INVENTORIES, INVESTMENTS, INTANGIBLES, & PROPERTY,

PLANT AND EQUIPMENT – Quiz Material

Items 1 to 6:
Information concerning tiny Corporation’s intangible assets are as follows:
(a) On January 1, 2002, Tiny signed an agreement to operate a franchise for an
initial franchise fee of P85,000. Of this amount, P25,000 was paid when the
agreement was signed and the balance is payable in four annual payments of
P15,000 each beginning January 1, 2003. The present value at January 1, 2002,
of the four annual payments discounted at 14% (the implicit rate for a loan at
this type) is P43,700. The agreement also provides that 5% of the revenue from
the franchise must be paid to the franchisor annually. Tiny’s revenue from the
franchise for 2002 was P900,000. Tiny estimates the useful life of the franchise
to be ten years.
(b) Tiny incurred P78,000 of experimental and development costs in its laboratory to
develop a patent which was granted on January 2, 2002. Legal fees and other
costs associated with registration of the patent totaled P48,000. Tiny estimates
that the useful life of the patent will be eight years.
(c) A trademark was purchased from Wall Company for P40,000 on July 1, 1999.
Expenditures totaling P68,000 were paid on July 1, 2002. Tiny estimated that
the useful life of the trademark will be 20 years from the date of acquisition.

1. How much is the amortization of franchise?

(a) P 0 (b) P6,870 (c) P17,175 (d) P8,500 B

2. How much is the amortization of patent?

(a) P 0 (b) P4,800 (c) P6,000 (d) P2,400 C

3. How much is the amortization of trademark?

(a) P 0 (b) P2,000 (c) P4,000 (d) P6,000 D

4. How much is the unamortized cost of franchise at December 31, 2002?

(a) P68,700 (b) P51,525 (c) P61,830 (d) P60,200 C

5. How much is the unamortized cost of patent at December 31, 2002?

(a) P42,000 (b) P48,000 (c) P45,600 (d) P43,200 A

6. How much is the unamortized cost of trademark at December 31, 2002?

(a) P101,000 (b) P99,000 (c) P104,000 (c) P102,000 B

7. Intangible assets should be carried (benchmark treatment):

(a) gross cost
(b) fair value on balance sheet date
(c) revalued amount minus accumulated amortization and accumulated impairment
losses
(d) cost minus accumulated impairment losses and accumulated amortization D

8. How should a research and development cost be accounted for?

(a) should be capitalized when incurred and then amortized over the estimated
useful life.
(b) should be expensed in the period incurred unless contractually reimbursable.
(c) may be either capitalized or expensed when incurred, depending upon the fact
of the situation.
(d) should be expensed in the period incurred unless it can be clearly demonstrated
that the expenditure will have significant future benefits. B
9. As a rule, goods are included in the inventory of a buyer when:
(a) there is an actual delivery of goods by the seller.
(b) the seller already finished recording the sales invoice.
(c) the title has been passed to the buyer.
(d) none. C

10. Which of the following items is not includible in the inventory?

(a) goods in transit and sold FOB destination
(b) goods held by customers on approval or on trial
(c) goods out on consignment
(d) goods in transit and purchase FOB destination D

11. Magnanimous Corporation included the following items in inventory on December

31, 2000:
Materials P300,000
Advances for materials ordered for January delivery 50,000
Materials in transit, FOB destination 100,000
Goods in process, at cost of materials and direct labor 200,000
Finished goods in factory, at cost including overhead of P100,000 500,000
Finished goods in company-owned retail store,
at sales price (150% of cost) 150,000
Finished goods in the hands of consignees, at sales price, including
40% profit on sales but excluding freight paid of P4,000 80,000
Finished goods in transit to customers – FOB shipping point, at cost 40,000
Finished goods out on approval, at cost, including delivery
freight of P5,000 75,000
Finished goods, at cost, unsalable 10,000
Unexpired insurance on inventories 12,000
Advertising catalogs and shipping supplies 6,000
Gasoline and oil for testing finished goods 15,000
Machine lubricants 13,000
What is the correct cost of the inventory on December 31, 2000?
(a) P1,300,000 (b) P1,272,000 (c) P1,318,000 (d)P1,250,000
A
12. When a portion of inventory has been pledged as security for a loan:
(a) the value of the inventory pledged should be deducted from the debt.
(b) an equal amount of retained earnings should be appropriated.
(c) the fact should be disclosed but the amount of current assets should not be
affected.
(d) the cost of the pledged inventory should be transferred from current asset to
noncurrent asset. C

13. Presented below is information related to Jagger Corporation for the current
accounting period:
Cost Retail
Beginning inventory P114,000 P200,000
Purchases 560,000 620,000
Freight in 40,000
Net markup 80,000
Net markdown 60,000
Sales 540,000
Under the LIFO retail approach, how much is the estimated cost of goods sold?
(a) P506,250 (b) P476,010 (c) P459,000 (d) P432,750
14. If a merchandise company ended a period with a larger inventory that it had at the
beginning of the period, which of the following statements must be true?
(a) The cost of goods sold was greater than net purchases.
(b) Net income was greater than gross profit.
(c) The cost of goods available for sale was smaller than cost of goods sold.
(d) The cost of goods sold was smaller than net purchases.

15. The equity method of accounting for an investment in the common stock of another
company should be used when the investment:
(a) is composed of common stock and it is the investor’s intent to vote the common
stock.
(b) ensures a source of supply such as raw materials.
(c) enables the investor to exercise significant influence over the investee.
(d) is obtained by an exchange of stock for stock. C

16. On January 10, 1997, Conroy Corporation acquired 1,000 shares of Alva Corporation
common stock at P70 per share as a short-term investment. On that date, Alva had
100,000 shares issued and outstanding. On November 1, 1997, Alva declared and
paid cash dividends of P2 per share on its outstanding common stock. On
December 31, 1997, the market value of Alva’s common stock was P62 per share.
At what value should Conroy report the investment in common stock of Alva on its
December 31, 1997 balance sheet?
(a) P60,000 (b) P62,000 (c) P68,000 (d) P70,000 B

17. On January 1, 1990, Rey Corporation paid P150,000 for 10,000 shares of Rio
Corporations’ common stock representing a 15% investment in Rio. Rio declared and
paid a dividend of P1 a share to its common stockholders during 1990. Rio’s net
income was P130,000 for the year ended December 31, 1990. At what amount
should Rey’s investment in Rio appear on Rey’s balance sheet as of December 31,
1990?
(a) P140,000 (b) P150,000 (c) P 159,500 (d) P169,500B

18. On January 1, 1999, Star Company paid P1,200,000 for 40,000 shares of Comet
Corporation’s common stock which represents a 25% investment in the net assets of
Comet. Star has the ability to exercise significant influence over Comet.
Star received a dividend of P3 per share from Comet in 1999. Comet reported
net income of P640,000 for the year ended December 31, 1999.
The balance on Star’s balance sheet account investment in Comet Corporation at
December 31, 1999 should be:
(a) P1,200,000 (b) P1,240,000 (c) P1,360,000 (d)P1,480,000
B
19. Bigo Corp. owns 1.000 shares of common stock of Berg, Inc., a large publicly traded
company listed on a major stock exchange.
If Berg issues a 20% stock dividend when the par value of P10 per share and the
market value is P70 per share, how much and what type of income should Bigo
report?
(a) Zero
(b) P2,000 ordinary income
(c) P14,000 ordinary income
(d) P2,000 ordinary income and P12,000 extraordinary income A

Items 20 and 21:

Bagong Sikat had the following investment transactions in the capital stock of
Masaya, Inc.:

Jan.5 Bought 400 common shares, par P100, at P88 per share.
June 15 Received 10% stock dividend.
 Aug 31 Received P4 cash dividend for each share of stock.
Oct. 10 Received stock rights to buy one new share at P135 for every 5 shares
held. Market value of right, P4; market value of stock ex-right, P156.

20. The unit cost of the stock after the stock dividend on June 15 is:
(a) 75 (b) 85 (c) 90 (d) 80 D

21. After receipt of the stock rights on October 10, the unit cost per share is:
(a) 78 (b) 80.50 (c) 82 (d) 81.50 A

22. The cost of property acquired by direct cash purchase includes the cash paid and:
(a) the implied interest on the debt to finance the purchase.
(b) the market value of any noncash asset surrendered to acquire the asset.
(c) the estimated residual value of the asset.
(d) directly attributable costs of bringing the asset to working condition for its
intended use. D

23. For assets acquired on credit or by installment, the cost or fair value is equal to:
(a) cash purchase price (c) installment price
(b) invoice price (d) list price A

24. A company purchased land to be used as the site for the construction of a plant.
Timber was cut from the building site so that construction of the plant could begin.
The proceeds from the sale of the timber should be:
(a) classified as other income.
(b) netted against the costs to clear the land and expensed as incurred.
(c) deducted from the cost of the plant.
(d) deducted from the cost of the land. D

25. A method which excludes salvage value from the base for the depreciation
calculation is:
(a) straight-line (c) double declining balance
(b) sum of years’ digits (d) productive output C

26. The sale of a depreciable asset resulting in a loss indicates that the proceeds from
the sale were:
(a) less than the current market value (c) greater than book value
(b) greater than cost (d) less than book value D

27. Bright Company purchased factory equipment which was installed and put into
service January 3, 2002 at a total cost of P1,280,000. Salvage value was estimated
at P80,000. The equipment is being depreciated over 8 years by the double
declining balance method. For the year 2003, how much depreciation expense
should Bright record on this equipment?
(a) P225,000 (b) P240,000 (c) P300,000 (d) P320,000 B

Items 28 to 30:
Harper is contemplating exchanging a machine used in its operations for a similar
machine on May 31, 2002. Harper will exchange machines with either Austin
Corporation or Lubin Company, or will trade in the machine with Sub, Inc., a dealer
in these machines. The data relating to the machines are presented below:
Harper Austin Lubin Sub
Original cost of machine P162,500 P180,000 P150,000 P140,000
Accumulated depreciation
through May 31, 2002 98,500 70,000 65,000 0
Fair value at May 31, 2002 80,000 95,000 60,000 165,000
28. If Harper exchanges its used machine and P15,000 cash for Austin’s used machine,
the gain that Harper should recognized from this transaction for financial reporting
purposes would be:
a. P 0 b. P2,526 c. P15,000 d. P16,000 A

29. If Harper exchanges its used machine for Lubin’s used machine and also receives
P20,000 cash, the gain that Harper should recognize from this transaction for
financial reporting purposes would be:
a. P 0 b. P4,000 c. P16,000 d. P25,000 B

30. If Harper exchanges its used machine and P85,000 cash for Sub’s machine, the gain
that Harper should recognize from this transaction for financial reporting purposes
would be:
a. P 0 b. P8,242 c. P16,000 d. P25,000 A