Father Saturnino Urios University

Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

Current Liabilities

1. Echo Company sells office equipment contracts agreeing to service equipment for a two-year period. Cash
receipts from contracts are credited to unearned service contract revenue and service contract costs are
charged to service contract expense as incurred. Revenue from service contract is recognized as earned over
the lives of the contracts.

Additional information for the year ended December 31, 2011 is as follows:
Unearned service contract revenue, January 1, 2011 P600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000

What amount should Echo report as unearned service contract revenue at December 31, 2011?
a. P460,000 b. P480,000 c. P490,000 d. P720,000

2. Day Care Company offers 3 payment plans on its 12 months contracts. Information on the 3 plans and the
number of children enrolled in each plan for the September 1, 2011 through August 31, 2012 contract year
follows:
Initial Payment Monthly Fees Number of
Plan Per Child per Child Children
1 P5,000 15
2 2,000 P300 12
3 500 9

Day Care received P99,000 of initial payments on September 1, 2011 and P32,400 monthly fees during the
period September 1 through December 31, 2011.In its December 31, 2011 statement of financial position, what
amount should Day Care report as deferred revenues?
a. P33,000 b. P43,800 c. P66,000 d. P99,000

3. Sour Company sells magazine subscriptions for one to three-year periods. Cash receipts from subscribers are
credited to the account magazine subscriptions collected in advance, and this account had a balance of
P2,400,000 at December 31, 2011 expire as follows:

2012…………P600,000 2013…………P900,000 2014…………P400,000

In its December 31, 2011 statement of financial position, what amount should Sour report as the balance for
magazine subscriptions collected in advance?
a. P 500,000 b. P1,200,000 c. P1,900,000 d. P2,400,000

4. Gallery Department Store sells gift certificated, redeemable for store merchandise that expires one year after
their issuance. Gallery has the following information pertaining to its gift certificates sales and redemptions:
Unearned at Dec 31 2014 600,000
2015 sales 2,000,000
2015 redemptions of prior year sales 200,000
2015 redemptions of current year sales 1,400,000

Gallery’s experience indicates that 10% of gift certificates sold will be not be redeemed. In its Dec 31 2015
statement of financial position, what amount should Gallery report as unearned revenue?
a. 400,000 b. 600,000 c. 800,000 d. 1,000,000

5. Strand Inc. provides am incentive compensation plan under which its president receives a bonus equal to 10%
of the corporation’s income in excess of P600,000 before income tax but after deduction of the bonus. If
income before income tax and bonus is P1,920,000 and the tax rate is 32%, the amount of the bonus would
be
a. P120,000 b. P132,000 c. P174,360 d. P192,000

6. Miguel Company, a grocery retailer, operates a customer loyalty program. The entity grants program mebers
loyalty points when they spend a specified amount on groceries. Program members can redeem the points
for further groceries. The points have no expiry date. During 2014, the entity granted 10,000 points.
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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

Management expects that 8,000 of these points will be redeemed. The fair value of each loyalty point is
estimated at P100. The sales during 2014 amounted to P8,000,000 including the loyalty points. On December
31, 2014, 4,000 points have been redeemed in exchanged for groceries. In 2015, the management revised its
expectations and now expects 9,000 points to be redeemed altogether. During 2015, the entity redeemed
4,100 points. What is the revenue earned from loyalty points for the year ended December 31, 2015?
a. 100,000 b. 400,000 c. 500,000 d. 80,000

7. Inter Company sells its products in reusable, expensive containers. The customer charged a deposit for each
container delivered and receives a refund for each container returned within two years after the year of
delivery. Inter accounts for the containers not returned within the time limit as being retired by sale at the
deposit amount. Information for 2012 is as follows:

Deposits for containers at December 31, 2011 from deliveries in:

2010 P 150,000

2011 430,000 P 580,000

Deposits for containers delivered in 2012 780,000

Deposits for containers returned in 2012 from deliveries in:

2010 P 90,000

2011 250,000
2012 286,000 626,000

What amount should Inter Company report as liability for deposits on returnable containers at December 31,
2012?
a. P494,000 b. P644,000 c. P674,000 d. P734,000

8. On December 31, 2014, the bookkeeper of Toblerone Company provided the following information:
Accounts Payable, including deposits and advances P 2,500,000
from customers of P500,000
Notes payable, including note payable to bank due 3,000,000
on December 31,2016 for P2,000,000
Share Dividends payable 800,000
Credit balance in customers’ account 400,000
Serial bonds, payable in annual installments of 10,000,000
P1,000,000
Accrued interest on bonds payable 300,000
Contested BIR tax assessment 600,000
Unearned rent income 100,000
Compute for current liabilities
a. 6,800,000 c. 5,300,000
b. 7,300,000 d. 8,700,000

9. East Company manufactures stereo systems that carry a two-year warranty against defects. Based on past
experience, warranty costs are estimated at 5% of sales for the warranty period. During the current year,
stereo systems sales amounted to P5,000,000 and warranty costs of P100,000 were incurred.

What amount should be reported as warranty expense for the current year?
a. 250,000 b. 150,000 c. 100,000 d. 125,000

What is the estimated warranty liability at the end of the current year?
a. 150,000 b. 50,000 c. 25,000 d. None

10. During 2011, Mallow Company sold 500,000 boxes of hotcakes under a new sales promotional program.
Each box contains one coupon, which when submitted with P16, entitles the customer to a baking pan.
Mallow pays P20 per pan and P2 for handling and shipping. Mallow estimates that 80% of the coupons will
be redeemed, even though only 300,000 coupons had been processed during 2011.
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Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

What amount should Mallows report as a liability for unredeemed coupons at December 31, 2011?
a. P300,000 b. P400,000 c. P600,000 d. P1,000,000

11. Louise Company includes one coupon in each box of laundry soap it sells. A towel is offered as a premium to
customers who send in 5 coupons and a remittance of P10.
2014 2015
Boxes of soap sold 2,000,000 2,500,000
Number of towels purchased at P50 each 65,000 90,000
Coupons redeemed 600,000 850,000
Experience indicates that only 40% of the coupons will be redeemed. What is the estimated premium
liability on Dec 31, 2015?
a. 1,400,000 c. 2,800,000
b. 1,500,000 d. 4,000,000

12. Charming Company estimates its annual warranty expense is 2% of annual net sales. The following data
relate to calendar year 2011:

Net sales 3,200,000

Warranty liability account:
Balance, Jan 1 2011 10,000 debit before adjustment
Balance, Dec 31 2011 54,000 credit after adjustment
Which of the following entries was made to record the 2011 estimated warranty expense?
a. Warranty expense 64,000
Accumulated profit/loss(prior period adjustment) 10,000
Estimated liability under warranties 54,000
b. Warranty expense 54,000
Accumulated profit/loss(prior period adjustment) 10,000
Estimated liability under warranties 64,000
c. Warranty expense 44,000
Estimated liability under warranties 44,000
d. Warranty expense 64,000
Estimated liability under warranties 64,000

13. On December 17, 2011, an explosion occurred at Cord Company plant causing extensive damage to area
buildings. Although no claims had yet been asserted against Cord Company by March 10, 2012, Cord’s
management and counsel concluded that it is reasonably possible Cord will be responsible for damages, and
that P2,500,000 would be reasonable estimate of its liability. Cord’s P10,000,000 comprehensive policy
liability policy has a P500,000 deductible clause.
In Cord’s December 31, 2011 financial statements, which were issued on March 25, 2012, how would this item
be reported?
a. No footnote disclosure or accrual is necessary.
b. As a footnote disclosure indicating the possible loss of P500,000.
c. As an accrued liability of P500,000.
d. As a footnote disclosure indicating the possible loss of P2,500,000.

14. In May 2011, West company filed suit against Brown, Inc. seeking P850,000 damages for patent infringement.
A court verdict in November 2011 awarded West P600,000 in damages, but Brown’s appeal is not expected
to be decided before 2011. West’s counsel believes it is probable but not virtually certain that West will be
successful against Brown for an estimated amount in the range between P300,000 and P450,000, with
P400,000 considered the most likely amount. What amount should West record as a contingent asset from
lawsuit in the year ended December 31, 2011?
a. None b. P300,000 c. P400,000 d. P600,000

Bonds Payable & Compound Financial Instrument

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

15. On Oct 1 2014, Winston Corporation issued at 99 excluding accrued interest, 2,000 of its 8% P1,000 bonds.
The bonds dated Jan 1 2014, mature on Jan 1 2024, and pay interest on July 1 and Jan 1. Winston paid
transaction costs of P70,000. From the bond issuance, Winston received net cash of
a. 1,910,000 b. 1,950,000 c. 1,980,000 d. 2,020,000

16. On July 1 2014, Anger Company issued its 11% bonds in the face amount of P2,000,000 that mature on June
30 2018. The bonds were issued to yield 5%, and interest is payable every Jan 1 and Jul1. Anger Company
uses the effective interest method of amortizing bond premium or discount. What is the carrying value of the
debt instrument as of July 1 2016? Carry present value factors to 3 decimal places.
a. 2,027,612 b. 2,051,085 c. 2,035,821 d. 2,043,639

17. On June 30, 2014, Orient Company had outstanding 8% P3,000,000 face amount, 15-year bonds maturing on
June 30, 2021. Interest is payable on June 30 and Dec 31. The unamortized balances on June 30 2014 in the
bond discount and deferred bond issue costs accounts were P105,000 and P30,000, respectively. Orient re-
acquired all of these bonds at 94 on June 30 2014, and retired them. Ignoring income taxes, how much gain
should Orient report on this early extinguishments of debt?
a. 45,000 b. 75,000 c. 105,000 d. 180,000

18. On Jan 1, 2009, Harlet Company redeemed its 15-year bonds of P5,000,000 par value for 102. The bonds
were originally issued on January 1, 1997 at 98 with a maturity date of January 1, 2012,, the bonds issue cost
relating to this transaction was P200,000. Harlet amortizes discounts, premiums, and bond issue costs using
the straight line method. What amount of loss should Harlet recognize on the redemption of these bonds?
a. 120,000 b. 160,000 c. 100,000 d. 0

19. On Jan 1 2014, Emilia Company issued its 5-year, 12% P5,000,000 face value convertible debt instrument for
P4,800,000. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50 per share
and can be converted anytime from Jan 2015 to maturity. At the time of issue the market rate of interest for
a similar instrument is 14%. Interest is payable every six months on Jan 1 and July 1.

On July 1 2015, the entire debt instrument was converted into equity instrument by the issuance of 80,000
ordinary shares of the enterprise. Transaction costs of P50,000 were incurred in relation to the issue of new
shares.
PV of 7% for an ordinary annuity of P1 after 10 periods 7.024
PV of 7% after 10 interest periods 0.508
What amount should be credited to the share premium account as a result of the conversion?
a. 0 b. 152,800 c. 831,349 d. 881,349

Note Payable & Debt Restructuring

20. KK Company, after having experienced financial difficulties in 2013, negotiated with a major creditor and
arrived at an agreement to restructure a note payable on Dec 31 2013. The creditor was owed a principal of
P3,600,000 and interest of P400,000 but agreed to accept equipment worth P700,000 and note receivable
from KK Company’s customer with a carrying amount of P2,700,000. The equipment had an original cost of
P900,000 and accumulated depreciation of P300,000. What amount should be recognized as gain from debt
extinguishment on Dec 31 2013?
a. 700,000 b. 600,000 c. 400,000 d.0

21. Sunflower Company is threatened with bankruptcy due to its inability to meet interest payments and fund
requirements to retire P6,000,000 note payable with accrued interest payable of P600,000. The entity has
entered into an agreement with the creditor to exchange equity instruments for the liability. The terms of the
exchange are 300,000 ordinary shares with P5 par value and P10 market value, and 25,000 preference shares
with P10 par value and P60 market value.
1. What is the gain on the extinguishment of the note payable?
a. 0 b. 2,100,000 c. 1,500,000 d. 2,750,000

2. What is the total share premium from the issuance of the preference and ordinary shares?
a. 2,100,000 b. 4,850,000 c. 2,750,000 d. 1,500,000

22. Due to extreme financial difficulties, Rose Company had negotiated a restructuring of a 10% P5,000,000 note
payable due on Dec 31 2013. The unpaid interest on the note on such date is P500,000. The creditor had
agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

extend the due date three years from Dec 31 2013. The PV of 1 at 10% for three periods is 0.75 and the PV of
an ordinary annuity of 1 at 10% for three periods is 2.49.
1. What is the gain on extinguishment of debt in 2013?
a. 504,000 b. 1,203,200 c.1,703,200 d. 2,000,000

2. What is the interest expense?

a. 320,000 b. 379,680 c. 400,000 d. 500,000

23. On Jan 1 2013, Daisy Company sold land to Morning Glory Company. There was no established market price
for the land. Morning Glory gave Daisy a P2,400,000 noninterest bearing note payable in three equal annual
installments of P800,000 with the first payment due Dec 31 2013. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%. The present value of a P2,400,000 note payable in
three equal annual installments of P800,000 at a 10% rate of interest is P1,989,600. What is the carrying
amount of the note payable on Dec 31 2013?
a. 1,989,600 b. 2,126,400 c. 1,388,560 d. 2,400,000

Leases

24. Ely Company leased equipment to Faye Company on May 1,2013. The lease expires on May 1, 2014. Faye
could have bought the equipment from Ely for P3,200,000 instead of leasing it. Ely’s accounting records
showed a carrying amount for the equipment on May 1, 2013 of P2,800,000. Ely’s depreciation on the
equipment in 2013 was P360,000. During 2013, Faye paid P720,000 in rentals to Ely for the 8-month period.
Ely incurred maintenance and other related costs under the terms of the lease of P60,000 in 2013. After the
lease with Faye expires, Ely will lease the equipment to another entity for two years. What is the pretax
income derived by Ely for 2013?
a. 300,000 b. 360,000 c. 660,000 d. 720,000

25. On Jan 1 2014, Dose Company leased equipment from Trim Company. Annual lease payments are P100,000
due each Dec 31, beginning Dec 31 2014. The last payment is due on Dec 31 2018. Dose and Trim agreed that
the interest rate is 10% and that a third party related to Trim guaranteed a P120,000 residual value when the
asset is returned on Jan 1 2019. The remaining useful life of the asset was six years. The PV of 1 at 10% for 5
periods is 0.62, and the PV of an ordinary annuity of 1 at 10% for 5 periods is 3.79. What is the measurement
of the lessor’s asset to be presented in its Dec 31 2014 statement of financial position?
a. 400,000 b. 303,200 c. 398,740 d. 316,900

26. Oak Company leased equipment for the entire nine-year useful life, agreeing to pay P500,000 at the start of
the lease term on Dec 31 2013, and P500,000 annually on each Dec 31 for the next eight years. The present
value on Dec 31 2013 of the nine lease payments over the lease term using the rate implicit in the lease
which Oak knows to be 10% was P3,165,000. The Dec 31 2013 present value of these lease payments using
Oak’s incremental borrowing rate of 12% was P2,985,000. Oak made a timely second lease payment. What
amount should be reported as lease liability on Dec 31 2014?
a. 3,500,000 b. 2,431,500 c. 2,283,200 d. 2,485,000

27. Maria Company adopted the policy of leasing as the primary method of selling its products. The entity’s main
product is a small helicopter that is very popular among politicians and entity managers. Maria Company
constructed such a helicopter for Jade Company at a cost of P8,500,000.

Financing the construction was at a 14% rate. The terms of the lease provided for annual advance payments
of P2,500,000 to be paid over 10 years with the ownership transferring to the lessee at the end of the lease
period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date.

The lease payment began Jan 1 2013. Maria incurred initial direct costs of P500,000 in financing the lease
agreement with Jade. The sale price of the helicopter is P14,875,000. The present value of an annuity due of
1 at 14% for 10 periods is 5.95.

1. What is the gross profit on sale that should be recognized by Maria Company?
a. 4,275,000 b. 4,775,000 c. 5,875,000 d. 6,375,000

2. What is the unearned interest income on Jan 1 2013?

a. 10,125,000 b. 11,725,000 c. 9,625,000 d. 8,525,000

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

28. On Jan 1 2013, Lessor Company leased a machine to Lessee Company. The machine had an original cost of
P6,000,000. The lease term was 5 years and the implicit interest rate on the lease was 15%. The lease is
properly classified as a direct financing lease. The annual lease payments of P1,730,541 are made each Dec
31. The machine reverts to Lessor at the end of the lease term, at which time the residual value of the
machine will be P400,000. The residual value is unguaranteed.

The PV of 1 at 15% for 5 periods is 0.4972, and the PV of an ordinary annuity of 1 at 15% for 5 periods is
3.3522. At the commencement of the lease, what would be the unearned interest income to be reported?
a. 2,851,585 b. 3,251,585 c. 2,652,705 d. 3,052,705

29. On Jan 1 2014, Alice Company entered into an 8 year finance lease for an equipment. The entity accounted
for the acquisition of the finance lease at P5,000,000 which included a P500,000 bargain purchase option. At
the end of the lease, the entity expects to exercise the bargain purchase option. The expected fair value of
the equipment is P400,000 at the end of the 10 year useful life. The straight line method is used. What
amount of depreciation should be recognized for 2014?
a. 575,0000 b. 460,000 c. 625,000 d. 450,000

Accounting for Income Tax

30. Humberg Company was organized on Jan 1 2014 and had pretax accounting income of P5,000,000 and
taxable income of P8,000,000 for the year ended Dec 31 2014. The only temporary difference is accrued
product warranty costs that expected to be paid as follows: 2015- 1,000,000, 2016- 500,000, 2017-500,000,
2018-1,000,000. The entity has never had any net operating losses and does not expect any in the future. The
enacted tax rates ate 35% for 2014, 30% for 2015 to 2017, and 25% for 2018. On Dec 31 2014, what amount
should be reported as deferred tax asset?
a. 1,050,000 b. 700,000 c. 850,000 d. 600,000

31. Evade Company has the following financial statement elements for which the Dec 31 2014 carrying amount is
different from the Dec 31 2014 tax basis:
Carrying amount Tax basis Difference
Equipment 5,500,000 4,000,000 1,500,000
Accrued liability-health 500,000 0 500,000
care
Computer software cost 2,000,000 0 2,000,000
The difference between the carrying amount and tax basis of the equipment is due to accelerated
depreciation for tax purposes. The accrued liability is the estimated health care cost that was recognized as
expense in 2014 but deductible for tax purposes when actually paid. In Jan 2014, Evade Company incurred
P3,000,00 of computer software cost. considering the technical feasibility of the project, this cost was
capitalized and amortized over 3 years for accounting purposes. However, the total amount was expensed in
2014 for tax purposes. The pretax accounting income for 2014 is P15,000,000. The income tax rate is 30% and
there are no deferred taxes on Jan 1 2014. What is the current tax expense for the year 2014?
a. 4,500,000 b. 3,600,000 c. 5,400,000 d. 3,300,000

32. Sosa Company located its business in two jurisdictions, France and Germany. In both countries, Sosa has the
legal right to offset the taxes receivable and payable. The following information related to deferred tax assets
and liabilities:
Classification Amount Taxing jurisdiction
Deferred tax asset 800,000 France
Deferred tax liability 300,000 Germany
Deferred tax liability 600,000 France
How should Sosa deferred taxes at year end?
Deferred tax asset Deferred tax liability
a. 800,000 900,000
b. 0 1,000,000
c. 200,000 600,000
d. 200,000 300,000

Employee Benefits

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

33. Kendi Company reported that the employees are each entitled to two weeks of paid vacation leave. During
the current year, the employees earned 1,500 weeks of vacation leave and used 1,000 weeks. The current
salary of the employees is an average of P3,000 per week and the salary is expected to increase by P300 per
week or a future weekly salary of P3,300.

1. What is the vacation pay expense if the benefit is accumulating and vesting?
a. 3,000,000 b. 4,500,000 c. 4,650,000 d. 4,950,000
2. What is the vacation pay expense if the benefit is nonaccumulating and nonvesting?
a. 3,000,000 b. 4,500,000 c. 4,650,000 d. 4,950,000
34. On Jan 1 2014, Kristal Company provided the following information prior to PAS 19R:
Fair value of plan assets 9,000,000
Unamortized past service cost 1,500,000
Projected benefit obligation 12,000,000
Unrecognized actuarial gain 1,000,000

On Jan 1 2014, the entity adopted PAS19R. During the year, the entity determined current service cost of
P3,000,000, actual return on plan assets of P800,000 and increase in projected benefit obligation of
P500,000. Contributions to the plan amounted to P2,000,000 and no benefits were paid during the year.
During the year, benefit obligation with present value of P1,000,000 was settled for P800,000. The discount
rate is 10% and the remaining service period of covered employees is 10 years.

1. What is the employee benefit expense for the current year?

a. 3,300,000 b. 4,200,000 c. 3,500,000 d. 3,100,000

2. What amount should be reported as accrued benefit cost on Dec 31 2014?

a. 4,700,000 b. 3,500,000 c. 3,000,000 d. 4,100,000

35. Caticlan Company provided the following information:

January 1 December 31
Fair value on plan assets 3,500,000 3,900,000
Market related value on plan assets 2,800,000 2,900,000
Contribution to the plan 280,000
Benefits paid to retirees 250,000
What is the actual return on plan assets for the current year?
a. 400,000 b. 370,000 c. 430,000 d. 100,000

36. Chris Company provided the following information during the current year:
Jan 1 Dec 1
Fair value of plan assets 6,000,000 8,500,000
Projected benefit obligation 5,000,000 6,500,000
Prepaid/accrued benefit cost- 1,000,000 2,000,000
surplus
Asset ceiling 700,000 1,200,000
Effect of asset ceiling 300,000 800,000
During the year, the entity recognized current service cost of P1,000,000, actual return on plan assets of
P900,000 and contribution to the plan of P1,600,000. The discount rate of 10%

What is the defined benefit cost for the current year?

a. 930,000 b. 1,100,000 c. 760,000 d. 1,400,000

Shareholder’s Equity/Retained Earnings

37. Dayron Company had 80,000 ordinary shares outstanding in January 2014. The entity distributed a 15% stock
dividend in March and a 10% stock dividend in June. After acquiring 10,000 shares of treasury in July, the
entity split the share 4 for 1 in December. How many ordinary shares are outstanding on December 31,
2014?
a. 364,800 b. 488,000 c. 498,000 d. 451,500

38. Watt Co.'s stockholders' equity at January 1, 2007 is as follows:

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

Common stock, $10 par value; authorized 300,000 shares;

Outstanding 225,000 shares $2,250,000
Paid-in capital in excess of par 900,000
Retained earnings 2,190,000
Total $5,340,000
During 2007, Watt had the following stock transactions:
Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2007. Assuming Watt uses the cost method to record treasury stock
transactions, the total amount of all additional paid-in capital accounts at December 31, 2007 is
a. 891,600 b. 870,000 c. 908,400 d. 927,600

39. Hazel Company was organized on Jan 1 2014. On that date, the entity issued 200,000 shares with P10 par
value at P15 per share. During the period Jan 1 2014 through Dec 31 2015, the entity reported net income of
P2,000,000 and paid cash dividends of P500,000. On Jan 5 2015, the entity purchased 10,000 shares at P20
per share to be held as treasury. On Dec 31 2015, 5,000 treasury shares were sold at P30 per share and the
remaining treasury shares were retired. What is the total shareholder’s equity on Dec 31 2015?
a. 4,450,000 b. 4,350,000 c. 4,400,000 d. 4,950,000

40. On Jan 1 2014, Isabel Company reported the following shareholder’s equity:
Share capital, 250,000 shares authorized, 100,00 shares outstanding 5,000,000
Share premium 4,000,000
Retained earnings 5,000,000

The board of directors declared a 10% stock dividend on July 1 2014, when the market price of the share was
P100. The stock dividend was issued on Oct 1 2014 when the market price of the share was P150. The share
has a par value of P50. The entity sustained a net loss of P2,500,000 for 2014. What amount should be
reported as retained earnings on Dec 31 2014?
a. 2,000,000 b. 4,000,000 c. 1,000,000 d. 1,500,000

41. Claire Company was organized on Jan 1 2012. After two years of profitable operation, the statement of
financial position showed the following:
Share capital, P5 par, 600,000 shares authorized, 200,000 shares outstanding 1,000,000
Share premium 4,000,000
Retained earnings 5,000,000

On Jan 31 2014, the entity reacquired 20,000 shares at P20 per share to be held as treasury. On June 30,2014,
the entity declared and issued a 100% stock dividend. On Dec 31 2014, the entity paid a cash dividend of P10
per share. The net income for 2014 was P3,000,000. What is the unappropriated balance of retained earnings
on Dec 31 2014?
a. 3,100,000 b. 4,600,000 c. 3,500,000 d. 4,900,000

Share Based Compensation

42. On Jan 1 2014, Anthony Company granted 100 share options each to 500 employees, conditional upon the
employee’s remaining in the entity’s employ during the vesting period. The share options vest at the end of a
three year period. On grant date, each share option has a fair value of P30. The par value per share is P100
and the option price is P120. On Dec 31 2015, 30 employees have left and it is expected that on the basis of a
weighted average probability, a further 30 employees will leave before the end of the three-year period. On
Dec 31 2016, only 20 employees actually left and all of the share options are exercised on such date. What is
the compensation expense for 2016?
a. 500,000 b. 880,000 c. 380,000 d. 470,000

43. On Jan 1 2014, Angel Company offered the top management share appreciation rights with the following
terms:
Predeterrmined price P100 per share
Number of shares 50,000 shares
Service period 3 years
Exercise date Jan 1 2017

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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

The quoted prices per share are 100,124,151 and 151 on Jan 1 2014, Dec 31 2014, Dec 31 2015, Dec 31 2016,
respectively. What amount should be charged to compensation expense for 2016 as a result of the share
appreciation right?
a. 2,550,000 b. 1,300,000 c. 850,000 d. 0

44. On Jan 1 2014, Vanna Company granted to an employee the right to choose either shares or cash payment.
The choices are as follows:
Share alternative-equal to 25,000 shares with par value of P30
Cash alternative-cash payment equal to the market value of 20,000 shares

The grant is conditional upon the completion of three years of service. On grant date, on Jan 1 2014, the
share price is P51. The share prices for the three-year vesting period are P54 on Dec 31 2014, P66 on Dec 31
2015 and P65 on Dec 31 2016. After taking into account the effect of vesting restrictions, the entity has
estimated that the fair value of the share alternative is P48.

1. What is the compensation expense for 2016?

a. 480,000 b. 420,000 c. 600,000 d. 580,000

2. What is the share premium if the employee has chosen the share alternative on Dec 31 2016?
a. 730,000 b. 750,000 c. 550,000 d. 880,000

3. What is the share premium if the employee has chosen the cash alternative on Dec 31 2016?
a. 730,000 b. 180,000 c. 700,000 d. 0

BVPS/BEPS/DEPS

45. Jinky Company provided the following equity balances on Dec 31 2014:
Ordinary share capital, P100 par, 72,000 shares 7,200,000
Subscribed ordinary share capital, 12 000 shares 1,200,000
Subscription receivable 400,000
Treasury shares, 4000 at cost 600,000
Retained earnings 2,000,000

What is the book value of ordinary share?

a. 122.50 b. 117.50 c. 100.00 d. 130.00

46. Mara Company began operations in Jan 2010 and reported the following net income or loss for five years of
operations:
2010 1,500,000 loss
2011 1,300,000 loss
2012 1,200,000 loss
2013 4,500,000 income
2014 9,000,000 income

On Dec 31 2014, the capital accounts were as follows:

Preference share capital, P100 par, 12% participating and cumulative, 100,000 shares 10,000,000
Preference share capital, P100 par, 10% nonparticipating and noncumulative 50,000 shares 5,000,000
Ordinary share capital, P10 par, 1,000,000 shares 10,000,000

The entity has never paid cash or stock dividend. The capital accounts have not changed since the entity
began operations. If the maximum amount available for cash dividend is declared on Dec 31 2014, what
amount of dividend is payable to the ordinary shareholders?
a. 1,200,000 b. 2,100,000 c. 1,920,000 d. 4,500,000

47. Sharon Company provided the following information in relation to share capital
Jan 1 Share outstanding 1,250,000
Apr 1 Share issued 200,000
Oct 1 Treasury shares purchased 100,000
Nov 1 Issued a 100% share dividend
Dec 1 Share issued 60,000
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Father Saturnino Urios University
Accountancy Program
AIR- Cluster 1 (Drill #3) VMBM, CPA

What is the number of weighted average shares?

a. 2,750,000 b. 2,760,000 c. 2,755,000 d. 2,745,000

48. Jay Company provided the following extract from the statement of comprehensive income for the year ended
Dec 31 2014:
Income before tax 6,000,000
Income tax expense 1,800,000
The entity paid during the year an ordinary dividend of P1,000,000 and a dividend on the redeemable
preference shares of P500,000. The entity had P1,000,000 of P5 par value ordinary shares in issue throughout
the year and 500,000 authorized ordinary shares. What amount should be reported as basic earnings per
share for the year?
a. 30.00 b. 27.50 c. 21.00 d. 18.50

49. Jan Company reported the following information on Dec 31 2014:

Ordinary share capital 110,000 shares

Convertible noncumulative preference share capital 20,000 shares
10% convertible bonds payable P2,000,000

Share options to purchase 60,000 shares at P15 were outstanding. Market price of ordinary share was P22 on
Dec 31 2014 and averaged P20 during the year. No value was assigned to the share options. The entity paid
preference dividends of P5 per share. The preference shares are convertible into 40,000 ordinary shares. the
10% bonds are convertible into a total of 30,000 ordinary shares. The net income for 2014 is P650,000. The
income tax rate is 30%. What amount should be reported as diluted earnings per share for 2014?
a. 5.00 b. 4.40 c. 4.05 d. 3.94

END OF DRILL #3 

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