PRACTICAL ACCOUNTING 1 – Exam

1. A corporation’s accounting records provided the following information (in 000’s):

Balances
Account 12/31/2001 12/31/2002
Current assets P 240 P ?
Property, plant and equipment 1,600 1,500
Current liabilities ? 130
Non-current liabilities 580 ?

Working capital of P92 remained unchanged from year 2001 to 2002. (Working capital is
current assets less current liabilities). Net income in year 2002 was P88. No dividends were
declared during year 2002 and there were no other changes in owners’ equity. Total long-
term liabilities at the end of year 2002 would be:
(a) P568 (b) P616 (c) P480 (d) P392 D

2. A corporation prepared financial statements each December 31. On December 31, year
2002, a P2,500 decrease in cash is reported on the statement of cash flows. If the cash
account had a balance of P12,500 at December 31, year 2002, the cash account balance at
December 31, year 2001 was:
(a) P10,000 (b) P12,500 (c) P15,000 (d) P0 C

3. S Company has the following partial bank reconciliation shown below.

Balance per bank P50,000 Balance per books P51,240

Deposit in transit 10,000 Interest earned ?
Checks outstanding 8,600 Service charge 20
NSF check 100
Adjusted balance P51,400 Adjusted balance ?

Assuming a combination entry, when the adjusting journal entry is made to record the
preceding bank reconciliation, cash should be debited for:
(a) P 0 (b) P160 (c) P120 (d) P280 B

4. F Company held the following trading securities at the end of the current reporting period:

Security Cost Market

J P60,000 P55,200
K 7,000 8,000
L 20,800 19,200

What amount should the company report on its balance sheet for net trading securities:
(a) P88,400 (b) P82,400 (c) P80,400 (d) P82,000 B

5. Dely Company is offering one toy shovel for 15 box tops of its cereal. Year-to-date sales
have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs
the company P3. The following data are available for the last three months of 2003:

Shovel sets Box tops

Boxes of purchased by redeemed by
Month cereal sold the company customers
October 21,000 880 12,000
November 24,000 1,083 16,005
December 33,000 1,697 20,745
 It is estimated that only 70% of the box tops will be redeemed. The cereal sells for P2.50
per box. How much is the inventory of shovel sets at December 31, 2003?
(a) P 0 (b) P942 (c) P 1,230 (d) P1,980 C

6. Adverse financial and operating circumstances warrant that Solid Company undergo a quasi-
reorganization at December 31, 2002. The following information may be relevant in
accounting for the quasi-reorganization.

a. Inventory with a cost of P2,150,000 is currently recorded in the accounts at its market
value of P2,000,000.
b. Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000 net of
accumulated depreciation.
c. A creditor agrees to extend the maturity date of a loan for five years, although interest
as originally stated must continue to be paid.
d. Individual stockholders contribute P5,000,000 to create additional paid-in capital to
facilitate the reorganization. No new shares of stock are issued, although control of a
majority of the company’s outstanding stock passes to the company’s creditors.
e. The par value of the common stock is reduced from P25 to P15.
Immediately before those events, the stockholders’ equity section appears as follows:
Common stock (P25 par value, 100,000 shares
authorized and outstanding) 2,500,000
Additional paid in capital 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000

After the quasi-organization, the additional paid in capital should have a balance of:
(a) 3,250,000 (b) 3,100,000 (c) 4,750,000 (d) 7,750,000 A

7. The following accounts are taken from the ledger of Angel Eyes Company for the year 2002:

Retained Earnings Appropriated for Contingencies

Debit Credit
Jan. 1 Balance 100,000
Dec. 31 50,000
Retained Earnings Appropriated for Treasury Stock
July 1 30,000 Jan. 1 Balance 70,000
April 1 20,000
Unappropriated Retained Earnings
April 1 Appropriated for Jan. 1 Balance 500,000
purchase of July 1 Treasury stock
treasury stock 20,000 reissuance 30,000
Oct. 31Preferred div. 50,000 Dec. 31 Net income 200,000
31 Stock dividend
on common
stock 100,000
Dec. 31 Appropriated
for conting. 50,000

How much is the retained earnings for the year ended December 31, 2002?
(a) P250,000 (b) P510,000 (c) P610,000 (d) P720,000 D

8. On June 30, 2002, Miller Company purchased 30% of the outstanding common stock of Rex
Company for P15,000,000. At that time, Rex Company’s net assets amounted to
P40,000,000. The level of investment is sufficient to provide Miller significant influence over
the activities of Rex. The difference between the purchase price and the underlying book
value of Rex’s net asses is due to the following:
 1. Land is undervalued of P2,000,000.
2. Depreciable assets with a 10-year remaining life are worth P3,000,000 more than the
book value.
3. Goodwill is determined to exist for any remaining difference between cost and book
value. Goodwill is estimated to have a useful life of 15 years from the date of the stock
purchase.

Rex Company reported net income of P20,000,000 for the year 2002 and paid cash
dividends of P5,000,000 on December 31, 2002. What amount should be reported by Miller
Company as investment in Rex Company on December 31, 2002?
(a) P16,405,000 (b) P16,500,000 (c) P16,310,000 (d) P16,400,000 A

For items 9 and 10:

Noble Corporation is in the process of negotiating a loan for expansion purposes. The
books and records have never been audited and the bank has requested that an audit be
performed.
During the course of the audit, the following facts were determined:

(a) An analysis of collections and losses on accounts receivable during the past two years
indicates a drop in anticipated losses due to bad debts. After consultation with
management, it was agreed that the loss experience rate on sales should be reduced
from the recorded 2% to 1% beginning with the year ended December 31, 2002. The
sales for 2001 and 2002 are P900,000 and P1,000,000 respectively.
(b) An analysis of marketable securities revealed that this investment portfolio consisted
entirely of short-term investments in marketable equity securities that were acquired in
2001. The total market valuation and cost for these investments as of the end of each
year were as follows:
Cost Market
December 31, 2001 78,000 81,000
December 31, 2002 78,000 62,000
(c) The merchandise inventory at December 31, 2001 was overstated by P4,000 and the
merchandise inventory at December 31, 2002 was overstated by P6,100.
(d) On January 2, 2001, equipment costing P12,000 (estimated life of 10 years and residual
value of P1,000) was incorrectly charged to operating expenses. Noble records
depreciation on the straight line method.
In 2002, fully depreciated equipment (with no residual value) that originally cost
P17,500 was sold as scrap for P2,500. Noble credited the proceeds of P2,500 to
property, plant and equipment.
(e) An analysis of 2001 operating expenses revealed that Noble charged to expense a three-
year insurance premium of P2,700 on January 15, 2001.
(f) The common stock account on December 31, 2002 shows a balance of P260,000. It
was found out that the authorized common stock consists of 50,000 shares with par
value of P10 per share, of which 20,000 shares are issued and outstanding.
(g) Unadjusted balances of net income per book as of 2001 and 2002 are P195,000 and
P220,000, respectively.

9. How much is the corrected net income for 2001?

(a) P203,700 (b) P184,100 (c) P212,400 (d) P203,500 A

10. How much is the corrected net income for 2002?

(a) P203,700 (b) P184,100 (c) P212,400 (d) P203,500 C

11. In December 2002, West Company exchanged an old packing machine, which cost
P120,000 and was 50% depreciated, for a similar used machine and paid a cash difference
of P16,000. The market value of the old packaging machine was determined to be P70,000.
For the year ended December 31, 2002, what amount of gain should West recognize on this
exchange?
(a) P 0 (b) P16,000 (c) P50,000 (d) P10,000 A
12. Elf Company prepared the following reconciliations of its pretax financial statement income
to taxable income for the year ended December 31, 2000, its first year of operations:

Pretax financial income P1,600,000

Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of
deductible amount 100,000
Depreciation in excess of financial
statement income ( 250,000)
Taxable income P1,400,000

Assume the income tax is 32%, what amount should Elf report as income tax expense –
current portion of its 2000 income statement?
(a) P416,000 (b) P448,000 (c) P496,000 (d) P512,000 B

13. Style Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditors to relieve its financial stress. Style has a P2,500,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Style Company in the
form of 200,000 shares of common stock valued at P12 per share. The par value of
common is P10 per share. How much is the gain from the debt restructuring?
(a) P500,000 (b) P100,000 (c) P400,000 (d) P 0 D

14. The following data were obtained from the actuarial valuation reports of Sight Company on
January 1, 2002:

Actuarial accrued liability P5,000,000

Actuarial value of plan assets 4,600,000
Current service cost for 2002 500,000
Experience adjustment gain 300,000
Contribution to the plan in 2002 450,000
Interest on unfunded actuarial liability 10%
Remaining working lives of employees 15 years

What is the retirement benefits expense for the year ended December 31, 2002?
(a) P450,000 (b) P520,000 (c) P700,000 (d) P480,000 B

15. Heart Corporation’s trial balance reflected the following account balances at December 31,
2002:

Accounts receivable P200,000

Accumulated depreciation 300,0 00
Cash in bank 150,000
Inventory 500,0 00
Equity securities – current 200,000
Machinery 1,000,000
Leasehold 50,000
Prepaid expenses 30,000
Equipment retired from use and held
for current sale 250,000
Treasury bill acquired 1 year ago but two
months remaining before maturity 100,000

The current assets on December 31, 2002:

(a) P1,050,000 (b) P1,080,000 (c) P1,180,000 (d)P1,430,000 D
16. Paradise Co. purchased two lots of Enrich Company stock, as follows:

Shares Cost per share

1991 100 P120
1992 120 150

In 1993, a 25% stock dividend was received. Because Paradise needed cash, it sold at
P130 per share all the 55 shares received as stock dividend. The gain realized on the
shares sold, on the first-in, first-out basis, was:
(a) P1,150 (b) P1,870 (c) P7,150 (d) 2,450 B

For items 17 and 18:

The Metro Company acquired stock of North Star Company, as follows:

Shares Cost
1991 100 P11,000
1992 150 18,000
In 1993, Metro Company received 250 rights to buy North Star stock at par (P100). Five
rights are required to buy one new share. At issue date, market values were: stock ex-
rights, P120, and rights, P5 each. One hundred fifty rights were exercised, the remaining
rights were sold later at P5 each.

17. Using the FIFO basis, the cost of the new shares acquired through the exercise of rights
was:
(a) P3,000 (b) P3,680 (c) P4,160 (d) P4,320 B

18. The sales of the remaining rights resulted in:

(a) No gain nor loss (b) P20 gain (c) P42 loss (d) P35 gain B

For items 19 and 20:

Bagong Sikat had the following investment transactions in the capital stock of Masaya, Inc.:
Jan.5 Bought 400 common shares, par P100, at P88 per share.
June 15 Received 10% stock dividend.
Aug 31 Received P4 cash dividend for each share of stock.
Oct. 10 Received stock rights to buy one new share at P135 for every 5 shares held.
Market value of right, P4; market value of stock ex-right, P156.

19. The unit cost of the stock after the stock dividend on June 15 is:
(a) P 75 (b) P 85 (c) P 90 (d) P 80 D

20. After receipt of the stock rights on October 10, the unit cost per share is:
(a) P 78 (b) P 80.50 (c) P 82 (d) P 81.50 A

21. A manufacturing company has a total raw materials purchases of P3,500,000 during its first
year of operations of which only 45% were unused at the end of the year. What is the
factory cost if prime cost is P2,505,500 and conversion cost of P1,403,100?
(a) P2,978,100 (b) P3,328,100 (c) P3,905,600 (d) P4,080,500 B

22. In Middle Company’s single-step income statement, the section title revenues consisted of
the following:

Net sales P374,000

Results from discontinuing operations:
Loss from operations of segment (net of
tax of 11,520) (24,480)
Gain on disposal of segment
(net of tax of 20,480) 43,520 19,040
 Interest revenue 20,400
Gain on sale of equipment 9,400
Cumulative effect of change in depreciation policy 30,600
Total revenues P463,440

How much is the amount to be presented under the revenues section of the income
statement?
(a) P374,000 (b) P403,800 (c) P467,800 (d) P477,920 C

23. Hero Company presented the following data relative to its cost of sales for the year ended
December 31, 2002 as follows: Factory overhead (100% of direct labor); Decrease in
finished goods, 40,000; Direct labor (50% of raw materials used); Increase in goods in
process, 30,000; Raw material used, 60,000; Increase in raw materials, 10,000.
How much is the cost of goods sold as of December 31, 2002?
(a) P110,000 (b) P120,000 (c) P130,000 (d) P150,000 C

24. On January 1, 2000, Fight Company purchased a machine for P5,600,000 and depreciated it
by the straight line using an estimated life of 10 years with P200,000 salvage value. On
January 1, 2002, Fight determined that the machine had a remaining useful life of 7 years
with no salvage. An accounting change was made in 2002 to reflect these additional data.
How much is the depreciation for the year 2000?
(a) P540,000 (b) P617,143 (c) P771,428 (d) P645,714 A

25. The following pertains to Restive Company for the year ended December 31, 2002:

Retained earnings – unappropriated, January 1 P400,000

Underdepreciation of 2000 due to fundamental error 200,000
Net income 2002 600,000
Dividends – common and preferred 300,000
Change in accounting policy from straight line to
accelerated method – debit adjustment 150,000
Retained earnings appropriated for treasury stock 100,000

How much is the total retained earnings at December 31, 2002?

(a) P500,000 (b) P600,000 (c) P850,000 (d) P1,050,000 B

26. The following pertains to transactions affecting the accounts receivable of Jar Company for
2002: Accounts receivable balance, January 1 – P600,000; Debits: charge sales –
P6,000,000, stockholders’ subscriptions – P200,000, deposit on contract – P120,000, claims
against carrier for shipping damages – P100,000, advances to employees – P10,000,
advances to affiliates – P100,000, advances to suppliers – P50,000; Credits: collections from
customers – P5,300,000, writeoff – P35,000, merchandise returns – P40,000, allowance to
customer for shipping damages – P25,000, collections on carrier claims – P40,000, collection
on subscriptions – P50,000.
How much is the total trade and other receivables on December 31, 2002?
(a) P1,100,000 (b) P1,200,000 (c) P1,320,000 (d) P1,470,000 C

27. Dart Company provides the following balance sheet accounts:

December 31, 2001 December 31, 2002

Assets:
Cash P 500,000 P3,550,000
Notes receivable 250,000
Inventory 1,500,000 ?
Liabilities:
Accounts payable P 500,000 ?
 The company pays for all operating expenses with cash, and purchases all inventory on
credit. During 2002, cash totaling P4,700,000 was paid on accounts payable. Operating
expenses for 2002 totaled P2,000,000. All sales are cash sales. The inventory was
restocked by purchasing 15,000 units per month, and valued by using periodic FIFO. The
unit cost of purchases was P33 during 2002. All sales are made for P50 per unit. The
ending inventory for 2001 was valued at P25 per unit.
How much is the gross income on December 31, 2002?
(a) P3,310,000 (b) P3,560,000 (c) P3,710,000 (d) P4,750,000 C

28. On April 30, 2002, a fire destroyed the office building of Cold Company. The following
balances were gathered from the general ledger on March 31, 2002:

Accounts receivable P 920,000

Inventory – January 1 1,880,000
Accounts payable 950,000
Sales 3,600,000
Purchases 1,680,000

Additional information:
a. An examination of the April bank statement and canceled checks revealed checks
written during the period April 1 – 30 as follows:
Accounts payable as of March 31 P240,000
April merchandise shipments 80,000
Expenses 160,000
Deposits during the same period amounted to P440,000 which consisted of collections
from customers with the exception of P20,000 refund from a vendor for merchandise
returned in April.
b. Customers acknowledged indebtedness of P1,040,000 at April 30, 2002. Customers
owed another P60,000 that will never be recovered. Of the acknowledged
indebtedness, P40,000 may prove uncollectible.
c. Correspondence with suppliers revealed unrecorded obligations at April 30, of P340,000
for April merchandise shipment, including P100,000 for shipments in transit on that
date.
d. The average gross profit rate is 40%.
e. Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of
the inventory was a total loss.

How much is the cost of the inventory on April 30, 2002?

(a) P1,200,000 (b) P1,300,000 (c) P1,440,000 (d) P1,560,000 C

29. The North Salem company has supplied you with information regarding two investment
which were made during 1995, as follows:

a. On January 1, 1995, North Salem purchased for cash 40% of the 500,000 shares of
voting common stock of the Yorktown Company for P2,400,000 representing 40% of the
net worth of Yorktown. Yorktown’s net income for the year ended December 31,1995
was P750,000. Yorktown paid dividends of P0.50 per share in 1995. The market value of
Yorktown’s common stock was P14 per share on December 31, 1995. North Salem
exercised significant influence over the operating and financial policies of Yorktown.
b. On July 1, 1995, North Salem purchased for cash 15,000 shares representing 5% of the
voting common stock of the Mahopac Company for P450,000. Mahopac’s net income
fore the six months ended December 31, 1995 was P350,000, and for the year ended
December 31, 1995 was P600,000. Mahopac paid dividends of P0.30 per share each
quarter during 1995 to stockholders of record on the last day of each quarter. The
market value of Mahopac’s common stock was P32 per share on January 1, 1995, and
P34 per share on December 31, 1995.
 Ignoring income tax and deferred tax considerations, how much is income to be reported by
North Salem for the year ended December 31, 1995?
(a) P 0 (b) P9,000 (c) P204,500 (d) P309,000 D

30. At the end of January, the unadjusted trial balance of Vivid, Inc., included the following
accounts:

Debit Credit
Sales (90% represent credit sales) P800,000
Accounts receivable P550,000
Allowance for doubtful accounts 4,280

The company uses the income statement approach in estimating uncollectible accounts
expense, and uncollectible accounts expense is estimated to be 2% of credit sales. The net
realizable value of the company’s accounts receivable in the January 31, balance sheet is:
(a) P705,600 (b) P535,600 (c) P529,720 (d) P531,320 D