CLINCHER QUESTION No. 1 The following T-account summarizes the transactions affecting the accounts receivable of FLASH Company for 2014: Beginning balance after deducting credit balances of P9,000 106,000 Charge 1,250,000 Charge to goods out on consignment Shareholders’ subscriptions Accounts written-off but recovered Cash paid to customer for Jan. 1 credit 5,000 Deposit on 50,000 Claim against common carrier for shipping
Accounts Receivable Collections from customers, including P Overpayment of P10,000 P1,240,000 Write sales offs 7,000 25,000 Merchandise returns 5,500 60,000 Allowance to customers for shipping damages 3,000 5,000 Collections on carrier claims 2,000 Collection on subscription Balance 45,000 contract damages
5,000 IOUs 1,000 Cash 50,000 Advances 10,000
Audit notes: a. It was ascertained that half of the adjusted outstanding accounts receivable-trade balance are still currently collectible. The term of sale is 5/30, n/60. Based on past experience, a 25% of customers whose accounts are still current normally pay within the discount period. b. 30% of the adjusted accounts receivable-trade is 60 days past due and is expected to be only 90% collectible. c. 20% of the adjusted accounts receivable-trade balance is more than 120 days past due and is expected to be 50% collectible. Determine the amortized cost of the accounts receivable – trade. Answer: P107,537 CLINCHER QUESTION No. 2 As part of a preliminary survey of the purchasing function, an auditor read the department's policies and procedures manual. The auditor concluded that the manual described the processing steps well and contained an appropriate internal control design. The next engagement objective was to determine the operating effectiveness of internal controls. Which procedure would be most appropriate in meeting this objective?
a) b) c) d)
Prepare a flowchart. Prepare a system narrative. Perform a test of controls. Perform a substantive test.
Solution: C a) Incorrect. Flowcharts are most appropriate for studying internal control design. The audit objective is whether the controls are in place and effective, which indicates the need for a test of controls. b) Incorrect. System narratives are most appropriate for studying internal control design. The audit objective is whether the controls are in place and effective, which indicates the need for a test of controls. c) Correct. Tests of controls, also known as compliance tests, help an auditor determine whether controls are being followed and are effective. For instance, a policy may require that all large transactions be approved by a manager. As a test of controls, the auditor may sample large transactions and review whether manager approval was obtained and whether the proposed transaction meets all the criteria that the manager was supposed to verify. d) Incorrect. Substantive tests are tests to determine whether an objective has been achieved and do not necessarily test internal controls. CLINCHER QUESTION No. 3 (Easy) Which of the following is not a function of financial management? A. Financing B. Risk-management C. Internal control D. Capital budgeting Answer: C The correct answer is (c) because internal control is a function of the controller’s office. Answers (a), (b), and (d) are incorrect because the functions of financial management include: financing, capital, budgeting, financial management, corporate governance, and risk management. CLINCHER QUESTION No. 4
Bankrupt Bank has a 5-year loan receivable with face value of Php2,000,000 dated January 1, 2014 from a borrower that is due on December 31, 2018. Interest on the loan is payable at 10% every December 31. The borrower paid the interest that was due on December 31, 2014 but informed Bankrupt on December 31, 2015 that interest accrued in 2015 and the interest for 2016 will be paid on maturity date. The borrower will also probably miss the last two years for interest payments because of
financial difficulty. After that, the borrower will also probably be expected to pay the loan and accrued interest in 2015 and 2016 on December 31, 2018. What is the loan impairment loss to be recognized on December 31, 2015? (Round off the present value factor to three decimal places)? ANSWER: Php397,600 Carrying amount (2,000,000 + 200,000) Present value of remaining cash flows [2,000,000 +(200,000 x 2)] x 0.751 Impairment loss
Php2,200, 000 1,802,400 Php397,60 0
CLINCHER QUESTION No. 5 Sharon Company uses the installment sales method in accounting for its installment sales. On January 1, 2014, Sharon Company had an installment account receivable from Rowena with a balance of P18,000. During 2014, P4,000 was collected from Rowena. When no further collection could be made, the merchandise sold to Rowena was repossessed. The merchandise had a fair market value of P6,500 after the company spent for P600 for reconditioning of the merchandise. The merchandise was originally sold with a gross profit rate of 40%. Determine the gain or loss on repossession and Cost of Repossessed Merchandise to be presented in the Income Statement, respectively: Answer: P2,500 loss; P6,500 (Average) FMV after reconditioning cost Less: Reconditioning cost FMV before reconditioning cost Less: Unrecovered cost (18,000-4,000)=14,000 x 60% Loss
P6,500 600 5,900 8,400 (P2,500)
CLINCHER QUESTION No. 6
Which of the following is not part of the powers of the Commissioner of Internal Revenue (CIR)? a. To interpret tax laws and decide on tax cases b. To give effect to and administer the supervisory and police powers conferred to it by National Internal Revenue Code (NIRC) and other tax laws
c. To obtain information, and to summon, examine, and take testimony of persons d. To make assessments and prescribe additional requirements for tax administration and enforcement ANSWER: B The CIR has the power to interpret tax laws and decide on tax cases (Sec. 4), to obtain information, and to summon, examine, and take testimony of persons (Sec. 5), and to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6).
CLINCHER QUESTION No. 7 Based on the information as follows, for what taxable year will a corporation become liable for MCIT? SEC Registration May 29, 2009 BIR Registration June 19, 2010 Start of commercial operations October 14, 2010 a. b. c. d.
2012 2013 2014 2015
Answer: C. MCIT is imposed upon any domestic corporation beginning the fourth taxable year in which such corporation commenced its business operations. For purposes of MCIT, the taxable year in which the business commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue. CLINCHER QUESTION No. 8 Which of the following statements would the hedging relationship qualify for hedge accounting? I. At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. II. The hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated. III. The effectiveness of the hedge can be reliably measured IV. The hedge is expected to be highly effective. Answer: I, II, III and IV Paragraph 88 of IAS 39 Financial Instruments: Recognition and Measurement A hedging relationship qualifies for hedge accounting under paragraphs 89–102 if, and only if, all of the following conditions are met. a) At the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk.
b) The hedge is expected to be highly effective (see Appendix A paragraphs AG105–AG113A) in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship. For cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss. CLINCHER QUESTION No. 9 Questions used to interrogate individuals suspected of fraud should: a) Adhere to a predetermined order. b) Cover more than one subject or topic. c) Move from the general to the specific. d) Direct the individual to a desired answer. Solution: C a) Incorrect. The interviewee's answer may suggest a follow-up question that should be asked before asking the next planned question. b) Incorrect. This may be confusing for the respondent. c) Correct. General information should be obtained first before details are sought. d) Incorrect. The interrogator should avoid leading questions, that is, questions that suggest an answer. CLINCHER QUESTION No. 10 (Average) Assume that Stripler Industries is considering investing in a project with the following characteristics: Initial investment Additional investment in working capital Cash flows before income taxes for years 1 to 5 Yearly tax depreciation Terminal value of investment Cost of capital Present value of P1 received after 5 years discounted at 10% Present value of an ordinary annuity of P1 for 5 years at 10% Marginal tax rate Investment life
P500 ,000 10, 000 140, 000 90, 000 50, 000 10% 0.621 3.791 30% 5 years
Assume that all cash flows come at the end of the year. What is the amount of the after-tax cash flows in year 2? Answer: Php125,000 Answer (b) is correct. The after-tax cash flows are calculated by deducting tax expense from the before-tax cash flows. Since depreciation is deductible for tax purposes it provides a tax shield. Therefore, income taxes for year 2 are equal to P15,000 [(P140,000 – P90,000) × 30%], and after-tax cash flows are P125,000 (P140,000 – P15,000). Answer (a) is incorrect because P140,000 is the before-tax cash flows. Answer (c) is incorrect because this solution fails to consider the deductibility of depreciation. CLINCHER QUESTION No. 11 The JPIA Co. operations resulted to regular corporate income tax (RCIT) amounting to Php25,000 with the minimum corporate income tax (MCIT) computed at Php100,000. It is the first time that JPIA will be paying MCIT after operating for 7 years. The RCIT rate is 30% while MCIT rate is 2%. If JPIA expects that the Company will still be liable to MCIT for the next periods, deferred tax asset to be recognized on the balance sheet for the year will be: ANSWER: Php-0PAS 12, Income Taxes provides that deferred tax assets shall be recognized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. Since the Company expects to still be liable to MCIT for the next periods, the tax credit from paying MCIT during the year may not be utilized and therefore should be recognized as zero. CLINCHER QUESTION No. 12 1. Crenshaw and Durkee formed a partnership on January 1, 2014. Crenshaw invested P60,000, Durkee P40,000. Each withdrew P5,000 on each of the following dates during 2014: March 1, July 1, and November 1. These capital withdrawals in total were equal to salaries for the year. Interest of 9 percent was to be paid to partners on the basis of their average capital balances excluding net income. Additionally Crenshaw was to get a 20 percent bonus based on partnership net income after the bonus, but before the salaries and interest.
Any remaining profit (or loss) was to be allocated equally among the partners. If partnership net income was P100,000, how much will be allocated to Crenshaw? Answer:P59,233.50 (Average) Salaries
0 4,725.00 16,667.00 22,841.50 P59,233.5 0
Interest (9% x Average) Bonus * Balance (equally)
Average Capital C: 60,000 55,000 50,000 45,000
x x x x
(Use Calculator) 2 = M+ 4 = M+ 4 = M+ 2 = M+ MR/12 = 52,500
D: 40,000 35,000 30,000 25,000
x x x x
2 4 4 2
*Bonus = = = B=
= = = =
0 2,925.00 0.00 22,841.50 P40,766.5 0
0 7,650.00 16,667.00 45,683.00 P100,000. 00
M+ M+ M+ M+ MR/12 = 32,500
.20 (NI-B) .20 (100,000-B) 20,000-.20B 16,667
CLINCHER QUESTION No. 13 Which of the following is subject to fringe benefits tax? a. b. c. d. e.
Compensation of rank and file employees Compensation of supervisory and managerial employees Fringe benefit of rank and file employees Fringe benefit of supervisory and managerial employees C and D
ANSWER: D BASIS: Compensation of both rank and file and supervisory and managerial employees are subject to WTW. Fringe benefits of rank and file employees are also subject to WTW. Section 33 of the Tax Code:
“Imposition of Tax. — A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer).”
CLINCHER QUESTION No. 14 Which of the following correctly describes prior period errors? A . B . C . D .
Errors committed and discovered in prior periods
Errors committed and discovered in the current period Errors committed and discovered in current and prior periods Errors committed in prior periods but are discovered only in the current period
Answer: D Paragraph 5 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors states that Prior period errors are omissions from, and misstatements in, the entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: a) was available when financial statements for those periods were authorised for issue; and b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. CLINCHER QUESTION No. 15 Effective January 2015, benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and productivity incentive schemes combined are tax exempt, provided that it does not exceed P___________ per employee per taxable year. a. P 5,000
b. P 10,000 c. P 30,000 d. P 82,000 ANSWER: B BASIS: Revenue Regulations (RR) 1-2015 “Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (Php 10,000.00) per employee per taxable year.”
CLINCHER QUESTION No. 16 Chris Products uses a process cost system and sells a variety of ready-tocook meat products. Four joint products were recovered during May 2015 as follows: Ham Bacon Salami Sausag e
1,000 kilos 9,000 kilos 500 kilos 5,000 kilos
Costs incurred up to the split-off point were: P20,000 for direct materials, P15,000 for direct labor, and P7,000 for factory overhead applied. Using the physical output method, how much joint cost would product Ham absorb? Answer: P2,710 (Average) Total cost (20,000+15,000+7,000) Divided by total output (1,000+9,000+500+5,000) Cost per unit Ham Joint cost – Ham
CLINCHER QUESTION No. 17
P42,000 15,500 P2.71 1,000 P2,710
An audit of an organization’s claims department determined that a large number of duplicate payments had been issued due to problems in the claims processing system. During the exit conference, the vice president of the claims department informed the auditors that attempts to recover the duplicate payments would be initiated immediately and that the claims processing system would be enhanced within six months to correct the problems. Based on this response, the chief audit executive should: a) Adjust the scope of the next regularly scheduled audit of the claims department to assess controls within the claims processing system. b) Monitor the status of corrective action and schedule a follow-up engagement when appropriate. c) Schedule a follow-up engagement within six months to assess the status of corrective action. d) Discuss the findings with the audit committee and ask the committee to determine the appropriate follow-up action. Solution: B a) Incorrect. Because the finding is significant, the internal audit activity should not wait until the next regularly scheduled audit to assess the status of corrective action. b) Correct. The internal audit activity should monitor the status of the corrective action. A follow-up engagement should be scheduled when changes to the claims processing system have been sufficiently completed to allow for testing of adequacy and effectiveness. c) Incorrect. Although management indicated that the corrections should be completed within six months, this may not be the case. As a result, the internal audit activity should monitor the status of corrective action and schedule a follow-up engagement when it is appropriate. d) Incorrect. Although the findings should be discussed with the audit committee because of their significance, the scope and timing of a follow-up engagement should be determined by the chief audit executive based on available information.
CLINCHER QUESTION No. 18 (Average) Assume that demand for a particular product changed as shown below from D1 to D2.
Which of the following could cause the change shown in the graph? A. A decrease in the price of the product B. An increase in supply of the product C. A change in consumer tastes D. A decrease in the price of a substitute for the product Answer: C The correct answer is (c) because a shift demand could result from a change in consumer tastes. Answer (a) is incorrect because this would result in movement along the existing demand curve. Answer (b) is incorrect because a change in supply would not affect the demand function. Answer (d) is incorrect because a decrease in price of a substitute would result in a shift of the curve to the left.
CLINCHER QUESTION No. 19 Titan Company issued a convertible bond on January 1, 2014, that matures in five years. The bond can be converted into ordinary shares at any time. Titan has calculated that the liability and the equity components of the bond are Php3,000,000 for the liability component and Php1,000,000 for the equity component, giving a total amount of the bond of Php4,000,000. The interest rate of the bond is 6% and local tax legislation allows a tax deduction for the interest paid in cash. What is the deferred tax liability arising on the bond as at the year ending December 31, 2014 if the tax rate is 32%? ANSWER: Php320,000 Bonds payable Future taxable amount Multiply by tax rate Deferred tax liability
Financi al 3,000,0 00
Tax base 4,000,0 00
Temporary difference Php1,000, 000 1,000,000 32% Php320,00