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College of Accountancy and Finance

Third Evaluation Exams
1st Semester, SY 2015-2016
TOTAL POINTS: 100%. Test I- Theory 30%, and Test II - Problem Solving 70%.
Test I (30 items, 1 point each) total 30 pts. Test II (28 items, 2.5 each) total 70 pts.
TOPICS: Property and Equipment, Investment Property,
Intangible Assets, Prepaid Expenses, Deferred Charges.

TEST I - MULTIPLE CHOICE - THEORY (30 items, 1 point each). (30%)

(NOTE: If answer is not among the choices A to D, use "E").

01. A computer software purchased as an integral part of a computer conrolled machine that
cannot operate without that specific software shall be treated as
A. Intangible asset. B. Property, plant and equipment
C. Expense in the year incurred. D. Research and development cost

02. Goodwill shall be tested for impairment

A. If there is an indication of impairment. B. Every five years.
C. On the acquisition of a subsidiary. D. Annually.

03. Which statement is incorrect concerning recognition and derecognition of an intangible asset?
A. An intangible asset shall be measured initially at cost.
B. After initial recognition, an intangible asset shall be carried at cost only less any
accumulated amortization and any accumulated impairment loss.
C. After initial recognition, an intangible asset shall be carried at either cost or revalued
amount less any subsequent accumulated amortization and accum. impairment loss.
D. An intangible asset shall be derecognized on disposal or when no future economic
benefits are expected from its use or disposal.

04. Which of the following assets is not a financial asset?

A. Cash. B. Prepaid expenses. C. An equity instrument of another entity.
D. A contract that may or will be settled in the entity's own instrument and is not
classified as an equity instrument of an entity.

05. One typical difference between the asset prepaid expenses and other assets, such as
accounts receivable and inventory, is the immateriality of the former in many audits.
Because of this immateriality, frequently the only audit procedure necessary to perform is
A. Tests of controls. B. Tests of transactions.
C. Tests of details and balances. D. Analytical procedures.

06. PSA, PSAE, PSRE, PSRS, PAPS. Their corresponding numbers are:
A. 1000 to 1999, 2000 to 2999, 3000 to 3999, 4000 to 4999, 5000 to 5999.
B. 100 to 999, 1000 to 1999, 2000 to 2999, 3000 to 3999, 4000 to 4999.
C. 100 to 999, 3000 to 3999, 2000 to 2999, 4000 to 4999, 1000 to 1999.
D. 100 to 999, 4000 to 4999, 3000 to 3999, 2000 to 2999, 1000 to 1999.

07. The risk-based audit process consists of three stages: risk assessment, risk response, and
reporting. The related PSAs to the last stage are the following:
A. PSA 260, 300, 330, 500. B. PSA 220, 330, 450.
C. PSA 520, 540, 700, 710. D. B and C.

08. To establish and maintain accounting systems which meet the needs of users, accountants
must be both creative and critical thinkers.
Statement 1: Creative thinking involves the use of imagination and insight to solve
problems by finding new relationships (ideas) among items of information.
A creative thinker is insightful, intuitive, imaginative, sensitive, flexible,
original, adaptable, and tolerant of ambiguity. Page 1/7
Statement 2: Critical thinking involves the logical analysis of issues, using inductive or
deducive reasoning to test new relationships (ideas) to determine their effectiveness.
A critical thinker is objective, independent, analytical, logical, rational,
consistent, organized, and able to synthesize.
A. True, true. B. False, false. C. True, false. D. False, true.

09. An entity bought a building lot to construct a new corporate office building. An older home
on the bilding lot was razed immediately so that the office building could be constructed.
The cost of purchasing the older home should be
A. Recorded as part of the cost of the land.
B. Written off as a loss in the year of purchase.
C. Written off as an extraordinary item in the year of purchase.
D. Recorded as part of the cost of the new building.

10. PAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant,
and equipment should be treated in one of the following ways. Which of the four options
mirrors the requirements of PAS 16?
A. Credited to retained earnings as this is an unrealized gain.
B. Released to the income statement an amount equal to the difference between the
depreciation calculated on historical cost vis-à-vis revalued amount.
C. Deducted from current assets and added to the property, plant, and equipment.
D. Debited to the class of PPE that is being revalued and credited to a reserve captioned
"revaluatrion surplus", which is presented under "equity."

11. Which of the following items should not be capitalized into the cost of PPE?
A. Cost of excess materials resulting from a purchasing error.
B. Cost of testing whether the asset works correctly.
C. Initial delivery and handling costs.
D. Cost of preparing the site for installation.

12. Which of the following should be included in the cost of an item of PPE?
A. Initial operating losses while demand builds up. B. Apportioned general overhead costs.
C. Costs of training staff on the new asset. D. Installation and assembly costs.

13. Directly attributable costs include all of the following except

A. Cost of site preparation, initial delivery, handling and installation.
B. Initial operating losses.
C. Professional fees such as for architects and engineers.
D. Estimated cost of dismantling and removing the asset and restoring the site, the
obligation for which the entity incurs when the asset is acquired.

14. After assessing control risk, the auditor must decide whether it is necessary to verify the
existence of individual items of manufacturing equipment included in the master file. This
audit procedure, if performed, would satisfy the audit objective of
A. Valuation. B. Classification. C. Validity. D. Mechanical accuracy.

15. Treetop Corp. acquired a building and arranged mortgage financing during the year.
Verification of the related mortgage acquisition costs would least likely to include an
examination of the related
A. Deed. B. Cancelled checks.
C. Closing statement. D. Interest expense.

16. Analysis of which account is least likely to reveal evidence relating to recorded retirement
of equipment?
A. Accumulated depreciation. B. Insurance expense.
C. Property, plant, and equipment. D. Purchase returns and allowances.

17. Depreciation expense is one of the few expense accounts that is not verified as part of
A. Tests of control. B. Tests of transactions.
C. Tests of details of balances. D. Analytical procedures. Page 2/7
18. The auditor is most likely to seek information from the plant manager with respect to the
A. Adequacy of the provision for uncollectible accounts.
B. Appropriateness of physical inventory observation procedures.
C. Existence of obsolete machinery.
D. Deferral of procurement of certain necessary insurance coverage.

19. In verifying accumulated depreciation, the credits to accumulated depreciation are verified
as part of the audit of depreciation expense, whereas the debits are normally tested as part
of the audit of
A. Asset acquisition. B. Capital acquisition.
C. Disposal of assets. D. Accumulated depreciation.

20. Accounting for tangible operational assets is primarily in conformity with the
A. Historical cost principle. B. Historical cost principle & reporting principle.
C. Matching princ. & reporting princ. D. Historical cost principle & matching principle.

21. Which of the following is least likely to be classified as PPE?

A. Land improvements. B. Idle Land.
C. Natural resources. D. Land.

22. Choose the correct statement about the accounting treatment for special one-time
assessments made by local governments requiring a firm to pay for improvements
including streetlights, sewers and other infrastructure.
A. They are capitalized but not depreciated.
B. If probable and estimable, they are expensed when determinable.
C. They are expensed as incurred.
D. They are capitalized and depreciated over their useful life.

23. Discounts available for early payment of liabilities on purchase of operational assets should
A. Be cap;italized as part of the cost of the asset, whether taken or not, and subsequently
included as depreciation expense.
B. Be recorded and reported as a contra account to the related liability account.
C. Not be capitalized as cost of the asset, whether taken or not.
D. Be given no recognition until taken or until the discount period has expired; if not taken,
the discounts should be added to the cost of the asset.

24. Apportionment of the purchase price in a lump-sum acquisition of different assets may be
based on all of the following except:
A. Book values of the assets to the seller. B. Relative market values.
C. Tax assessment values. D. Appraised values.

25. Capitalization of the construction period interest is based primarily upon the
A. Comparability principle. B. Revenue principle.
C. Full-disclosure principle. D. Matching principle.

26. An improvement made to an old machine increased its fair market value and its production
by 25% without extending the machine's useful life. The cost of the improvement should
preferably be
A. Expensed. B. Capitalized.
C. Recorded as a loss. D. Recorded as a liability.

27. Which of he following items relevant to depreciation of an asset can be negative?

A. Residual value. B. Depreciable Cost.
C. Useful life. D. Cost subsequent to acquisition.

28. Which of the following would be reported as Investment Property?

A. Property that is being constructed or developed for future use as investment property.
B. Property that is leased to another entity under a finance lease.
C. Owner-occupied property awaiting sale.
D. Property available for lease. Page 3/7
29. Which of the following would not be reported as investment property?
A. Property owned by the entity and leased out under one or more operating leases.
B. Property held by the entity to be leased out under one or more operating leases.
C. Property owned by the entity and leased out to another entity under a finance lease.
D. Real estate held for an undetermined future use.

30. The applicable PFRS/PAS for a property being constructed or developed for future use as
investment property is
A. PAS 2 Inventories, until construction is complete and then it is accounted for under
PAS 40 Investment Property.
B. PAS 40 Investment Property.
C. PAS 11 Construction Contracts, until construction is complete and then it is accounted for
under PAS 40 Investment Property.
D. PAS 16 Property, Plant, and Equipment, until construction is complete and then it is
accounted for under PAS 40 Investment Property.

TEST II - MULTIPLE CHOICE - PROBLEMS (28 items, 2.5 points each). (70%)
Present solutions on a work sheet or yellow pad paper to be submitted
together with the answer sheet and test questionnaire after the test.
(NOTE: If answer is not among the choices A to D, use "E").

PROBLEM A: QUESTIONS 31 TO 35 are based on the following information.

SAMSON COMPANY acquires a new manufacturing equipment on Jan 1, 2014, on installment
basis. The deferred payment contract provides for a down payment of P300,000 and an
8- year note for P3,104,160. The note is to be paid in 8 equal annual installment payments
of P388,020, including 10% interest. The payments are to be made on Dec 31 of each year,
beginning Dec 31, 2014. The equipment has a cash price equivalent of P2,370,000.
Samson's financial year-end is Dec 31.

31. What is the acquisition cost of the equipment?

A. P2,370,000. B. P3,104,160. C. P3,404,160. D. P2,804,160
32. The amount to be recognized on Jan 1, 2014 as discount on note payable is
A. P827,160. B. P -0- C. P1,034,160. D. P310,416
33. The amount of interest expense to be recognized in 2014 is
A. P310,416. B. P207,000. C. P -0- D. P188,898.
34. The amount of interest expense to be recognized in 2015 is
A. P207,000. B. P -0- C. P310,416. D. P188,898.
35. The carrying value of the note payable at Dec 31, 2015 is
A. P1,312,062. B. P1,700,082. C. P1,689,858. D. P1,888,980.

PROBLEM B: QUESTIONS 36 TO 37 are based on the following information:

Various equipment used by MARIMAR COMPANY in its operation are either purchased from
dealers or self-constructed. The following items for two different types of equipment were
recorded during the calendar year 2014.

Manufacturing equipment (self-constructed):

Materials and purchased parts at gross invoice price
(Marimar failed to take the 2% cash discount) 300,000
Imputed interest on funds used during construction
(stock financing) 21,000
Labor costs 285,000
Overhead costs (fixed-P30,000; variable-P45,000) 75,000
Gain on self-construction 45,000
Installation cost 6,600

Store equipment (purchased):

Cash paid for the equipment 105,000
Freight and insurance cost while in transit 2,000
Cost of moving equipment into place at the store 3,100
Wage cost for technicians to test equipment 4,000 Page 4/7
Insurance premium paid during first year of
operation of this equipment 1,500
Special plumbing fixtures required for this equipment 8,000
Repair cost incurred in first year of equipment's operation 1,300

36. What is the total cost of the self-constructed equipment?

A. P660,600. B. P734,600. C. P674,600. D. P770,600.

37. What is the total cost of the store equipment purchased?

A. P191,400. B. P122,100. C. P194,900. D. P193,700.

PROBLEM C: QUESTIONS 38 TO 42 are based on the following information:

On Dec 31, 2011, STEM COMPANY subjected to impairment test a piece of equipment. Data
pertinent to the equipment as of Dec 31, 2011 follow:
Original cost 2,400,000
Adjusted accumulated depreciation 600,000
Selling price 1,400,000
Estimated cost to make the sale 200,000
Value in use 1,100,000
Remaining useful life 6 years
Method of depreciation Straight line

On Dec 31, 2013, the asset is found to have a recoverable amount of P1,300,000.

38. How much is the loss on impairment in 2011?

A. P600,000. B. P700,000. C. P400,000. D. P500,000.

39. How much is the depreciation expense recognized in 2012?

A. P300,000. B. P333,333 C. P200,000. D. P216,667.

40. How much gain in recovery is recognized in 2013?

A. P300,000. B. P200,000. C. P500,000. D. P400,000.

41. How much is the depreciation expense recognized in 2014 under the cost model?
A. P250,000. B. P200,000. C. P325,000. D. P300,000.

42. How much is the depreciation expense recognized in 2014 under the revaluation model?
A. P250,000. B. P200,000. C. P325,000. D. P300,000.

PROBLEM D: QUESTIONS 43 TO 47 are based on the following information:

The following information relates to PIYAYA COMPANY.
a) On July 1, Piyaya purchased the plant assets of Ayokona Co. which discontinued operations.
Following are the fair values of the assets acquired:
Land 10,500,000
Building 31,500,000
Machinery and equipment 21,000,000
Total 63,000,000
Piyaya issued 550,000 shares of it P100 par value ordinary share capital in exchange for the
above plant assets. On the acquisition date, the stock had a fair value of P160 per share.
b) Piyaya expended the following amounts in cash between July 1 and Dec 20, the date when
the company first occupied the building.
Special assessment by city on land 540,000
Repairs to building 3,150,000
Construction of bases for machinery
and equipment acquired 4,050,000
Driveways and parking lots 3,660,000
Remodelling of office space in bldg.,
including new partitions and walls 4,830,000
c) On Dec 23, Piyaya paid cash for machinery, P7,800,000, subject to a 2% cash discount, and
freight on machinery of P315,000. Page 5/7
Based on the preceding information, calculate the cost of each of the following PPE items:
43. Land A. P14,200,000. B. P11,040,000. C. P10,540,000. D. P14,700,000.
44. Bldgs. A. P31,500,000. B. P30,000,000. C. P39,480,000. D. P37,980,000.
45. Mach & E A. P33,009,000. B. P21,000,000. C. P32,009,000. D. P28,959,000.
46. Land Imp A. P 540,000. B. P -0- C. P 4,200,000. D. P 3,660,000.
47. The entry to record the purchase of Ayokona's plant assets should include a
A. Debit to Land of P22,666.667.
B. Credit to Share Premium of P8,000,000.
C. Credit to Ordinary Share Capital of P63,000,000.
D. Debit to Machinery and Equipment of P29,333,333.

PROBLEM E: QUESTIONS 48 TO 51 are based on the following information:

The following data pertain to VIOLA CORPORATION's PPE for 2014.

Audited balances at Dec 31, 2013: DEBIT CREDIT

Land 7,500,000
Buildings 30,000,000
Accum depreciation - Bldgs. 6,577,500
Machinery & equipment 22,500,000
Accum depreciation - M & E 6,250,000
Delivery equipment 5,750,000
Accum depreciation - DE 4,230,000

Depreciation data: Depreciation Method Useful Life

Buildings 150% declining balance 25 years
Machinery & equipment Straight line 10 years
Delivery equipment Sum-of-years digits 4 years
Leasehold improvements Straight line

Transactions during 2014 and other information are as follows:

a) On Jan 2, 2014 Viola purchased a new truck for P1,000,000 cash and trade-in of a 2-year old
truck with a cost of P900,000 and a book value of P270,000. The new truck has a cash price of
P1,200,000; the market value of the trade-in is not known.

b) On April 1, 2014, a machine purchased for P575,000 on April 1, 2009 was stolen. Viola
recovered P387,500 from its insurance company.

c) On May 1, 2014, costs of P8,400,000 were incurred to improve leased ofiice premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
Dec 31, 2020.

d) On July 1, 2014, machinery and equipment were purchased at a total invoice cost of
P7,000,000; additional costs of P125,000 for freight and P625,000 for installation were incurred.

e) Viola determined that the delivery equipment comprising the P5,750,000 balance at
Jan 1, 2014, would have been depreciated at a total amount of P900,000 for the year ended
Dec 31, 2014.

The salvage values of the depreciable assets are immaterial. The policy of Viola Corp. is to
compute depreciation to the nearest month.

Based on the preceding information, compute the following:

48. Depreciation expense for 2014 on Buildings:
A. P1,200,000. B. P1,800,000. C. P1,405,350. D. P 929,700.
49. Depreciation expense for 2014 on Machinery and Equipment:
A. P2,651,875. B. P2,594,375. C. P2,637,500. D. P2,981,875
50. Depreciation expense for 2014 on Delivery Equipment:
A. P1,380,000. B. P1,020,000. C. P1,110,000. D. P1,200,000.
51. Depreciation expense for 2014 on Leasehold Improvements:
A. P840,000. B. P933,333 C. P700,000. D. P1,050,000. Page 6/7
PROBLEM F: QUESTIONS 52 TO 58 are based on the following information:
VIGILANT CORP. maintains the following items in its intangibles account as of fiscal year
ended June 30, 2014. INTANGIBLES
Research (Red Micah) 98,475
Copyrights 94,500
Goodwill 48,000
Audit findings:
a) Research Red Micah is for a research project which consists of the following charges:

Salaries of research staff 27,750

Patent acquired solely for the use of the project 18,000
Special equipment acquired and useful for various
similar research activities 15,000
Patent acquired for use in several research projects
including project Red Micah 24,300
Cost of pilot models 13,425
Total 98,475

The patent has generally been found to be useful for approximately ten (10) years while
the special equipment useful for five (5) years. You have further discovered both patents
and special equipment were acquired at the beginning of the fiscal year and that the cost
of models and salaries were incurred evenly throughout the fiscal year. Amortization is
yet to be made on the related intangible.

b) The company's copyrights were accounted for as follows;

Asset Acquisition Date Use. Life Cost

Copyright R23 Jan 2, 2010 25 yrs. 45,000
Copyright B42 July 15, 2011 15 yrs 49,500
You have discovered that the company made no amortizations on the above intangibles
from the year of acquisition.

c) The company's goodwill was acquired as part of business combination when it acquired
the net assets of JM Corp. at an acquisition cost amounting to P2,373,000 on Feb 24, 2012.
JM's net assets were carried in its books at P2,325,000 while their fair value aggregated to

d) Management has now decided to correct its past accounting treatment deciding to use the
straight line method of amortizing intangible computed to the nearest half year.

Based on the above information, ascertain the following:

What is the carrying value of the following intangibles as of June 30, 2014:

52. Project Red Micah 28,425 54,375 0 15,000
53. Patents 24,000 21,870 35,370 29,700
54. Copyrights 89,400 94,500 75,750 76,500
55. Goodwill 48,000 75,000 0 33,000
56. Research expense for fiscal year 2014:
A. P59,175. B. P64,605. C. P41,175. D. P56,175.
57. Amortization for copyrights in fiscal year 2014:
A. P3,450. B. P3,000. C. P5,100. D. P4,200.
58. Amortization for goodwill in fiscal year 2014:
A. P2,400. B. P3,000. C. P -0- D. P1,650.

vvvvvv THE END vvvvvv

5 Trust in the Lord with all your heart, and lean not on your own undersanding.
6 In all your ways acknowledge Him, and He shall direct your paths.
Guidance for the Young. Proverbs 3:5,6. New King James Version.
FAB Sept 2015 Page 7/7