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CRC-ACE REVIEW SCHOOL The Professional CPA Review School  735-9031 / 735-8901 PRACTICAL ACCOUNTING 2 2nd PRE-BOARD EXAMS OCTOBER 2007 BATCH AUGUST 19, 2007 (Sun) 2:00-4:30 INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by writing a VE...

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CRC-ACE REVIEW SCHOOL The Professional CPA Review School  735-9031 / 735-8901

PRACTICAL ACCOUNTING 2 OCTOBER 2007 BATCH 2nd PRE-BOARD EXAMS 2007 (Sun) 2:00-4:30

AUGUST 19,

INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by writing a VERTICAL LINE corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use Pencil No. 1 or No. 2 only.

C B D C B C A Use the following information in answering questions 1 and 2 The income statement of Vita Plus Partnership for the year ended December 31, 2007 appear below: Vita Plus Partnership Income Statement For the year ended December 31, 2007 Sales P300,000 Less: Cost of Goods Sold 190,000 Gross Profit P110,000 Less: Operating Expenses 30,000 Net Income P 80,000 Additional Information: 1. Melon and Dalandan began the year with capital balances of P40,800 and P112,000, respectively. 2. On April 1, Melon invested an additional P15,000 into the partnership and on August 1, Dalandan invested an additional P20,000 into the partnership. 3. Throughout 2007, each partner withdrew P400 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distribution. Melon and Dalandan have agreed to distribute partnership net income according to the following plan: MELON DALANDAN 1. Interest on average capital balances 6% 6% 2. Bonus of net income before the bonus but after interest on average capital balances 10% 3. Salaries P25,000 P30,000

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4. Residual (if positive) 30% 5. Residual (if negative) 50%

70% 50%

1. The share of Melon and Dalandan on the net income, respectively is: c. P40,342 and P39,658 a. P40,473 and P39,527 b. P40,282 and P39,718 d. P38,935 and P41,065 2. The ending capital balance of Dalandan is: b. P150,727 a. P152,328 c. P150,918

d. P150,858

Use the following information in answering questions 3 and 4 On January 2, 2007, P Company purchased 1,500 shares of the outstanding common stock of S Company for P140,000 and additional payment of. P4,000 indirect cost and P5,000 direct cost. On that date, the assets and liabilities of S Company had fair market values as indicated below. Balance sheets of the companies on January 2, 2007, after acquisition are as follows: P Company Cash Accounts Receivable Inventory Land Building, net Equipment, net Investments in S Company

Accounts Payable 8% Bonds Payable Common Stock – P Company, P40 par Common Stock – S Company, P25 par Additional Paid-In Capital – P Company Additional Paid-In Capital – S Company Retained Earnings – P Company Retained Earnings – S Company

P 80,000 56,000 56,000 28,000 163,000 224,000 149,000 P 756,000 P 42,000

S Company Book Fair value Value P 14,000 P 14,000 28,000 28,000 22,000 28,000 54,000 60,000 72,000 98,000 56,000 39,000 P 246,000 16,000 62,000

16,000 52,000

320,000 50,000 100,000 56,000 294,000 P 756,000

62,000 P 246,000

3. As a result of business combination, the amount of total net assets is b.P764,000 c.P718,250 d.P768,000 a. P714,250 4. The Retained earnings balance is a. P294,000 b.P356,000 c. P294,250 d. P290,000 5. A statement of the capital accounts of Roel and Bless follows: ROEL BLESS Balance, January 1 P 72,000 P 96,000 Add: Additional Investments, July 1 32,000 16,000 Net Income for the Year: Salaries 12,000 14,400 Interest on Capital 5,280 6,240 Remainder 10,362 8,478 Totals P131,642 P141,118

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Deduct Drawings: Monthly Amounts Additional Drawings, Dec. 31 Balance, December 31

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P 9,600

P 10,800 2,042 318 P 11,642 P 11,118 P120,000 P130,000

If the net income remains the same the following year, and if there is neither a change in the partnership agreement nor any additional investments, how much more or less will Roel’s total share of the net income be than it was this year? b. Less by P6.00 a. More by P6.00 c. P27,648 d. P29,112 6. Partner’s Rachel, Cecil, and Arlene share profits and losses 5:3:2, respectively, and their balance sheet on October 31, 2007 follows: Cash P 240,000 Accounts P 600,000 Payable Other Assets 2,160,00 Rachel, Capital 444,000 0 Cecil, Capital 780,000 Arlene, Capital 576,000 P 2,400,000 P 2,400,000 The assets and liabilities are recorded at their current fair value. Lark is to be admitted as a new partner with a 1/5 interest in capital and earnings. Rachel was credited a bonus of P15,000. How much should Lark contribute? a. P456,000 b. P450,000 c. P480,000 d. P487,500 Use the following information in answering questions 7 and 8 S Co. had net income of P400,000 and paid dividends of P200,000 during the year 2007. S Co.’s stockholders’ equity on December 31, 2006 and December 31, 2007 is summarized as follows: Dec. 31,2006 Dec. 31, 2007 10% cumulative preferred stock, P100 par P 300,000 P 300,000 Common stock, P1 par 1,000,000 1,000,000 Additional paid-in capital 2,200,000 2,200,000 Retained earnings 500,000 700,000 Stockholders’ Equity P4,000,000 P4,200,000 On January 2, 2007, P Co. purchased 400,000 common shares of S Co. at P4 per share and also paid P50,000 direct cost of acquiring the investment. P uses equity method in accounting for its investment in S. 7. P Co.’s income from Shine for 2007 should be: a. P160,000 b. P155,000 c. P148,000 d. P143,750 8. The balance of the investment in Shine account at December 31, 2007 should be: a. P1,725,750 b. P1,730,000 c. P1,650,000 d. P1,742,750 Use the following information in answering questions 9 and 10 Parent Company sells land with a book value of P5,000 to Subsidiary Company for P6,000 in 2004. Subsidiary Company holds the land during 2005. Subsidiary Company sells the land for P8,000 to an outside entity in 2006. 9. In 2004 the unrealized gain: a. To be eliminated is affected by the minority interest percentage. b. Is initially included in the subsidiary’s accounts and must be eliminated from Parent Company’s income from Subsidiary Company under the equity method. c. Is eliminated from consolidated net income by a working paper entry that

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includes a credit to the land account for P1,000 d. Is eliminated from consolidated net income by a working paper entry that includes a credit to the land account for P6,000. 10.

Which of the following statements is true?. a. Under the equity method, Parent Company’s investment in Subsidiary account will be P1,000 less than its underlying equity in Subsidiary throughout 2005. b. No working paper adjustments for the land are required in 2005 in Parent Company has applied the equity method correctly c. A working paper entry debiting gain on sale of land and crediting land will be required each year until the land is sold outside the consolidated entity. d. In 2006, the year of Subsidiary’s sale to an outside entity, the working paper adjustment for the land will include a debit to gain on sale of land for P2,000.

Use the following information in answering questions 11 and 12 Perry Corporation sold machinery to its 80 percent-owned subsidiary, Samuel Corporation, for P100,000 on December 31, 2006. The cost of the machinery to Perry was P80,000, the book value at the time of sale was P60,000, and the machinery had a remaining useful life of five years (Perry uses equity in accounting for its investment in Samuel). 11. How will the intercompany sale affect Perry’s income from Samuel and Perry’s net income for 2006? Perry’s Income Perry’s Perry’s Income Perry’s from Samuel Net Income from Samuel Net Income a. No effect No effect c. Decreased No effect b. Increased No effect d. Decreased Decreased 12. How will the consolidated assets & consolidated net income for 2006 be affected by the intercompany sale? Consolidated Consolidated Net Consolidated Net Consolidated Net Net Assets Income Assets Income a. No Decreased c. Increased No effect effect b. Decreased d. No effect No effect Decreased Use the following information in answering questions 13 and 14 Punk Corp. manufactures and sells heavy industrial equipment. On July 1, 2006 Punk sold equipment that it manufactured at a cost of P300,000 to its 100 percent owned subsidiary, Sunk Company, for P400,000. Sunk is depreciating the equipment over a five-year period using the straight-line method. 13. The equipment and accumulated depreciation that appear in the consolidated balance sheet for Punk and subsidiary at December 31, 2006 will include amounts related to this transaction of: a. P300,000 and P30,000 c. P400,000 and P40,000 b. P300,000 and P60,000 d. P400,000 and P80,000 14. If Punk account for its investment in Sunk as a one-line consolidation, working paper entries to consolidate the financial statements of Punk and Sunk for 2006 will include which of the entries: a. Sales P100,000 c. Sales P400,000 Cost of Sales P100,000 Cost of Sales P300,000 b. Sales P100,000 Equipment P100,000 Investment in S P100,000 d. Sales P400,000 Cost of Sales P400,000 15. The following selected accounts appeared in the trial balance of Genius Sales as of December 31, 2007: Installment receivable- P 6,000 Repossessions P 1,200 2006 sales Installment receivable80,000 Installment sales 170,000 2007 sales

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Inventory, December 31, 2006 Purchases

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28,000 222,000

Regular sales

154,000

Deferred gross profit – 2006 Operating Expenses

21,600 46,000

Additional information: Installment receivable – 2006 sales, December 31, 2006 P 57,100 Inventory of new and repossessed merchandise as of December 31, 2007 38,000 Gross Profit percentage on installment sales in 2006 is 10% higher than the gross profit percentage on regular sales in 2007 Repossession was made during the year and was recorded correctly. It was a 2006 sales and the corresponding uncollected account at the time of repossession was P3,100. Net Income for 2007 is a. P54,180 b. P6,740

c. P52,940

d. P53,600

16. On January 1, 2007, M Products Corp. issues 12,000 shares of its P10 par stock to acquire the net assets of L Steel Company. Underlying book value and fair value information for the balance sheet of L Steel Company at the time of acquisition are as follows: Balance sheet Items Book Fair value value Cash P60,00 P60,000 0 Accounts receivable 100,00 100,000 0 Inventory 60,00 115,000 0 Land 50,00 70,000 0 Building and Equipment 400,00 350,000 0 Less: Accumulated Depreciation (150,000 ) Total Assets P520,000 Accounts payable Bonds payable Common stock (P5 par value) Additional paid-in capital Retained earnings Total Liabilities and Capital

P10,000 200,000 150,000 70,000 90,000 P520,000

10,000 180,000

L Steel shares were selling at P18 and M Product shares were selling at P50 just before the merger announcement. Additional cash payments made by M Corporation in completing the acquisition were: Finder’s fee paid to firm that located L Steel P10,000 Audit fee for stock issued by M Products 3,000 Stock registration fee for new shares of M Products 5,000 Legal fees paid to assist in transfer of net assets 9,000 Cost of SEC registration of M Products shares 1,000 How much is the increase in the total assets to be recorded by M Products? a. P809,000 b. P591,000 c. P781,000 d. P667,000 17. I Inc., K Inc., and E Inc. agreed to a business combination that meets all the requirements for purchase of interests. Their condensed balance sheets before combination show:

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I K E Assets P7,000,000 P875,000 P9,625,000 Liabilities P4,987,500 P306,250 P2,625,000 Capital stock, par P100 2,625,000 437,500 1,750,000 Additional paid in capital 218,750 700,000 Retained earnings (deficit) (612,500) ( 87,500) 4,550,000 P7,000,000 P875,000 P9,625,000 It was agreed that I Inc. will be the continuing entity and shall issue 4,375 shares to K and 52,500 shares to E. To what extent will the stockholders equity of I increase after the combination? a. P7,568,750 b. P2,187,000 c. P5,687,500 d. P875,000 18. On July 2007, Jonathan Company sold P2,400,000 real estate that had a cost P1,440,000, receiving P350,000 cash and mortgage note for the balance payable in monthly installments. Installment received in 2008 reduced the principal of the note to a balance of P2,000,000. The buyer defaulted on the note at the beginning of 2009, and the property was repossessed. The property had an appraised value of P1,150,000 at the time of repossession. Compute the gain (loss) on repossession, assuming that: Profit is recognized when the Gross profit is recognized in sale is made (point of sale) proportion to periodic collection a. P(850,000) P(450,000) b. (850,000) (50,000) c. 850,000 (450,000) d. (50,000) 50,000 19. Abogado Company uses the installment method of reporting for accounting purposes. The following data were obtained. 2004 2005 2006 Installment sales P600,000 P810,000 P990,000 Cost of installment _420,000 _486,000 _643,500 sales Gross profit P180,000 P324,000 P346,500 Installment contract receivables, December 31: 2004 2005 2006 2004 sales P360,000 P270,000 P120,000 2005 sales 600,000 390,000 2006 sales 780,000 In 2006, one of the customers defaulted in his payment and the company repossessed the merchandise with an estimated market value of P30,000. The sales was in 2004 and the unpaid balance on the date of repossession was P45,000. Compute for 2006 (1) the gain (loss) on repossession; (2) total realized gross profit, and (3) the deferred gross profit. (1) (2) (3) a. P P 189,000 P (1,500) 451,500 b. 129,000 465,000 750 c. 189,000 465,000 (1,500) d. 73,500 273,000 1,500 20. Lea Mae Stores sell appliances for cash and also on the installment plan. Entries to record cost of sales are made monthly. The following information appears on the trial balance of the company as of December 31, 2007. Cash P153,00 0 Installment Accounts Receivable, 48,000 2006 Installment Accounts Receivable, 91,000...