1. Tone Company is the defendant in a lawsuit filed by Witt in 2016 disputing the validity of copyright held by Tone. At December 31, 2016, Tone determined that Witt would probably be successful against Tone for an estimated amount of P400,000. Appropriately, a P400,000 loss was accrued by a charge to income for the year ended December 31, 2016. On December 15, 2017, Tone and Witt agreed to a settlement providing for cash payment of P250,000 by Tone to Witt, and transfer of Tone’s copyright to Witt. The carrying amount of the copyright on Tone’s accounting records was P60,000 at December 15, 2017.What would be the effect of the settlement on Tone’s income before income tax in 2017?a. 150,000 increase b. 60,000 decrease c. 90,000 increase d. 0

2. On December 31, 2017, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each P1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of P5 par value common at P25. Immediately after issuance, the market value of each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On December 31, 2017, what amount should Moses record as discount or premium on bonds payable?a. 170,000 discount b. 450,000 premium c. 450,000 discount d. 800,000 premium

3. Kemp Company must determine the December 31,2017, year-end accruals for advertising and rent expense. A P50,000 advertising bill was received January 7, 2018, comprising costs of P35,000 for advertisements in December 2017 issues, and P15,000 for advertisements in January 2018 issues of the newspaper.A store lease, effective December 16, 2016, calls for fixed rent of P120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P6,000,000 per calendar year is payable on January 31 of the following year. Net sales for 2017 were P9,000,000.In its December 31, 2017 balance sheet, Kemp should report accrued liabilities ofa. 260,000 b. 185,000 c. 210,000 d. 245,000

4. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2017, maturing on January 1, 2018 and paying interest semiannually on January 1 and July 1. It is estimated that the bonds would sell only at 103 without the conversion feature. Each P1,000 bond is convertible into 10 shares of P100 par value common stock. How much is the increase in stockholders’ equity arising from the issuance of the convertible bonds on January 1, 2017?a. 350,000 b. 500,000 c. 150,000 d. 0

5. Dunn Trading Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Dunn’s past experience indicates that only 80% of the stamps sold the licensees will be redeemed. Dunn’s liability for stamp redemptions was P6,000,000 at December 31, 2012. Additional information for 2017 is as follows:Stamp service revenue from stamps sold to licensees 5,000,000Cost of redemption (stamps sold prior to 1/1/2017) 2,750,000If all the stamps sold in 2017 were presented for redemption in 2014, the redemption cost would be P2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, 2017?a. 7,250,000 b. 5,500,000 c. 5,050,000 d. 3,250,000

6. Susan Company issued 5,000 convertible bonds on January 1, 2017. the bonds have a three-year term and are issued at 110 with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at anytime up to maturing into 100 common shares with par value of P5. When the bonds are issued, the prevailing market interest rate of similar debt instrument without conversion option is 9%. The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53. What is the equity component of the issuance of the convertible bonds on January 1, 2017?a. 1,150,000 b. 1,650,000 c. 891,000 d. 391,000

7. During 2017 Mann Company experienced financial difficulties and is likely to default on a P5,000,000, 15% three-year note date January 1, 2015, payable to Summit Bank. On December 31, 2017, the bank agreed to settle the note and unpaid interest of P750,000 for 2017 for P4,100,000 cash payable on January 31, 2018.What amount should Mann report as gain from debt extinguishment in its 2017 income statement?a. 1,650,000 b. 900,000 c. 750,000 d. 0

8. On January 1, 2017, Colt Company issued ten-year bonds with face amount of P5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows:

Present value of 1 for 10 periods at 10% 0.3855Present value of an ordinary annuity Of 1 for 10 periods at 10% 6.145

The total issue price of the bonds wasa. 5,000,000 b. 1,927,500 c. 5,614,500 d. 4,385,500

9. Due to extreme financial difficulties, Armada Company has negotiated a restructuring of its 10% P5,000,000 note payable due on December 31, 2017. The unpaid interest on the note on such date is P500,000. The creditor has agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December 31, 2017.The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for three periods is 2.49.Armada Company should report gain on extinguishment of debt in its 2017 income statement ata. 1,703,200 b. 1,203,200 c. 2,000,000 d. 540,000

10. On January 1, 2017, Gina Company had 300,000 common shares outstanding, P100 par or a total par value of P30,000,000. During 2017, Gina 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, 2017. The market value of each common share immediately prior to March 31, 2017 was P160. The net income for 2017 was P6,000,000.The 2017 income statement should report basic earnings per share ata. 17.14 b. 16.67 c. 18.75 d. 17.39

11. Included in Witt Company’s liability account balance at December 31, 2017 were the following:14% note payable issued October 1, 2016 maturing September 30, 2018 500,00016% note payable issued April 1, 2011 maturing April 1, 2018 800,000

Witt’s December 31, 2017 financial statements were issued on March 31, 2018. On January 15, 2018, the entire P800,000 balance of 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2018, Witt consummated a non-cancelable agreement with the lender to refinance the 14%, P500,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there

have been no violations of the agreement’s provision. On the December 31, 2017 balance sheet, the amount of the notes payable that Witt should classify as current liability is

a. 1,300,000 b. 500,000 c. 800,000 d. 0

12. Excel Company has 600,000 common shares outstanding on January 1, 2017. During 2017, Excel issued rights to acquire one common share at P10 in the ratio of one new share for every 4 outstanding.The market value of the common share immediately prior to the rights issue is P35. The rights were exercised on October 1, 2017. Thenet income of Excel Company for the year 2017 is P8,550,000.Excel Company shall report basic earnings per share in its 2017 income statement ata. 11.40 b. 12.00 c. 14.25 d. 13.41

13. On January 1, 2017, Day Company entered into a 10-year lease agreement with Ward Company for industrial equipment. Annual lease payments of P1,000,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease which is the implicit rate in the lease. The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay Ward as residual value of P500,000 at the end of the lease.Present value of an ordinary annuity of 1 at 10% for 10 periods 6.14Present value of 1 at 10% for 10 periods 0.39In Day’s October 31, 2017 balance sheet, the principal amount of the lease obligation wasa. 6,335,000 b. 6,140,000 c. 5,810,000 d. 5,650,000

14. Mount Banahaw Company has outstanding 20,000 written put options on its common shares with an exercise price of P350. The average market price of common shares for the period is P280. In calculating diluted earnings per share, how many incremental common shares should be included as a result of the written putoptions?a. 20,000 b. 25,000 c. 5,000 d. 0

15. On December 31, 2016, Roe Company leased a machine from Colt for a five-year period. Equal annual payments under the lease are P1,050,000 including P50,000 annual executory costs and are due on December 31 of each year. The first payment was made on December 31, 2016, and the second payment was made on December 31, 2017. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was P4,170,000. the lease is appropriately accounted for as a finance lease by Roe.In its December 31, 2017 balance sheet, Roe should report a lease liability ofa. 3,170,000 b. 3,150,000 c. 2,853,000 d. 2,487,000

16. Citadel Company provides the following data for the entire year:Net income 15,000,000Common stock, P100 par, 500,00 shares 50,000,000Employee stock options outstanding during the entire year:

Option shares 50,000Fair value of each stock option 20Exercise price 180Average market price 250Ending market price 400

Diluted earnings per share should bea. 30.00 ` b. 29.18 c. 29.41 d. 28.57

17. On January 1, 2017, Babson Company leased two automobile for executive use. The lease requires Babson to make five annual payments of P1,300,000 beginning January 1, 2017. At the end of the lease term, December 31, 2017, Babson guarantees the residual value of the automobiles will total P1,000,000. The lease qualifies as a finance lease. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows:

For an annuity due with 5 payments (in advance) 4.240For an ordinary annuity with 5 payments 3.890Present value of 1 for 5 periods 0.650

Babson’s recorded capital lease liability immediately after the first required payment should bea. 4,862,000 ` b. 4,407,000 c. 3,562,000 d. 3,107,000

18. Canterbury Company has one temporary difference at the end of 2013 that will reverse and cause taxable amounts to P1,100,000 in 2014, P1,200,000 in 2015 and P1,200,000 in 2016. Canterbury's pretax accounting income for 2013 is P6,000,000 and the tax rate is 35%. There are no deferred taxes at the beginning of 2013.The income tax payable on December 31, 2013 amounts toa. 2,100,000 b. 1,715,000 c. 1,260,000 d. 875,000

19. Shear Company began operations in 2013. Included in Shear's 2013 financial statements were bad debt expense of P150,000 and profit from an installment sale of P250,000. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in 2014. the enacted tax rate is 35% for 2013 and future years.

In its 2013 income statement, what amount should shear report as deferred tax expense?a. 35,000 b. 52,500 c. 87,500 d. 0

20. Camia Company is in the business of leasing new sophisticated equipment. As lessor, Camia expects a 12% return on its net investment. All leases are classified as a direct financing lease. At the end of the lease term, the equipment will revert to Camia Company. On January 1, 2017 an equipment is leased to a lessee with the following information.

Cost of equipment to Camia 5,500,000Residual value – unguaranteed 400,000Annual rental payable in advance 959,500Useful life and lease term 8 yearsImplicit interest rate 12%First lease payment January 1, 2017

What is the total financial income to be recognized over the lease term?a. 2,576,000 b. 2,176,000 c. 1,776,000 d. 1,616,500

21. On January 1, 2017, Gallant Company entered into a lease agreement with Blacksheep Company for a machine which was carried on the accounting records of Gallant at P2,000,000. Total payments under the lease which expires on December 31, 2019, aggregate P3,550,800 of which P2,400,000 represents cost of the machine to Blacksheep. Payments of P355,080 are due each January 1 of each year. The interest rate of 10% which was stipulated in the lease is considered fair and adequate compensation to Gallant for the use of its funds. Blacksheep expects the machine to have a 10-year life, no residual value and be depreciated on a straight line basis. The lease is to be conceived as a sales type lease.What should be the total income before income tax derived by Gallant from this lease for the year ended December 31, 2017?a. 204,492 b. 604,492 c. 355,080 d. 755,080

22. The differences between the book basis and tax basis of the assets and liabilities of Chamber Company at the end of 2013 are presented below.

Book basis Tax basisInstallment accounts receivable 1,000,000 0Litigation liability 200,000 0

It is estimated that the litigation liability will be settled in 2014. The difference in account receivable will result in taxable amounts of P600,000 in 2014 and P400,000 2015. Chamber has a taxable income of P7,000,000 in 2013 and is expected to have taxable income in each of the following two years. The income tax rate is 35%. This is the first year of operations of Chamber and the operating cycle of the business is two years. What are the net deferred tax expense, current tax expense and income tax expense of Chamber respectively?

a. 280,000: 2,450,000; 2,730,000 c. 420,000; 2,450,000; 2,450,000b. 350,000; 2,450,000; 2,730,000 d. 280,000; 2,450,000; 2,450,000

23. Marianas Company adopted the policy of leasing as the primary method of selling its products. The company’s main product is a small helicopter that is very popular among politicians and company managers. Marianas Company constructed such a helicopter for Jade Enterprises at a cost of P8,500,000. Financing the construction was at 14% rate. The terms of the lease provided for annual advance payments of P2,500,000 to be paid over 10 years with the ownership transferring to Jade at the end of the lease period. It is estimated that the helicopter will have a residual value of P1,600,000 at that date. The lease payments began January 1, 2017. Marianas Company incurred initial direct cost of P500,000 in financing the lease agreement with Jade. The sales price of the helicopter is P14,875,000.The profit on the sale to be recognized by Marianas Company should bea. 5,875,000 b. 6,375,000 c. 4,275,000 d. 4,775,000

24. As of December 31, 2013, its first year of operations, Batangas Company had taxable temporary differences totaling P3,000,000. Of this total, P1,000,000 relates to current items. Batangas also had deductible temporary differences totaling P1,500,000, P250,000 of which relates to current items. Pretax financial income for the year was P20,000,000. The income tax rate is 35%. Batangas Company should report income tax payable on December 31, 2013 ata. 7,000,000 b. 6,737,500 c. 7,525,000 d. 6,475,000

25. On June 30, 2017, Lee Company sold equipment to an unaffiliated company for P5,500,000. The equipment had a book value of P5,000,000 and a remaining life of 10 years. That same day, Lee leased back the equipment at P15,000 per month for 2 years with no option to renew the lease or repurchase the equipment. The present value of the lease payments using the appropriate interest rate was P318,650 on June 30. Lee’s equipment rent expenses for the year ended December 31, 2017 should bea. 110,000 b. 90,000 c. 50,000 d. 40,000

26. Ireland Company had an agreement with its bondholders that required the company to make payments to a sinking fund and to maintain a related appropriation of retained earnings to retire the bonds. The company has been required to make sinking fund contributions of P500,000 for each of the last five years. At the beginning of 2013, the bonds are repaid, the retained earnings appropriation is canceled, and a 40% common stock dividend is declared and distributed. Immediately before the declaration of the dividend, the company had 1,250,000 shares of P10 par value common stock outstanding with a per share market value of P12. Immediately before repaying the bonds at their carrying amount, the company's unappropriated retained earnings balance was P4,000,000.The unappropriated retained earnings balance on December 31, 2013 should bea. 1,500,000 b. 4,000,000 c. 6,500,000 d. 500,000

27. On December 31, 2017, XYZ Company sold equipment with an estimated remaining useful life of 10 years. At the same time, XYZ leased back the equipment for 2 years. The leaseback is an operating lease.

Sales price 7,500,000Carrying amount 5,000,000Fair value of equipment on date of sale 6,000,000

In its 2017 income statement, XYZ should report gain ata. 2,500,000 b. 1,500,000 c. 1,000,000 d. 1,750,000

28. Conn Company purchased a new machine for P4,800,000 on January 1, 2017 and leased it to East the same day. The machine has an estimated 12-year life and will be depreciated P400,000 per year. The lease is for a three-year period expiring January 1, 2013, at an annual rental of P850,000. Additionally, East paid P300,000 to Conn as a lease bonus to obtain the three-year lease. For 2017 Conn incurred insurance expense of P80,000 for the leased machine.

What is Conn’s 2017 operating profit on this leased asset?a. 670,000 b. 550,000 c. 470,000 d. 370,000

29. Cerritos Company began operations on January 1, 2010. During its first three years of operations, Cerritos reported net income and declared dividends as follows:

Net income Dividends declared2010 800,000 02011 2,500,000 1,000,0002012 3,000,000 1,000,000The following data relate to 2013:Income before income tax 4,800,000Prior period adjustment - understatement of 2011 depreciation before tax

400,000

Cumulative decrease in income from change in inventory method before tax

700,000

Dividend declared (of this amount, P500,000 will be paid on 2,000,000

January 15, 2014)Income tax rate 35%

The retained earnings of Cerritos Company on December 31, 2013 should bea. 4,705,000 b. 5,405,000 c. 6,000,000 d. 5,360,000

30. On December 31, 2017, Albocasser Company purchased a tractor from Cheliff Company. Simultaneous with the sale, Cheliff leased back the tractor for 12 years for its use in the new farm that it is developing. The sales price of the tractor was P7,800,000, while its carrying amount in the books of Cheliff as of the date of the sale was P5,850,000. Cheliff’s engineers have estimated that the remaining economic life of the tractor is 15 years. Cheliff is a wholly-owned subsidiary of a US company. It is required to follow US generally accepted accounting principles in its reporting package for consolidation.What is the amount that Cheliff should report as deferred gain from the sale of the tractor at December 31, 2017 in its reportingpackage for use in consolidation with the Head Office accounts?a. 1,950,000 b. 1,820,000 c. 1,787,500 d. 0

31. Nam Company reported the following amounts in the stockholders' equity section of its balance sheet dated December 31, 2012:Preferred stock (P150 par value, 20,000 shares) 3,000,000Common stock (P50 par value, 100,000 shares) 5,000,000Additional paid in capital 6,000,000Retained earnings 4,500,000

On January 1, 2013, Nam sold 20,000 additional shares of common stock for P90 per share. Late in 2013, it was learned that because of mathematical error, an overstatement of depreciation expense by P500,000 had occurred in 2012. Nam reported net income of P4,000,000 for 2013. Nam declared cash dividend of P1,000,000 on preferred stock and P2,000,000 on the common stock during 2013. The income tax rate is 35%. What should be the retained earnings balance on December 31, 2013?

a. 5,825,000 b. 6,000,000 c. 5,175,000 d. 4,425,000

32. Christelle Company has incurred heavy losses since its inception. At the recommendation of chief executive officer, the board of directors voted to implement a quasi-reorganization, subject to approval of stockholder's. Immediately prior to the restatement on December 31, 2013, Christelle Company's stockholders' equity was as follows:

Common stock, P100 par, 500,000 shares 50,000,000Additional paid in capital 5,000,000Retained earnings (deficit) (8,000,000)

The stockholders approved the quasi-reorganization on January 1, 2014 to be accomplished by a reduction in inventory of P2,000,000, a reduction in property, plant and equipment of P4,000,000, write-off of goodwill of P1,000,000 and appropriate adjustment to the capital structure against additional paid in capital first and any remaining deficit against the common stock account. To implement the quasi-reorganization, Christelle should reduce the common stock account in the amount of

a. 10,000,000 b. 15,000,000 c. 20,000,000 d. 3,000,000

33. On September 1, 2017, Howe Company offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump sum and periodic future payments. Additionally, the employees accepting the company offer receive the usual early retirement pension benefits. The offer expired on November 30, 2017. Actual or reasonably estimated amounts on December 31, 2017 relating to the employees accepting the offer are as follows:

Lump sum payments made on January 1, 2018 475,000Present value of periodic payments of P60,000 annually for 3 years which will begin January 1, 2018 155,000Reduction of accrued pension cost on December 31, 2017 for the termination employees 45,000

In its December 31, 2017, Howe should report a total liability for termination benefits ofa. 475,000 b. 585,000 c. 630,000 d. 655,000

34. On March 1, 2013, Ria Company issued 10,000 shares of its P20 par value common stock and 20,000 shares of its P20 par value convertible preferred stock for a total of P800,000. At this date, the common stock was selling for P36 per share, and the convertible preferred stock was selling for P27 per share.What amount of the proceeds should be allocated to the convertible preferred stock?a. 600,000 b. 540,000 c. 480,000 d. 440,000

35. North Company has an employees benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employee can elect to receive payment in lieu of vacation days. However, no payment is given for sick days not taken. At December 31, 2017, North’s unadjusted balance of liability for compensated absences was P210,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 2017. North’s employees earn an average of P1,000 per day.In its December 31, 2017 balance sheet, what amount of liability for compensated absences is North required to report?a. 360,000 b. 225,000 c. 210,000 d. 150,000

36. Pointe Company issued all of its outstanding common shares for P390 in 2013. On January 1, 2014, Pointe acquired 200,000 shares of its stock at P360 per share and retired them. Pointe’s equity accounts as at December 31, 2013 follow:

Retained earnings 75,000,000Additional paid-in capital 162,000,000Common stock, P300 par value, 2,000,000 shares authorized, 1,800,000 shares issued and outstanding 540,000,000

What should be the balance sheet in the additional paid-in capital account immediately after the retirement of the shares?a. 156,000,000 b. 150,000,000 c. 144,000,000 d. 168,000,000

37. On January 1, 2017, Maricar Company agreed to grant its employees ten vested vacation days each year, with the provision that vacation days earned in a particular year could not be taken until the following year. For the year ended December 31, 2017, all 50 Maricar’s employees earned P400 per day each and earned ten vacation days each. These vacation days were taken during the first half of 2018. Wages rates remained the same for 2018.

In the 2017 income statement, how much expense should be reported for compensated absences?

a. 200,000 b. 100,000 c. 50,000 d. 0

38. Cox Corporation was organized on January 1, 2011 at which date it issued 100,000 shares of P10 par common stock at P15 per share. During the period January 1, 2011 through December 31, 2013, Cox reported net income of P450,000 and paid cash dividend of P230,000. On January 10, 2013, Cox purchased 6,000 shares of its common stock at P12 per share. On December 31, 2013, Cox sold 4,000 treasury shares at P8 per share and retired the remaining treasury shares. Cox uses the cost method of accounting for treasury shares.What is Cox’s total stockholders’ equity at December 31, 2013?a. 1,720,000 b. 1,704,000 c. 1,688,000 d. 1,680,000

39. Tacloban Company has a retirement program for its employees for several years. The following information relates to the defined benefit plan on December 31, 2017.

Projected benefit obligation 9,000,000Accumulated benefit obligation 8,250,000Fair value of plan assets 7,000,000Accrued pension cost 250,000Unrecognized past service cost 800,000

In prior years, no additional liability was required. What is the additional minimum pension liability, if any, for 2017?

a. 1,250,000 b. 1,000,000 c. 2,000,000 d. 1,750,000

40. Negros Company was incorporated on January 1, 2013, with the following authorized capitalization: 200,000 shares of common stock, no par, stated value P100 per share 200,000 shares of 10% cumulative preferred stock, par value P50 per share. During 2013 Negros issued 150,000 shares of common stock for total of P18,000,000 and 50,000 shares of preferred stock at P60 per share. In addition, on December 15, 2013, subscriptions for 20,000 shares of preferred stock were taken at a purchase price of P100. These subscribed shares were paid for on January 15, 2014. Net income for 2013 was P5,000,000. What should Negros report as total contributed capital on its December 31, 2013 balance sheet?

a. 28,000,000 b. 21,000,000 c. 23,000,000 d. 26,000,000

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