CPA REVIEW SCHOOL OF THE PHILIPPINES Manila Sunday, February 16, 2020 First Preboard Examination 12:00 p.m. to 3:00 p.m. SETA MULTIPLE CHOICE: MARK FULLY with Pencil No. 2 the letter of your choice on the answer sheet provided. Make the mark DARK but do not use too much pressure. ERASURES ARE STRICTLY NOT ALLOWED. Problems 1 and 2 Situation 1 An entity has two divisions, Cars and Clothing. Both qualify as business components. In 2020, the entity decided to dispose of the assets and liabilities of division Clothing and it is probable that the disposal will be completed early 2021. The revenue and expenses of the entity for 2020 and 2019 are as follows: 2020 2019 Sales-Cars 5,000,000 4,600,000 Total nontax expenses-Cars 4,400,000 4,100,000 Sales-Clothing 3,500,000 5,100,000 Total nontax expenses-Clothing 3,900,000 4,500,000 During the later part of 2020, the entity disposed of a portion of division Clothing and recognized a pretax loss of P2,000,000 on the disposal. The income tax rate is 30%. Situation 2 The entity reported the following items on December 31, 2020: Bank A — demand deposit 270,000 Undeposited customer checks 104,000 Currency and coins on hand 11,600 Savings deposit ~ for plant expansion 8,000,000 Bank B—demand deposit 400,000 ‘Treasury bills — 7 months maturity 600,000 ‘Treasury bills ~- 2 months maturity 300,000 Marketable equity securities ~ns yey de 500,000 The demand deposit in Bank B represents a 20% compensating balance for a P2,000,000 loan with the bank. The entity may not withdraw the balance until the loan is repaid in 2024. 1. What amount of loss from discontinued operation should the entity report in 2020? a. 1,800,000 a1 OM b. 1,260,000 be gn e. ( 4. 2,400,000 (stay 4 nam 2, What amount of cash and cash equivalents should the entity report on December 31, 2020? a. 1,285,600 nk A-Denandlepet —1204en b. 1,685,600 i “14am ° 4 185,600,Problems 3, 4,5 and 6 = Situation 1 On January 1, 2020, Aye Company acquired machinery worth P8,000,000 with a 10- year ‘usefill life and no residual value. The entity elected to use the cost model. On December 31, 2021, the entity decided to sell the asset and classified it as held for sale. The fair value less cost of disposal on such date is P5,100,000. On December 31, 2022, the entity decided to classify the asset back into property, plant and equipment since there were no buyers for the asset. On this date, the fair value less cost of disposal is P4,700,000 and the value in use is P5,500,000. Situation 2 The following information for the current year is provided by Bee Company: Sales 6,000,000 Cost of goods sold 4,500,000 Unrealized gain on equity investment at FVOCI (pretax) oc 450,000 Remeasurment loss on benefit plans (pretax) 0 600,000 Distribution cost 200,000 Administrative cost 250,000 Impairment loss on debt investment at amortized cost 300,000 Pretax gain on disposal of a major business division jor otdian*rved cpactin 400,000 Income tax rate 30% Situation 3 Zee Company recorded the following data at the end of the current year: Accounts receivable 8,000,000 Credit sales 20,000,000 Doubtful accounts expense (2% of credit sales) 400,000 The allowance for doubtful accounts on January 1 has a balance of P150,000. The entity elected to estimate its doubtful accounts by using percent of accounts receivable method. The entity estimated that 10% would be a good estimate. gm, x10). = en. Heydatowance 3. What amount of impairment loss on the machine should Aye Company recognize in 2021? 1,600,000 Cot” team b Alo —_(1teeherv) ©. 800,000 a eam a 0 weap CINE), ; + ham 4, What amount of gain or loss on reclassification to PPE should Aye Company recognize in 2022? a. 400,000 gain. sina b. 400,000 loss nm ¢. 500,000 gain ino Goin a 0 Ren 5. What amount of net income should Bee Company report for the #9port forthe current year? a. 280,000 ne 4.000) b. [san c. 700,000 ‘aan tin t om ¢ Are x FF.Problems 7, 8,9 and 10 Situation 1 On January 1, 2020, X Company purchased machinery for P4,000,000 with a 10-year useful life and mo residual value. On March 20, 2020, the entity incurred minor repairs and maintenance cost to this equipment for P300,000. eae The entity also used the percentage of sales method in estimating doubtful accounts. Doubtful accounts are estimated to be 5% of sales in each quarter. In 2020, the entity followed this procedure for the first three quarters. However, in the fourth quarter, the entity determined that doubtful account expense for the year should be P600,000. Following the calendar year, sales per quarter are first quarter — P1,500,000, second quarter — 1,000,000, third quarter — P2,000,000, fourth quarter — P1,600,000. Situation 2 Y Company sold accounts receivable with recourse with a face amount of P6,000,000. ‘The factor charged a service fee of 10% of the accounts factored and withheld 4% of the accounts factored as protection against customer returns and other adjustments. The fair value of the recourse obligation is determined to be P250,000. The accounts were fully collected by the factor during the year. Situation 3 Z Company provided the following data connected to its inventory transactions: Date and transaction Units Unit cost January 1 balance 40,000 P20 February 10 sale (30,000) April 12 purchase 60,000 P25 September 20 sale (59,000) November 28 purchase 40,000 _ P30 e500 vai ‘The entity used the weighted average method. At December 31, the entity determined that the NRV per unit is P23. 7. What total amount of expenses should X Company recognize in the fourth quarter? a. 180,000 Deprediatin (4m ioyy = 4) —PloDsend b. 775,000 ©. d. 482,500 8. What total amount of loss on factoring should Y Company recognize in the current year? a. 840,000 Yraterpaees -cenrafee Las dag 240,000 sm.mx of (auen ae ©. 850,000 Mme yes Bo 9089. a. Ro tot 600,000 7 yt ‘9. What is the cost of inventory of Z Company on December 31? a. 1,173,000 tf aN 8 820 = SOM ». Ears m0 sje tom x M5 in c. 1,475, goa 990 * 120) 1,466,890 a Tom stim 10, What amount of cost of goods sold should Z-Company report forthe current year? - ae wr. whhZl Ne Won = 125 XSW ume = PUTS AADPage 4 Problems 11, 12, 13 and 14 Situation I An entity used the average cost retail method to estimate its inventory. Data relating to the inventory on December 31, 2020 are: Cost Retail Inventory, January 1 1,000,000 1,500,000 Purchases 5,300,000 7,000,000 Net markup 800,000 Net markdown (300,000) Sales 6,000,000 } Estimated normal shoplifting losses 200,000 |“ Estimated normal shrinkage is 5% of sales nn Situation 2 On November 1, 2020, another entity entered into a noncancelable commitment to purchase 100,000 barrels of aviation fuel for PSO per barrel on March 31, 2021. The entity entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2020, the purchase price of aviation fuel had fallen to P43 per barrel. However, by March 31, 2021, when the entity took delivery of the 100,000 barrels the price of aviation fuel had risen to P55 per barrel. Situation 3 On January 1, another entity has 3-year old cows measured at fair value less cost of disposal of P2,500,000. On September 1, additional cows aged at 3 years old and 8 months were purchased for P500,000. On October 1, there were newborn cows valued at P200,000. There were no disposals nor death of cows during the year. Below are the following total fair value less cost of disposal: 3-year old on January 1 2,500,000 4-year old on December 31 5,500,000 3-year old on December 31 3,000,000 New born on October 1 200,000 3-year and 8-month old on September 1 500,000 New born on December 31 300,000 3-year and 8-month old on December 31 700,000 3-month old on December 31 450,000 11. What is the estimated cost ote using the average retail? a. 11,750,000 7 ugg wean isa b. 1,692,500 fae, 59mm an ¢. 1,475,000 Wegmans im d. 1,960,000 Tam eam — + TT. (ostian) 12. What emount of gain on purchase commimekt ald be coon 30017 a. 1,200,000 b. 700,000) ©. 500,000 90-t = PX Iman =70, a. 0 Soy 13. What amount is debited to purchases on March 31, 2021? 6, Santen DX 100,000 = $9.00 610 b. c. 4,300,000 d. 5,250,000 14, What is the gain from price change ie inet 1,000 hye Old as -70N) ~ MD) o Soo00 aunsinad C0) > tan c. 600, Nevo Can- 7) * _ LOAN 3 pots Gimp, 3h 15. What is the gain from = £210) feng fiscal dyeProblems 16, 17, 18 and 19 Situation 1 An entity included the following investments at cost and fair value: Cost Fair value — 12/31/20 Fair value ~ 12/31/21 Bond investment 4,000,000 2,800,000 3,600,000 Share investment 7,000,000 _ 7,400,000 _ 8,000,000 _ ; (oro, OW (o,201.000 TWA ‘The business model for the bond investment is to collect ceantrmetual cash flows composed of principal and interest, and sell the asset. The bonds were purchased at face amount of P4,000,000._ The ordinary shares are nontrading and the entity elected to present fair value changes in other comprehensive income. On January 1, 2022, the entity sold the bonds and shares for. P5,000,000 and 9,000,000 respectively. Situation 2 Another entity requires 100,000 pounds of copper. To eliminate the price risk associated with copper purchases, on October 1, 2020, the entity entered into a futures contract as a cash flow hedge to buy 100,000 pounds of copper on April 1, 2021. The futures price is P60 per pound. ‘The futures contract is managed through an exchange, so the entity does not know the other party on the other side of the contract. ‘As with most derivative contracts, this futures contract is settled by an exchange of cash on April 1, 2021 based on the price of copper on that date. The market price of copper per pound is P57 on December 31, 2020 and P65 on April 1, 2021. 16. What net amount in other comprehensive income is recognized in the statement of changes in equity on December 31, 2021? F leo, a b ’ : c. 1,400,000 Lom ween, 4. 1,000,000 17. What total amount is recognized in profit ors due to disposal of investments in 2022? a. 3,000,000 dct FP a cameo b. 2,000,000 A & sn : .000,¢ a _umany D ©. canine Ot, TL eH an, hema? 1 igre 4. 1,400,000 antares (4a) EE May i ce) QP BE ncheffect in pj ff ord dadaan 00 Phe 18, What is the derivative asset or liability on December 31, 2020? ao a. 800,000 asset b. 300,000 asset 10-59 = 9 KIM Ms = YAM) Nay «. [300,000 liability a. 0 19, What will happen when the futures contract is settled on April 1, 2021? a.Problems 20,21, 22 and 23 jation 1 On January 1, 2020, an entity purchased 9% bonds in the face amount of P3,000,000 for 2,776,000 to yield 11%. The bonds mature on January 1, 2025. The entity classified the bonds as held for trading and interest is payable annually every December 31, The fair value of the bonds and effective rate were: Fair value Effective rate December 31, 2020 2,758,000 12% December 31, 2021 3,078,000 8% On December 31, 2021, the entity changed its business model for this investment to collecting contractual cash flows composed of principal and interest. On January 1, 2022, the fair value of the bonds was the same as of December 31, 2021. smined ost Situation 2 On December 31, 2020, a financing entity had a P5,000,000 loan receivable from a borrower. The loan bears a 10% interest rate and the financing entity accru this date. Due to financial setbacks of the borrower, the entity decided to reduce the principal by 20%, forgive the accrued interest and the new principal will be paid on December 31, 2022 with no interest. PVot A ge 2 prc = 0.99 20. What net amount in profit or loss is recognized for the bonds in 2020? a. 18,000 Game X41. = PDT net come ‘reaasriieason b. 287,360 darene inf Kan) = hen cot c. 270,000 Ponds ——— "ie gies 0 A - 252,000” le #2510 ana Savor tosh —# PPL > Ridecel © reine dat 4 etu (h-FU = frie amend cat Puce 21. What is the interest income on the bond investment for the year 2022? 2D 90T$;M X87.» 7240.00 [Ne recat det b ee * Ch ~ We pedaafaten = 9 Oc ce. 313,567 «Original effechue vate ~#04 ads d. 338,275 Nea ramet aa fa 4 chew Gj. enous racgnc 22. What is the carrying amount of the bond investment on December 31, 2022? | ‘iocp as elomond Sadun apis Yee FUE reac Ae, Fe ‘Fagin eRedke re tf ade b. 3,078,000 eta 407g x [08 210M) ~FHosU:INO Sea d. 2,887,235 € Pe cedamificatin - Mt Ch New efeave ote, 23. What is the impairment loss on the loan on December 31, 2020? (nou. it. 2,180,000 ch (5m} ne) +s *en b. 1,500,000 Gmsenf)x 0% z0.m aad «. 1,000,000 Ina ti *e Ble & 1,000.00 yam y edict, Imesnen at ae Shae eee ape 7 Lm]. <0.“ Dot-Mf. Into! Memwenent “A War ae ‘it mtiney — Api i eli Be i Pree: ch w a. 800,000 833,333 Oh AN one AD Cerin) (258 at) Cale “F2m,h SiARam “Tee Ab}. ~ !moanw & smn = 4 HM = $Me > PRC. OH_peyn 2 32. What is the revaluation surplus on December 31, ona oe aE 8 d. 1,875,000 crore 2, # oy b 1,350,000 oF 4m SOE ie + 4yy c. 2,025,000 Ad (inal), (125900) IMO anew 5 d._ 1,417,500 Coles 24M an ISM “fom time —acanel bby tammy PHS ON X71. OR ¢inqn0 ae 5 4s 75 a_ficencal wanaten 7 ReProblems 33, 34, 35, 36 and 37 Situation 1 On January 1, 2020, an entity purchased equipment at a cost of P12,000,000 that has an 8-year useful life, The entity used the SYD method of depreciation. On the same date, the entity received a government grant of P3,600,000 towards the purchase of the equipment. g (£41 ) 7% \ ‘The entity used the deferred income approach in accounting for the grant. On January 1, 2022, the entity violated some conditions attached to the grant and therefore returned the entire subsidy. Situation 2 The entity incurred the following costs in 2020 related to a new cancer drug: Research for new formula alias open 3,000,000 Development of a new formula 1,500,000 aipiained Legal and filing fees for a patent for the new formula 800,000:aptalveA ‘The development costs were incurred after technological and commercial feasibility was established and after future economic benefits were deemed probable. The project was successfully completed and the new drug was patented before the end of 2020. Situation 3 In December 2020, an NGO filed suit against an entity secking penalty for violation of clean air laws. The entity’s counsel advised that it is probable that the entity will lose the case and that the amount of penalty is estimated at P4,000,000. Appropriately, the entity recorded the liability. one oa Aen epee he (On January 20,2021, The entity reached a settlement to pay P2,500,000 in penalty. The 2020 financial statements were issued on March 1, 2021. afer Bf date Iefrre yrwance — adjacting vent What amount of income from grant is recognized for the year 2021? a, 800,000 » | 700,000 | Hr fhenan > 10 c. 450,000 4 0 34. What is the loss on repayment of the grant on January 1, 2022? a. 3,600,000 1 (Sho xrtudan) 790,00 b._ 2,100,000 w.2 Ch x Hun) TH, 1,500,000 © licens #150. °, d. 2,700,000 35, What is the depreciation of the equipment for the year 2022? a log X FMM ~ 1000 b. 1,500,000 ‘fe X ¥aAO - 1 20,0 _ Yep ©. 3,500,000 d. 4,100,000 36. What total amount should be capitalized as an intangible asset’? a. 5,300,000 Day cont + bon >. /2300.0009 sa rf apt 6 c. 1,500,000 ‘Hal CF Of He oagiok aver P 24ND 800,000 —— 37, What amount of provision for penalty should be reported on December 31, 2020?Problems 38, 39, 40, 41 and 42 Situation 1 On January 1, 2020, Entity CC purchased Jand containing a mineral mine for P24,000,000. Additional costs of P9,000,000 were incurred to develop the mine. Geologists estimated that 5,000,000 tons of ore would be extracted and after the ore is removed, the land will have a resale value of P1,500,000, The entity estimated that all the ore can be removed in 8 years. rooanined san ach The entity also built small storage building on the site at a cost of P2,250,000. The building will have a useful life of 10 years and cannot be moved afier the ore has been extracted. Therefore, the building will be left on site. eegate Also, the entity purchased equipment costing P!,200,000. The entity does not plan to move the equipment to another site after the mining project is completed. revised from 5,000,000 to 5,230,000. During 2021, $00,000 tons were extracted of which’75% were i =e iy In 2020, 400,000 tons were extracted_and sold. In 2021, the total estimated tons in sh eee sold. Situation 2 Entity AA engaged your services to compute the goodwill in the purchase of Entity BB which provided the following: Net income Net assets 2018 2,000,000 7,800,000 2019 2,500,000 8,700,000 2020 3,900.000_ 9,000,000. i go1,e70 a5em) Goodwill is measured by capitalizing average excess earnings at 25% with normal rétumn on average net assets at 20%, 38. What is the depletion for the year 2020? ON a. 4,125,000 a ee b. 3,937,500 bt a) relia tector ©. 2,640,000 ee rt : Deptt aot FN, OR == FeAMLAT fons = $3 X Aonen nt = 1252 39, What is the depreciation for the year 20202 2. §§276.0009 eo ee an b. 321,000 gupment [eae . 1,380,000 Toa“ Son . 3,450,000 eee 0-004 x 400, tm = 40. What is the depletion that is part of cost of goods sold in 2021? 4,800,000 ele ck FETE > 6000007 en sam) e. 3,324,000 Remaaning OA 28,490, ) 4. 4,432,000 annem) (senban- dev 26 x (ADAM toms seid = Pile. OrD 41, What is the goodwill from the purchase of Entity BB? a, 3,300,000 unm: > t2a1mn b. 8,400,000 @sem.m+4)x 20), ~_l0.A0 in, +e; aw P 440,00 42. What is the purchase price of Entity BB? cr d. 4,000,000Problems 43, 44, 45, 46 and 47 Situation 1 An entity includes one coupon in each package of cereal it sells. A towel is offered as a Premium to customers who send in 10 coupons. Data for the premium offer are: 2020 2021 Packages of cereal sold 500,000 800,000 Number of towels purchased at P40 per towel. 30,000 60,000 Number of towels distributed as premium, 20,000 50,000 Number of towels to be distributed as premium next period 5,000 3,000 Situation 2 On January 1, 2020, the entity acquired machinery with a cost of P6,000,000, useful life of 10 years and no residual value. Impairment indicators exist at the end of 2021 and 2022. The entity tested the machine for impairment. On December 31, 2021 and 2022, the recoverable amounts of the machine are P4,300,000 and 4,500,000 respectively, Situation 3 The entity issued 5,000 convertible bonds on January 1, 2020. The bonds have & three-year term and are issued at 110 with a face amount of P1,000 per bond. Interest is payable annually at a nominal 6% interest rate. Each bond is convertible at anytime up to maturity into 100 shares with par value of PS. When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. The present value of | 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. On December 31, 2020, all bonds were converted into ordinary shares. 43. What amount of premium expense should be recognized for the year 2021? 1,920,000 o.cFfowesdfinuied , 202 Dm b 2,120,000 No.of four vedic AD} ©. 2000.00 4 plemi ext ped = Zoe A Oe Aion & $40 $1400.00 44, What amount of gain on reversal of impairment should be recognized in 2022? i a. 500,000 ote bal in) ee oa ! Gan, ch wl impiwen Gu b. 737,500 I cs H (pant 2 cows ¢ MISO mI) iy, IR Sn et a 0 mm) Ml * i oes ca Aatagy ment 4m, 45. What is the equity component on the issue of the convertible bonds payable? a. 391,000 sm x07) = %85D b. (891,000 MOY X 253 = 194060 ©. 1,150,000 tia loo d. 1,650,000 Uatetity componet( $900.00") Pea 46. What is the carrying amount of the convertible bonds payable on December 31, 20202 a b. 5,000,000 c. 4,494,190 460% Y 104 400,0n) = $4:123,910_ oA, iff am0 ee d, 4,885,190 41. What amount of share premium should be peice asa result of the conversion?Page 12 Problems 48, 49 and 50 Situation 1 On January 1, 2020, an entity leased equipment with the following information: Annual rental payable every December 31 3,000,000 Purchas option that is certain to be exercised 800,000, Payment to lessor to obtain a long-term lease 400,000 Restoration cost required by contract at present value 790,000 Annual executory cost paid by the entity 100,000 The lease term i known by the entity, is 10% while the discount rate applicable to the reste -ars while the equipments useful life is 8 years. The implicit rate in the lease, ion cost is 6%. The PV of an ordinary annuity of | at 10% for 4 periods are 3.17 and 0.68 respectively, while the PV of 1 at 6% for 4 periods is 0.79. 48, What is the initial lease liability? Anwicl verted (mx 4.11) #951000 Reacondlely certain P.O (ax 0.48) B40 y Temminahn venehts ©. 10,371,000 a = aL D200, 000) {nha lease batty # 10.05% 49. What is the cost of the right of use asset? 1,244,000 + fata exe atity + 1,054.00 BaD Lee venus ~ ee wees 40,00 Y Inna lect tost oa aduahics Right oF Ue asset Fi 24 50. What is the total interest expense for the year 2020? sy a. 1,037,100 {O0KMM X10}. - ov5,4o0 b. 1,005,400 140.m X67. = 4h4o ©. 4. 1,030,000 ‘a nieest Eypae 51. Which one of the following enhances the relevance of accounting information? a. Monetary unit b. cc. Neutrality 4. Predictive 52. Results of discontinued operation shall include the following, except a. Revenues and expenses from operations b. Any impairment loss © Geeta d._ Loss from disposal of assets - 53. In the case of grant related to an asset, which is the accounting treatment? Record the grant at a nominal value in the first year and write it off in the sut lof eth fre cor ein aig yi ano mn Record the eran and take it to income in the subsequent year. jit to the income statement and disclose it as an extraordinary gain. ple value and all losses of inventory shall be od the writedown or loss occurs. the writedown or loss oceurs.Page (3 55. PAS 36 on “impairment of assets” applies to which of the following? a. Inventories b. Financial assets ©. Assets held for sale d. Intangible assets. Which of the following will not appear in the postelosing trial balance? «. Gains from change in fair value of financial assets held for trading b. Deferred revenue ¢. Accounts receivable d. Accumulated depreciation 56. eee 57. Current value measurement includes the following, except a. Fair value b. Value in use c. Current cost a 3 58. Under the Revised Conceptual Framework, which of the following is not a characteristic ofa liability? a. There must be a present obligation. b. ‘The present obli ast event, 4. The settlement will require a transfer of economic resource. 59. Which of the following is subject to impairment? a, Equity investment held for trading b. c. Debt investment held for trading 4. Financial liability at amortized cost 60. Under the equity method, the following will affect the investor's profit or loss, except a, Qeotiaiaanie aS b, Amortization of excess cost pertaining to inventory c. Excess fair value on the purchase d. Share in the associate’s net income 61. How is impairment loss treated if it relates to a cash generating unit? It is allocated to the assets based on carrying amount. oe of pny Iris f G@rnduut It is not recognized since it violates prudence. B. Ofer assets ao 62. The following are capitalized costs of a building. except a. Architect fee & Renovation costs prior to use Lard acs Ke Demolition cost of an existing building t9 construct a new building 63, The following are considered investment property, except. aePage 14 64. Which of the following would decrease the cost ratio under the retail inventory method? a. b, Lower net markups ©. More employee discounts d. Higher freight in costs 6: . Which of the following is not a related party? Key management personnel Individual’s domestic partner and children A venturer who has joint control over a joint venture pose 66. Which of the following is incorrect concerning liabilities and provisions? «(A provision should be ecogized for cots tobe incured nthe fate sng .. Itis not necessary to know the identity of the party to whom the obligation is owed. b. c. A provision is a liability of uncertain amount or timing. 4. A provision is recognized when an entity accepts responsibility for damage. 6 al Which of the following intangible assets does not have the characteristic of exchangeability? a. Patent b. Copyright c. d. Franchise 68. Once recognized, intangible assets can be carried at a. Cost less accumulated amortization b c. Revalued amount less accumulated amortization d. Cost plus a notional increase in fair value since the intangible asset is acquired 69. The following are included in the cost of the right of use asset, except a. Present value of lease payments Right of ave Asset > b. Lease bonus less any lease incentives Inga Lease Way * Ge Lease Bonus - Leme inceniues ee d. Present value of restoration cost required by lease contract lela dock "i x Regyation (Pv) eae 70. The following are included in computing the present value of lease payments, except. a. Fixed lease payments b. Termination penalties if lease term reflects exercise of termination option - oe d. Any resi itee ae -END -