Practical Accounting 1.doc

CRC-ACE REVIEW SCHOOL The Professional CPA Review School  735-9031 / 735-8901

PRACTICAL ACCOUNTING 1 SECOND PRE-BOARD EXAMS 12:30AM

MAY 2007 BATCH MAR 4, 2007; 10:30AM-

GENERAL INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by writing a VERTICAL LINE corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use PENCIL NO. 1 or NO. 2 only.

Use the following information for numbers 1 –3 On September 30, 2007, Harry Company acquired a smelting machine for P180,000 paying a down payment of P30,000 and the balance to be paid in equal annual instalments starting September 30, 2008. There was no stated interest provided in the note, however, an 8% interest rate is considered to be appropriate for a note of this type. Harry Company incurred P12,000 for installation and testing. A grinder was removed to make way to the smelting machine at a cost of P2,000. Harry Company uses the straight-line method of depreciation. The machine is expected to have a useful life of 8 years and a salvage value of P4,000. On January 1, 2010, it was determined that the machine would be useful for at least five years to include 2010. The expected salvage value remains at P4,000. 1. The amount of depreciation expense to be included in Harry Company’s 2007 income statement is: a. P5,875 b. P5,000 c. P4,938 d. P5,938 2. The amount to be reported as interest expense in Harry Company’s 2008 income statement is a. P12,000 b. P11,592 c. P9,192 d. P9,000 3. The carrying amount of the machine to be reported in Harry Company’s December 31, 2010 balance sheet is:

a. P94,850

b. P98,850

c. P113,700

d. P77,600

Use the following information for numbers 4 –5 On January 1, 2006 Hermione Company acquired a five-year, 10%, P1,000,000 face value debt security of Ginny Company and paid P912,000 and has classified it as an available-for-sale security. Direct transaction costs paid by Hermione Company amounted to P16,000. The fair value of the Ginny Company debt security at December 31, 2006 and 2007 were P915,000 and P945,000 respectively. 4. The amount of interest income to be included in Hermione Company’s 2006 income statement is: a. P109,440 b. P100,000 c. P111,360 d. P92,800 5. The amount of net unrealized gain/loss presented in the stockholders’ equity section of Hermione Company’s 2007 balance sheet is

a. unrealized loss of P7,083 b. unrealized loss of P55,000

c. unrealized gain of P17,000 d. unrealized gain of P17,277

Use the following information for numbers 6 – 8 Ron Company started operations in January 2, 2006 and has acquired three assets which it classified under property, plant and equipment for a lump sum price of P2,400,000. The carrying amount and fair values of each are provided as follows: Carrying amount Fair value Delivery trucks P 1,200,000 P 1,680,000 Latching machine 300,000 420,000 Office equipment 400,000 700,000 Delivery trucks Latching machine Office equipment

Depreciation method Straight-line Double-declining balance Sum-of-the-year’s digits

Salvage value P 80,000 5,000 15,000

Estimated useful life 8 years 4 years 6 years

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6. Assuming that the delivery trucks were sold in October 12, 2007 for P 1,200,000, the amount of gain/loss to be included in Ron Company’s income statement is

a. loss of P130,000 b. gain of P57,500 c. gain of P137,500 d. gain of 75,000 7. The carrying amount of the office equipment to be presented in the December 31, 2008 balance sheet of Ron Company is

a. P182,143

b. P171,429

c. P200,000

d. P210,714

8. The total depreciation expense to be reported in the 2009 income statement of Ron Company is a. P293,571 b. P123,571 c. P106,571 d. P122,946 Use the following information for items 9 – 13 On November 1, 2007 Draco Company bought 15,000 Crabbe Company shares acquired at a total cost of P180,000. Draco Company intends to profit on the short-term price fluctuations of the abovementioned securities and appropriately classifies them as held for trading. On November 15, 2007 Draco Company acquired 12,000 common shares and all of the 5,000, 8%, P100 par value preferred stocks of Goyle Company for a lump sum price of P680,000. At the date of acquisition the common stocks were quoted at P20 per share, while the preferred were selling at P102. Draco Company classified these securities as available-for-sale. At December 31, 2007, Draco Company determined the following information in relation to the quoted prices of the stocks in the market: Crabbe company common, P13 per share; Goyle Company common, P15 per share; Goyle Company preferred P96 per share. In January 4, 2008 Draco Company was able to sell all of its Crabbe Company shares for P14.80 each. The proceeds were used to acquire 100,000 Neville Company shares and were classified as trading securities. In February 2008 Goyle Company declared and distributed a cash dividend to all its shareholders totalling to P240,000. Goyle Company has 100,000 outstanding common shares when the dividends were declared Draco Company, on March 12, 2008, exchanged its preferred stock investment in Goyle Company for a paper copier, which has a carrying amount of P377,000. At the time of exchange, Goyle Company’s preferred stocks were quoted at P94. The copier has an estimated useful life of 5 years, no salvage value and to be depreciated using the straight-line method On March 31, 2008, the quoted prices of the equity investments were as follows: Neville Company common, P2.45 per share; Goyle Company common shares, P18 per share. 9. The amount of unrealized gain/loss to be presented in Draco Company’s 2007 balance sheet is a. unrealized loss of P90,000 c. unrealized loss of P5,000 b. unrealized loss of P20,000 d. unrealized gain of P15,000 10. The amount reported as dividend income in Draco Company’s quarterly income statement ending March 31, 2008 is

a. P 0

b. P64,000

c. P28,800

d. P70,000

11. The amount initially capitalized as the cost of the paper copier included in Draco Company’s property, plant and equipment account is

a. P377,000

b. P480,000

c. P470,000

d. P462,400

12. The net effect to net income (increase/decrease) brought about by Draco Company’s investment in equity securities for the quarter ending March 31, 2008 is

a. increase P121,600

of b. increase of P81,600

c. increase P114,000

of d. increase P104,000

13. The amount of unrealized gain/loss to be presented in Draco Company’s balance sheet as of March 31, 2008 is a. unrealized gain of P36,000 c. unrealized loss of P54,000 b. unrealized loss of P24,000 d. unrealized loss of P1,600 Use the following information for numbers 14 – 18 Dumbledore Company started operations on January 6, 2006 and will engage itself in the importation and distribution of the following casual shoes, Gryfindor & Slytherin, as well as sport shoes, Ravenclaw and Hupplepuff. Dumbledore Company’s initial purchase amounted to P3,000,000. It borrowed P2,000,000 to partially finance the acquisition of the initial inventory from Gringgots Bank

of

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which stipulated a 10% interest rate. The following inventory information was provided for the year 2006. 2006 1/6 7/1 10/15

2006 2/8 7/15 9/23 11/9 12/7

Initial inventory Purchases Purchases

Sales Sales Sales Sales Sales

Gryffindor Units Cost/unit 1,800 450 1,900 475 1,200 500

Gryffindor Units SP/unit 800 510 500 540 650 540 500 550 600 550

Slytherin Units Cost/unit 2,000 300 1,800 330 1,700 360

Slytherin Units SP/unit 1,100 330 300 365 700 365 500 390 700 390

Ravenclaw Units Cost/unit 2,000 375 1,750 400 2,000 440 Ravenclaw Units SP/unit 1,400 415 350 445 800 445 950 520 650 520

Hupplepuff Units Cost/unit 2,100 400 1,900 420 2,200 425 Hupplepuff Units SP/unit 1,400 460 1,100 496 400 496 800 522 1,300 522

Dumbledore Company uses a periodic inventory system and applies the FIFO cost approach to its casual shoes while it applies the weighted-average method for its sport shoes. The following information were likewise provided at December 31, 2006 Gryffindor Slytherin Ravenclaw Replacement costs 490 320 433 Normal profit margin 60 45 40 Estimated selling price 580 410 510 Estimated cost of disposal 165 45 79

Hupplepuff 445 50 530 125

14. Prior to the any adjustments to present inventory at the lower of cost or market, the amount of inventory for Gryffindor casual shoes at December 31, 2006 is:

a. P908,750

b. P833,750

c. P873,087

d. P767,750

15. Prior to the any adjustments to present inventory at the lower of cost or market, the amount of inventory for Ravenclaw sports shoes at December 31, 2006 is:

a. P600,000

b. P704,000

c. P648,348

d. P689,600

16. The total cost of inventory recognized as expenses in the 2006 income statement of Dumbledore Company is: a. P6,342,402 b. P6,189,402 c. P6,316,402 d. P6,275,150 17. The difference in the ending inventory balance of Hupplepuff sport shoes prior to the application of the lower of cost or net realizable value rule to the ending inventory balance if the cost flow method applied was FIFO a. P12,000 b. P24,000 c. P18,000 d. P6,000 18. Prior to the application of the lower of cost or net realizable value rule, the amount of inventory at the end for Slytherin casual shoes if the LIFO periodic method was used is:

a. P111,000

b. P137,000

c. P211,800

d. P185,800

Use the following information for items 19 - 24 At the end of 2006, Hagrid Company reported the following balances in relation to its property, plant and equipment account: Property, plant and equipment Land 5,000,000 Building 4,000,000 Accumulated depreciation-building 1,000,000 3,000,000 Machinery 1,200,000 Accumulated depreciation-machinery 600,000 600,00 0 8,600,00 0 The building and the machinery had been depreciated for 5 years, under the straight-line method and are assumed to have no salvage value. The building was estimated to have a useful life of 20 years while the machine was expected to last for 10 years. At the start of 2007, an appraisal was made by an independent party and the following net appraisal values were provided: Land, P6,500,000; Building, P3,600,000; Machinery, 690,000. In October 11, 2007, ¼ of Hagrid Company’s land which was being used as parking space for its employees was sold for P1,800,000.

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At December 31, 2007, after an assessment conducted by Hagrid Company in relation to all of its plant assets, evidences showing that the assets were impaired were identified. The fair value Hagrid Company’s plant assets net of any related cost of disposal were as follows: Land, P5,500,000; Building P2,900,000 and Machinery, P458,400. The estimated future cash flows from the continued use of the machinery is as follows: Net future cash flows 2008 200,000 2009 150,000 2010 110,000 2011 60,000 The applicable risk-free rate of interest is determined as of this date to be 6% 19. The amount of depreciation expense recorded in 2007 by Hagrid Company is a. P320,000 b. P378,000 c. P360,000 20. The amount of revaluation surplus transferred directly to retained earnings in 2007 is a. P393,000 b. P375,000 c. P415,000

d. 338,000 d. P433,000

21. The net recoverable amount of the machinery in determining any amount of impairment is a. P458,400 b. P461,300 c. P520,000 d. P410,800 22. The amount of impairment loss included in the 2007 income statement of Hagrid Company is a. P18,700 b. P90,700 c. P93,600 d. P21,600 23. Total depreciation expense to be reported in the 2008 income statement of Hagrid Company is a. P378,000 b. P353,325 c. P321,743 d. P322,468 24. The balance of the revaluation surplus to be presented as part of the total stockholders’ equity section of Hagrid Company’s 2008 balance sheet is

a. P1,125,000

b. P1,217,857

c. P1,592,857

d. P2,074,000

Use the following information for 25 – 28 On January 1, 2006, Snape Company acquired 20,000 newly issued shares directly from Luscious Company, which at the time of the issuance has 100,000 shares outstanding. Total acquisition costs amounted paid by Snape Company was P220,000. In 2006, Luscious Company reported a net income of P1,500,000 and has declared dividends of P9 per share on December 15, 2006, for holders on record as of January 15, 2007 and payment date was set at February 14, 2007. The fair value of Luscious Company shares was P12 each On January 10, 2007 Snape Company sold 15,000 Luscious Company shares for a total consideration of P335,000. The remaining 5,000 shares were sold on January 26, 2007 for a total cash amount of P59,000. 25. The amount to be income to be included in Snape Company’s 2006 income statement arising from its equity security investment is

a. P0

b. P300,000

c. P180,000

d. P250,000

26. The carrying amount of the investments in Luscious Company shares to be presented in the 2006 balance sheet of Snape Company is

a. P240,000

b. P220,000

c. P340,000

d. P290,000

27. The amount of gain/loss on the sale of the shares of stocks to be included in the 2007 income statement of Snape Company is

a. gain of P39,000

b. gain of P174,000

c. gain of P155,000

d. gain of P19,000

Use the following information for 28 – 30 On January 1, 2007, Tom Riddle Magic Company started operations and issued 100,000 of its P5 par value common stock for P12 each. It likewise issued, 5,000 shares as payment for P60,000 legal & other professional services rendered by Voldemort & Associates. By yearend, Tom Riddle Magic Company reported a net income of P780,000. No dividends were declared. In 2008, Tom Riddle Magic Company acquired 25,000 of its own shares for a total consideration of P225,000. In the middle of 2008, 15,000 of these acquired shares were issued for P13 each. In August 7,000 treasury shares were sold for P8.50 each. In October 2008, the remaining shares were retired. On

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December 31, 2008, Tom Riddle Magic Company declared dividends of P4 per share and reported earning of P1,400,000. 28. Tom Riddle Company’s additional paid-in capital at December 31, 2007 is a. P 700,000 b. P 735,000 c. P 760,000

d. P 525,000

29. The net gain/loss arising from the acquisition and subsequent sale of the treasury shares included in the 2008 income statement of Tom Riddle Company’s income statement is

a. P 63,500

b. P 56,500

c. P 60,000

d. P 0

30. The total stockholders’ equity of Tom Riddle Company included in its 2008 balance sheet is a. P 3,061,500 b. P 3,005,000 c. P3,039,500 d. P 2,281,500

31. On January 1, 2007, McGonagal Company acquired a patent named “Transfigure” and paid P400,000. It was expected that the commercial life of this patent is 15 years, however, its registration has a remaining period of only 12 years. At the start of 2008, McGonagal Company won its patent infringement case against Dursley Company. Legal costs incurred in successfully defending the patent was P40,000. The amount of amortization expense to be recognized in 2008 in relation to the patent, assuming further that McGonagal Company is using the straight-line method a. P 33,333 b. P 26,666 c. P 36,973 d. P 29,529 Use the following for numbers 32 - 33 On March 1, 2007, Padfoot Company began construction of a small building. The following expenditures were incurred for construction: March 1, P750,000; April 1 P840,000; May 1, P1,800,000; June 1, P3,000,000; July 1, P1,000,000 The building was completed and occupied on July 1. To help pay for construction P600,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a P5,000,000, 10% note issued two years ago. 32. The weighted-average accumulated expenditure is a. P 3,280,000 b. P 1,010,000

c. P 1,093,000

d. P 3,030,000

33. The avoidable interest cost is a. P 113,000 b. P 315,000

c. P 432,500

d. P 73,583

34. Mad Eye Moody has an agreement with the sales manager that he is to receive a bonus of 5% of net income after deduction of the bonus and income taxes. Mad Eye Company reported income before deduction of the bonus and income taxes of P1,500,000. Income taxes are 35% and the bonus is deductible for tax purposes.

a. P 47,215

b. P 50,388

c. P 98,063

d. P 48,750

Use the following for 35 – 36 Goblet of Fire Company gives its customers coupons redeemable for a poster plus a Moaning Myrtle CD. One coupon is issued for each P1 of sales. On the surrender of 100 coupons and P5 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for 2006 were P1,050,000, and the coupons redeemed totalled 510,000. Goblet of Fire Company bought 30,000 posters at P2.00/poster and 30,000 CDs at P6/CD. Sales for 2007 were P1,260,000, and the coupons redeemed totalled 1,275,000. 35. The amount to be reported as premiums expense for 2006 is a. P 15,300 b. P 31,500 c. P 25,200

d. P67,200

36. The estimated liability to be reported in the December 31, 2007 balance sheet in relation to the premium offer is a. P 15,750

b. P 1,890

c.

P 12,960

d. P 5,040

37. The cash account shows a balance of P42,000 before reconciliation. The bank statement does not include a deposit of P2,300 made on the last day of the month. The bank statement shows a

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collection by the bank of P940 and a customer's check for P220 was returned because it was NSF. A customer's check for P450 was recorded on the books as P540, and a check written for P79 was recorded as P97. The correct balance in the cash account was a. P 42,648 b. P42,792 c. P 40,348 d. P 41,208 38. Wormtail Company assigned P500,000 of accounts receivable to Scabbers Finance Company as security for a loan of P420,000. Scabbers Finance Company charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Wormtail Company collected P110,000 on assigned accounts after deducting P380 of discounts. Wormtail Company accepted returns worth P1,350 and wrote off assigned accounts totaling P3,700. The amount of cash Wormtail Company received from Scabbers Finance at the time of the transfer was a P 378,000

b

P 410,000

c

-end of exam-

PRACTICAL ACCOUNTING 1 1 2 3 4 5 6 7 8 9 10

C C A C A B A B B B

11 12 13 14 15 16 17 18 19 20

C A D A C A B A B D

21 22 23 24 25 26 27 28 29 30

B A D B C A A B D A

31 32 33 34 35 36 37 38

A B A A C B A C

P 411,600

d

P 420,000