Review 105-----------Day 10

THEORY OF ACCOUNTS
6. Which statement is correct regarding the classification of financial instruments as liability or
1. Kyla Company purchased bonds at a discount on the open market and intends to hold equity?
these bonds to maturity. Kyla should account for those bonds at a. If an enterprise issues preferred shares that pay a fixed rate of dividend and that have
a. Cost c. Fair value a mandatory redemption feature at a future date should be recognized as equity.
b. Amortized cost d. Lower at cost or market b. A financial instrument that gives the holder the right to return it to the issuer for cash or
another financial asset is a financial liability.
2. For a marketable debt securities portfolio classified as held to maturity, which of the c. A contractual right or obligation to receive or deliver a number of its own shares or
following amounts should be included in the net income? other equity instruments that varies so that the fair value of the entity's own equity
I. Unrealized temporary losses during the period. instruments to be received or delivered equals the fixed monetary amount of the
II. Realized gains during the period contractual right or obligation is equity.
III. Changes in the valuation allowance during the period. d. When a derivative financial instrument gives one party a choice over how it is settled, it
a. III only b. II only c. I and II d. I, II and is usually treated as equity.
III
7. Which statement is incorrect regarding compound financial instruments
3. Moira has a portfolio of marketable equity securities which it does not intend to sell in the a. Compound instruments have both a liability and an equity component from the issuer's
near term. How should Moira classify these and how should it report unrealized gains and perspective.
losses from these securities? b. The component parts should be accounted for and presented separately according to
a. Trading securities and any unrealized gains and losses are reported as component of their substance based on the definitions of liability and equity.
income. c. The split is made at issuance and not revised for subsequent changes in market
b. Available for sale securities and any unrealized gains and losses are reported as interest rates, share prices, or other event that changes the likelihood that the conversion
component of equity. option will be exercised.
c. Trading securities and any unrealized gains and losses are reported as component of d. When the initial carrying amount of a compound financial instrument is required to be
equity. allocated to its equity and liability components, the liability component is assigned the
d. Available for sale securities and any unrealized gains and losses are reported as residual amount after deducting from the fair value of the instrument as a whole the
component of income. amount separately determined for the equity component.

4. A financial liability is any liability that is 8. On both December 31, 2004 and 2005, Kate Company’s only marketable equity security
I. A contractual obligation to deliver cash or another financial asset to another entity. had the same market value, which was below cost. Kate considered the decline in value to
II. A contractual obligation to exchange financial assets or financial liabilities with another be temporary in 2004 but “other than temporary” in 2005. At the end of both years, the
entity under conditions that are potentially favorable to the entity. security was classified as a noncurrent asset. Kate considers the investment as “available for
III. A contract that will or may be settled in the entity's own equity instruments. sale”. What should be the effects of the determination that the decline was other than
a. I, II and III b. I and II only c. I and III only d. I only temporary on Kate’s 2005 noncurrent assets and net income?
a. No effect
5. Which statement is incorrect regarding the classification of financial instruments as liability b. No effect on noncurrent assets and decrease in net income
or equity? c. Decrease in noncurrent assets and no effect on net income
a. The fundamental principle of PAS 32 is that a financial instrument should be classified d. Decrease in both noncurrent assets and net income
as either a financial liability or an equity instrument according to the substance of the
contract. 9. The transfer of a security between categories of investments shall be accounted for at fair
b. The enterprise must make the decision every balance sheet date. value. Which is incorrect concerning the treatment of the security’s unrealized gain or loss at
c. The classification is not subsequently changed based on changed circumstances. the date of transfer?
d. A financial instrument is an equity instrument only if (a) the instrument includes no a. For a security transferred from trading securities, the unrealized gain or loss at the
contractual obligation to deliver cash or another financial asset to another entity and (b) if date of transfer shall be recognized in earnings.
the instrument will or may be settled in the issuer's own equity instruments.
 b. For a security transferred into trading securities, the unrealized gain or loss at the date 15. An investor uses the equity method to account for investment in common stock. The
of transfer shall be recognized in earnings. purchase price implies a fair value of the investee’s depreciable assets in excess of the
c. For a debt security transferred into available for sale securities from “held to maturity”, investee’s net asset carrying values. The investor’s amortization of the excess
the unrealized gain or loss at the date of transfer shall be reported as a separate a. Decreases the investment account
component of stockholders equity. b. Decreases the goodwill account
d. For a security transferred into “held to maturity” from available for sale securities, the c. Increases the investment revenue account
unrealized gain or loss at the date of transfer shall be included in earnings. d. Does not affect the investment account

10. It is an enterprise in which the investor has significant influence.

a. Subsidiary c. Parent P1
b. Associate d. Investee
The following trial balance of Macabebe Company on December 31, 2005 has been adjusted
11. Significant influence is to power except for income tax expense.
I. To participate in the financial and operating policy decisions of the investee but not
control over those policies Cash 4,000,000
II. Govern the financial and operating policies of an enterprise so as to obtain benefits Accounts receivable 6,700,000
from its activities. Inventory 11,000,000
a. Both I and II b. Neither I nor II c. I only d. II only Property, plant and equipment 19,000,000
Accounts payable and accrued liabilities 7,000,000
12. Which statement is correct concerning the equity method? Income tax payable 4,800,000
I. . The investment in an associate is initially recognized at cost and the carrying amount Deferred tax liability 1,200,000
is increased or decreased to recognize the investor’s share of the profit or loss of the Common stock 10,000,000
investee after the date of acquisition. Additional paid in capital 4,000,000
II. Adjustments to the carrying amount may also be necessary for changes in the Retained earnings – 1/1 5,000,000
investor’s proportionate interest in the investee arising from changes in the investee’s Nets sales and other revenues 80,000,000
equity that have not been recognized in the investee’s profit or loss. Costs and expenses 65,000,000
a. I only b. II only c. Both I and II d. Neither I nor II Income tax expense 6,300,000 ________
112,000,000 112,000,000
13. An investor uses the equity method to account for an investment in common stock. After
the date of acquisition, the investment account of the investor would During the year, estimated tax payments of P1,500,000 were charged to income tax expense.
a. Not be affected by its share of the earnings or losses of the investee The current and future tax rate is 32% on all types of revenue. The deferred tax liability is
b. Not be affected by its share of the earnings of the investee but be decreased by its unrelated and will reverse in 2006.
share of the losses of the investee
c. Be increased by its share of the earnings of the investee but not be affected by its 1. The adjusted retained earnings on December 31, 2005 should be
share of the losses of the investee a. P15,200,000 c. P20,000,000
d. Be increased by its share of the earnings of the investee and decreased by its share of b. P13,700,000 d. P15,000,000
the losses of the investee
2. The total current liabilities on December 31, 2005 should be
14. When an investor uses the equity method to account for investment in common stock, a. P10,300,000 c. P11,800,000
cash dividends received by the investor from the investee should be recorded as b. P11,500,000 d. P13,000,000
a. Dividend income
b. A deduction from the investor’s share of the investee’s earnings
c. A deduction from investment account The bookkeeper for Guagua Computers, Inc., reports the following balance sheet amounts as of
d. A deduction from goodwill June 30, 2005.

Current assets P2,440,500

 Noncurrent assets 6,285,500 Preferred stock: 190,000 shares outstanding (P20 par value) 3,800,000
Current liabilities 1,386,000 Common stock: 1,600,000 shares at P1 stated value 1,600,000
Noncurrent liabilities 900,000 Additional paid-in capital 1,040,000
Owners’ equity 6,440,000 P6,440,000

A review of account balances reveals the following data. f. Common shares were originally issued for P3,910,000, but the losses of the company for
the past years were charged against additional paid-in capital.
a. An analysis of current assets discloses the following:
QUESTIONS:
Cash P 422,500
Investment securities – trading 600,000 Determine the adjusted amounts of the following:
Trade accounts receivable 568,000
Inventories, including advertising supplies of P20,000 850,000 3. Current assets
P2,440,500 a. P2,462,000 b. P2,477,000 c. P2,440,500 d. P2,435,500

4. Noncurrent assets
b. Noncurrent assets include the following: a. P5,490,000 b. P6,560,000 c. P5,511,500 d. P6,264,000

Property, plant and equipment: 5. Current liabilities

Depreciated book value (cost P6,560,000) P5,490,000 a. P1,401,000 b. P1,602,500 c. P1,581,000 d. P1,491,000
Deposit with a supplier for merchandise ordered
for August delivery 21,500 6. Noncurrent liabilities
Goodwill recorded on the books to cancel losses a. P720,000 b. P900,000 c. P810,000 d.
incurred by the company in prior years 774,000 P880,000
P6,285,500
7. Owners’ equity
c. Current liabilities include the following: a. P7,710,000 b. P6,440,000 c. P8,750,000 d. P5,666,000

Payroll payable P 71,500

Taxes payable 41,500
Rent payable 114,000 8. The following information pertains to Malolos Company’s 2005 cost of good sold.
Trade accounts payable
Total owed to suppliers on account P1,014,000 Inventory, January 1 10,000,000
Less: 6-month note received from a supplier Purchases 40,000,000
who purchased some used equipment Writeoff of obsolete inventory 5,000,000
on June 29, 2005 15,000 999,000
Inventory, December 31 3,000,000
Notes payable 160,000
P1,386,000
What amount should Malolos report as cost of goods sold?
d. Noncurrent liabilities include the following: a. P42,000,000 c. P47,000,000
b. P45,000,000 d. P50,000,000
9% mortgage on property, plant, and equipment, payable in
semiannual installment of P90,000 through to June 30, 2010 P900,000
9. Valenzuela Company incurred the following infrequent losses during 2005:
e. Owners’ equity Includes the following:
Loss on disposal of one of four dissimilar factories 1,000,000
Foreign exchange loss on an amount remitted by a foreign
 customer due to major currency devaluation 2,000,000 b. P432,000 d. P691,200
Loss on worthless inventory due to a competitor’s
unexpected product innovation 5,000,000
Loss from major strike by employees 4,000,000 13. During 2005, Angat Company decided to change from the FIFO method of inventory
Loss on early extinguishment of long-term debt 1,500,000 valuation to the weighted average method. Inventory balances under each method were:
Loss from expropriation of asset 3,000,000 FIFO Weighted average
December 31, 2003 10,000,000 7,000,000
In its 2005 income statement, what total amount should Valenzuela report as part of December 31, 2004 8,000,000 7,500,000
continuing operations? December 31, 2005 6,000,000 5,000,000
a. P13,500,000 c. P12,000,000
b. P16,500,000 d. P15,500,000 Ignoring income tax, in its 2005 statement of retained earnings, what amount should
Angat report as the effect of this accounting change?
a. P3,500,000 c. P3,000,000
10. The following information was taken from Hagonoy Company’s accounting records for the b. P4,500,000 d. P 500,000
year ended December 31, 2005:
14. The Natividad Publishing Company follows the procedure of debiting Bad Debts Expense
Decrease in raw materials inventory 1,000,000 for 2% of all new sales. Sales for 4 consecutive years and year-ended allowance account
Increase in goods in process inventory 3,000,000 balances were as follows:
Increase in finished goods inventory 2,000,000
Raw materials purchased 40,000,000 Allowance for Bad Debts
Direct labor payroll 10,000,000 End-of-Year Credit Balance
Factory overhead 6,000,000 Year Sales
Freight out 4,000,000
2002 P2,100,000 P21,500
Freight in 5,000,000
2003 1,975,000 35,500
The cost of goods sold is 2004 2,500,000 50,000
a. P59,000,000 c. P61,000,000 2005 2,350,000 66,000
b. P57,000,000 d. P63,000,000
Compute the amount of accounts written off for the year 2005.
a. P31,000 b. P25,500 c. P35,500 d. P5,500
11. On January 1, 2003, Calumpit Company purchased a machine for P12,000,000 and
depreciated it by the straight line method using an estimated useful life of eight years with no
residual value. On January 1, 2005, Calumpit determined that the machine had a useful life of 15. The following information for 2005 is provided by Marilao Company:
six years from the date of acquisition and will have a residual value of P200,000. An
accounting change was made in 2005 to reflect these additional data. The accumulated Sales 20,000,000
depreciation for this machine should have a balance on December 31, 2005 of Cost of goods sold 12,000,000
a. P5,200,000 c. P5,250,000 Selling expenses 1,200,000
c. P6,000,000 d. P4,425,000
General and administrative expenses 1,800,000
Interest expense 1,500,000
12. On January 1, 2003, Baliuag Company purchased for P5,400,000 a machine with a Gain on early extinguishment of long-term debt 500,000
useful life of 10 years and no residual value. The machine was depreciated by the double Correction of inventory error, net of income tax – credit 800,000
declining balance method and the carrying amount of the machine was P3,456,000 on Investment income – equity method 600,000
December 31, 2004. Baliuag changed to the straight line method on January 1, 2005. In its Gain on sale of investment 2,000,000
2005 income statement, what amount should Baliuag report as depreciation for this machine? Income tax expense 2,100,000
a. P345,600 c. P540,000
Dividends declared 2,500,000
 B. systems feasibility D. systems maintenance
What was the 2005 income from continuing operations?
a. P4,900,0007.
7. Which of the following costs would not be accounted for in a company's recordkeeping
b. P6,600,000
c. P4,500,000 system?
d. P7,000,000
a. an unexpired cost
b. an expired cost
MAS c. a product cost
d. an opportunity cost
1. The process of learning how the current system, functions, determining the needs of
users, and developing the logical requirements of a proposed system is referred to as 8. The basis for measuring the cost of capital derived from bonds and preferred stock,
A. systems maintenance C. systems feasibility study respectively, is the
B. systems analysis D. systems design
a. pre-tax rate of interest for bonds and stated annual dividend rate less the expected
earnings per share for preferred stock.
2. Which of the following is not a characteristic of a batch processing system? b. pre-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
A. The collection of like transactions which are sorted and processed sequentially
c. after-tax rate of interest for bonds and stated annual dividend rate less the expected
against a master file.
B. Keypunching of transactions, followed by machine processing. earnings per share for preferred stock.
C. The production of numerous printouts. d. after-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
D. The posting of a transaction, as it occurs, to several files without intermediate
printouts. 9. All other factors equal, a large number is preferred to a smaller number for all capital
project evaluation measures except
3. All activity related to a particular application in a manual system is recorded in a journal.
The name of the corresponding item in a computerized system is a a. net present value.
A. master file C. transaction file b. payback period.
B. year-to-date file D. current balance file c. internal rate of return.
d. profitability index.
4. One of the first steps in the creation of a data base is to
A. define common variables and fields used throughout the firm* make or buy decision, the reliability of a potential supplier is
B. increase the secondary storage capacity.
C. obtain software that will facilitate data retrieval. 10. In a make or buy decision, the reliability of a potential supplier is
D. integrate the accounting system into the data base.
a. an irrelevant decision factor.
5. A system with several computers that are connected for communication and data b. relevant information if it can be quantified.
transmission purposes but that permits each computer to process its own data is a
A. distributed data processing network C. decentralized network c. an opportunity cost of continued production.
d. a qualitative decision factor.
B. centralized network D. multidrop network
11. Which of the following costs is irrelevant in making a decision about a special order price
6. The process of developing specifications for hardware, software, personnel hours, data if some of the company facilities are currently idle?
resources, and information products required to develop a system is referred to as
A. systems analysis C. systems design a. direct labor
 b. equipment depreciation b. 4,000
c. variable cost of utilities c. 5,000
d. opportunity cost of production d. 9,000

12. A manager is attempting to determine whether a segment of the business should be

eliminated. The focus of attention for this decision should be on 2. Lindy, a US corporation, bought inventory items from a supplier in Argentina on November
5, 2002, for 100,000 Argentine pesos, when the spot rate was .4295. At Lindy’s December
a. the net income shown on the segment's income statement. 31, 2002 year-end, the spot rate was .4245. On January 15, 2003, Lindy bought 100,000
b. sales minus total expenses of the segment. pesos at the spot rate of .4345 and paid the invoice. How much should Lindy report as part of
c. sales minus total direct expenses of the segment. net income for 2002 and 2003 as foreign exchange transaction gain or loss?
d. sales minus total variable expenses and avoidable fixed expenses of the segment.
2002 2003
a. 500 (1,000)
13. Which of the following costs should consider the tax shield effect in computing the costs b. 0 (500)
of capital? c. (500) 0
A. Cost of debt d. (1,000) 500
B. Cost of common stock
C. Cost of preferred stock
D. Cost of retained earnings 3. On November 30, 2003, Tyrola Publishing Company, located in Colorado, executed a
contract with Ernest Blyton, an author from Canada, providing for payment of 10% royalties
14. Which of the following is not considered in the cash conversion cycle?
A. Receivable collection period on Canadian sales of Blyton’s book. Payment is to be made in Canadian dollars each
B. Debt repayment period January 10 for the previous year’s sales. Canadian sales of the book for the year ended
C. Inventory conversion period December 31, 2003, totaled 50,000 Canadian. Tyrola paid Blyton his 2003 royalties on
D. Payable deferral period January 10, 2004. Tyrola’s 2003 financial statements were issued on February 1, 2004. Spot
rates for Canadian dollars were as follows:
15. Cash flows from capital budgeting projects are assumed to be received
A. At the beginning of the year November 30, 2002 .87
B. Evenly during the year January 1, 2003 .88
C. At the end of the year
D. At a certain point of the year December 31, 2003 .89
January 10, 2004 .90
How much should Tyrola accrue for royalties payable at December 31, 2003?
P2 a. 4,350
b. 4,425
1. On September 1, 2003, Bain Corp. received an order for equipment from a foreign c.4,450
customer for 300,000 local currency units (LCU) when the US dollar equivalent was 96,000. d. 4,500
Bain shipped the equipment on October 15, 2003, and billed the customer for 300,000 LCU
when the US dollar equivalent was 100,000. Bain received the customer’s remittance in full
on November 16, 2003, and sold the 300,000 LCU for 105,000. In its income statement for 4. Which of the following statements is(are) true regarding derivative financial instruments?
the year ended December 31, 2003, Bain should report as part of net income a foreign
exchange transaction gain of I. Derivative financial instruments should be measured at fair value and reported in the
balance sheet as assets or
a. 0
liabilities. to occur?

II. Gains and losses on derivative instruments not designated as hedging activities should be a. The embedded derivative meets the definition of a derivative instrument.
reported and recognized in earnings in the period of the change in fair value. b. The hybrid instrument is regularly recorded at fair value.
c. Economic characteristics and risks of the embedded instrument are “clearly and closely”
a. I only. related to
b. II only. those of the host contract.
c. Both I and II. d. All of the above.
d. Neither I nor II.

10. Financial instruments sometimes contain features that separately meet the definition of a
5. If the price of the underlying is greater than the strike or exercise price of the underlying,
derivative instrument. These features are classified as
the call option is
a. Swaptions.
a. At the money. b. Notional amounts.
b. In the money. c. Embedded derivative instruments.
c. On the money.
d. Underlyings.
d. Out of the money.

11. The process of bifurcation

6. Which of the following is not a distinguishing characteristic of a derivative instrument?
a. Protects an entity from loss by entering into a transaction.
a. Terms that require or permit net settlement. b. Includes entering into agreements between two counterparties to exchange cash flows
b. Must be “highly effective” throughout its life. over specified period of time in the future.
c. No initial net investment. c. Is the interaction of the price or rate with an associated asset or liability.
d. One or more underlyings and notional amounts.
d. Separates an embedded derivative from its host contract.

7. An example of a notional amount is

a. Number of barrels of oil. 12. On December 12, 2003, Imp Co. entered into three forward exchange contracts, each to
b. Interest rates. purchase 100,000 euros in ninety days. The relevant exchange rates are as follows:
c. Currency swaps.
d. Stock prices. Spot rate Forward rate

(for March 12, 2004)

8. Which of the following is not a derivative instrument?
November 30, 2003 .87 .89
a. Futures contracts.
b. Credit indexed contracts. December 12, 2003 .88 .90
c. Interest rate swaps.
December 31, 2003 .92 .93
d. Variable annuity contracts.

9. Which of the following criteria must be met for bifurcation

. Imp entered into the first forward contract to hedge a purchase of inventory in November Corporation as of December 31, 2005:
2003, payable in
Authorized common stock, P100 par value P4,000,000
March 2004. At December 31, 2003, what amount of foreign currency transaction gain from Cash dividends payable 160,000
this forward contract should Imp include in net income? Donated capital 800,000
Gain on sale of treasury stock 80,000
a. 0 Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
b. 3,000
Premium on bonds payable 240,000
c. 5,000 Reserve for bond sinking fund 400,000
d. 10,000 Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
13. At December 31, 2003, what amount of foreign currency transaction loss should Imp Subscribe capital stock 480,000
include in income from the revaluation of the Accounts Payable of 100,000 euros incurred as Stock subscriptions receivables 120,000
a result of the purchase of inventory at November 30, 2003, payable in March 2004? Stock warrants outstanding 200,000
Treasury stock, at cost 144,000
a. 0 Unissued common stock 800,000
b.3,000
REQUIRED:
c. 4,000
d. 5,000 Compute for the following:

A B C D
14. Imp entered into the third forward contract for speculation. At December 31, 2003, what
amount of foreign currency transaction gain from this forward contract should Imp include in 1.
net income? Common stock issued 4,000,000 3,200,000 3,056,000 3,680,000
a. 0 2.
Additional paid-in capital (APIC) 320,000 1,400,000 1,320,000 1,200,000
b. 3,000
3.
c. 5,000 Appropriated retained earnings 400,000 544,000 1,000,000
d. 10,000 4.
Total stockholders’ equity 6,760,000 6,640,000 6,480,000 6,240,000
5.
15. The risk of an accounting loss from a financial instrument due to possible failure of Legal capital 3,200,000 3,680,000 3,560,000 4,000,000
another party to perform according to terms of the contract is known as

a. Off-balance-sheet risk. PROBLEM NO. 2

b. Market risk.
c. Credit risk. Following is the stockholders’ equity section of Tenacity Corporation’s balance sheet at
d. Investment risk. December 31, 2004:

AP Common stock, P10 par value; authorized 1,500,000

PROBLEM NO. 1
shares; issued and outstanding 900,000 shares P9,000,000
The following data were compiled prior to preparing the balance sheet of the Conviction
Additional paid-in capital 750,000 7. Additional paid-in capital
Retained earnings 2,700,000 a. P1,485,000 b. P1,575,000 c. P3,825,000 d. P1,275,000
Total stockholders’ equity P12,450,000 8. Unapproriated retained earnings
a. P2,550,000 b. P2,422,500 c. P2,220,000 d. P2,190,000
Transactions during 2005 and other information relating to the stockholders’ equity 9. Total stockholders’ equity
accounts were as follows: a. P16,425,000 b. P14,295,000 c. P16,095,000 d. P16,065,000

• 10.In an examination of shareholder’s equity, an auditor is most concerned that

On January 26, Tenacity reacquired 75,000 shares of its common stock for P11 per a. Capital stock transactions are properly authorized.
share. b. Stock splits are capitalized at par or stated value on the dividend declaration date.
• c. Dividends during the year under audit were approved by the shareholders.
On April 4, Tenacity sold 45,000 shares of its treasury stock for P14 per share. d. Changes in the accounts are verified by a bank serving as a registrar and stock
• transfer agent.
On June 1, Tenacity declared a cash dividend of P1 per share, payable on July 15,
2005 to stockholders of record on July 1, 2005. 11.In audit of a medium-sized manufacturing concern, which one of the following areas
can be expected to require the least amount of audit time?
• a. Owner’s equity b. Assets c. Revenue d. Liabilities
On August 15, each stockholder was issued one stock right for each share held to
purchase two additional shares of stock for P12 per share. The rights expire on 12.When a corporate client maintains its own stock records, the auditor primarily will rely
October 31, 2005. upon
• a. Confirmation with the company secretary of shares outstanding at year-end.
On September 30, 150,000 stock rights were exercised when the market value of the b. Review of the corporate minutes for data as to shares outstanding.
stock was P12.50 per share. c. Confirmation of the number of shares outstanding at year-end with the appropriate
• state official.
On November 2, Tenacity declared a two for one stock split-up and charged the par d. Inspection of the stock book at year-end and accounting for all certificate numbers.
value of the stock from P10 to P5 per share. On November 20, shares were issued for
the stock split. 13.When a client company does not maintain its own stock records, the auditor should
• obtain written confirmation from the transfer agent and registrar concerning
On December 5, 60,000 shares were issued in exchange for a secondhand equipment. a. Restrictions on the payment of dividends.
It originally cost P600,000, was carried by the previous owner at a book value of b. The number of shares issued and outstanding.
P300,000, and was recently appraised at P390,000. c. Guarantees of preferred stock liquidation value.
• d. The number of shares subject to agreement to repurchase
Net income for 2005 was P720,000.
QUESTIONS: 14.The auditor is concerned with establishing that dividends are paid to client
corporation shareholders owning stock as of the
Based on the above and the result of your audit, determine the following as of December a. Issue date c. Record date
31, 2005: b. Declaration date d. Payment date

6. Common stock 15. An audit program for the retained earnings account should include a step that
a. P12,600,000 b. P10,800,000 c. P10,050,000 d. P12,300,000 requires verification of the
a. Fair value used to charge retained earnings to account for a two-for-one-stock c. When a donors tax return was filed and it was found out by the BIR to have
split. errors which gave rise to a deficiency donors tax, the donor cannot be required to
b. Approval of the adjustment to the beginning balance as a result of a write-down of pay the deficiency.
an account receivable.
d. The government is not legally bound by the agreement between the donor and
c. Authorization for both cash and stock dividends. the donee that the later shall pay the donors tax instead of the former.
d. Gain or loss resulting from disposition of treasury shares.

BLT
1. For the donation to be considered valid, acceptance of the donation must be made.
5. First statement: In all cases, void donations are not subject to donors tax.
a. during the lifetime of the donor only. Second statement: Every donation between the spouses during the marriage shall
b. during the lifetime of the donee only be void.
c. during the lifetime of the donor and the donee
d. none of the choices a. both statements are true
b. both statements are false
2. First statement: Donors tax shall be levied, assessed collected and paid upon the c. First statement is true while second statement is false
transfer of property by any person , resident or non-resident as a gift. d. First statement is false while the second statement is true
Second statement: For the purpose of donor’s tax, a stranger is a person who is
not a relative by consanguinity in the collateral line within the fifth degree of 6. A leased to B a 5 DOC generator for two years at a lease rental fee of P1,000 per
relationship. month and signed an option in favor of B to buy the generator at the end of the term
of the lease at P60,000. All rental fees paid are to be considered as partial payment
a. True, True of the sale. After 12 months B was able to pay the rental fees for 9 months and was
b. False, False in arrears for three months. A terminated the lease contract and repossessed the
c. True, False generator. The consequence of the transaction is
d. False True a. A can collect the rental fees for three months which are in arrears
b. A can collect the rental fees for the unexpired 12 months of the lease contract
3. One of the following donees will not entitle the donor-parent to a P10,000 dowry c. When A took possession of the generator, he has no further action against B
exemption. d. A in terminating the lease and repossessing the generator is obliged to refund
the 9 months
a. Legitimate Child
b. Recognize Natural Child 7. X sold his car to Y for P50,000. No date was fixed for the performance of the
c. Adopted Child obligation of the seller and the buyer. The obligation of X is
d. Stepchild a. To deliver the car immediately because the sale is a perfected contract
b. To deliver the car only after Y writes to X demanding the delivery of the car
4. Which of the following statement is incorrect? c. To deliver the car only after Y pays the P50,000
d. To rescind the contract because there is no time fixed for the delivery
a. A separate return shall be filed by each donor for each gift or donation made on 8. Earnest money and option money both apply to perfected sale.
different dates during the year reflecting therein any previous net gift made in the In a contract of sale of personal property the price of which is payable in installment,
same calendar year. the vendor may cancel the sale should the vendee fail to pay.
a. Both are true
b. Only one return shall be filed for several gift or donations by a donor to the b. Both are false
different donees on the same date. c. Only the first is true
d. Only the second is true
9. Should the vendee’s failure to pay, cover two or more installments, the vendor may c. P 8,000
foreclose the chattel mortgage on the thing sold but he shall have no further action d. P 25,000
against the purchaser to recover any unpaid balance of the price, except if there is an
agreement to the contrary.
Sale is a consensual contract, therefore delivery or payment is not essential for 14. Income tax is not a
perfection.
a. Both are true
b. Both are false
c. Only the first is true a. personal tax
d. Only the second is true b. national tax
c. excise tax
10. The ownership of the thing sold shall be transferred to the vendee upon perfection of d. direct tax
the contract.
An unaccepted unilateral promise to buy or sell a determinate thing for a price certain
is binding upon the promisor. 15. Under RA8424, the allowable deduction for medical expenses of a resident
a. Both are true decedent shall not exceed :
b. Both are false
c. Only the first is true
d. Only the second is true
a. P 50,000
11. Gross income means all income derived from whatever source, including the b. P 550,000
following items except: c. P 5,000
d. P 500,000

a. Pensions
b. Prizes and winnings
c. Rents
d. Stock dividends

12. A tax imposed at every stage of distribution process on the sale, barter or
exchange of goods and services and transactions deemed sale, as well as
importation of goods and services.

a. privilege tax
b. percentage tax
c. VAT
d. excise tax

13. Additional exemption for each dependent child per RA 9504

a. P 10,000
b. P 9,000