SPECIFIC INTANGIBLE ASSETS

1) On July 1, 2013, Apple Company signed an agreement to operate as a franchisee for

an initial franchise fee of P12,000,000. On the same date, the entity paid P4,000,000
and agreed to pay the balance in four equal annual payments of P2,000,000,
beginning July 1, 2014. The down payment is not refundable and no future services
are required of the franchisor. The entity can barrow at 14% for a loan of this type.
Present and future value factors are as follows:
Present value of 1 at 14% for 4 periods
Future amount of 1 at 14% for 4 periods
Present value of an ordinary annuity of 1 at 14% for 4 periods

0.59
1.69
2.91

What is the initial measurement of the franchise?

a. 12,000,000

b.13,520,000

c. 8,720,000

d. 9,820,000

2) Banana Company was granted a patent on January 1, 2010 and appropriately

capitalized P225,000 of related costs. The entity was amortizing the patent over its
useful life of 15 years. During 2013, the entity paid P75,000 in legal cost in
successfully defending an attempted infringement of the patent. After the legal action
was completed, the entity sold the patent to the plaintiff for P375,000. The policy is to
take no amortization in the year of disposal. What amount should be reported as gain
from sale of patent in 2013?
a. 75,000

b. 120,000

c. 195,000

d. 135,000

RESEARCH AND DEVELOPMENT COST

During the current year, ABS-CBN Company incurred costs to develop and produce a
routine, low-risk computer software product.
Duplication of computer software and training materials
from product masters (1,000 units)
Packaging product (500 units)
Completion of detailed program design
Costs incurred for coding and testing to establish
technological feasibility
Other coding costs after establishment of technological
feasibility
Other testing costs after establishment of technological
feasibility
Costs of producing product masters for training materials

7,500,000
2,700,000
3,900,000
3,000,000
7,200,000
6,000,000
4,500,000

3) In the year-end statement of financial position, what amount should be reported in

inventory?
a. 7,500,000

b. 10,200,000

c. 12,000,000

d. 14,700,000

4) In the year-end statement of financial position, what amount should be capitalized as

software cost, subject to amortization?
a. 20,700,000

b. 17,700,000

c. 17,100,000

d. 16,200,000

LIABILITIES
5) Gullon Company reported the following information on December 31, 2013:
Accounts Payable
Advances to employees
Unearned rent revenue
Estimated liabilities under warranties
Cash surrender value of officers life insurance
Bonds Payable, due 2014
Discount on bonds payable
Dividends payable
Note payable, due 2014

1,200,000
50,000
500,000
150,000
35,000
2,500,000
300,000
700,000
350,000

What total amount should be reported as current liabilities?

a. 5,150,000

b. 5,000,000

c. 5,100,000

d. 5,185,000

6) Pacio Company offers its customers a cereal bowl if they send in three boxtops from
its products and P10. The entity estimated that 70% of the boxtops will be redeemed.
In 2013, the entity sold 675,000 boxes and customers redeemed 330,000 boxtops
receiving 110,000 bowls. The cost of each bowl is P25. What is the liability for
outstanding premiums on December 31, 2013?
a. 475,000

b. 1,187,500

c. 337,500

d. 712,500

PROVISION AND CONTINGENT LIABILITY

7) Ian Company sells electrical goods covered by a one-year warranty for any defects.
Of the sales of P100,000,000 for the year, the entity estimated that 3% will have
major defect, 5% will have minor defect and 92% will have no defect. The cost of
repairs would be P5,500,000 if all products sold had major defect and P3,300,000 if
all had minor defect. What amount should be recognized as a warranty provision?
a. 330,000

b. 300,000

c. 374,000

d. 320,000

8) On December 31, 2013, Yam Company was a defendant in a pending lawsuit. In the
opinion of the entitys attorney, it is probable that Yam Company will have to pay
P600,000 and it is reasonably possible that Yam Company will have to pay P800,000
as a result of this lawsuit. What should be reported in the 2013 financial statements?
a. An accrued liability of P600,000 only.
b. An accrued liability of P1,400,000.
c. An accrued liability of P600,000 and disclosure
d. An accrued liability of 800,000 only.of a contingent liability of P200,000.
BONDS PAYABLE
9) Red Company reported the following on December 31, 2013:
Unsecured
8% debentures, callable in 2014, due in 2015
10% debentures (P500,000 maturing annually)
11% convertible bonds, callable beginning in 2014, due 2015

3,500,000
4,000,000
1,300,000

Secured
12% guaranty security bonds, due in 2015
12% collateral trust bonds, convertible into share
capital beginning in 2014, due in 2015
8% commodity backed bonds (P500,000
maturing annually beginning in 2014)

5,000,000
2,000,000
4,500,000

What total amount of serial bonds, term bonds and debenture bonds should be
reported?
Serial bonds
a. 8,800,000
b. 8,500,000
c. 11,800,000
d. 8,500,000

Term bonds
11,800,000
8,800,000
8,500,000
11,800,000

Debenture bonds
8,500,000
11,800,000
8,800,000
8,800,000

10) The December 31, 2013 statement of financial position of Love Company included a
9% bonds payable due December 31, 2019 with a carrying amount of P15,405,000.
The bonds were issued on December 31, 2009 and have a face amount of
P15,000,000 with interest payable semi-annually on June 30 and December 31 of
each year. On January 1, 2014, the entity retired P5,000,000 of these bonds at 99.
What amount should be reported in the 2014 income statement as gain or loss on the
retirement of the bonds?
a. 235,000 gain

b. 235,000 loss

c. 185,000 gain

d. 185,000 loss

EFFECTIVE INTEREST METHOD

11) On January 1, 2013, HRGR Company issued its 9% bonds in the face amount of
P4,000,000, which mature on January 1, 2023. The bonds were issued for
P3,756,000 to yield 10%, resulting in bond discount of P244,000. The entity uses the
interest method of amortizing bond discount. Interest is payable annually on
December 31. On December 31, 2013, what is the balance of the unamortized bond
discount?
a. 204,000

b. 208,000

c. 206,440

d. 228,400

12) A cash flow of P2,000,000 may be received by Ian Company in one year, two years
or three years, with probabilities of 25%, 45%, and 30% respectively. The rate of
interest on default risk-free investment is 5%. The present value factors are:
PV of 1 at 5% for 1 year
PV of 1 at 5% for 2 years
PV of 1 at 5% for 3 years

.952
.907
.864

What is the expected present value of the cash flow?

a. 1,810,700

b. 1,806,200

c. 1,814,000

d. 1,728,000

COMPOUND FINANCIAL INSTRUMENT

13) On March 1, 2013, Rika Company issued P5,000,000 of 12% nonconvertible bonds
at 103 which are due on February 28, 2018. In addition, each P1,000 bond was
issued 30 share warrants, each of which entitled the bondholder to purchase for P50
one share of Rika Company, par value P25. Interest is payable annually every

February 28. On March 1, 2013, the market value of the share was P40 and the
market value of the warrant is P4. The market rate of interest for similar bonds exwarrant is 14%. The present value of 1 at 14% for 5 periods is 0.52 and the present
value of an ordinary annuity of 1 at 14% for 5 periods is 3.43. What amount should
be recognized on March 1, 2013 as discount or premium on the issuance of the
bonds?
a. 450,000 discount b. 450,000 premium c. 342,000 discount d. 342,000 premium
14) On December 1, 2013, IGB Company issued at 105, five thousand of 9%, P1,000
face value bonds. Attached to each bond was one share warrant entitling the holder
to purchase 10 ordinary shares of the entity. On December 1, 2013, the fair value of
the bonds without the share warrants was 95, and the fair value of the share warrant
was P45. What amount of the proceeds from the bond issuance should be accounted
for as the initial carrying amount of the bonds payable?
a. 5,250,000

b. 5,150,000

c. 5,000,000

d. 4,750,000

NOTE PAYABLE AND DEBT RESTRUCTURE

15) Hoho Company bought a new machine and agreed to pay in equal annual
instalment of P1,000,000 at the end of each of the next five years. The prevailing
interest rate for this type of transaction is 12% for the five periods is 3.60. The future
amount of an ordinary annuity of 1 at 12% for five periods is 6.35. The present value
of 1 at 12% for five periods is 0.567. What amount should be reported as note
payable if financial statements were prepared today?
a. 567,000

b. 2,160,000

c. 6,350,000

d. 3,600,000

16) During 2013, Huhuhu Company experienced financial difficulties and is likely to
default on a P5,000,000, 15% three-year note dated January 1, 2011 payable to
Hahaha Bank. On December 31, 2013, the bank agreed to settle the note and unpaid
interest of P800,000 for 4,200,000 cash payable on January 31, 2014. What amount
should be reported as gain from extinguishment of debt in the 2013 income
statement?
a. 800,000

b. 1,600,000

c. 1,700,000

d. 0

OPERATING LEASE
17) On July 1, 2013, Red Company leased office premises for a three-year period at
annual rental of P400,000 payable on July 1 each year. The first rent payment was
made July 1, 2013. Additionally on July 1, 2013, Red Company paid P300,000 as a
lease bonus to obtain the three-year lease instead of the lessors usual term of six
years. In the December 31, 2013 statement of financial position, what amount should
be reported as prepaid rent?
a. 450,000

b. 250,000

c. 600,000

d. 380,000

18) Mama Company leased a new machine to Papa Company on January 1, 2013. The
lease expires on January 1, 2018. The annual rental is P600,000. Additionally, on
January 1, 2013, Papa Company paid P500,000 to Mama Company as a lease
bonus and P250,000 as a security deposit to be refunded upon the expiration of the
lease. In 2013 income statement, what amount should be reported as rent revenue?

a. 500,000

b. 700,000

c. 1,100,000

d. 1,350,000

FINANCE LEASE LESSEE

19) ABCD Company leased machinery for 10 years, its useful life, with effect from
January 1, 2013. At that date,, the fair value of the machinery was P5,000,000.
Annual rentals of P700,000 are payable in advance on January 1 of each year,
beginning January 1, 2013 and the interest rate implicit in the lease is 9%. What total
amount of lease liability should be recognized in the statement of financial position on
December 31, 2013?
a. 4,687,000

b. 4,578,000

c. 700,000

d. 0

20) Ate Company has leased an asset under a finance lease. The present value of the
minimum lease payments is 676,000 and the fair value of the asset is 700,000. The
asset has a useful life of 5 years and the lease is for a period of 4 years, after which
the asset can be acquired at a near zero cost, which is substantially below the
expected value of the asset at that date. The asset is depreciated on a straight line
basis. What is the annual depreciation expense?
a. 140,000

b. 169,000

c. 135,200

d. 175,000

DIRECT FINANCING LEASE LESSOR

21) On January 1, 2013, Ex Company, as a lessor, leased an equipment for ten years at
an annual rental of P1,300,000, payable by Susu Company, the lessee, at the
beginning of each year. The lease is appropriately accounted for as finance lease.
The equipment had a cost of P8,400,000 with an estimated life of 12 years and no
residual value. The straight line depreciation is used. The implicit rate is 9%. What
amount of interest income should be reported in the income statement for 2013?
a. 1,300,000

b. 648,000

c. 620,000

d. 639,000

22) Someday Company leased an asset to another entity. The cost of the asset was
P7,884,000. Terms of the lease specify four-year life for the lease, an annual interest
rate of 15%, and four year-end rental payments. The lease qualifies as a finance
lease and is classified as a direct financing lease. The lease provides for a transfer of
title to the lessee at the end of the lease term. After the fourth year, the residual value
is estimated to be P1,000,000. The PV of 1 at 15% for 4 periods is .572, and the PV
of an ordinary annuity of 1 at 15% for 4 periods is 2.855. What is the annual rental
payment?
a. 13,783,220

b. 5, 384,048

c. 2,761,471

d. 1,356,394

SALES TYPE LEASE LESSOR

23) Myloves Company is a car dealer. On January 1, 2013, the entity entered into a
finance lease with a customer under which the customer would pay P300,000 on
January 1 each year for 5 years, commencing in 2013. The cost of the car is
P750,000 and the cash selling price was P900,000. The entity paid legal fees of
P25,000 to a law firm in connection with the arrangement of the lease. What amount
of gross profit on sale should be recognized for the year ended December 31, 2013?
a. 150,000

b. 125,000

c. 115,000

d. 0

24) Rhea Company leased equipment to another entity on January 1, 2013. The lease is
for an eight-year period expiring December 31, 2020. The first of eight equal annual
payments of P900,000 was made on January 1, 2013. Rhea Company had
purchased the equipment on December 29, 2012 for P4,800,000. The lease is
appropriately accounted for as a sales type lease by Rhea Company. The present
value on January 1, 2013 of all rent payments over the lease term discounted at a
10% interest rate was P5,280,000. What amount of interest revenue should be
recorded in 2014?
a. 391,800

b. 438,000

c. 480,000

d. 490,000

SALE AND LEASEBACK

25) Orange Company sold an item of plant and machinery on January 1, 2013 for its fair
value of P3,500,000 when the carrying amount was P3,000,000. Orange Company
leased the item back on that date for 5 years, the items remaining useful life. Lease
payments are P800,000 on January 1 each year.
What amount of profit on disposal should be recognized in the 2013 income
statement?
a. 500,000

b. 250,000

c. 100,000

d. 0

26) What is the total finance charge over the lease term?
a. 1,500,000

b. 1,000,000

c. 500,000

d. 0

ACCOUNTING FOR INCOME TAX

27) Happy Company has a noncurrent asset which had a carrying amount of P2,000,000
in the statement of financial position on December 1, 2013. The tax written down
value or tax base of the asset at that date was P950,000. The tax rate is 30%. What
is the deferred tax balance in respect of the asset on December 31, 2013?
a. 285,000

b. 315,000

c. 600,000

d. 615,000

28) In 2013, Lonely Company reported pretax financial income of P5,000,000. Included
in the pretax financial income are P800,000 of non-taxable life insurance proceeds
received as a result of the death of an officer, P1,300,000 of estimated warranty
expenses accrued on December 31, 2013, and P150,000 of life insurance premiums
for a policy for an officer. No income tax was previously paid during the year and the
income tax rate is 30%. What is the income tax payable on December 31, 2013?
a. 810,000

b. 825,000

c. 1,605,000

d. 1,695,000

POSTEMPLOYMENT BENEFITS & OTHER EMPLOYEE BENEFITS

29) Eggnog Company has established a defined benefit pension plan for the employees.
Annual payments under the pension plan equal to 3% of an employees highest
lifetime salary multiplied by the number of years in the entity. An employees salary in
2013 was P1,000,000. The employee is expected to retire in 10 years, and the salary
increases are expected to average 4% per year during that period. On December 31,
2013, the employee has worked for 15 years. The future value of 1 at 4% for 10
periods is 1.48. What is the annual pension payment that should be used in
computing the projected benefit obligation on December 31, 2013?

a. 1,110,000

b. 750,000

c. 666,000

d. 450,000

30) Hello Company has a profit sharing bonus plan which requires the entity to pay 12%
of the income for the year to employees who serve throughout the current year and
who will continue to serve throughout the following year. The entity reported income
of P40,000,000 for 2013. The entity expects to save 5% of the maximum possible
bonus through staff turnover. The bonus will be paid on December 31, 2014. What is
the bonus expense for 2013?
a. 4,800,000

b. 2,400,000

c. 4,560,000

d. 2,280,000

SHAREHOLDERS EQUITY
31) Angry Company was incorporated on January 1, 2013 and provided the following
information:
Jan. 1
Feb. 1
July 1
Dec. 1

Number of shares authorized

Number of shares issued
Number of shares reacquired but not cancelled
One for two share split

300,000
195,000
15,000

On December 31, 2013, what is the number of ordinary shares outstanding?

a. 360,000

b. 90,000

c. 142,500

d. 45,000

32) The following accounts appear in the December 31, 2013 trial balance of Resilient
Company:
Preference share capital authorized, P100 par
Ordinary share capital authorized, P10 par
Unissued preference share capital
Unissued ordinary share capital
Subscriptions receivable, ordinary
Subscriptions receivable, preference
Preference share capital subscribed
Ordinary share capital subscribed
Treasury preference shares (1,400 shares at cost)
Retained Earnings
Cumulative translation adjustment credit

10,000,000
4,000,000
3,600,000
2,000,000
360,000
380,000
600,000
440,000
1,360,000
4,000,000
1,500,000

What is the shareholders equity on December 31, 2013?

a. 12,830,000

b. 11,670,000

c. 11,450,000

d. 12,840,000

RETAINED EARNINGS
33) Inday Company had 40,000 ordinary shares outstanding in January 2013. The entity
distributed a 15% stock dividend in March and a 10% stock dividend in June. After
acquiring 5,000 shares of treasury in July, the entity split its shares 2 for 1 in
December. How many ordinary shares are outstanding on December 31, 2013?
a. 91,200

b. 90,000

c. 90,400

d. 89,200

34) Lovely Company, a calendar year entity, had sufficient retained earnings in 2013 as
a basis for dividends but was temporarily short for cash. The entity declared a

dividend of P400,000 on April 1, 2013 and issued promissory notes to its

shareholders in lieu of cash. The notes, which were dated April 1, 2013, had a
maturity date of March 31, 2014 and a 10% interest rate. How should the scrip
dividend and related interest be accounted for?
a. Debit retained earnings for P440,000 on April 1, 2013.
b. Debit retained earnings for P400,000 on April 1, 2013 and debit interest expense
for 30,000 on December 31, 2013.
c. Debit retained earnings for P440,000 on December 31, 2013.
d. Debit retained earnings for P400,000 on April 1, 2013 and debit interest expense
for 30,000 on March 31, 2014.