REVIEW 105 – DAY 20 6.

Under a sales type lease, what is the meaning of “gross investment in

the lease” on the part of the lessor?
a. Present value of minimum lease payments
TOA b. Present value of minimum lease payments and present value of unguaranteed
residual value.
c. Absolute amount of the minimum lease payments
1. The minimum lease payments under a finance lease include all of the following, d. Aggregate of minimum lease payments and unguaranteed residual value
except
a. Contingent rent and executory costs 7. Net investment in the lease is equal to the
b. Periodic rentals over the lease term a. Gross investment in the lease less unearned finance income
c. Any amount guaranteed by the lessee or by a party related to the lessee. b. Gross investment in the lease less dealer’s profit
d. Payment required to exercise an option on the part of the lessee to purchase c. Minimum lease payments
the asset at a price which is expected to be sufficiently lower than its fair value at d. Minimum lease payments less unguaranteed residual value.
the option exercise date.
8. What is the treatment of unguaranteed residual value in determining the cost of
2. A lease contains a bargain purchase option. In determining the capitalized cost at sales under a sales type lease?
the beginning of the lease term, the payment called for by the bargain option would a. Ignored
a. Not be capitalized c. Be subtracted at its present b. Added to the cost of the leased asset
value c. Deducted from the cost of the leased asset at absolute amount
b. Be added at its exercise value d. Be added at its present value d. Deducted from the cost of the leased asset at present value
3. At the inception of a capital lease, the guaranteed residual value should be 9. Initial direct costs incurred by the lessee in connection with a finance lease are
a. Included as part of minimum lease payments at present value a. Included as part of the amount recognized as an asset under the lease
b. Included as part of minimum lease payments at future value b. Expensed immediately
c. Excluded from minimum lease payments c. Deferred and amortized over the lease term on a straight line basis.
d. Included as part of minimum lease payments to the extent that the guaranteed d. Included in the minimum lease payments at present value.
residual value is expected to exceed estimated residual value
10. Which statement is correct concerning a finance lease on the part of the lessor?
4. The lessee’s balance sheet liability for a capital lease would be periodically I. Initial direct costs should be recognized as expense in the income
reduced by the statement at the inception of a sales type lease.
a. Minimum lease payment plus the amortization of the related asset II. Initial direct costs incurred by the lessor in a direct financing lease are
b. Minimum lease payment less the amortization of the related asset included in the net investment in the lease and will have the effect of
a. Minimum lease payment reducing the interest income from the finance lease.
b. Minimum lease payment less the portion allocable to interest a. I only b. II only c. Both I and II d. Neither
I nor II
5. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the 11. If the sale and leaseback transaction results in a finance lease, any gain from the
a. Useful life of the asset sale and leaseback should
b. Lease term a. Not be recognized
c. Useful life of the asset if there is reasonable certainty that the lessee will obtain b. Be recognized as income immediately.
ownership by the end of the lease term. c. Be deferred and amortized over the lease term.
d. Lease term or useful life of the asset, whichever is shorter d. Be deferred and amortized over the useful life of the asset.
12. ABC Company sold its headquarters building at a gain and simultaneously 1. Accounts payable:
leased back the building. The lease was reported as a finance lease. At the time
of sale, the gain should be reported as Accounts payable per general ledger control amounted to P3,400,000, net
a. Operating income of P150,000 debit balances in suppliers’ accounts. The unpaid voucher
b. An extraordinary item file included the following items that not had been recorded as of
c. A separate component of stockholders’ equity December 31, 2005:
d. As asset valuation allowance
13. Under PAS 12, which enterprises are required to report deferred tax asset or a) Earth Company – P140,000 merchandise shipped on December 31, 2005,
liability? FOB destination; received on January 10, 2006.
I. Public enterprises II. Nonpublic enterprises b) Gemstone, Inc. – P120,000 merchandise shipped on December 26, 2005,
a. I only b. II only c. Both I and II d. FOB shipping point; received on January 16, 2006.
Neither I nor II
On December 28, 2005, a supplier authorized Danaya to return goods
14. Temporary difference is the billed at P100,000 and shipped on December 20, 2005. The goods were
I. Difference between the tax basis of an asset or liability and its reported returned by Danaya on December 28, 2005, but the P100,000 credit
amount that will result in taxable or deductible amounts in future years memo was not received until January 6, 2006.
when the reported amount of the asset or liability is recovered or settled
respectively. a. P3,670,000 b. P3,520,000 c. P3,570,000 d.
II. Item of income or expense which is included in either financial income P3,420,000
or taxable income but will never be included in the other.
a. I only b. II only c. Both I and II d. 2. Payroll:
Neither I nor II
Items related to Danaya’s payroll as of December 31, 2005 are:
15. Taxable temporary difference is the
I. Temporary difference that will result in taxable amount in determining taxable Accrued salaries and wages P485,000
income of future periods when the carrying amount of the asset or liability is Payroll deductions for:
recovered or settled. Income taxes withheld 35,000
II. Temporary difference that will result in deductible amount in determining SSS contributions 40,000
taxable income of future periods when the carrying amount of the asset or liability Philhealth contributions 10,000
is recovered or settled.
Advances to employees 50,000
a. I only b. II only c. Both I and II d. Neither I nor II
a. P485,000 b. P620,000 c. P570,000 d.
P1 P520,000

Questions 1 to 10 are based on the following information:

3. Litigation:
The following information relates to Danaya Company’s obligations as of December
31, 2005. For each of the numbered items, determine the amount if any, that should In May, 2005, Danaya became involved in a litigation. The suit being
be reported as current liability in Danaya’s December 31, 2005 balance sheet. contested, but Danaya’s 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 Caused by temporary differences in accounting Deferred tax
of potential liability than any other amount. For gross profit on installment sales P235,000 Cr.
For depreciation on property and equipment 360,000 Cr
a. P2,000,000 b. P2,500,000 c. P3,000,000 d. P0 For product warranty expense 112,000 Dr
P483,000 Cr.
4. Bonus obligation:
a. P483,000 b. P595,000 c. P123,000 d. P0
Danaya Company’s president gets an annual bonus of 10% of net income
after bonus and income tax. Assume the tax rate of 30% and the correct 8. Product warranty:
income before bonus and tax is P6,000,000. (Ignore the effects of other
given items on net income.) Danaya has a one year product warranty on selected items in its product
line. The estimated warranty liability on sales made during 2004, which
a. P451,600 b. P392,500 c. P247,000 d. was outstanding as of December 31, 2004, amounted to P260,000. The
P1,400,000 warranty costs on sales made in 2005 are estimated at P940,000. Actual
warranty costs incurred during the current 2005 fiscal year are as follows:
5. Note payable:

A note payable to the Bank of the Philippine Islands for P1,500,000 is Warranty claims honored on 2004 sales P260,000
outstanding on December 31, 2005. The note is dated October 1, 2004, Warranty claims honored on 2005 sales 620,000
bears interest at 18%, and is payable in three equal annual installment of Total warranty claims honored P880,000
P500,000. The first interest and principal payment was made on October
a. P940,000 b. P60,000 c. P320,000 d. P0
1, 2005.
9. Premiums:
a. P67,500 b. P567,500 c. P545,000 d. P45,000

6. Purchase commitment: To increase sales, Danaya Company inaugurated a promotional campaign

on June 30, 2005. Danaya placed a coupon redeemable for a premium in
During 2005, Danaya entered in a noncancellable commitment to each package of product sold. Each premium costs P100. A premium is
purchase 200,000 units of inventory at fixed price of P5 per unit, delivery offered to customers who send in 5 coupons and a remittance of P30.
to be made in 2006. On December 31, 2005, the purchase price of this The distribution cost per premium is P20. Danaya estimated that only
inventory item had fallen to P4.40 per unit. The goods covered by the 60% of the coupons issued will be redeemed. For the six months ended
purchase contract were delivered on January 28, 2006. December 31, 2005, the following is available:

a. P120,000 b. P1,000,000 c. P880,000 d. P0 Packages of product sold 100,000

Premiums purchased 10,000
7. Deferred taxes: Coupons redeemed 40,000

On December 31, 2005, Danaya’s deferred income tax account has a a. P1,080,000 b. P360,000 c. P720,000 d. P1,000,000
2005 ending credit balance of P483,000, consisting of the following items:
1. Due to Lireo Finance company:
 from the comic strip. In its 2004 income statement, what amount should Super report as
Danaya’s accounting records show that as of December 31, 2005, royalty revenue?
P800,000 was due to Lireo Finance Company for advances made against a. $125,000
P1,000,000 of trade accounts receivable assigned to the finance company b. $175,000
c. $200,000
with recourse.
d. $300,000
a. P1,000,000 b. P200,000 c. P800,000 d. P0
14. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on
11. Lin Co., a distributor of machinery, bought a machine from the manufacturer in
July 31 for oil sold between December 1 and May 31. Production reports show the following
November 2003 for $10,000. On December 30, 2003, Lin sold this machine to Zee Hardware
oil sales:
for $15,000, under the following terms: 2% discount if paid within thirty days, 1% discount if
paid after thirty days but within sixty days, or payable in full within ninety days if not paid
June 1, 2002 - November 30, 2002 $300,000
within the discount periods. However, Zee had the right to return this machine to Lin if Zee
December 1, 2002 - December 31, 2002 50,000
was unable to resell the machine before expiration of the ninety-day payment period, in
December 1, 2002 - May 31, 2003 400,000
which case Zee’s obligation to Lin would be canceled.
June 1, 2003 - November 30, 2003 325,000
In Lin’s net sales for the year ended December 31, 2003, how much should be included for
December 1, 2003 - December 31, 2003 70,000
the sale of this machine to Zee?
a. $0
What amount should Rill report as royalty revenue for 2003?
b. $14,700
a. $140,000
c. $14,850
b. $144,000
d. $15,000
c. $149,000
d. $159,000
12. Regal Department Store sells gift certificates, redeemable for store merchandise, that
15. Luge Co., which began operations on January 2, 2003, appropriately uses the installment
expire one year after their issuance. Regal has the following information pertaining to its gift
sales method of accounting.
certificates sales and redemptions:
The following information is available for 2003:
Unredeemed at 12/31/02 $ 75,000
Installment accounts receivable, December 31, 2003 $800,000
2003 sales 250,000
Deferred gross profit, December 31, 2003 (before
2003 redemptions of prior year sales 25,000
recognition of realized gross profit for 2003) 560,000
2003 redemptions of current year sales 175,000
Gross profit on sales 40%
Regal’s experience indicates that 10% of gift certificates sold will not be redeemed. In its
For the year ended December 31, 2003, cash collections and
December 31, 2003 balance sheet, what amount should Regal report as unearned
realized gross profit on sales should be
revenue?
Cash collections Realized gross profit
a. $125,000
a. $400,000 $320,000
b. $112,500
b. $400,000 $240,000
c. $100,000
c. $600,000 $320,000
d. $ 50,000
d. $600,000 $240,000
13. In 2002, Super Comics Corp. sold a comic strip to Fantasy, Inc. and will receive royalties
of 20% of future revenues associated with the comic strip. At December 31, MAS
2003, Super reported royalties receivable of $75,000 from Fantasy. During 2004, Super
received royalty payments of $200,000. Fantasy reported revenues of $1,500,000 in 2004
1. What is the main factor that differentiates the short-run cost function from the long-run a. 14.2%
cost function? b. 32.2%
a. Nothing, the two functions are identical. c. 37.6%
b. The level of technology. d. 45.2%
c. Changes in government subsidies.
d. The nature of the costs. 6. Newton Corporation is offered trade credit terms of 3/15, net 45. The firm does not take
advantage of the discount, and it pays the account after 67 days. Using a 365- day year,
2. If consumer confidence falls, the impact upon the economy is what is the nominal annual cost of not taking the discount?
a. A downturn. a. 18.2%
b. An upturn. b. 21.71%
c. No change. c. 23.48%
d. Consumer confidence does not have an impact upon the economy. d. 26.45%

3. A company enters into an agreement with a firm who will factor the company’s accounts 7. Which of the following is a strength of the payback method?
receivable. The factor agrees to buy the company’s receivables, which average $100,000 per a. It considers cash flows for all years of the project.
month and have an average collection period of 30 days. The factor will advance up to 80% b. It distinguishes the source of cash inflows.
of the face value of receivables at an annual rate of 10% and charge a fee of 2% on all c. It considers the time value of money.
receivables purchased. The controller of the company estimates that the company would d. It is easy to understand.
save $18,000 in collection expenses over the year. Fees and interest are not deducted in
advance. Assuming a 360-day year, what is the annual cost of financing? 8. Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the
a. 10.0% expectation that $20,000 per year could be saved in after-tax cash costs if the equipment
b. 14.0% were acquired. The equipment’s estimated useful life is ten years, with no residual value,
c. 16.0% and would be depreciated by the straight-line method. The payback period is
d. 17.5% a. 4.0 years.
b. 4.4 years.
4. A company with $4.8 million in credit sales per year plans to relax its credit standards, c. 4.5 years.
projecting that this will increase credit sales by $720,000. The company’s average collection d. 5.0 years.
period for new customers is expected to be 75 days, and the payment behavior of the
existing customers is not expected to change. Variable costs are 80% of sales. The firm’s 9. All of the following capital budgeting analysis techniques use cash flows as the primary
opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s basis for the calculation except for the
benefit (loss) from a. Net present value.
the planned change in credit terms? b. Payback period.
a. $0 c. Discounted payback period.
b. $ 28,800 d. Accounting rate of return.
c. $144,000
d. $120,000
10. If a firm is offered credit terms of 2/10, net 30 on its purchases. Sound cash
5. Gild Company has been offered credit terms of 3/10, net 30. Using a 365-day year, what is management practices would mean that the firm would pay the account on which of the
the nominal cost of not taking advantage of the discount if the firm pays on the 35th day following days?
after the purchase? a. Day 2 and 30.
b. Day 2 and 10. AP
c. Day 10. You are now in the completion stage of your audit of the Merly Company’s financial
d. Day 30. statements for the year ended December 31, 2010.

The next 5 items represent various commitment and contingencies of Merly at December 31,
11. What factor explains the difference between real and nominal interest rates? 2010, and events subsequent to December 31, 2010, but prior to the authorization for issue
a. Inflation risk. of the 2010 financial statements. For each item, select from the ff list the reporting
b. Credit risk. requirement.
c. Default risk.
d. Market risk.
1. At December 31, 2010. Merly had outstanding purchase orders in the ordinary course
12. Southwest Airlines benchmarked the process of turning around an airplane with the pit of business for purchase of a raw material to be used in its manufacturing process.
stop process for formula racecars. This is an example of The market price is currently higher than the purchase price and is not anticipated to
a. Internal benchmarking. change within the next year.
b. Generic benchmarking. a. Disclosure only
c. Competitor benchmarking. b. Accrual only
c. Both accrual and disclosure
d. Functional benchmarking.
d. Neither accrual nor disclosure
13. Which measures would be useful in evaluating the performance of a manufacturing
2. A government contract completed during 2010 is subject to renegotiation. Although
system?
Merly estimates that it is reasonably possible that a refund of approximately P200,00-
I. Throughput time. P300,000 may be required by the government, it does not wish to publicize this
II. Total setup time for machines/Total production time. possibility.
III. Number of rework units/Total number of units completed. a. Disclosure only
a. I and II only. b. Accrual only
b. II and III only. c. Both accrual and disclosure
c. I and III only. d. Neither accrual nor disclosure
d. I, II, and III.
3. Merly has been notified by a governmental agency that it will be held responsible for
14. A tool which indicates how frequently each type of defect occurs is a the cleanup of toxic materials at a site where Merly formerly conducted operations.
a. Control chart. Merly estimates that it is probable that its share of remedial action will be
b. Pareto diagram. approximately P500,000
c. Cause-and-effect diagram. a. Disclosure only
d. Fishbone diagram. b. Accrual only
c. Both accrual and disclosure
15. A tool which identifies potential causes for failures or defects is d. Neither accrual nor disclosure
a. Control chart.
b. Pareto diagram.
c. Cause-and-effect diagram.
d. Strategy map.