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1. The liabilities section of the balance sheet of Pug Company on December 31, 2005
detailed the following:
Accounts payable 2,000,000
Notes payable-trade 2,500,000
Bank note payable -10% 800,000
Bank note payable – 12% 1,000,000
Accrued expenses 350,000
Accrued interest payable 500,000
Mortgage note payable – 6% 4,000,000
Bonds payable – 10% due June 30, 2006 5,000,000
The 10% bank note payable is issued on January 1, 2005, payable on demand and
interest is payable every six months. The 12% bank note payable is a two-year note
issued on July 1, 2004.
The 6%, 10 year mortgage note was issued on October 1, 2002. Terms of the note give
the holder to demand payment if the company fails to make monthly interest payment.
On December 31, 2005, Pug is three months behind in paying its required interest.
What is the total amount of current liabilities on December 31, 2005?
a. P10,150,000 c. P15,750,000
b. P16,150,000 d. P15,150,000
4. National Appliance Center sells washing machines that carry a three-year warranty
against manufacturer's defects. Based on company experience, warranty costs are
estimated at P60 per machine. During the year, National sold 48,000 washing
machines and paid warranty costs of P340,000. In its income statement for the year
ended December 31, National should report warranty expense of
a. P2,200,000 c. P680,000
b. P2,880,000 d. P960,000
6. On March 1, 2004, Bohol Company borrowed P5,000,000 and signed a 2-year note
bearing interest at 12% per annum compounded annually. Interest is payable in full at
maturity on February 28, 2006. What amount should Bohol report as a liability for
accrued interest at December 31, 2005?
a. P1,200,000 c. P1,160,000
b. P1,100,000 d. P 0
7. On March 1, 2005, Tiaong Company issued 10,000 of its P1,000 face value bonds at
95 plus accrued interest. Tiaong Company paid bond issue cost of P1,000,000. The
bonds were dated November 1, 2004, mature on November 1, 2014, and bear interest
at 12% payable semiannually on November 1 and May 1. What amount did Tiaong
receive from the bond issuance?
a. P8,500,000 c. P9,500,000
b. P8,900,000 d. P9,900,000
8. On December 31, 2005, Atimonan Company issued 8,000 of its 8%, 10-year P1,000
face value bonds with detachable stock warrants at 120. Each bond carried a
detachable warrant for two shares of Atimonan’s P100 par value common stock at a
specified option price of P150. Immediately after issuance, the market value of the
bonds ex-warrants was P8,100,000 and the market value of the warrants was
P900,000. In its December 31, 2005 balance sheet, what amount should Atimonan
report as bonds payable?
a. P8,000,000 c. P8,100,000
b. P8,640,000 d. P9,600,000
9. Lara Company showed the following balances in connection with its noncurrent
liabilities on December 31, 2005.
Bonds payable – 10%, maturing December 31, 2010 10,000,000
Bonds payable – 12%, maturing December 31, 2015 8,000,000
Discount on bonds payable 800,000
Premium on bonds payable 500,000
Bond issue cost 200,000
The discount is related to the 10% bonds payable and the premium and bond issue
cost are applicable to the 14% bonds payable. No bonds were retired during 2005.
How much interest expense on the bonds payable should Lara report in its 2005
income statement?
a. P2,070,000 c. P1,870,000
b. P2,090,000 d. P1,890,000
Page 3 of 8
10. On April 1, 2004, Jerry Company sold 12,000 of its P1,000 11%, 5-year face value
bonds at 96. The bonds are dated April 1, 2004 and interest payment dates are April 1
and October 1, and the company uses the straight-line method of bond discount
amortization. On March 31, 2005, Jerry took advantage of favorable prices of its stock
to extinguish all of the bonds by issuing 800,000 shares of its P10 par value common
stock. At this time, accrued interest was paid in cash. The company’s stock was selling
for P30 per share on March 1, 2005. The increase in additional paid in capital due to
the conversion of Jerry’s bonds is
a. P4,000,000 c. P3,616,000
b. P3,520,000 d. P 0
12. Tabaco Company leased equipment for its entire nine-year useful life, agreeing to pay
P1,000,000 at the start of the lease term on January 1, 2004, and P1,000,000 annually
on each January 1, for the next eight years. The present value on January 1, 2004, of
the nine lease payments over the lease term, using the rate implicit in the lease which
Tabaco knows to be 10% was P6,330,000. The January 1, 2004, present value of the
lease payments using Tabaco’s incremental borrowing rate of 12% was P5,970,000.
Tabaco made a timely second lease payment. What amount should Tabaco report as
capital lease liability in its December 31, 2005 balance sheet?
a. P4,863,000 c. P4,970,000
b. P4,467,000 d. P5,330,000
13. Bran Company leased equipment for its entire 10 year economic life, agreeing to pay
P1,000,000 at the start of the lease term on January 1, 2005 and P1,000,000 annually
on each January 1 for the next nine years. The present value factors using the implicit
rate in the lease which is 10% for an annuity due with ten payments: 6.76 and for an
ordinary annuity with ten payments: 6.15. Bran properly recorded the finance lease
and depreciated the asset using the straight line method. What is the current portion of
the lease liability on December 31, 2005?
a. P324,000 c. P424,000
b. P466,400 d. P516,040
14. On January 2, 2005, Trent Company signed an 8-year noncancelable lease for a new
machine requiring P1,500,000 annual payments at the beginning of each year. The
machine has a useful life of 12 years with no residual value. Title passes to Trent at the
lease expiration date. Trent uses the straight-line depreciation for all of its plant assets.
Aggregate lease payments have a present value on January 2, 2005 of P5,400,000
based on an appropriate interest rate. For 2005, Trent should record depreciation
expense for the leased machine at
a. P1,500,000 c. P675,000
b. P 450,000 d. P325,000
15. Cabusao Company is indebted to Ragay Company under a P5,000,000, 10^% three-
year note dated December 31, 2002. Because of financial difficulties, Cabusao owed
accrued interest of P500,000 on the note at December 31, 2005. Under a debt
restructuring on December 31, 2005, Ragay Company agreed to settle the note and
accrued interest for a tract of land having a fair value of P3,500,000. The acquisition
cost of the land is P1,000,000. The income tax rate is 32%. In its 2005 income
statement Cabusao should report gain on restructuring at
a. P4,000,000 c. P1,500,000
b. P2,720,000 d. P1,020,000
Page 4 of 8
17. Bacolod Company provided the following data in its memorandum records for a defined
benefit plan on January 1, 2005.
Fair value of plan assets 12,000,000
Unamortized past service cost 1,000,000
Accrued benefit obligation ( 9,000,000)
Prepaid/accrued benefit cost 4,000,000
The remaining average vesting period for the employees covered by the past service
cost is 5 years. Transactions affecting the plan for 2005 are:
Service cost 3,500,000
Interest cost 500,000
Expected and actual return on plan on assets 1,200,000
Contribution to the plan 2,300,000
Benefits paid to retirees 2,500,000
18. Mara Company provided the following comparative information concerning its defined benefit plan in its
memorandum records:
January 1, 2005 December 31, 2005
Fair value of plan assets 10,000,000 11,500,000
Unamortized past service cost 1,500,000 1,350,000
Accrued benefit obligation 12,500,000 13,035,000
Unrecognized actuarial gain 1,700,000 1,620,000
The transactions for 2005 related to the defined benefit plan are:
Current service cost 2,000,000
Interest cost 1,000,000
Expected return on plan assets 1,200,000
Contribution to the plan 2,800,000
Benefits paid to retirees 2,300,000
Unexpected decrease in accrued benefit obligation 165,000
Amortization period of past service cost and actuarial gain 10 years
The actual return on plan assets in 2005 is
a. P1,200,000 c. P1,000,000
b. P1,905,000 d. P2,000,000
Page 5 of 8
19. Binalbagan Company obtains the following from its actuary on January 1, 2005?
Accrued benefit obligation 9,000,000
Market related asset value 10,000,000
Unrecognized net loss 1,500,000
During 2005, the actuary determined the current service and interest cost at
P4,000,000. The expected and actual return on plan assets was P1,000,000. The
average remaining service period of the covered employees is 10 years. What is the
total benefit expense for 2005?
a. P3,000,000 c. P3,150,000
b. P3,060,000 d. P3,050,000
20. Manapla Company computed a pretax financial income of P15,000,000 for the year
ended December 31, 2005. In preparing the tax return, the following differences are
noted between financial income and taxable income.
Nondeductible expense 2,000,000
Nontaxable revenue 1,000,000
Estimated warranty cost that was recognized as expense
in 2005 but deductible for tax purposes when paid 1,500,000
Excess tax depreciation over financial depreciation 500,000
What is the current tax expense for 2005 if the tax rate is 32%?
a. P5,440,000 c. P4,800,000
b. P5,600,000 d. P5,120,000
21. Matalam Company has one temporary difference at the end of 2005 that will reverse
and cause taxable amounts of P2,000,000 in 2006 and P3,000,000 in 2007. Matalam’s
pretax financial income for 2005 is P20,000,000 and the tax rate is 32%. There are no
deferred taxes on January 1, 2005. The income tax payable for 2005 should be
a. P4,800,000 c. P6,400,000
b. P5,760,000 d. P5,440,000
22. The accounts below appear in the December 31, 2005 trial balance of Dumaguete
Company:
Authorized common stock 30,000,000
Unissued common stock 5,000,000
Subscribed common stock 3,000,000
Subscription receivable 1,000,000
Additional paid in capital 10,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 2,000,000
Revaluation surplus 4,500,000
Treasury stock, at cost 1,500,000
In its December 31, 2005 balance sheet , Dumaguete should report total equity at
a. P49,000,000 c. P43,500,000
b. P48,000,000 d. P58,000,000
23. The stockholders’ equity section of Norm Company revealed the following information
on December 31, 2005:
Preferred stock, P100 par 5,000,000
Additional paid in capital-preferred 2,000,000
Common stock, P50 3,200,000
Additional paid in capital-common 500,000
Subscribed common stock 800,000
Retained earnings-appropriated 250,000
Unrealized loss on available for sale securities 600,000
Subscription receivable-common 400,000
Retained earnings- unappropriated 3,500,000
Treasury stock 1,000,000
Page 6 of 8
How much is the contributed capital of Norm Company as of December 31, 2005?
a. P10,100,000 c. P11,100,000
b. P11,500,000 d. P10,500,000
24. Victorias Company reported the following in its statement of stockholders’ equity on
January 1, 2005:
Common stock, P50 par value, authorized 1,000,000 shares,
issued 500,000 shares 25,000,000
Additional paid-in capital 25,000,000
Retained earnings 15,000,000
65,000,000
Less: Treasury stock, at cost, 100,000 shares 7,000,000
Total stockholders’ equity 58,000,000
The following transactions occurred in 2005:
June 1 40,000 shares of treasury stock were sold for P3,200,000.
August 31 200,000 shares of previously unissued common stock were sold for
P120 per share.
October 1 Distribution of a 2-for-1 stock split, resulting in the common stock’s per
share par value being halved.
Victorias accounts for treasury stock under the cost method. In Victorias Company’s
statement of stockholders’ equity, the number of outstanding shares should be
a. 1,400,000 c. 1,280,000
b. 1,320,000 d. 2,280,000
25. On June 1, Mason Company issued 80,000 shares of its P10 par common stock to
Dixon for a tract of land. The stock had a fair market value of P18 per share on this
date. On Dixon's last property tax bill, the land was assessed at P960,000. Mason
should record an increase in Additional Paid-In Capital of
a. P960,000 c. P400,000
b. P640,000 d. P160,000
26. On August 1, 2005, B. Doran Company reacquired 4,000 shares of its P15 par value common stock for P18 per
share. What journal entry should Doran make to record the acquisition of treasury stock?
a. Treasury Stock 60,000
Additional Paid-In Capital 12,000
Cash 72,000
b. Treasury Stock 60,000
Retained Earnings 12,000
Cash 72,000
c. Retained Earnings 72,000
Cash 72,000
d. Treasury Stock 72,000
Cash 72,000
27. Manjuyod Company was organized on January 1, 2003. On that date it issued 500,000
shares of its P10 par value common stock at P15 per share. During the period January
1, 2003 through December 31, 2005, Manjuyod reported net income of P3,000,000 and
paid cash dividends of P500,000. On January 5, 2005, Manjuyod purchased 50,000
shares of its common stock at P20 per share. On December 31, 2005, 45,000 treasury
shares were sold at P30 per share and retired the remaining treasury shares. What is
the total stockholders’ equity on December 31, 2005?
a. P10,250,000 c. P10,850,000
b. P10,500,000 d. P10,350,000
Page 7 of 8
28. In connection with a stock option plan for the benefit of key employees, Matanao
Company intends to distribute treasury shares when the options are exercised. These
shares were originally bought at P70 per share. On January 1, 2005, Matanao granted
stock options for 50,000 shares at P150 per share as additional compensation for
services to be rendered over the next two years. The options are exercisable during a
4-year period beginning January 1, 2007, by grantees still employed by Matanao.
Market price of Matanao stock was P200 per share at the grant date. The fair value of
each stock option is P60 on grant date. No stock options were terminated during 2005.
In Matanao’s 2005 income statement, what amount should be reported as
compensation expense pertaining to the options?
a. P1,500,000 c. P1,250,000
b. P1,750,000 d. P 750,000
29. On January 1, 2005, Mabel Company established a fixed stock option plan for its senior
employees. At total of 200,000 options were granted that permit employees to purchase
200,000 shares of P50 par common stock at P100 per share. Each option had a fair
value of P42 on the grant date. Options are exercisable beginning January 1, 2008 and
can be exercised anytime during 2008. The market price for Mabel common stock on
January 1, 2005 was P130. What is the compensation expense for the year 2005?
a. P6,000,000 c. P2,000,000
b. P8,400,000 d. P2,800,000
30. On January 1, 2004, Bansalan Company offered its top management stock
appreciation right with the following terms:
Predetermined price P100 per share
Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2007
The stock appreciation right is to be exercised on January 1, 2007. The quoted prices
of Bansalan Company stock are 100, 124, and 151 on January 1, 2004, December 31,
2004 and December 31, 2005, respectively. What amount should Bansalan charge to
compensation expense for the year ended December 31, 2005 as a result of the stock
appreciation right?
a. P1,700,000 c. P1,200,000
b. P1,300,000 d. P 500,000
b. P12,400,000 d. P18,900,000
34. The stockholders’ equity of Sunny Company on December 31, 2005, consists of the following capital balances:
Preferred stock, 10% cumulative, 3 years in arrears, P100 par,
P110 liquidation price 150,000 shares 15,000,000
Common stock, P100 par, 200,000 shares 20,000,000
Subscribed common stock, net of subscription receivable of
P4,000,000 6,000,000
Treasury common stock, 50,000 shares at cost 4,000,000
Additional paid in capital 3,000,000
Retained earnings 20,000,000
The book value per share of the common stock is
a. P156.00 b. P190.00 c. P172.00 d. P286.67
35. Bindayan Company has incurred heavy losses since its inception. At the
recommendation of its president and CEO, the board of directors voted to implement
quasi-reorganization, through reduction of par value subject to stockholders’ approval.
Immediately prior to the restatement on December 31, 2005. Bindayan Company’s
stockholders’ equity was as follows:
Common stock, P100 par 500,000 shares 50,000,000
Additional paid in capital 15,000,000
Retained earnings (deficit) (10,000,000)
The stockholders approved the quasi reorganization on December 31,2005 to be
accomplished by a reduction in inventory of P2,000,000, a reduction in property, plant
and equipment of P6,000,000, and writeoff of goodwill at P5,000,000. To eliminate the
deficit, Bindayan should reduce common stock by
a. P23,000,000 c. P13,000,000
b. P10,000,000 d. P 8,000,000
- end of examination -
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