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CEBU CPAR CENTER

FINAL COMPREHENSIVE EXAMINATION
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THEORY
Select the best answer from the choices given.
1. A contingent liability is
a. A liability of uncertain timing or amount.
b. A possible obligation depending on whether some uncertain future event occurs.
c. A present obligation but payment is not probable or the amount cannot be
measured reliably.
d. Either b or c.
2. Which statement is incorrect?
a. Provisions should only be used for the purpose for which they were originally
recognized.
b. Enterprises should not recognize contingent liabilities but should disclose them,
unless the possibility of an outflow of economic resources is remote.
c. Contingent assets should not be recognized but should be disclosed where an
inflow of economic benefits is probable.
d. When the realization of income is virtually certain, then the related asset is not a
contingent asset but its recognition is inappropriate unless received.
3. Which statement is incorrect regarding classification of leases?
a. A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incident to ownership.
b. All other leases that do not transfer substantially all the risks and rewards incident to
ownership are classified as operating leases.
c. Classification is made at the inception of the lease.
d. Whether a lease is a finance lease or an operating lease depends on the form of the
transaction.
4. Which statement is incorrect in classifying a lease of land and buildings?
a. In classifying a lease of land and buildings, land and buildings elements would
normally be separately.
b. The minimum lease payments are allocated between the land and buildings
elements in proportion to their relative fair values.
c. The land element is normally classified as an operating lease unless title passes to
the lessee at the end of the lease term.
d. The buildings element is normally classified as a finance lease unless title will not
pass to the lessee at the end of the lease term.
5. The following situations would normally lead to a lease being classified as finance
lease, except
a. The lease transfers ownership of the asset to the lessee by the end of the lease
term.
b. The lessee has the option to purchase the asset at a price which is expected to be
equal to the fair value at the date the option becomes exercisable that, at the
inception of the lease, it is reasonably certain that the option will be exercised.
c. The lease term is for the major part of the economic life of the asset, even if title is
not transferred.
d. At the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset.
6. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the
a. Useful life of the asset

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b. Lease term
c. Useful life of the asset if there is reasonable certainty that the lessee will obtain
ownership by the end of the lease term.
d. Lease term or useful life of the asset, whichever is shorter
7. Which statement is incorrect regarding defined benefit plans?
a. The amount recognized in the balance sheet should be the present value of the
defined benefit obligation, as adjusted for unrecognized actuarial gains and losses
and unrecognized past service cost, and reduced by the fair value of plan assets at
the balance sheet date.
b. The present value of the defined benefit obligation should be determined using the
Accrued Benefit Valuation Method.
c. Valuations should be carried out with sufficient regularity such that the amounts
recognized in the financial statements do not differ materially from those that would
be determined at the balance sheet date.
d. The rate used to discount estimated cash flows should be determined by reference
to market yields at the balance sheet date on high quality corporate shares.
8. It is the increase in the present value of the defined benefit obligation resulting from
employee service in the current period.
a. Past service cost
c. Current service and interest cost
b. Current service cost
d. Interest cost
9. Which statement is incorrect regarding actuarial gains and losses?
a. On an ongoing basis, actuarial gains and losses arise that comprise experience
adjustments and the effects of changes in actuarial assumptions.
b. In the long-term, actuarial gains and losses may offset one another and, as a result,
the enterprise is not required to recognize all such gains and losses immediately.
c. If the accumulated unrecognized actuarial gains and losses exceed 10% of the
greater of the defined benefit obligation or the fair value of plan assets, the net gain
or loss is required to be recognized immediately as income or expense.
d. Actuarial gains and losses that do not breach the 'corridor' need not be recognized although the enterprise may choose to do so.
10. Temporary difference is the
I. A difference between the carrying amount of an asset or liability and its tax base.
II. Item of income or expense which is included in either financial income or taxable
income but will never be included in the other.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
11. It is deferred tax consequence attributable to a deductible temporary difference.
a. Deferred tax liability
c. Deferred tax asset
b. Current tax liability
d. Current tax asset
12. The general principle in PAS 12 is that deferred tax liabilities should be recognized for
all taxable temporary differences, except
a. Liabilities arising from goodwill for which amortization is not deductible for tax
purposes.
b. Liabilities arising from the initial recognition of an asset/liability other than in a
business combination which, at the time of the transaction, does not affect either the
accounting or the taxable profit.
c. Liabilities arising from undistributed profits from investments where the enterprise is
able to control the timing of the reversal of the difference and it is probable that the
reversal will not occur in the foreseeable future.
d. All of the above.
13. Which is incorrect concerning accounting for capital stock transactions?

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a. When shares with par value are sold, the proceeds should be credited to the capital
stock account to the extent of the par value of the shares with any excess being
reflected as additional paid in capital.
b. If shares are issued for a consideration other than cash, the proceeds should be
measured by the fair value of the shares issued.
c. When shares are issued for services received, the measure should be the fair value
of such services.
d. In case shares are issued for outstanding liabilities, the amount of the liabilities set
off should be the measure for recording.
14. Treasury shares should be recorded at cost irrespective of whether these are acquired
below or above par value. The cost of treasury shares acquired for noncash
consideration is usually measured by
a. Fair value of the noncash consideration
b. Recorded amount or book value of the noncash asset surrendered
c. Book value of the shares
d. Par value of the shares
15. Which statement is true concerning appropriations of retained earnings?
a. Appropriations reduce total retained earnings.
b. The only proper way to eliminate an appropriation of retained earnings after it has
served its purpose is to credit the unappropriated retained earnings account.
c. An appropriation of retained earnings means that assets are segregated for a
specific purpose.
d. When treasury stock is purchased, retained earnings must be appropriated equal
to the par or stated value of such stock.
16. Which statement is incorrect regarding requirement to present EPS?
a. An entity whose securities are publicly traded (or that is in process of public
issuance) must present, on the face of the income statement, basic and diluted
earnings per share.
b. Basic and diluted earnings per share must be presented with equal prominence for
all periods presented.
c. Basic and diluted EPS must be presented even if the amounts are negative.
d. If an entity reports a discontinued operation, basic and diluted amounts per share
must be disclosed for the discontinued operation on the face of the income
statement.
17. Which statement is incorrect regarding basic EPS?
a. Basic EPS is calculated by dividing profit or loss attributable to common
stockholders of the parent entity by the simple average number of common shares
outstanding during the period.
b. The earnings numerators used for the calculation should be after deducting all
expenses including taxes, minority interests, and preferred stock dividends.
c. The denominator is calculated by adjusting the shares in issue at the beginning of
the period by the number of shares bought back or issued during the period,
multiplied by a time-weighting factor.
d. Contingently issuable shares are included in the basic EPS denominator if the
contingency has been met.
18. In computing diluted EPS, interest expense on convertible bond payable should be
a. Ignored
b. Deducted from net income net of tax
c. Added back to net income at gross
d. Added back to net income net of tax
19. Which is not an essential characteristic of an accounting liability?
a. The liability is the present obligation of a particular entity.
b. The liability arises from past event or transaction.
c. The payee to whom the obligation is owed must be identified.

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d. The settlement of the liability requires an outflow of resources embodying economic

benefits.
20. A liability shall be classified as current when it satisfies any of the following criteria,
except
a. It is expected to be settled in the entitys normal operating cycle.
b. It is due to be settled within twelve months after balance sheet date.
c. It is not held primarily for the purpose of being traded.
d. The entity has no unconditional right to defer settlement of the liability for at least
twelve months after the balance sheet date.
21. What amount is accrued as a provision?
a. Minimum
b. Median

c. Maximum

d. Best estimate

22. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the
a. Useful life of the asset if there is reasonable certainty that the lessee will obtain
ownership by the end of the lease term.
b. Useful life of the asset
c. Lease term
d. Lease term or useful life of the asset, whichever is shorter
23. The corridor in the recognition of actuarial gain or loss is equal to
a. 10% of the higher between the present value of the defined benefit obligation and
the fair value of the plan assets at the beginning of the year.
b. 10% of the present value of the defined benefit obligation at the beginning of the
year.
c. 10% of the fair value of the plan assets at the beginning of the year.
d. 10% of the lower between the present value of the defined benefit obligation and
the fair value of the plan assets at the beginning of the year.
24. Which is incorrect concerning accounting for capital stock transactions?
a. When shares are issued for services received, the measure should be the fair value
of such services.
b. In case shares are issued for outstanding liabilities, the amount of the liabilities set
off should be the measure for recording.
c. When shares with par value are sold, the proceeds should be credited to the capital
stock account to the extent of the par value of the shares with any excess being
reflected as additional paid in capital.
d. If shares are issued for a consideration other than cash, the proceeds should be
measured by the fair value of the shares issued.
25. Treasury shares should be recorded at cost irrespective of whether these are acquired
below or above par value. The cost of treasury shares acquired for noncash
consideration is usually measured by
a. Recorded amount or book value of the noncash asset surrendered
b. Fair value of the noncash consideration
c. Book value of the shares
d. Par value of the shares
26. When stock options are granted, in what circumstances is compensation expense
immediately recognized?
a. In circumstances when options are granted for prior service and the options are
immediately exercisable
b. In no circumstances
c. In all circumstances
d. In circumstances when options are exercisable within 2 years for services rendered
the next two years
27. Which statement is incorrect concerning stock dividends?
a. A stock dividend gives rise to a change in either the enterprises assets or its
shareholders proportionate interest therein.
b. dividends declared by closely held enterprises should be capitalized at par or stated
value.

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c. Stock dividends are recorded on the date of declaration.

d. Stock dividend of 20% or more should be capitalized at par or stated value.
28. Potential common shares do not include
a. Stock warrants
b. Stock options or employee plans that allow employees to receive common shares
as part of their renumeration and other stock purchase plans
c. Shares which would be issued upon the satisfaction of certain conditions resulting
from contractual arrangements, such as the purchase of a business or other assets
d. Debt or equity instruments, including preferred shares, that are not convertible into
common shares
29. Which is incorrect concerning fair presentation of financial statements?
a. In virtually all circumstances, a fair presentation is achieved by compliance with
applicable Philippine Financial Reporting Standards.
b. Financial statements shall present fairly the financial position, performance and
cash flows of an enterprise.
c. An enterprise whose financial statements comply with PFRS shall make an explicit
and unreserved statement of such compliance in the notes.
d. Inappropriate accounting treatments are rectified either by disclosure of the
accounting policies used or by note or explanatory material.
30. Which statement is incorrect?
a. As a minimum, the face of the balance sheet shall include line items that are
sufficiently different in nature or function to warrant separate presentation.
b. The standard does not prescribe the order or format in which the line items are to
be presented.
c. Additional line items, headings and subtotals shall be presented on the face of the
balance sheet when such presentation is relevant to an understanding of the entitys
financial position.
d. When entity presents current and noncurrent captions, it shall classify deferred tax
assets and deferred tax liabilities as current.
PROBLEMS
Questions 1 to 10 are based on the following information:
The following information relates to Danaya Companys obligations as of December 31,
2005. For each of the numbered items, determine the amount if any, that should be
reported as current liability in Danayas December 31, 2005 balance sheet.
1. Accounts payable:
Accounts payable per general ledger control amounted to P3,400,000, net of P150,000
debit balances in suppliers accounts. The unpaid voucher file included the following
items that not had been recorded as of December 31, 2005:
a) Earth Company P140,000 merchandise shipped on December 31, 2005, FOB
destination; received on January 10, 2006.
b) Gemstone, Inc. P120,000 merchandise shipped on December 26, 2005, FOB
shipping point; received on January 16, 2006.
On December 28, 2005, a supplier authorized Danaya to return goods billed at
P100,000 and shipped on December 20, 2005. The goods were returned by Danaya
on December 28, 2005, but the P100,000 credit memo was not received until January
6, 2006.
a. P3,670,000
2. Payroll:

b. P3,520,000

c. P3,570,000

d. P3,420,000

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Items related to Danayas payroll as of December 31, 2005 are:

Accrued salaries and wages
Payroll deductions for:
Income taxes withheld
SSS contributions
Philhealth contributions
Advances to employees
a. P485,000

b. P620,000

P485,000
35,000
40,000
10,000
50,000
c. P570,000

d. P520,000

3. Litigation:
In May, 2005, Danaya became involved in a litigation. The suit being contested, but
Danayas lawyer believes there is reasonable possibility that Danaya may be held liable
for damages estimated in the range between P2,000,000 and P3,000,000, and no
amount is a better estimate of potential liability than any other amount.
a. P2,000,000

b. P2,500,000

c. P3,000,000

d. P0

4. Bonus obligation:
Danaya Companys president gets an annual bonus of 10% of net income after bonus
and income tax. Assume the tax rate of 30% and the correct income before bonus and
tax is P6,000,000. (Ignore the effects of other given items on net income.)
a. P451,600

b. P392,500

c. P247,000

d. P1,400,000

5. Note payable:
A note payable to the Bank of the Philippine Islands for P1,500,000 is outstanding on
December 31, 2005. The note is dated October 1, 2004, bears interest at 18%, and is
payable in three equal annual installment of P500,000. The first interest and principal
payment was made on October 1, 2005.
a. P67,500

b. P567,500

c. P545,000

d. P45,000

6. Purchase commitment:
During 2005, Danaya entered in a noncancellable commitment to purchase 200,000
units of inventory at fixed price of P5 per unit, delivery to be made in 2006. On
December 31, 2005, the purchase price of this inventory item had fallen to P4.40 per
unit. The goods covered by the purchase contract were delivered on January 28, 2006.
a. P120,000

b. P1,000,000

c. P880,000

d. P0

7. Deferred taxes:
On December 31, 2005, Danayas deferred income tax account has a 2005 ending
credit balance of P483,000, consisting of the following items:
Caused by temporary differences in accounting
For gross profit on installment sales
For depreciation on property and equipment
For product warranty expense
a. P483,000

b. P595,000

c. P123,000

Deferred tax
P235,000 Cr.
360,000 Cr
112,000 Dr
P483,000 Cr.
d. P0

8. Product warranty:
Danaya has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2004, which was outstanding as of
December 31, 2004, amounted to P260,000. The warranty costs on sales made in

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2005 are estimated at P940,000. Actual warranty costs incurred during the current
2005 fiscal year are as follows:
Warranty claims honored on 2004 sales
Warranty claims honored on 2005 sales
Total warranty claims honored
a. P940,000

b. P60,000

P260,000
620,000
P880,000

c. P320,000

d. P0

9. Premiums:
To increase sales, Danaya Company inaugurated a promotional campaign on June 30,
2005. Danaya placed a coupon redeemable for a premium in each package of product
sold. Each premium costs P100. A premium is offered to customers who send in 5
coupons and a remittance of P30. The distribution cost per premium is P20. Danaya
estimated that only 60% of the coupons issued will be redeemed. For the six months
ended December 31, 2005, the following is available:
Packages of product sold
Premiums purchased
Coupons redeemed
a. P1,080,000 b. P360,000

100,000
10,000
40,000
c. P720,000

d. P1,000,000

10. Due to Lireo Finance company:

Danayas accounting records show that as of December 31, 2005, P800,000 was due
to Lireo Finance Company for advances made against P1,000,000 of trade accounts
receivable assigned to the finance company with recourse.
a. P1,000,000

b. P200,000

c. P800,000

d. P0

11. The liabilities section of the balance sheet of Pug Company on December 31, 2005
detailed the following:
Accounts payable
Notes payable-trade
Bank note payable -10%
Bank note payable 12%
Accrued expenses
Accrued interest payable
Mortgage note payable 6%
Bonds payable 10% due June 30, 2006

2,000,000
2,500,000
800,000
1,000,000
350,000
500,000
4,000,000
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. P15,150,000
d. P16,150,000
12. A new product introduced by Wilkenson Promotions carries a two-year warranty against
defects. The estimated warranty costs related to dollar sales are as follows:
Year of sale ..............................
Year after sale ...........................

3 percent
5 percent

Sales and actual warranty expenditures for the years ended December 31, 2004 and
2005, are as follows:
Sales

Actual Warranty
Expenditures

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2004
2005

P 8,000,000
10,000,000

P200,000
700,000

What amount should Wilkenson report as its estimated liability as of December 31,
2005?
a. P 40,000
c. P540,000
b. P240,000
d. P740,000
13. On November 5, 2005, a Calauag Company truck was in an accident with an auto
driven by Macalelon. Calauag received notice on January 15, 2006, of a lawsuit for
P4,000,000 damages for personal injuries suffered by Macalelon. Calauags counsel
believes it is possible that Macalelon will be awarded an estimated amount in the range
between P2,000,000 and P3,000,000, and no amount is a better estimate of potential
liability than any other amount. The accounting year ends on December 31, and the
2005 financial statements were issued on March 31, 2006. What amount of provision
should Calauag accrue at December 31, 2005?
a. P4,000,000
c. P2,500,000
b. P3,000,000
d. P
0
14. 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 Atimonans 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
15. On January 2, 2005, the Santiago, Inc. issued P2,000,000 of 8% convertible bonds at
par. The bonds will mature on January 1, 2009 and interest is payable annually every
January 1. The bond contract entitles the bondholders to receive 6 shares of P100 par
value common stock in exchange for each P1,000 bond. On the date of issue, the
prevailing market interest rate for similar debt without the conversion option is 10%.
How much of the proceeds from the issuance of convertible bonds should be allocated
to equity?
a. P634,000
b. P126,816
c. P221,664
d. P0
16. Using the same information is no. 15 above, how much is the carrying value of the
bonds payable as of December 31, 2005?
a. P2,000,000
b. P1,389,400
c. P1,796,170
d. P1,900,502
17. 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 companys stock was selling
for P30 per share on March 1, 2005. The increase in additional paid in capital due to
the conversion of Jerrys bonds is
a. P4,000,000
c. P3,616,000
b. P3,520,000
d. P
0
18. 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

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the lease liability on December 31, 2005?

a. P424,000
b. P466,400

c. P324,000
d. P516,040

19. 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
20. Sabarre Inc. leases equipment to its customers under noncancelable leases. On
January 1, 2005, Sabarre leased equipment costing P4,000,000 to Rebasa Co., for
nine years. The rental cost was P440,000 payable in advance semiannually (January 1
and July 1), plus P20,000 semiannually for executory costs. The equipment had an
estimated life of 15 years and sold for P5,330,250 with an estimated unguaranteed
residual value of P800,000. The implicit interest rate is 12 percent.
How much is the total interest income from lease that will be earned by Sabarre, Inc.?
a. P2,869,988
b. P3,675,616
c. P3,389,748
d. P0
21. Using the same information in no. 20, Sabarre, Inc. should report profit on the sale at
a. P1,330,252
b. P1,050,012
c. P1,044,384
d. P1,338,492
22. Using the same information in no. 20, how much should be reported by Rebasa Co. as
liability under finance lease as of December 31, 2005?
a. P4,143,593
b. P4,273,410
c. P4,446,613
d. P0
23. Cabusao Company is indebted to Ragay Company under a P5,000,000, 10% threeyear 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. P1,020,000
b. P2,720,000
d. P2,000,000
24. 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
Nontaxable revenue
Estimated warranty cost that was recognized as expense
in 2005 but deductible for tax purposes when paid
Excess tax depreciation over financial depreciation
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

2,000,000
1,000,000
1,500,000
500,000

25. 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. Matalams
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

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26. The following information relates to the defined benefit pension plan of the Casino
Company as of January 1, 2005:
Projected benefit obligation (PBO)
P16,150,000
Fair value of plan assets
15,135,000
Unrecognized prior service cost
1,050,000
Unrecognized net pension gain or loss
0
Pension data for the year 2005 follows:
Current service cost
Contributions to the plan
Benefits paid to retirees
Actual return on plan assets
Amortization of past service cost
Actuarial change increasing PBO
Settlement interest rate
Long-term expected rate of return on plan assets

P 870,000
1,200,000
1,320,000
263,500
210,000
800,000
11%
10%

What is the 2005 net benefit expense?

a. P2,593,000
b. P1,200,000

d. P1,343,000

c. P4,370,000

27. Using the same information in no. 26, the projected benefit obligation as of December
31, 2005 is
a. P18,276,500
c. P17,476,500
b. P16,973,000
d. P16,173,000
28. Using the same information in no. 26, the prepaid/accrued benefit cost on December
31, 2005 is
a. P1,358,000
b. P108,000
c. P3,135,000
d. P0
29. 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 Matanaos 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
30. On January 1, 2004, Bansalan Company offered its top management stock
appreciation right with the following terms:
Predetermined price
Number of shares
Service period
Exercise date

P100 per share

50,000 shares
3 years
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
31. Rex Company was organized on January 1, 2000. After 5 years of profitable
operations, the equity section of the balance sheet on December 31, 2004 was as

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follows:
Common stock, P50 par, 1,000,000 shares authorized
400,000 shares issued and outstanding
Additional paid in capital
Retained earnings

20,000,000
5,000,000
10,000,000

On January 20, 2005, Rex Company reacquired 50,000 shares of common stock at
P100 per share. The treasury stock is recorded at cost. On March 1, 2005, the
company issued a 20% stock dividend. The market value of the stock is P100 on this
date. On June 30, 2005 the company declared a P5 cash dividend per share payable
on September 10, 2005. The company reported net income of P8,000,000 for the year
ended December 31, 2005. What should be the balance of retained earnings on
December 31, 2005?
a. P16,250,000
c. P11,850,000
b. P12,400,000
d. P18,900,000
32. The following information pertains to Babak Company:
* Dividends on its 50,000 shares of 10%, P100 par value cumulative preferred
stock have not been declared or paid for 3 years.
* Treasury stock was acquired at a cost of P1,000,000 during the year. The treasury
stock had been reissued as of year-end.
What amount of retained earnings should be appropriated as a result of these items?
a. P1,500,000
c. P2,500,000
b. P1,000,000
d. P
0
33. 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

34. 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 Companys
stockholders equity was as follows:
Common stock, P100 par 500,000 shares
Additional paid in capital
Retained earnings (deficit)

50,000,000
15,000,000
(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
35. On January 1, 2005 Gingoog Company had 300,000 common shares outstanding,
P100 par, or a total par value of P30,000,000. During 2005, Gingoog issued rights to
acquire one common share at P100 in the ratio of one share for every 5 shares held.
The rights are exercised on March 31, 2005. The market value of each common share
immediately prior to March 31, 2005 was P160. The net income for 2005 was

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P6,000,000. The 2005 income statement should report basic earnings per share at
a. 17.14
b. 16.67
c. 18.75
d. 17.39
- end of examination -

Good Luck