SRAW- THE FINAL CLASH

SRAW1. [P1] At the end of 2014, Konohamaru Corporation has one timing difference
that will reverse and cause taxable amounts to P275,000 in 2015, P300,000 in
2016, and P300,000 in 2017. Konohamaru’s pretax financial income for 2014 is
P1,500,000 and the tax rate is 32%. There are no deferred taxes at the beginning
of 2014. How much should be the income tax payable for 2014?

ANSWER: 200,000
Financial Income P1,500,000
Taxable Amount (275,000+300,000+300,000) 875,000
625,000 x 32% = *P200,000
Journal Entry:
Income Tax Expense (1,500,000x32%) 480,000
Income Tax Payable 200,000
Deferred Tax Liability 280,000

SRAW2. [AP] At December 31, 2012. Lee Company’s liabilities include the
following:
A. P10 million of 10% notes are due on March 31, 2017. The financing agreement
contains a covenant that requires Lee to maintain current assets at least equal
to 200% of its current liabilities. As of December 31, 2012, Lee has breached
this loan covenant. On February 10, 2013, before Lee’s financial statements are
authorized for issue, Lee obtained a period of grace from Tenten Bank until
January 31, 2014, having convinced the bank that the company’s normal 3 to 1
ratio of current assets to current liabilities will be reestablished during 2013.

B. P15 million of noncancellable 12% bonds were issued at face value on September
30, 1991. The bonds mature on August 31, 2013. Lee expects to have sufficient
cash available to redeem the bonds at maturity.

C. P20 million of 10% bonds were issued at face value on June 30, 1993. The bonds
mature on June 30, 2022, but bondholders have the option to call the bonds on
June 30, 2013. However, the call option is not expected to be exercised, given
prevailing market conditions.

How much of Lee Company’s debt should be reported as noncurrent liability?

ANSWER: Zero
ALL of the liabilities should be reported as CURRENT liabilities in Lee’s
Statement of Financial Position as of December 31, 2012.
a. P10 million notes – The period of grace was given by the bank AFTER Lee’s
reporting date. As of December 31, 2012, Lee DOES NOT have an unconditional
right to defer the settlement of its liability for at least twelve months
from the end of the reporting period.
b. P15 million bonds – These are payable in the succeeding year. As of the end
of the reporting period, NO long term refinancing has been made by Lee.
c. 20 million callable bonds – Because these bonds are callable by the creditor
in the succeeding year, Lee DOES NOT have an unconditional right to defer
its settlement beyond twelve months from the end of the reporting period,
even if the debt is not expected to be called.

SRAW3. [BL] The Corporation Code sanctions a contract between two or more
corporations which have interlocking directors, provided there is no fraud that
attends it and it is fair and reasonable under the circumstances. The interest of
an interlocking director in one corporation may be either substantial or nominal.
It is nominal if his interest:
a. Does not exceed 25% of the outstanding capital stock.
b. Exceeds 25% of the outstanding capital stock.
c. Exceeds 20% of the outstanding capital stock.
d. Does not exceed 20% of the outstanding capital stock.

ANSWER: D. Does not exceed 20% of the outstanding capital stock.

Corporation Code. Title III. Sec. 33. Contracts between corporations with
interlocking directors. - Except in cases of fraud, and provided the contract is
fair and reasonable under the circumstances, a contract between two or more
corporations having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions of the
preceding section insofar as the latter corporation or corporations are
concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock

shall be considered substantial for purposes of interlocking directors.

SRAW4. [TX] Which statement/s is/are true?

Statement 1 – The point on which a tax is originally imposed is incidence of
taxation
Statement 2 – Police power is superior to the non-impairment clause of the
constitution
Statement 3 – As a rule, taxes are subject to set-off or compensation
Statement 4 – As a rule, provisions on the validity of tax exemptions are
resolved liberally in favor of the taxpayer.

ANSWER: Statement 2 ONLY.

Statement 1 – The point on which a tax is originally imposed is IMPACT of
taxation
Statement 3 – As a rule, taxes are NOT subject to set-off or compensation
Statement 4 – As a rule, provisions on the validity of tax exemptions are
resolved STRICTLY AGAINST the taxpayer.

SRAW5.[AT]The 3,000 accounts receivable of Neji Company have a total book value
of P60,000. Uzumaki Naruto, CPA has selected and audited a sample of 100 accounts
with a total book value of P2,100. Using the difference estimation technique,
Naruto has properly estimated a projected misstatement of a P9,000 overstatement
for the entire population. The estimated total audited value of the population is
___________.
ANSWER: P51,000
Total BV 60,000 – Overstatement 9,000 = *P51,000

SRAW6.[BL] An agreement where the pledgor or mortgagor will execute a contract

transferring ownership of the property pledged or mortgaged to the pledgee or
mortgagee in case of default, such an execution of the contract is known as
____________.

ANSWER: Dacion en Pago [Dation in Payment]

SRAW7.[MS]Orochimaru is a newly established janitorial firm, and the owner is

deciding what type of checking account to open. Orochimaru is planning to keep a
P500 minimum balance in the account for emergencies and plans to write roughly 80
checks per month. The bank charges P10 per month plus a P0.10 per check charge
for a standard business checking account with no minimum balance. Orochimaru also
has the option of a premium business checking account that requires a P2,500
minimum balance but has no monthly fees or per check charges. If Orochimaru's
cost of funds is 10%, which account should Orochimaru choose and how much is the
savings per year?

ANSWER: Premium Account; P16 per year

The standard account will cost [P10 per month plus P8 in check charges (P.10
x 80 checks)] a total of P18 per month or P216 per year.
The premium account has no check charges, but it will require the depositor
to maintain a balance of P2,000 more than desired. At a 10% cost of capital,
the incremental P2,000 minimum deposit will cost P200 per year.
 Thus, the premium account should be selected because it is cheaper by P16
per year.

SRAW8.[MS] Choji Stores is opening a department store in a new suburban mall and
plans to hire many new sales clerks. The average sales per clerk at Choji's other
stores is P32,000 per month, and the company is investigating ways to increase
this average at the new store. Currently, Choji pays a beginning sales clerk
P1,500 per month with a 10% increase after 6 months if sales equal or exceed the
average. Which one of the following compensation plans is most likely to
encourage new sales clerks to increase their average monthly sales to P35,000 or
greater?
a. P1,500 per month with a 15% increase after 6 months if sales equal or exceed
the average.
b. P1,200 per month plus a 3% commission on all sales.
c. A 6.5% commission on all sales with no base salary.
d. P1,750 per month with a 10% increase after 6 months if sales equal or exceed
the average.

ANSWER. C. A 6.5% commission on all sales with no base salary.

a. INcorrect, because employees would initially earn only P1,500 per month,
and later P1,725.
b. INcorrect, because a P1,200 base salary plus 3% of sales result in
compensation of only P2,250 on sales of P35,000.
c. CORRECT. Assuming that employees prefer more money to less, a 6.5%
commission on all sales with no base salary is most likely to have the
desired motivational effect. This plan will result in compensation of
P2,275 per month based on sales of P35,000. This amount is greater than
that for any of the other choices.
d. INcorrect, because an initial P1,750 per month with a possible later
increase to P1,925 is not as desirable as P2,275 per month.

SRAW9.[P2]The summarized Statement of Realization and Liquidation for Shikamaru

Corporation for 2013 follows:
Assets to be realized P 60,000
Assets acquired 40,000
Assets realized 55,000
Liabilities to be liquidated 80,000
Liabilities assumed 50,000
Liabilities not liquidated 65,000
Supplementary credits 110,000

Retained earnings decreased by P12,000 during the year. The ending balances
of ordinary shares and retained earnings are P100,000 and P(75,000),
respectively. The beginning balance of cash is

ANSWER: P57,000
Liabilities to be liquidated 80,000
SHE, beginning (100,000-75,000+12,000) 37,000
Assets, beginning 117,000
Assets to be realized (60,000)
Cash balance, beginning *57,000

SRAW10. [P2] On March 1, 2014, Madara established a P100,000 endowment fund, the
income from which is to be paid to Tobi Hospital for general operating purposes.
Tobi does not control the fund’s principal. Madara appointed Kizame Bank as
trustee of this fund. What entry is required by Tobi to record the establishment
of the endowment?

ANSWER: MEMORANDUM ENTRY ONLY.

Donor-restricted, permanently restricted fund.

SRAW11. [P1] Kiba Company purchased 100 beef cattle at an auction for P800,000 on
July 1, 2014. Transportation costs were P8,000. Kiba Company would have to incur
the same transportation costs if it had sold its cattle in the auction. In
addition, there would be a 2% auctioneer’s fee on the market price of the cattle
payable by the seller. Kiba Company also incurred P4,000 veterinary expenses. On
December 31, 2014, the fair value of the cattle in the most relevant market
increases to P880,000. On May 2, 2015, Kiba Company sold 18 cattle at auction for
P160,000 and incurred transportation charges of P1,200. On June 15, 2015, the
fair value of the remaining cattle was P662,560 but on the same day, 42 cattle
were slaughtered with total costs of P33,600. The fair value of the carcasses on
that day was P386,400 and the estimated transportation costs to sell the
carcasses is P3,360. No other selling costs are expected. On June 30, 2015, the
fair value of the remaining 40 cattle was P358,400. The estimated transportation
cost is P3,200.

What amount of gain as a result in the change in value of the biological asset to
be reported in the Statement of Comprehensive Income for the year ended December
31, 2014?

ANSWER: P78,400

FV in the most relevant market P880,000

Transportation Costs (8,000)
Auctioneer’s Fee (880,000x2%) (17,600)
FV at point of purchase, 12/31/14 P854,400

FV in the most relevant market P800,000

Transportation Costs (8,000)
Auctioneer’s Fee (880,000x2%) (16,000)
FV at point of purchase, 07/01/14 776,000
Change in FV-P/L *78,400

SRAW12. [P1] In 2014, Shino Company acquired 10% in an investee for P1,000,000.
In 2015, the investor acquired a further 15% interest in the investee for
P2,250,000, immediately after the second acquisition Shino Company now holds 25%
and is able to exercise significant influence. Shino Company has been accounting
for its 10% investment at fair value in accordance with IAS/PAS 39. The following
are relevant information:

Book value of the net assets of investee, January 2, 2014 P 6,000,000

Fair value of the net assets of investee, January 2, 2014* 8,000,000
Profit of the investee in 2014 5,000,000
Dividends declared since 2014 2,000,000
Increase in fair value of net assets of the investee 1,000,000
Book value of the net assets of investee in 2015 9,000,000
Fair value of the net assets of investee in 2015 12,000,000
*The fair value uplift from P6,000,000 to P8,000,000 entirely relates to non-
depreciable assets.

What should be the carrying value of the investment immediately after the 2015
acquisition assuming Shino Company uses the cost based approach with a catch up
adjustment to equity including any share in other comprehensive income of
associate?

ANSWER: P3,650,000
Amount paid for 2014 acquisition P1,000,000
Catch up adjustments:
Share in 2014 net income (5,000,000x10%) 500,000
Share in 2014 dividends (2,000,000x10%) (200,000)
Change in fair value (1,000,000x10%) 100,000 400,000
Carrying value-Equity method 1,400,000
Amount paid for 2015 acquisition 2,250,000
Carrying value immediately after the 2015 acquisition *3,650,000

SRAW13.[AT] The auditors expect a population deviation rate of billing errors of

eight percent, and have established a tolerable rate of five percent. The
sampling approach most likely to be used is ________.
ANSWER: NONE, as sampling does not seem appropriate in this situation.

SRAW14.[P2] On January 2, 2013, Itachi Company signed an agreement to operate as

a franchisee of Sasuke Products, Inc., for an initial franchise fee of
P10,000,000 for 10 years. Of this amount, P2,000,000 was paid when the agreement
was signed and the balance payable in four annual payments beginning on December
31, 2013. Itachi Company issued a non-interest bearing note for the balance.

Itachi’s rating indicates that it can borrow money at 24% for the loan of this
type. Present value of an annuity of 1 for 4 periods at 24% is 2.40.

Assume that substantial services amounting to P1,020,000 had already been

rendered by Sasuke Products. Indirect franchise cost paid amounted to P272,000.

Calculate the realized gross profit for 2013 assuming collection of the note is
not reasonably assured.

ANSWER: P2,420,800
Down payment P2,000,000
PV of installments (2,000,000x2.40) 4,800,000
Total 6,800,000
Franchise cost (1,020,000)
Gross Profit 5,780,000
GP Rate (5,780,000/6,800,000) 85%

Down payment P2,000,000

First installment 2,000,000-(4,800,000x24%) 848,000
Total 2,848,000
GP Rate x 85%
Realized gross profit *2,420,800
[collection NOT reasonably assured]

SRAW15.[TX]The revenue district office can carry out proceedings of a distraint

of a personal property when the tax liability in not more than ________.

ANSWER: P1,000,000
NIRC. Chapter II. Sec. 207. (A) Distraint of Personal Property. - Upon the
failure of the person owing any delinquent tax or delinquent revenue to pay
the same at the time required, the Commissioner or his duly authorized
representative, if the amount involved is in excess of One million pesos
(P1,000,000), or the Revenue District Officer, if the amount involved is One
million pesos (P1,000,000) or less, shall seize and distraint any goods,
chattels or effects, and the personal property, including stocks and other
securities, debts, credits, bank accounts, and interests in and rights to
personal property of such persons ;in sufficient quantity to satisfy the
tax, or charge, together with any increment thereto incident to delinquency,
and the expenses of the distraint and the cost of the subsequent sale.

SRAW16.[MS] To be more responsive to its customers, a bank wants a system that

will permit account representatives to consolidate information about all the
accounts belonging to individual customers. Bank management is willing to
experiment with different approaches because the requirements are evolving
rapidly. The best development approach for this system is
a. Prototyping.
b. System development life cycle model.
c. Structured analysis and design technique.
d. Pilot operation.

ANSWER: A. Prototyping
a. Correct. Prototyping (an experimental assurance process) is costly and time-
consuming and thus is not currently the most common approach. It entails
developing and putting into operation successively more refined versions of the
system until sufficient information is obtained to produce satisfactory design.
Prototyping is the best approach in these circumstances because the
 requirements are difficult to specify in advance and are likely to change
significantly during development.
b. Incorrect, because the system development life cycle model is appropriate for
highly structured operational applications whose requirements can be defined in
advance. Thus, it is not suitable for the bank's application.
c. Incorrect, because structured analysis and design technique is a specific
application of the system development life cycle model.
d. Incorrect, because pilot operation is a modular approach to conversion to a new
system, not an experimental technique.

SRAW17. [MS] Obito Company is a grocery store that is currently open only Monday
through Saturday. Obito Company is considering opening on Sundays. The annual
incremental costs of Sunday openings are P31,200. Obito’s gross margin on sales
is 25 percent. Obito estimates that 75 percent of its Sunday sales to customers
would be made on other days if the store were not open on Sundays. The one-day
volume of Sunday sales that would be necessary for Obito to attain the same
weekly operating as the current six-day week is _________.

ANSWER: P9,600
Fixed Costs = 31,200/52weeks = 600 per week
(0.25S x 25%) – 600 = 0
*S=9,600

SRAW18.[P2]Certain balance sheet accounts of a foreign subsidiary of Tsunade

Company have been stated in Philippine pesos as follows:
Stated
Current Historical
Rates Rates
Accounts receivable, current P200,000 220,000
Accounts receivable, long 100,000 110,000
term
Prepaid insurance 50,000 55,000
Goodwill 80,000 85,000
430,000 470,000
The subsidiary’s functional currency is peso. What total amount Tsunade’s
balance sheet include for the preceding items?

ANSWER: P440,000
Because the peso is the functional currency, a remeasurement (temporal)
method is required. All receivables are remeasured at current rates. Assets
carried at historical cost, such as prepaid insurance and goodwill, are
remeasured at historical rates.
Accounts receivable, P200,000
current
Accounts receivable, 100,000
long term
Prepaid insurance 55,000
Goodwill 85,000
*440,000

SRAW19.[TA]Under a “build-operate-and-transfer” arrangement, the project

proponent transfers the facility to the government agency or local government
unit concerned at the end of this fixed term which shall not exceed how many
years?

ANSWER: 50 years
RA 7718. Sec. 2 [b] Build-operate-and-transfer. - A contractual arrangement
whereby the project proponent undertakes the construction, including
financing, of a given infrastructure facility, and the operation and maintenance
thereof. The project proponent operates the facility over a fixed term during
which it is allowed to charge facility users appropriate tolls, fees, rentals,
and charges not exceeding these proposed in its bid or as negotiated and
incorporated in the contract to enable the project proponent to recover its
investment, and operating and maintenance expenses in the project. The project
proponent transfers the facility to the government agency or local government
unit concerned at the end of the fixed term which shall not exceed fifty [50]
years: Provided, That in case of an infrastructure or development facility whose
operation requires a public utility franchise, the proponent must be Filipino or,
if a corporation, must be duly registered with the Securities and Exchange
Commission and owned up to at least sixty percent [60%] by Filipinos.

SRAW20. [TX] An employer maintains pension trust for its employees. The following
contributions are made:
2009 2010 2011
Current P100,00 P100,00 P100,00
service 0 0 0
costs
Past service 80,000 60,000 -
costs
Total 180,000 160,000 100,000
contribution
s

How much is the deductible pension contributions for the year 2011?

ANSWER: P114,000
NIRC. Sec. 34(J)
Amount deductible
Contributions for current In full; considered ordinary and
pension necessary expense
Contributions for past Apportioned in equal parts over a
pension period of 10 years
2011:
100,000 + (80,000/10) + (60,000/10) = *114,000

SRAW21.[P1] On January 2, 2014, Hidan Company acquired a 30% interest in Kakuzu

Company at a cost of P1,000,000. Investor Hidan Company has significant influence
over Kakuzu Company. The associate has net assets of P2,000,000 at the date of
acquisition, which have a fair value of P2,400,000. During the year ended
December 31, 2014, Kakuzu Company reported a post-tax profit of P400,000 and paid
dividend of P36,000. Kakuzu Company also recognized foreign translation losses of
P80,000 in other comprehensive income.

On January 2, 2015, Kakuzu Company has rights issue that investor Hidan Company
does not participate in. The rights issue brings in additional P300,000 in cash
and dilutes investor Hidan Company’s interest in Kakuzu Company to 25%.

What amount of dilution gain or loss should Hidan Company recognize on January 2,
2015 assuming goodwill is not included in the carrying amount of investment
deemed disposed of?

ANSWER: P63,000
Share in the proceeds (300,000x25%) P75,000
Carrying value of investment deemed disposed of: [NO GW]
FV of net assets acquired (2,400,000x30%) P720,000
Share in net income (400,000x30%) 120,000
Share in dividends (36,000x30%) (10,800)
Share in translation loss (80,000x30%) (24,000)
805,200 x 5%/30% (134,200)
Dilution Loss (59,200)
Reclassification of translation loss (24,000x5%/30%) (4,000)
Total Dilution Loss *63,200

SRAW22.[AP] The adjusted account balances of AKATSUKI Corp. for the year ended
December 31, 2012 are as follows:
Cash and cash equivalents P400,000
Bank overdraft 100,000
Accounts receivable 900,000
Allowance for doubtful accounts 40,000
Raw materials 560,000
Goods in process 600,000
Finished goods 1,400,000
Financial asset at fair value through other comprehensive income 2,500,000
Land, at fair market value 12/31/12 1,000,000
Building 6,000,000
Accumulated depreciation – building 1,600,000
Plant and equipment 2,400,000
Accumulated depreciation – plant and equipment 400,000
Patent 800,000
Goodwill, recognized in Jan. 2011 thru a business combination 1,400,000
Note payable, bank – due June 30, 2013 1,300,000
Note payable, bank – due June 30, 2014 2,100,000
Accounts payable 1,000,000
Employee benefit provisions 180,000
Warranty liabilities 80,000
Income tax payable 120,000
Deferred tax liability 280,000
Accumulated profits, January 1, 2012 3,600,000
Revaluation surplus on Land, January 1, 2012 360,000
Unrealized gain on financial assets, January 1, 2012 280,000
Share capital 5,000,000
Share premium 1,000,000
Sales 10,000,000
Revaluation surplus on Land during the year 140,000
Unrealized gain on financial asset during the year 100,000
Cost of sales 6,000,000
Selling expenses 1,960,000
Administrative expenses 500,000
Finance cost 100,000
Income tax expense 160,000

The company declared and paid cash dividends totaling to P1,000,000 during the
year.

Assuming that the company is a Small/Medium Enterprise which should apply PFRS
for SMEs, what is the total noncurrent assets to be reported in the 2012
statement of financial position?

ANSWER: P8,820,000 500,000

Land, at COST
Building 6,000,000
Accumulated depreciation – building (1,600,000)
Plant and equipment 2,400,000
Accumulated depreciation – plant and equipment (400,000)
Patent 800,000
Goodwill, recognized in Jan. 2011 thru a business 1,400,000
combination
Amortization of Goodwill (280,000)
Total noncurrent assets *8,820,000

Financial asset at fair value through other comprehensive income, CURRENT.

PFRS for SMEs. Sec. 3, 11, 12. Financial instruments are measured at fair value
through profit or loss.
The only OCI items under the IFRS for SMEs are:
 Some foreign exchange gains and losses relating to a net investment in a
foreign operation (see Section 30)
 Some changes in fair values of hedging instruments – in a hedge of variable
interest rate risk of a recognised financial instrument, foreign exchange
risk or commodity price risk in a firm commitment or highly probable
forecast transaction, or a net investment in a foreign operation (see
Section 12)
 Some actuarial gains and losses (see Section 28)
Land at Cost.
PFRS for SMEs. Sec. 17. The revaluation model is NOT permitted.
Land, at revalued amount, 12/31/12 1,000,000
Revaluation surplus on Land, 1/1/12 360,000
 Revaluation surplus on Land during the year 140,000
Land, at cost 500,000

Amortization of Goodwill
PFRS for SMEs. Sec. 19. All goodwill must be amortized. If the entity is
unable to estimate useful life, then use 10 years.
1400,000/10 x 2 = 280,000

SRAW23. [AT] The following statements relate to RA 9298 and its IRRs. Which
statements/s is/are true?
I. Any person who shall violate RA 9298 or any of its implementing rules and
regulations as promulgated by the Board of Accountancy subject to the
approval of the PRC, shall, upon conviction, be punished by a fine of not
less than fifty thousand pesos (P50,000), or by imprisonment for a period
not exceeding three years, or both.
II. Those who failed to renew professional licenses for a period of four
continuous years from initial registration, or from last renewal shall be
declared delinquent.
III. The Board of Accountancy has six members including the Chairman.
IV. The APO shall submit its nominations with complete documentation to the
Commission not later than sixty days prior to the expiry of the term of
an incumbent chairman or member.
V. A meaningful experience shall be considered as satisfactory compliance if
it is earned in Public Practice and shall include at least two years as
audit assistant and at least one year as auditor in charge of the audit
engagement covering full audit functions of significant clients.

ANSWER: IV ONLY.
I. 2 years
II. 5 years.
III. 7 including Chairman.
V. 3 years in ANY areas.

SRAW24.[TX]Which of the following statement/s is/are incorrect?

I. A taxpayer may appeal to the Court of Tax Appeals.
II. A taxpayer may appeal from a decision of the Court of Tax Appeals.
III. The government may appeal to the Court of Tax Appeals.
IV. The government may appeal from the decision of the Court of Tax Appeals.
V. In case of systems unavailability as declared by the Commissioner of
Internal revenue or his duly authorized representative during tax filing
deadlines, filing of tax returns and payment of taxes due thereon shall
be accepted manually or over-the-counter by the EFPs-AABs.
VI. Once the system is up/online the required tax returns which was manually
filed shall be e-filed within fifteen days from the date of manual
filing.

ANSWER: III ONLY. The TAXPAYER, NOT the government, may appeal to the Court of
Tax Appeals.

SRAW25.[P2] Jiraiya Company which began operations on January 1, 2013

appropriately uses installment method of accounting. The following data pertain
to Jiraiya’s operations for year 2013:
Installments sales (before over/under-allowance) P
3,150,000
Operating expenses 367,500
Regular sales 1,312,500
Total collections for the year (excluding interest of 2,088,000
P84,000)
Cost of regular sales 752,500
Cost of installment sales 2,205,000
Accounts receivable – 12/31/13 512,500
Installment receivable written-off (no provision was made) 154,000
Estimated resale value of reposed merchandise 290,000
Profit usual on the sale of repossessed merchandise 15%
Repossessed accounts 350,000
Actual value of trade-in merchandise 280,000
Trade-in allowance 490,000
Reconditioning cost of the repossessed merchandise 57,500

How much is the net income for the year ended December 31, 2013?

ANSWER: P525,000

Installment Sales P 3,150,000

Over-allowance (490,000-280,000) ( 210,000)
I/S, adjusted 2,940,000
Cost of I/S ( 2,205,000)
Gross Profit 735,000 - 25%

Fair Value of Repossessed Merchandise (290,000x85% - 57,500) P

189,000
Unrecovered Cost (350,000 x 75%) ( 262,500)
Loss on Repossession P 73,500

GP on Regular Sales (1,312,500-752500) P 560,000

RGP on I/S [(2,088,000-800,000) x 25%) 322,000
Total RGP 822,000
Interest Income 84,000
Operating Expenses ( 367,500)
Loss on Repossession ( 73,500)
Net Income P *525,000

SRAW26.[P2]On January 1 ,2012, Zabusa Construction Corporation began constructing

a P2,100,000 contract. Zabusa uses percentage of completion method. For the year
ended December 31, 2013, Zabusa Construction billed its client an additional 55%
of the contract price.
2012 2013 2014
Construction in Progress P 441,000 ? ?
Estimated Costs to Complete ? ? -
Costs Incurred 425,250 969,000 675,75
0
Excess of CIP in Progress 84,000 330,750 -
Billings liability liability

How much is the realized gross profit (loss) on 2013?

ANSWER: P60,750 Loss
Billings, 2013 (2,100,000 x 55%) 1,155,000
Billings, 2012 ( 441,000 + 84,000) 525,000
Total Billings to date 1,680,000
Excess of PB over CIP ( 330,750)
CIP to date 1,349,250
Cost Incurred to date (425,250+969,000) 1,394,250
Gross Profit (Loss) to date ( 45,000)
Gross Profit, 2012 (441,000-425,250) ( 15,750)
Gross Profit Loss, 2013 *( 60,750)

SRAW27.[MS] The Deidara Corporation is about to go public. It currently has

after-tax earnings of P7.5 million and 2.5 million shares are owned by the
present stockholders (the Uchiha Family). The new public issue will represent
600,000 new shares. The new shares will be priced to the public at P20 per share,
with a 5% spread on the offering price. There will also be P200,000 in out-of-
pocket costs to the corporation.

Determine what rate of return must be earned on the proceeds to the corporation
so there will not be a dilution in earnings per share during the year of going
public.

ANSWER: 16.07%
EPS = 7.5M/2.5M = 3
 600,000(3)
600,000 (20)(95 )– 200,000 = *16.07%

SRAW28. [AT] PAS 500 describes five generalizations concerning the reliability of
evidence. The situations given below indicate the relative degrees of assurance
provided by two types of evidence obtained in different situations. Which
describes an exception to one of the generalizations?
a. The schedule of insurance coverage obtained from the company’s insurance agent
provides greater assurance than one prepared by the internal audit staff.
b. The report of an expert regarding the valuation of a collection of paintings
held as an investment provides greater assurance than the auditor’s physical
observation of the paintings.
c. The auditor’s computation of interest payable on outstanding bonds provides
greater assurance than reliance on the client’s calculation.
d. The auditor has obtained greater assurance about the balance of sales at Plant
A where he/she has made limited tests of transactions because of effective
internal control than at Plant B where he/she has made extensive tests of
transaction because of ineffective internal control.

ANSWER: B.The report of an expert regarding the valuation of a collection of

paintings held as an investment provides greater assurance than the auditor’s
physical observation of the paintings.

SRAW29. [P2]On July 1, 2013 Minato Company purchased 80% of the outstanding
shares of Kushina Company at a cost of P1,600,000. On that date, Kushina had
P1,000,000 of the capital stock and P1,400,000 of retained earnings. For 2013,
Minato had income of P560,000 from its separate operations and paid dividends of
P300,000. For 2013, Kushina reported income of P130,000 and paid dividends of P
60,000. All the assets and liabilities of Kushina have book values equal to their
respective fair market values. Assume income was earned evenly throughout the
year except for the intercompany transaction on October 1. On October 1, 2013
Minato purchased an equipment from Kushina for P200,000. The book value of the
equipment on that date was P240,000. The loss of P40,000 is reflected in the
income of Kushina indicated above. The equipment is expected to have a useful
life of 5 years from the date of sale.

In the December 31, 2013 consolidated statement of financial position, how much
is the consolidated net income attributable to the parent company?

ANSWER: P946,400

Parent NCI Total

Net Income-Parent 560,000 560,000
Net Income-Subsidiary 36,000 9,000
45,000*
Gain on Acquisition 320,000 320,000**
Upstream Sale-Unrealized Gross Loss 32,000 8,000
40,000
Upstream Sale-Realized Gross Loss ( 1,600) ( 400)
(2,000)***
Net Income *946,400 16,600

*45,000
Net Income, 2013 130,000
Loss 40,000
Net Income from Regular Operations 170,000
Net Income from Reg. Operations, Jul-Dec 85,000
Loss (40,000)
Net Income, Jul-Dec 45,000

**320,000
Acquisition Cost 1,600,000
FV of Net Assets Acquired (2,400,000x80%) (1,920,000)
Gain on Acquisition ( 320,000)
 *** (2,000)
40,000/5 x 3/12 = 2,000

SRAW30.[TA] Hashirama Corporation prepares its financial statements in accordance

with PFRS. Which of the following items is required disclosure on the income
statement?
a. Revenues, cost of goods sold, and advertising expense.
b. Finance costs, tax expense, and income.
c. Operating expense, non-operating expenses, and extraordinary items.
d. Gross profit, operating profits, and net profit.

ANSWER. B. Finance costs, tax expense, and income

CLINCHER

C1. [TX] A taxpayer has a business property having an adjusted basis of P100,000.
It is completely destroyed by fire in 2010. The only claim for reimbursement
consists of an insurance claim for P80,000 is settled in 2011. How much is the
deductible loss in 2010?

ANSWER: Zero
Deductible on the date settled, 2011.

C2.[P2] Pasig Garment Company operates a branch in Cabanatuan City. At the end of
the year, the Branch account in the books of the home office at Manila shows a
balance of P150,000. The following information are ascertained:
1. The home office has billed the branch the amount of P37,500 for the
merchandise, which was in transit on December 31.
2. A home office accounts receivable for P10,500 was collected by the branch.
Said collection was not reported to the home office by the branch.
3. Supplies of P4,500 was returned by the branch to the home office but the
home office has not yet reflected in its records the receipt of the
supplies.
4. The branch made profit of P10,100 for the month of December but the home
office erroneously recorded it as P11,180.
5. The branch has not received the cash in the amount of P25,000 sent by home
office on December 31.This was charged to General Expense account.
All transactions are presumed to have been properly recorded.
What is the adjusted balance of the reciprocal accounts?

ANSWER: P179,920
Home Office Books Branch Books
(Branch Current – Dr. (Home Office Current –
balance) Cr. balance)
Unadjusted balance P150,000 P117,420
Add (deduct)
adjustments:
In transit 37,500
HO A/R collected by 10,500
Br.
Supplies returned (4,500)
Error in recording Br. (1,080)
NI
Cash sent to Br., to 25,000 25,000
Gen. Exp. By HO
Adjusted Balance *179,920 179,920

C3. [TA] Under IFRIC 12. The private concession operator shall recognize
infrastructure asset as
a. Intangible asset
b. Financial asset
c. Either a or b
d. Neither a or b
ANSWER: C

C4. [TX] Which of the following statements is/are true?

I. Transitional Input Tax is also called Tax deemed paid.
II. A zero rated person need not be a VAT Registered person.
III. Non life Insurance businesses are subject to 2% OPT.
IV. Amusement tax on winnings is computed based on the total price or
dividends.
V. A VAT registered person is liable to VAT regardless of his sales or
receipts.

ANSWER: V ONLY.
IA19,20,21; 62,66,73

C5.[MS] Unemployment that is caused by a mismatch between the composition of the

labor force (in terms of skills, occupation, industries, or geographic location)
and the makeup of the demand for labor is called
A. Real wage unemployment.
B. Deficient-demand unemployment.
C. Frictional unemployment.
D. Structural unemployment.

*D
CMA 0686 1-19
Answer (A) is incorrect because real wage unemployment is not a meaningful term
in this context.
Answer (B) is incorrect because deficient-demand unemployment is not a meaningful
term in this context.
Answer (C) is incorrect because frictional unemployment is defined as the amount
of unemployment caused by the normal workings of the labor market. It includes,
for example, unemployment resulting from time lost in changing jobs.
Answer (D) is correct. Structural unemployment exists when aggregate demand is
sufficient to provide full employment, but the distribution of the demand does
not correspond precisely to the composition of the labor force in terms of
skills, industries, etc.