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 periods0.59Future amount of 1 at 14% for 4 periods1.69Present value of an ordinary annuity of 1 at 14% for 4 periods2.91

What is the initial measurement of the franchise?

a. 12,000,000b.13,520,000c. 8,720,000d. 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. 75,000b. 120,000c. 195,000d. 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)7,500,000Packaging product (500 units)2,700,000Completion of detailed program design3,900,000Costs incurred for coding and testing to establishtechnological feasibility3,000,000Other coding costs after establishment of technological feasibility7,200,000Other testing costs after establishment of technological feasibility6,000,000Costs of producing product masters for training materials4,500,000

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

a. 7,500,000b. 10,200,000c. 12,000,000d. 14,700,000

4) In the year-end statement of financial position, what amount should be capitalized as software cost, subject to amortization?

a. 20,700,000b. 17,700,000c. 17,100,000d. 16,200,000

LIABILITIES 5) Gullon Company reported the following information on December 31, 2013:

Accounts Payable1,200,000Advances to employees50,000Unearned rent revenue500,000Estimated liabilities under warranties150,000Cash surrender value of officers life insurance 35,000Bonds Payable, due 20142,500,000Discount on bonds payable300,000Dividends payable700,000Note payable, due 2014350,000

What total amount should be reported as current liabilities?

a. 5,150,000b. 5,000,000c. 5,100,000d. 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. 475,000b. 1,187,500c. 337,500d. 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. 330,000b. 300,000c. 374,000d. 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:

Unsecured8% debentures, callable in 2014, due in 20153,500,00010% debentures (P500,000 maturing annually)4,000,00011% convertible bonds, callable beginning in 2014, due 20151,300,000Secured12% guaranty security bonds, due in 20155,000,00012% collateral trust bonds, convertible into share capital beginning in 2014, due in 20152,000,0008% commodity backed bonds (P500,000 maturing annually beginning in 2014)4,500,000

What total amount of serial bonds, term bonds and debenture bonds should be reported? Serial bondsTerm bondsDebenture bondsa. 8,800,00011,800,0008,500,000b. 8,500,0008,800,00011,800,000c. 11,800,0008,500,0008,800,000d. 8,500,00011,800,0008,800,000

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 gainb. 235,000 lossc. 185,000 gaind. 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. 204,000b. 208,000c. 206,440d. 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.952PV of 1 at 5% for 2 years.907PV of 1 at 5% for 3 years.864

What is the expected present value of the cash flow?

a. 1,810,700b. 1,806,200c. 1,814,000d. 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 ex-warrant 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. 5,250,000b. 5,150,000c. 5,000,000d. 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. 567,000b. 2,160,000c. 6,350,000d. 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. 800,000b. 1,600,000c. 1,700,000d. 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. 450,000b. 250,000c. 600,000d. 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. 500,000b. 700,000c. 1,100,000d. 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. 4,687,000b. 4,578,000c. 700,000d. 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. 140,000b. 169,000c. 135,200d. 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. 1,300,000b. 648,000c. 620,000d. 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. 13,783,220b. 5, 384,048c. 2,761,471d. 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. 150,000b. 125,000c. 115,000d. 024) 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. 391,800b. 438,000c. 480,000d. 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. 500,000b. 250,000c. 100,000d. 026) What is the total finance charge over the lease term?

a. 1,500,000b. 1,000,000c. 500,000d. 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. 285,000b. 315,000c. 600,000d. 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. 810,000b. 825,000c. 1,605,000d. 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. 1,110,000b. 750,000c. 666,000d. 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. 4,800,000b. 2,400,000c. 4,560,000d. 2,280,000

SHAREHOLDERS EQUITY

31) Angry Company was incorporated on January 1, 2013 and provided the following information:

Jan. 1Number of shares authorized300,000Feb. 1Number of shares issued195,000July 1Number of shares reacquired but not cancelled15,000Dec. 1One for two share split

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

a. 360,000b. 90,000c. 142,500d. 45,000

32) The following accounts appear in the December 31, 2013 trial balance of Resilient Company:

Preference share capital authorized, P100 par10,000,000Ordinary share capital authorized, P10 par4,000,000Unissued preference share capital3,600,000Unissued ordinary share capital2,000,000Subscriptions receivable, ordinary360,000Subscriptions receivable, preference380,000Preference share capital subscribed600,000Ordinary share capital subscribed440,000Treasury preference shares (1,400 shares at cost)1,360,000Retained Earnings4,000,000Cumulative translation adjustment credit1,500,000

What is the shareholders equity on December 31, 2013?

a. 12,830,000b. 11,670,000c. 11,450,000d. 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. 91,200b. 90,000c. 90,400d. 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.