,000,000

3,000,000

5,000,000

204,000

10%

3,000,000

5,000,000

10,000,000

404,000

12%

5,000,000

1,004,000

15%

10,000,000

10,000,000

100,000

Solution: P26,800 June 1, 2012 Net Gift Less: Limit Taxable excess gift donor's tax rate Tax on excess gift Tax on Limit Tax due and payable on June 1, 2012

PhP PhP PhP PhP

July 3, 2012 Net Gift (490,000 + 450,000) Less: Limit Taxable excess gift donor's tax rate Tax on excess gift Tax on Limit Tax due Less: previously paid in June 1, 2012 Tax due and payable on July 3, 2012

14 .

PhP

940,000.00 500,000.00 PhP 440,000.00 6% PhP 26,400.00 14,000.00 PhP 40,400.00 13,600.00 PhP 26,800.00

(TAX-DIFFICULT) A married decedent died leaving the following: Community property Exclusive property Community deductions Exclusive deductions

490,000.00 200,000.00 290,000.00 4% 11,600.00 2,000.00 13,600.00

PhP

5,000,000 3,000,000 450,000 850,000

Among those included in the exclusive property were the following:

A piece of land inherited from the decedent’s father who predeceased him 3 ½ years ago, FMV at the time of inheritance is PhP 800,000 (no mortgage indebtedness); FMV at the time of present decedent’s death, PhP 900,000. This was mortgaged during the marriage for the benefit of the family for PhP 300,000 which was paid by the decedent before he died. Car which was received as gift 18 months before the present decedent’s death, FMV date of donation, PhP 500,000; FMV date of death, PhP 400,000. The vanishing deduction was: Solution: P 435,500 Land Value to be taken (whichever is lower between FMV at the time of transfer and death) Less: Mortgage paid by the decedent Initial basis Deduction form the initial basis (Total deductions x Initial basis/Gross Estate) 1,300,000 x 500,000/8,000,000 1,300,000 x 400,000/8,000,000 Basis of vanishing deduction Level of deduction Vanishing deduction TOTAL

15 .

PhP

800,000

PhP

(300,000) 500,000

Car

PhP PhP

400,000 400,000

(81,250) PhP

PhP

418,750 (3-4 years) 40% 167,500

PhP

PhP PhP

(65,000) 335,000 (1-2 years) 80% 268,000 435,500

(TAX-DIFFICULT) Cherry, a VAT-registered trading business reported the following transactions during the month of December 200X:

Cash sales to VAT persons Cash sales to Non-VAT persons Cash sales to government units Credit sales to VAT persons Sales return Sales discount Purchases of goods for sale from VAT person, at VAT invoice amount inclusive of VAT Purchases of goods for sale from Non-VAT person Payment of services to VAT person gross of VAT: For business purposes For personal needs of the owner

PhP

Which of the following statements is false? a. The net VAT payable during the month is PhP 52,200. b. The net VAT payable for the sales made to government units is PhP 0. c. The standard input VAT is 7% of net sales to government units. d. The net VAT payable during the month is PhP 48,600. Solution: D Output VAT from: Cash sales to VAT persons (PhP 300,000 x 12%) Cash sales to Non-VAT persons (PhP 100,000 x 12%) Cash sales to government units (PhP 200,000 x 12%) Credit sales to VAT persons (PhP 400,000 x 12%) Sales return (PhP 10,000 x 12%) Less: Input VAT from: Purchases from VAT person per invoice (PhP 324,800/9.3333) Payment of services for business purposes, gross of VAT (PhP 72,800/9.3333) Standard input VAT – government (PhP 200,000 x

PhP 36,000 12,000 24,000 48,000 ( 1,200)

PhP 118,800

PhP 34,800 7,800 14,000

56,600

300,000

7%) VAT payable Less: Final withholding VAT – government (PhP 200,000 x 5%) Net VAT payable

PhP 62,200 10,000 PhP 52,200

Notes: 1. The sales discount is generally a cash discount that depends on the happening of future events which is the prompt payment of customers. This sales discount is not allowed to be deducted for VAT purposes. (Sec. 4.106-9, RR No. 14-2005) 2. The 5% final withholding VAT is deductible from output VAT on sales to the government.