AIR DIAGNOSTIC EXAM

Cluster 1- Level 2 & 3

03.30.15

Write the letter of your choice before each number. No erasures allowed.

1. Inflation is ignored in accounting due to

a. objectivity c. materiality
b. periodicity assumption d. economic entity

2. Which of the following is included in the normal journal entry to record the collection of
accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts

3. Generally, biological assets should be measured using

a. historical cost
b. historical cost less accumulated depreciation
c. a fair value approach
d. net realizable value

4. Under the fair value option, an entity may

a. irrevocably designate a financial asset as measured at fair value through profit or loss even if the

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amortized cost measurement is satisfied
b. irrevocably designate a financial asset as measured at fair value through other comprehensive
income
c. revocably designate a financial asset as measured at fair value through profit or loss even if the
amortized cost measurement is satisfied
d. designate all instruments as measured at fair value through profit or loss

5. Which of the following disclosures must be made when the fair value model is used for
investment property?
a. depreciation method
b. the amount of impairment loss recognized
c. useful life or depreciation rate
d. net gains or losses from fair value adjustments

6. A government grant that becomes repayable shall be accounted for as

a. change in accounting estimate
b. change in accounting policy
c. both change in accounting estimate and change in accounting policy
d. neither change in accounting estimate nor change in accounting policy

7. Which of the following research and development related costs should be capitalized and
depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the
future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently
in process

8. If bonds are issued initially at a premium and the effective-interest method of amortization is
used, interest expense in the earlier years will be
a. greater than if the straight-line method were used
b. greater than the amount of the interest payments
c. the same as if the straight-line method were used
d. less than if the straight-line method were used

9. Which of the following best describes the cash-basis method of accounting for warranty costs?

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

a. Expensed based on estimate in year of sale

b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred

10. An entity has public accountability under all of the following, except: (REVIEW SME)
a. its debt and equity instruments are traded in a public market
b. it is in the process of issuing debt and equity instruments for trading in a public market
c. it holds assets in fiduciary capacity for a broad group of outsiders for reasons incidental to a
primary business
d. it holds assets in fiduciary capacity for as one of its primary businesses

11. Esther Co. provided the following information about the composition of its cash on Dec 31 2014:
 Commercial savings account of P600,000 and a commercial checking account balance of
P900,000 are held at BPI
 Money market fund account held by Citibank that permits Esther to write checks in this balance,
P5,000,000
 Travel advances of P180,000 for executive travel for the first quarter of next year (employee to
pay through salary deduction)
 A separate cash fund in the amount of P1,500,000 is restricted for the retirement of long term
assets

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 Petty cash fund, P10,000
 Undeposited coins and currency, P35,000
 Company checks written (and deducted from the demand deposits amount) but not scheduled
to be mailed until Jan 2 next year, P270,000
 Time deposit, P3,000,000
What is the correct cash Esther Co should report in its December 31 2014 statement of financial
position?
a. 9,995,000 b. 6,815,000 c. 1,815,000 d. 9,815,000

12. Hope Company’s inventory at December 31, 2011 was P7,500,000 based on physical count
priced at cost and before any necessary adjustment for the following:
 Merchandise costing P550,000, shipped “Free Alongside” from a vendor on December 30, 2011,
was received and recorded on January 10, 2012.
 Goods in the shipping area are excluded from inventory although shipment was not made until
January 4, 2012. The goods, billed to the customer “Ex-ship” on December 30, 2011, had a cost
of P600,000.
 Included in the physical count were goods specifically segregated per sale contract with a sale
price of P1,800,000. The goods were sold at a gross profit rate of 25% on sales.
 Goods purchased from a vendor, FOB buyer, were shipped on December 30, 2011. The goods
were received by the customer on January 3, 2012. The goods had a cost of P240,000.

What amount should Hope report as inventory on December 31, 2011?

a.7,300,000 b. 8,650,000 c. 6,940,000 d. 6,700,000

13. Jamie Company started construction on a building at the beginning of the current year and
completed construction at year end. The entity had only two interest notes outstanding during
the year and both of these notes were outstandin during the year and both of these notes were
outstanding for all 12 months of the year. The following information is available:
Average accumulated expenditures P2,500,000
Ending balance in construction in progress before capitalization of
Interest 3,600,000
6% note incurred specifically for the project 1,500,000
9% long term note 5,000,000

What is the cost of the building?

a. 3,780,000 b. 2,680,000 c. 3,750,000 d. 3,825,000

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

14. The following expenditures related to the construction of a new home office for Facetious
Company:
Cost of land, which included an old apartment
building appraised at P200,000 2,000,000
Legal fees, including fee for title search 10,000
Payment of apartment building mortgage and related
interest due at time of sale 50,000
Payment of delinquent property taxes assumed 20,000
Cost of razing the apartment building 30,000
Proceeds from sales of salvaged materials 5,000
Grading and drainage on land site 15,000
Architect fee on new building 200,000
Payment of building contractor 8,000,000
Interest cost on specific borrowing during construction 300,000
Payment on medical bills of employees accidentally
injured while inspecting building construction 10,000
Cost of paving the driveway and parking lot 40,000
Cost of trees, shrubs and other landscaping 55,000
Cost of installing lights in parking lot 5,000
Premium for insurance of building during construction 25,000

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Cost of open house party to celebrate the opening of building 60,000
What is the cost of the building?
a. 8,625,000 b. 8,525,000 c. 8,540,000 d. 8,530,000

15. Radical Company acquired a mineral right for P30,000,000 in January 2012. The mine has a
recoverable ore estimated at 4,000,000 tons. After it has extracted all the ore, the entity will be
required by law to restore the land to its original condition at a discounted amount of
P2,000,000. The entity believed that the property can be sold afterwards for P5,000,000.

Early in 2012, roads were constructed and other development costs were incurred to aid in the
extraction and transportation of the mined ore at a cost of P6,000,000. In 2012, 200,000 tons of ore
were mined and sold. On December 31, 2013 a new survey made by new mining engineer indicated
that 5,000,000 tons of ore were available for mining. In 2013, 225,000 tons of ore were extracted
and sold. What amount of depletion expense should be recognized for 2013?
a. 1,650,000 b. 1,350,000 c. 1,856,250 d. 1,410,000

16. Seaside Company applied revaluation accounting to plant asset with carrying amount of
P4,000,000 on Jan 1 2013, useful life of 4 years, and no residual value. Depreciation is calculated
on the straight line basis. On Dec 31 2013, independent appraisers determined that the asset
has a fair value of P3,750,000

What is the journal entry to record depreciation for 2014?

a. Debit accumulated depreciation P1,000,000
b. Debit depreciation P1,250,000
c. Credit accumulated depreciation P750,000
d. Debit depreciation P1,000,000

17. Zenith Company purchased four convenience store buildings on January 1, 2007 for a total of
P25,000,000. The buildings have been depreciated using the straight line method with a 20-year
useful life and 10% residual value. On January 1, 2013, the entity has converted the buildings
into a hotel and restaurant. The entity estimated that the buildings have a remaining useful life
of 12 years, that their residual value will be zero, that net cash inflows from the buildings will
total P1,600,000 per year, and that the fair value less cost of disposal of the four buildings totals
P10,000,000. The appropriate discount rate is 12%. The present value of an ordinary annuity of
1 at 12% for 10 periods is 5.65.

What is the amount of impairment loss?

a. 3,375,000 b. 10,900,000 c. 10,335,000 d. 9,375,000

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

18. Dinkie Company incurred P1,600,000 of research and development costs to develop a product
for which a patent was granted on January 1, 2013. Legal fees and other costs associated with
registration of the patent totaled P300,000. On March 31, 2013, Dinkie paid P450,000 for legal
fees in a successful defense of the patent.
What is the total amount that should be capitalized for the patent through March 31, 2013?
a. 750,000 b. 300,000 c. 2,050,000 d. 2,350,000

19. Maribeth Company incurred research and development costs in the current year as follows:
Equipment acquired for use in various research and development projects 975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
What is research and development expense the current year?
a. 850,000 b. 1,085,000 c. 1,235,000 d. 1,825,000

20. Maria Company had P600,000 convertible 8% bonds payable outstanding on June 30,2013. Each
P1,000 bonds was convertible into 10 ordinary shares of P50 par value. On July 1,2013, the
interest was paid to bondholders, and the bonds were converted into ordinary shares, which had

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fair value of P75 per share. The unamortized premium on these bonds was P12,000 at the date
conversion. No equity component was recognized when the bonds were originally issued. As a
result of bond conversion, what is the increase in share premium?
a. 312,000 b. 306,000 c. 162,000 d. 12,000
21. On Jan 1, 2013 Solemn Company sold land to Glory Company. There was no established market
price for the land. Glory gave Solemn a P2,400,000 noninterest bearing note payable in three
equal annual installments of P800,000 with the first payment due Dec 31, 2013. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a
P2,400,000 note payable in three equal annual installments of P800,000 at a 10% rate of interest
is P1,989,600. What is the carrying amount of the note payable on December 31, 2013?
a. 1,989,600 b. 2,126,400 c. 2,400,000 d. 1,388,560

22. Bibi Company, lessor, leased an equipment under an operating lease. The lease term is 5 years
and the lease payments are made in advance in January 1 of each year as shown in the following
schedule:
January 1, 2013 1,000,000
January 1, 2014 1,000,000
January 1, 2015 1,400,000
January 1, 2016 1,700,000
January 1, 2017 1,900,000
On December 31,2014, what amount should be recognized as rent receivable?
a. 1,400,000 c. 400,000
b. 800,000 d. 0
23. On Jan 1, 2013, Day Company leased a new machine from Parr with the following pertinent
information:
Lease term 6 years
Annual rental payable at the end of each year 500,000
Useful life of machine 8 years
Implicit interest rate in lease 12%
Present value of an ordinary annuity of 1 for 6 periods at 12% 4.11
Present value of an annuity of 1 in advance for 6 periods at 12% 4.60
The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The
cost of the machine on Parr’s accounting records is P3,755,000. Costs directly attributable in
lease agreement were incurred for P 50,000. At the beginning of the lease term, what amount
should be recorded as cost of the machine?
a. 2,055,000 b. 2,105,000 c. 3,755,000 d. 2,800,000

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

24. Samuel Company is a dealer in equipment. On Jan 1, 2014, an equipment was leased to another
entity with the following provisions:
Annual rental payable at end of each year 1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Guaranteed residual value 500,000
Implicit interest rate 12%
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term on Dec 31, 2018, the equipment will revert to the lessor. On
such date, the fair value of the asset is P350,000. The perpetual inventory system is used. The
lessor incurred initial direct cost of P200,000 in finalizing the lease agreement.
What is the interest income to be recognized for 2014?
a. 960,000 b. 900,000 c. 648,000 d. 682,200

25. Raymart Company is in the business of leasing new sophisticated equipment. The lessor expects
a 12% return on its net investment. All leases are classified as direct financing lease. At the end
of the lease term, the equipment will revert to the lessor. On Jan 1, 2014 an equipment is leased
to a lessee with the following information
Cost of equipment to the lessor 5,000,000

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Residual value – unguaranteed 600,000
Annual rental payable in advance 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years
Implicit interest rate 12%
First lease payment Jan 1, 2014
What is the unearned interest income on Jan 1, 2014?
a. 2,550,000 c. 1,950,000 c. 3,150,000 d. 1,500,000

26. Aloha Company provided the following information on December 31, 2013:
Carrying amount Tax
base
Accounts receivable 1,500,000
1,750,000
Motor vehicle 1,650,000
1,250,000
Provision for warranty 120,000 0
Deposit received in advance 150,000 0

The depreciation rates for accounting and taxation are 15% and 25% respectively. The deposits
are taxable when received and warranty costs are deductible when paid. An allowance for
doubtful debts of P250,000 has been raised against accounts receivable for accounting purposes
but such debts are deductible only when written off as uncollectible. The tax rate is 30%. What
amount should be reported as deferred tax liability on December 31, 2013?
a. 120,000 b. 156,000 c. 81,000 d. 36,000

27. On January 1, 2014, Zea Company provided the following information in connection with the
defined benefit plan:
Fair value on plan assets 10M
Projected benefit obligation (13M)
Prepaid/Accrued Benefit Cost (3M)
Transactions affecting the plan for the current year are as follows:

Current service cost 2.5M

Past service cost-remaining vesting period of covered employees is 5 years 1M
Contribution to the plan 3.5M
Benefits paid to retirees 3M

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

Actual return on plan assets 1.5M

Decrease in projected benefit obligation due to change in actuarial assumptions
400,000
Discount rate 10%
Expected return on plan assets 12%

What amount should be reported on December 31, 2014 as accrued or prepaid benefit cost?
a. 3,300,000 accrued b. 3,300,000 prepaid c. 2,400,000 accrued d. 2,400,00 prepaid

28. At December 31, 2010, Eagle Corp. reported P1,750,000 of appropriated retained earnings for
the construction of new office building, which was completed in 2011 at a total cost of
P1,500,000. In 2011, Eagle appropriated P1,200,000 of retained earnings for the construction of
a new plant. Also, P2,000,000 of cash was restricted for the retirement of bonds due in 2012. In
its 2011 balance sheet, Eagle should report what amount of appropriated retained earnings?
a.P1,200,000 b. P1,450,000 c. P2,950,000 d. P3,200,000

29. Tan Company reported the following current assets on December 31, 2014:
Cash 500,000
Accounts receivable 3,500,000
Inventory 2,000,000
Prepaid expenses 100,000
Deferred tax asset 400,000

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Noncurrent asset classified as "held for sale" 3,000,000
Total current assets 6,500,000

Cash on hand, including customers' postdated check of P20,000 and employee IOU of
P10,000 130,000
Cash in bank per bank statement (outstanding checks on December 31, 2014, P70,000 370,000
Total cash 500,000

Customers' debit balances, net of customers' deposit of P50,000 1,900,000

Allowances for doubtful accounts ( 150,000)
Selling price of goods invoiced to customers at 150% of cost on December 29, 2014 but
delivered on January 5, 2015 and excluded from reported inventory 750,000
Subscription receivable, collectible currently 1,000,000
3,500,000
30. On December 31, 2014, what amount should be reported as total current assets?
a. 6,230,000 b. 5,830,000 c. 5,900,000 d. 5,800,000

31. Benedict Company had the following bank reconciliation on June 30, 2011:
Balance per bank statement, June 30 3,000,000
Deposit transit 400,000
Total 3,400,000
Outstanding checks -900,000
Balance per book, June 30 2,500,000

The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for Benedict) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000

All reconciling items on June 30 cleared through the bank in July. The outstanding checks
totaled P600,000 and the deposit in transit amounted to P1,000,000 on July 31. What is the cash
balance per book on July 31?
a. 5,400,000 b. 5,350,000 c. 5,550,000 d. 4,500,000

32. On December 1, 2010, Bamboo Company assigned specific accounts receivable totaling
P2,000,000 as collateral on a P1,500,000, 12% note from a certain bank. Bamboo Company will
continue to collect the assigned accounts receivable. In addition, to the interest on the note, the
bank also charged a 5% finance fee deducted in advance on the P1,500,000 value of the note.

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

The December collections of assigned accounts receivable amounted to P1,000,000 less cash
discounts of P50,000. On December 31, 2010, Bamboo Company remitted the collections to the
bank in payment for the interest accrued on December 31, 2010 and the note payable.
How much cash was received from the assignment of accounts receivable on December 1, 2010?
a. 2,000,000 b. 1,500,000 c. 1,425,000 d. 1,925,000

33. Kimmy Company used the moving average method to determine the cost of the inventory.
During January of the current year, the entity recorded the following information pertaining to
its inventory:
Units Unit Cost Total Cost
Balance on Jan 1 40,000 50 2,000,000
Sold on Jan 17 35,000
Purchased on Jan 28 20,000 80 1,600,000
What amount of inventory should be reported on Jan 31?
a. 2,000,000 b. 1,850,000 c. 1,625,000 d. 1,500,000

34. The records of Shoe Department Store report the following date for the month of July 2011:
Sales 13,500,000 Mark down 1,200,000
Sales Allowance 250,000 Mark down cancelations 200,000
Sales returns 500,000 Freight on purchases 200,000

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Employee discounts 200,000 Purchases at cost 9,400,000
Theft and other losses 300,000 Purchases returns at cost 480,000
Initial markup on purchases 5,400,000 Purchase returns at sales price 700,000
Additional mark up 500,000 Beginning inventory at cost 880,000
Mark up cancelations 200,000 Beginning inventory as sales price 1,600,000

Using the average retail inventory method, what is the estimated ending inventory?
a.937,500 b. 1,000,000 c. 1,093,750 d. 1,125,000

35. Pillar Company acquired a 30% equity interest in an investee for P400,000 on January 1, 2013.
For the year ended December 31, 2013, the investee earned profit of P80,000 and paid no
dividend. For the year ended December 31, 2014, the investee incurred loss of P32,000 and
paid a dividend of P10,000.
In the statement of financial position on December 31, 2014, what is the carrying amount of the
investment in associate?
a. 438,000 b. 411,400 c. 414,400 d. 400,000

36. On January 1, 2013, Gala Company purchased marketable equity securities to be held as
“trading” for P5,000,000. The entity also paid commission, taxes and other transaction costs
amounting to P200,000. The securities had a market value of P5,500,000 on December 31,
2013. No securities were sold during 2013. The transaction costs that would be incurred on the
disposal of the investment are estimated at P100,000.
What amount of unrealized gain or loss on these securities should be reported in the 2013 income
statement?
a. 500,000 unrealized gain c. 400,000 unrealized gain
b. 500,000 unrealized loss d. 400,000 unrealized loss

37. On October 1, 2013, Yesterday Company purchased 4,000 of the P1,000 face value, 10% bonds of
Fell Company for P4,400,000 which includes accrued interest of P100,000. The bonds, which
mature on Jan 1, 2020, pay interest semiannually on Jan 1 and July 1. Yesterday Company used
the straight line method of amortization and appropriately recorded the bonds as long term
investment. What is the carrying amount of the bonds on Dec 31 2013?
a. 4,284,000 b. 4,288,000 c. 4,300,000 d. 4,400,000

38. Bona Company and its subsidiaries own the following properties that are accounted for in
accordance with PAS 40
Land held by Bona for undetermined use 5,000,000
A vacant building owned by Bona and to be leased out under

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

an operating lease 3,000,000

Property held by a subsidiary of Bona, a real estate firm, in the
ordinary course of business 2,000,000
Property held by Bona for use in production 4,000,000
Building owned by a subsidiary of Bona and for which the
subsidiary provides security and maintenance
services to the lessees 1,500,000
Land leased by Bona to a subsidiary under an operating lease 2,500,000
Property under construction for use as investment property 6,000,000
Land held for future factory site 3,500,000
Machinery leased out by Bona to an unrelated party under an
Operating lease 1,000,000
What is the investment property that should be reported in the consolidated statement of
financial position of the parent and its subsidiaries?
a. 15,500,000 b. 12,000,000 c. 10,500,000 d. 9,500,000

39. On Jan 1 2014m Charis Company adopted a plan to accumulate funds for a new building to be
erected beginning Jan 1 2018 at an estimated cost of P20,000,000. The entity intends to make
four equal annual deposits in a fund beginning December 31 2014 that will earn interest at 12%
compounded annually. The future value of an ordinary annuity of 1 at 12% for 4 periods is 4.78,
and the future value of an annuity of 1 in advance at 12% for 4 periods is 5.35. what is the

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annual deposit to the fund?
a. 5,000,000 b. 4,184,100 c. 3,738,318 d. 3,149,606

40. On Jan 1 2014, Jane Company borrowed P5,000,000 from a bank at a variable rate of interest for
2 years. Interest will be paid annually to the bank on Dec 31 and the principal is due on Dec 31
2015. Under the agreement, the market rate of interest every Jan 1 resets the variable rate for
that period and the amount of interest to be paid on Dec 31. In conjunction with the loan, the
entity entered into a “receive variable, pay fixed” interest rate swap agreement with another
bank speculator as a cash flow hedge. The market rates of interest are 10% on Jan 1, 2014 and
12% on Jan 1, 2015. The underlying fixed interest rate is 10%. The PV of 1 at 10% for one period
is 0.91 and the PV of 1 at 12% for one period is .89
What is the derivative asset or liability on December 31, 2014?
a. 91,000 asset b. 91,000 liability c. 89,000 asset d. 89,000 liability

41. Sophia Company purchased equipment for P 14,100,000 on January 1, 2011. Sophia received a
government grant of P600,000 in respect of this asset. Sophia treated the grant as a deduction
from the cost of the asset. The equipment has a useful life of 5 years and will use SYD in
depreciating the asset. On January 1, 2014, Sophia violated some conditions and fully repaid the
grant. What is the depreciation of the equipment to be recognized in 2014?
a. 1,800,000 b. 2,400,000 c. 2,200,000 d. 2,360,000

42. Brandy Company purchased equipment for P5,000,000 on January 1, 2013 with a useful life of 10
years and no residual value. On December 31, 2013, the entity classified the asset as held for
sale. The fair value of the equipment on December 31, 2013 is P4,200,000 and the cost of
disposal is P50,000. On December 31, 2014, the fair value of the equipment is P3,500,000 and
the cost of disposal is P100,000. On December 31, 2014, the entity believed that the criteria for
classification as held for sale can no longer be met. Accordingly, the entity decided not to sell
the asset but to continue to use it.

What is the measurement of the equipment that ceases to be held for sale on December 31,
2014?
a. 4,000,000 b. 3,400,000 c. 3,500,000 d. 4,150,00

NCA HFS measured at the lower of Carrying amount and FV less cost of
Disposal

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AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

If it ceases to be held for sale, measured at carrying amount had there been
no reclassification as NCA HFS, or FV less cost of disposal
=CA, 4,000,000 vs FVLCD, 3,400,000
43. Spongebob Company reported revenue of P50,000,000, excluding intersegment sales of
P10,000,000, expenses of P47,000,000 and net income of P3,000,000 for the current year.
Expenses included payroll costs of P15,000,000. The combined assets of all segments at year end
totaled P45,000,000.
What is the minimum amount of sales to a major customer?
a. 5,000,000 b. 4,000,000 c. 4,500,000 d. 6,000,000

Major customer- 10% or more of entity’s external revenue

50M*10%=5M
44. Warrior Company provided the following information for the year 2011:
 Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller for
the remaining P800,000.
 Executed a debt-equity swap and replaced a P600,000 loan by giving the lender ordinary shares
worth P600,000 on the date swap was executed.
 Purchase land for P1,000,000. Paid P350,000 and gave ordinary shares worth P650,000.

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 Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan proceeds
as follows: P150,000 for purchase of additional inventory, P300,000 to pay cash dividends and
P100,000 to increase the cash balance.

What amount should be reported as net cash used in investing activities?

a. 1,200,000 b. 2,200,000 c. 400,000 d. 750,000

Purchase of bldg 400,000

Purchase of land 350,000
Total 750,000

45. On Jan 1 2013, SVJ Company granted the chief executive officer (CEO) 50,000 share appreciation
rights for past services. The rights are exercisable immediately and expire on Dec 31 2014. On
exercise, the CEO is entitled to receive cash for the excess of the share market price on exercise
date over the market price on grant date. The CEO did not exercise any of the rights in 2013. The
market price of the share P100 on Jan 1, 2013 and P115 on Dec 31 2014 when the market price
was P110. What amount should be recognized as gain on reversal of share appreciation rights in
2014?
a. 0 b. 250,000 c. 500,000 d. 750,000

12/31/13 (15*50,000) 750,000 2013: Salaries 750,000

12/31/14 (10*50,000 rights) 500,000 Acc salaries Payable 750,000
250,000 2014: Acc Salaries Payable 750,000
Cash 500,000

Gain on reversal 250,000

46. Cam Company reported the following balances for the current year:
December 31 January 1
Inventory 2,600,000 2,900,000
Accounts Payable 750,000 500,000
The entity paid suppliers P4,900,000 during the current year. Under the accrual basis, what
amount should be reported as cost of goods sold for the current year?
a. 5,450,000 b. 4,950,000 c. 4,850,000 d. 4,350,000

750k+4.9M-500k=5,150,000(purchases)+2.9M-2.6M=5,450,000

9
AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

47. Shara Company reported that the financial statement contained the following errors
December 31 2013 December 31 2014
Ending inventory P950,000 overstated P800,000 understated
Depreciation P250,000 understated
An insurance premium of P600,000 was prepaid in 2013 covering the years 2013, 2014, and
2015. The entire amount was charged to expense in 2013. No corrections have been made for
any of the errors. Ignore income tax. What is the total effect of the errors on retained earnings
on December 31 2014?
a. understatement of P1,550,000
b. overstatement of P1,550,000
c. overstatement of P750,000
d. understatement of 750,000

2013 2014 Net effect

Ending invty (950,000) 950,000
800,000
Depreciation (250,000)
Insurance premium 400,000 (200,000)
Effect (800,000) 1,550,000 750,000

VMBM,CPA
48. Yza Company provided the following information during 2014:
Inventory Jan 1 1,650,000
Purchases 4,000,000
Inventory Dec 31 2,500,000

The relevant index numbers are 120 on Jan 1 2014, 280 on Dec 31 2014, and the average inddex
number for 2013 is 110. What is the cost of goods sold in hyperinflationary income statement for
2014?
a. 3,150,000 b. 4,410,000 c. 6,300,000 d. 7,300,000

Purchases 280/200*4M 5.6M

Beg invty 280/110*1,650,000 4.2M
Ending invty 280/200*2.5M 3.5M
4.2M+5.6M-3.5M=6.3M

49. Caroline Company provided the following events that occurred after Dec 31 2013:
1/15/2014 P3,000,000 of accounts receivable was written off due to the bankruptcy of a
major customer
2/14/2014 A shipping vessel of the entity with carrying amount of P5,000,000 was
completely lost at sea because of a hurricane
3/11/2014 A court case involving the entity as the defendant was settled and the entity was
obligated to pay the plaintiff P1,500,000. The entity previously has not
recognized a liability for the suit because management deemed it possible that
the entity would lose the case
3/15/2014 One of the entity’s factories with a carrying mount of P4,000,000 was
completely razed by forest fire that erupted in its vicinity
The management completed the draft of the financial statements for 2013 on Feb 10,2014. On
March 20, 2014, the board of directors authorized the financial statements for issue. The entity
announced its profit and other selected information on March 22, 2014. The financial
statements were approved by shareholders on April 2, 2014 and filed with the SEC the very next
day. What total amount should be reported as “adjusting events” on December 31 2013?
a. 9,500,000 b. 8,500,000 c. 9,000,000 d. 4,500,000

Adjusting events that should be reported: Jan 15,2014 & March 11, 2014

10
AIR DIAGNOSTIC EXAM
Cluster 1- Level 2 & 3
03.30.15

50. On Jan 1 2013, Yvonne Company granted share options to each of the 300 employees working in
the sales department. The share options vest at the end of a three-year period provided that the
employees remain in the entity’s employ and provided the volume sales will increase by more
than 10% per year. The fair value of each share option on grant date is P30. If the sales increase
by more than 10%, each employee will receive 200 share options. If the sales increase by more
than 15%, each employee will receive 300 share options. On Dec 31 2013, the sales increased by
more than 10% but not more than 15%, and no employees have left the entity. On Dec 31 2014,
sales increased by more than 15% and no employees left. On December 31 2015, the sales
increased by more than 15%, and 50 employees left the entity. What amount should be
recognized as compensation expense for 2015?
a. 2,250,000 b. 1,200,000 c. 450,000 d. 900,000

If sales >10% 200 share options

If sales >15% 300 share options

2013- (200 share options*300*30)/3=600,000

2014- (300 share options*300*30)*2/3=1,800,000-600,000=1,200,000
2015- (300 share options*250*30)-1,800,000=450,000

VMBM,CPA
END OF EXAM 

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