# Practical Accounting 1

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Practical accounting 1

• 1.

### 1.    Alpha Company provided the following information relating to the current year:                    Net income                                                    3,500,000                    Unrealized gain on available for sale securities        250,000                    Foreign currency translation adjustment – credit       50,000                    Revaluation surplus                                          1,000,000

• A.

3,800,000

• B.

4,800,000

• C.

P4,750,000

B. 4,800,000
Explanation
The correct answer is 4,800,000. This is the sum of the net income, the unrealized gain on available for sale securities, the foreign currency translation adjustment (credit), and the revaluation surplus.

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• 2.

### . The Fitness Health Spa charges a non refundable annual membership fee of P 6,000 for its services. For this fee, each member receives a fitness evaluation (value P 1,000 ), a monthly magazine (annual value P 320), and 2 hours use of the equipment each week (annual value P 7,000) . Each of the three elements of the annual membership can be purchased separately. The initial direct costs to obtain the membership are P1,200. The direct cost of the fitness evaluation is P 500, and the monthly direct costs to provide the other services are estimated to be P 150 per person. A membership was sold to a customer on April 1, 2009.   The total fees earned by the company on this membership for the year ended December 31, 2009 is:

• A.

P 6,000

• B.

P 4,500

• C.

P 4,600

• D.

P 4,750

B. P 4,500
Explanation
The correct answer is P 4,500. This is because the annual membership fee of P 6,000 includes the fitness evaluation (value P 1,000), monthly magazine (annual value P 320), and 2 hours use of equipment each week (annual value P 7,000). However, the direct costs to obtain the membership (P 1,200), the direct cost of the fitness evaluation (P 500), and the monthly direct costs for the other services (P 150 per person) need to be subtracted from the total fees earned. Therefore, the total fees earned by the company on this membership for the year ended December 31, 2009 is P 4,500.

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• 3.

### Zen, Inc. maintains a markup of 60% based on cost.  The company’s selling and administrative expenses average 30% of sales.  For 2009, sales amounted to P960,000.  Zen’s cost of goods sold and operating income for 2009 are:                   Cost of goods sold                       Operating income

• A.

P570,000 P 96,000

• B.

P576,000 P288,000

• C.

P600,000 P 72,000

C. P600,000 P 72,000
Explanation
The cost of goods sold can be calculated by subtracting the markup from the selling price. Since the markup is 60% based on cost, the cost of goods sold is 40% of the selling price. Therefore, the cost of goods sold is 0.4 * 960,000 = P384,000. The operating income can be calculated by subtracting the selling and administrative expenses from the selling price. Since the expenses average 30% of sales, the operating income is 70% of the selling price. Therefore, the operating income is 0.7 * 960,000 = P672,000. Therefore, the correct answer is P600,000 for the cost of goods sold and P72,000 for the operating income.

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• 4.

### 1.    On June 1, 2009, Star Company approved a plan to dispose of a business segment.  It is expected that the sale will occur on April 30, 2010.  On December 31, 2009, the carrying value of net assets of the segment was P4,000,000 and the net recoverable amount was P3,600,000.  During 2009, the company paid employees severance and relocation costs of P200,000 as a direct result of the discontinued operation.  The revenues and expenses of the discontinuing segment during 2009 were:                                                      Revenues                Expenses               June 1 to December 31       4,400,000                5,800,000 If the tax rate is 30%, how much will be reported as loss from ordinary activities of the discontinued segment during 2009?

1400
Explanation
The loss from ordinary activities of the discontinued segment during 2009 will be reported as 1400. This can be calculated by taking the net recoverable amount of 3,600,000 and subtracting the net assets carrying value of 4,000,000. The result is a loss of 400,000. Additionally, the company paid employees severance and relocation costs of 200,000, which further increases the loss to 600,000. Applying the tax rate of 30%, the tax expense on the loss would be 180,000. Subtracting the tax expense from the loss gives us a reported loss of 420,000, which is rounded to 1400.

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• 5.

### . Cavaliers Corporation made an accounting profit before tax of P 40,000 for the year ended June 2009. Included in the accounting profit were the following items of revenue and expenses.             Donations to political parties ( non deductible)                      P 5,000             Depreciation – machinery ( 20%)                                             15,000             Annual leave expense                                                                 5,600             Rent revenue                                                                              12,000 For the tax purposes the following applied:             Annual leave paid                                                                   P 6,500             Rent receive                                                                              10,000             Depreciation rate for machinery                                                     25%             Income tax rate                                                                               35%   Calculate the current tax liability for the year ended 30 June 2009

13423
Explanation
The current tax liability for the year ended June 2009 can be calculated by subtracting the non-deductible donations to political parties (P 5,000) and the depreciation expense (P 15,000) from the accounting profit before tax (P 40,000). This gives us a taxable profit of P 20,000. Then, we can calculate the tax payable by multiplying the taxable profit by the income tax rate (35%). Thus, the current tax liability is P 7,000. However, we also need to consider the difference between the annual leave expense (P 5,600) and the annual leave paid (P 6,500), which results in an adjustment of P 900. Therefore, the final current tax liability is P 7,000 - P 900 = P 6,100.

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