First preboard

Question 1

1. An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertions of:
   . Presentation Existence
   A. yes yes
   B. yes no
   C. no yes
   D. no no
2. Assurance services involve all the following except:
   A. improving the quality of information for decision purposes.
   B. improving the quality of the decision model used.
   C. improving the relevance of information.
   D. implementing a system that improves the processing of information.
3. When a company’s stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:
   A. Amount of dividends paid to related parties.
   B. Expected proceeds from stock subscriptions receivable.
   C. Number of shares issued and outstanding.
   D. Proper authorization of stock rights and warrants.
4. Which of the following would not represent one of the primary problems that would lead the users to demand for independent audits of a company‟s financial statements?
   A. Management bias in preparing financial statements.
   B. The downsizing of business and financial markets.
   C. The complexity of transactions affecting financial statements.
   D. The remoteness of the user from the organization and thus the inability of the user to directly obtain financial information from the company.
5. Which of the following is a correct statement?
   A. An audit provides limited assurance by attesting to the fairness of the client‟s assertions.
   B. A review provides positive assurance by attesting the reliability of the client‟s assertions.
   C. Management consulting services provide attestation in all cases.
   D. Accounting services do not provide attestation.

Answer 1

1. C
2. D
3. C
4. B
5. D

Question 2

11. Which of the following will an auditor least likely discuss with the former auditors of a potential client prior to acceptance of an audit engagement?
    A. Integrity of the management
    B. Fees charged for the services
    C. Disagreements between the predecessor auditor and the management regarding accounting principles
    D. Reasons for changing audit firms
12. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s
    A. opinion of any subsequent events occurring since the predecessor’s audit report was issued.
    B. understanding as to the reasons for the change of auditors.
    C. awareness of the consistency in the application of PFRS between periods.
    D. evaluation of all matters of continuing accounting significance.
13. The auditor is most likely to presume that a high risk of irregularities exists if
    A. the client is a multinational company that does business in numerous foreign countries.
    B. the client does business with several related parties.
    C. inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.
    D. inadequate employee training results in lengthy computer exception reports each month.
14. Which of the following concepts is most useful in assessing the scope of an auditor’s program relating to various accounts?
    A. Attribute sampling
    B. Materiality
    C. The reliability of information
    D. Management fraud
15. Which of the following does an auditor least likely perform in assessing audit risk?
    A. Gather audit evidence in support of recorded transactions.
    B. Obtain an understanding of the client’s system of internal control.
    C. Understand the economic substance of significant transactions completed by the client.
    D. Understand the entity and the industry in which it operates.

Answer 2

11. B
12. B
13. C
14. B
15. A

Question 2

6. The review of a company’s financial statements by a CPA firm:
   A. Is substantially less in scope of procedures than an audit
   B. Requires detailed analysis of the major accounts
   C. Is of similar scope as an audit and adds similar credibility to the statements
   D. Culminates in issuance of a report expressing the CPA’s opinion as to the fairness of the statements
7. Which one of the following is not a part of the attest process?
   A. gathering evidence about assertions
   B. proving the accuracy of the books and records
   C. evaluating evidence against objective criteria
   D. communicating the conclusions reached
8. Which one of the following is not a reason why the users of financial statements desire for an independent assessment of the financial statement presentation?
   A. complexity of transactions affecting the financial statements
   B. lack of criteria on which to base information
   C. remoteness of the user from the organization
   D. all of them are potential reasons
9. An audit which determines whether organizational policies are being followed and whether external mandates are being met is known as
   A. a financial audit.
   B. a compliance audit.
   C. an operational audit.
   D. none of the above
10. Which of the following factors most likely would cause a CPA to decline a new audit engagement?
    A. The CPA does not understand the entity’s operations and industry.
    B. Management acknowledges that the entity has had recurring operating losses.
    C. The CPA is unable to review the predecessor auditor’s working papers.
    D. Management is unwilling to permit inquiry of its legal counsel.

Answer 2

6. A
7. B
8. B
9. B
10. D

Question 2

16. If the results of the auditor’s tests of controls induce the auditor to change the assessed level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain constant, what is the effect on the acceptable level of detection risk?
    A. A change in detection risk cannot be calculated because audit risk and inherent risk values are not given.
    B. Detection risk would increase from 0.3 to 0.6.
    C. Detection risk would decrease from 0.4 to 0.2.
    D. Detection risk would not change since audit risk and inherent risk do not change.
17. Which of the following is true?
    A. Auditors are responsible for detecting all fraudulent financial reporting.
    B. Auditors must specifically consider fraud risk from overstating liabilities.
    C. Auditors must specifically consider fraud risk from management override of controls.
    D. All of them are true
18. The principal reason for developing a written audit program is to help assure that the
    A. audit work is properly supervised.
    B. audit work is properly planned and documented.
    C. audit report contains only significant findings.
    D. work of different auditors is properly coordinated.
19. Which of the following questions would an auditor most likely include in an internal control questionnaire for notes payable?
    A. Are assets that collateralize notes payable critically needed for the entity‟s continued existence?
    B. Are two or more authorized signatures required on checks that repay notes payable?
    C. Are the proceeds from notes payable used for the purchase of noncurrent assets?
    D. Are direct borrowings on notes payable authorized by the board of directors?
20. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely associated with which of the following?
    A. Separation of duties
    B. Flowchart accuracy
    C. Understanding the system
    D. Tests of controls

Answer 2

16. C
17. C
18. B
19. D
20. C

Question 2

21. Which of the following statements regarding the auditor’s documentation of the client‟s internal control structure is correct?
    A. Documentation must include flow charts.
    B. Documentation must include procedural write-ups.
    C. No documentation is necessary although it is desirable.
    D. No one particular form of documentation is necessary, and the extent of documentation may vary.
22. The objective of tests of details of transactions that are being performed as tests of controls procedures is to
    A. monitor the design and use of entity documents such as pre-numbered shipping form.
    B. determine whether controls have been placed in operation.
    C. detect material misstatements in the account balances in the financial statements.
    D. evaluate whether controls operate effectively.
23. Tests of controls least likely include:
    A. Inquiries of appropriate client vendors.
    B. Reperformance of a control.
    C. Observation of the application of an accounting procedure.
    D. Inspection of documents.
24. Which of the following audit tests would be a test of controls?
    A. Tests of the specific items making up the balance in a financial statement account.
    B. Comparing inventory prices to vendors’ invoices.
    C. Tracing signatures on canceled checks to board of directors‟ authorizations.
    D. Tests of the additions to property, plant, and equipment by physical inspections.
25. An audit process is a well-defined methodology for organizing an audit to ensure that
    A. the evidence gathered is both sufficient and competent.
    B. all appropriate audit objectives are specified.
    C. all appropriate audit objectives are met.
    D. All of the responses are correct

Answer 2

21. D
22. D
23. A
24. C
25. D

Question 3

26. An audit evidence is generally considered relevant when it is
    A. derived through valid statistical sampling.
    B. objective and unbiased.
    C. factual, adequate, and convincing.
    D. consistent with the audit objectives.
27. Two overriding considerations that affect an auditor’s judgment in accumulating evidence are:
28. Sufficient competent evidence must be accumulated to meet the auditor’s professional responsibility.
29. Cost of accumulating evidence should be minimized. In evaluating these conditions,
    A. the first is more important than the second.
    B. the second is more important than the first.
    C. they are equally important.
    D. it is impossible to prioritize one.
30. In testing the existence assertion for an asset, an auditor ordinarily works from the
    A. financial statements to the potentially unrecorded items.
    B. potentially unrecorded items to the financial statements.
    C. accounting records to the supporting evidence.
    D. supporting evidence to the accounting records.
31. WB Industries has significant information that is transmitted, processed, maintained, and accessed electronically. The auditor has concluded that it is not possible to reduce detection risk to an acceptable level by performing only substantive tests for a number of financial statement assertions. The auditor’s alternative strategy is to
    A. increase the acceptable audit risk.
    B. focus audit tests on other assertions for which substantive tests prove to be effective.
    C. require management to change its information system to provide appropriate evidence.
    D. perform tests of controls to gather evidential matter to be used as basis of assessing control risk related to those assertions.
32. Audit procedures are normally performed
    A. early in the accounting period being examined.
    B. throughout the accounting period being examined, but with emphasis on the transactions near the end.
    C. within one to three months after the close of the accounting period.
    D. During all three of the above periods

Answer 3

26. D
27. A
28. C
29. D
30. D

Question 4

31. The auditor would unlikely perform early substantive testing of account balances when:
    A. A number of significant deviations from control policies and procedures were detected
    during tests of controls.
    B. Due to economic factors, the fourth quarter activity this year is expected to be somewhat sluggish.
    C. The client uses a natural business year.
    D. The taking of the client’s inventory is performed at an early date.
32. As the acceptable level of detection risk decreases, an auditor may change the
    A. timing of substantive tests by performing them at an interim date rather than at yearend.
    B. nature of substantive tests from a less effective to a more effective procedure.
    C. timing of tests of controls by performing them at several dates rather than at one time.
    D. assessed level of inherent risk to a higher amount.
33. The auditor is concerned that a client usually fails to bill customers for shipments. An audit procedure that would gather relevant evidence would be to
    A. select a sample of duplicate sales invoices and trace each to related shipping documents.
    B. trace a sample of shipping documents to related duplicate sales invoices.
    C. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
    D. compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.
34. Which of the following is not among the risk assessment procedures that the auditor should perform in obtaining an understanding of the entity and its environment, including its internal control?
    A. Inquiries of management and others within the entity
    B. Analytical procedures
    C. Observation and inspection
    D. Confirmation
35. The audit procedure that may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios and trends that may indicate matters that have financial statement and audit implications is
    A. inquiries of management.
    B. observation and inspection.
    C. confirmation.
    D. analytical procedures.

Answer 4

31. A
32. B
33. B
34. D
35. D

Question 5

36. Which of the following is a definition of control risk?
    A. The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
    B. The risk that the auditor will not detect a material misstatement.
    C. The risk that the auditor’s assessment of internal controls will be at less than the maximum level.
    D. The susceptibility of material misstatement assuming there are no related internal control policies or procedures.
37. The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually is reflected in its
    A. computer-based controls.
    B. system of segregation of duties.
    C. control environment.
    D. safeguards over access to assets.
38. Which of the following services provides the lowest level of assurance on a financial statement?
    A. An audit
    B. A review
    C. Neither service provides assurance on financial statements
    D. Each service provides the same level of assurance on financial statements
39. ________ risk reflects the possibility that the information upon which the business decision was made was inaccurate.
    A. Client acceptance
    B. Business
    C. Information
    D. Control
40. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?
    A. Presumptive
    B. Judgmental
    C. Criticizing
    D. Questioning

Answer 5

36. A
37. C
38. B
39. C
40. D

Question 6

41. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control?
    A. Compensating
    B. Preventive
    C. Adjustive
    D. Nonroutine
42. Significant unexpected fluctuations identified by analytical procedures will usually necessitate a(n)
    A. audit report modification.
    B. understanding of the client’s internal control.
    C. explanation in the representation letter.
    D. auditor investigation.
43. Which of the following statements is correct regarding internal control?
    A. A well-designed internal control environment ensures the achievement of an entity’s control objectives.
    B. An inherent limitation to internal control is the fact that controls can be circumvented by management override.
    C. A well-designed and operated internal control environment should detect collusion perpetrated by two people.
    D. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.
44. A procedure that involves tracing a transaction from its origination through the company’s information systems until it is reflected in the company’s financial report is referred to as a(n)
    A. analytical analysis.
    B. substantive procedure.
    C. test of a control.
    D. walk-through.
45. During an audit engagement, pertinent data are compiled and included in the audit working papers. The working papers primarily are considered to be
    A. a client-owned record of conclusions reached by the auditors who performed the engagement.
    B. evidence supporting financial statements.
    C. support for the auditor’s representations as to compliance with relevant PSAs.
    D. a record to be used as a basis for the following year’s engagement.

Answer 6

41. A
42. D
43. B
44. D
45. C

Question 7

46. An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is what type of audit?
    A. Operational audit
    B. Production audit
    C. Compliance audit
    D. Financial statement audit
47. When considering internal control, an auditor must be aware of the concept of reasonable assurance which recognizes that the
    A. employment of competent personnel provides assurance that management’s control
    objectives will be achieved.
    B. establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
    C. cost of internal control should not exceed the benefits expected to be derived therefrom.
    D. separation of incompatible functions is necessary to ascertain that the internal control is effective.
48. When engaged to compile the financial statements of an entity, an accountant is required to possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of the
    A. internal control awareness of the entity’s senior management.
    B. risk factors relating to misstatements arising from illegal acts.
    C. design of the entity’s internal controls implemented.
    D. nature of the entity’s business transactions, the form of its accounting records and the accounting basis on which the financial information is to be presented.
49. An auditor uses assessed control risk to
    A. evaluate the effectiveness of the entity’s internal controls.
    B. identify transactions and account balances where inherent risk is at the maximum.
    C. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
    D. determine the acceptable level of detection risk for financial statement assertions.
50. Which of the following should an auditor do when control risk is assessed at the maximum level?
    A. Perform fewer substantive tests of details.
    B. Perform more tests of controls.
    C. Document the assessment.
    D. Document the internal control system more extensively.

Answer 7

46. A
47. C
48. D
49. D
50. C

Question 8

Situation 1
On January 1, 2025, the shareholders’ equity section of BLISS, INC.’s statement of financial position disclosed the following information:
12.5% Convertible preference shares (P40 par value; 150,000 shares
authorized, 60,000 shares issued and outstanding) ………………………………. P2,400,000
Ordinary shares (P5 par value; 600,000 shares authorized,
360,000 shares issued and outstanding) ……………………………………………… 1,800,000
Share premium ………………………………………………………………………………… 9,000,000
Retained earnings ………………………………………………………………………….. 13,500,000
Total shareholders’ equity ………………………………………………………………. P26,700,000

The following equity transactions occurred during 2025 and 2026:
1. On February 2, 2025, 45,000 ordinary shares were acquired by the company for P33 per share.
2. On September 30, 2025, 15,000 preference shares were converted to ordinary shares. One preference share is convertible into one ordinary share. At the time of conversion, the ordinary shares had a market value of P42 per share.
3. On December 21, 2025, the company placed a share subscription of 30,000 ordinary shares at a subscription price of P33 per share. The subscription contract required a cash down payment equal to 60% of the subscription price, with the balance due on February 1, 2026.
4. On February 1, 2026, 25,500 ordinary shares were issued according to the subscription contract. Because of default by a subscriber, 4,500 shares were not issued. The subscription contract requires the subscriber to forfeit all cash advances.
5. On April 15, 2026, 30,000 shares held as treasury were reissued at P50 per share.
6. On May 16, 2026, a special dividend of preference shares was distributed to ordinary shareholders. One hundred ordinary shares entitled a shareholder to one preference share. The market price of preference shares was P40 per share at the time.
7. Cash dividends are declared for preference and ordinary shares on October 31 and April 30 of each year. Semiannual cash dividends for ordinary shares are P0.50 per share.

Bliss, Inc. reported net income of P1,980,000 in 2025 and P2,670,000 in 2026.

Questions:
What are the balances of the following accounts on December 31, 2025?
51. Share premium
A. P10,365,000 B. P10,239,000 C. P10,328,100 D. P9,840,000

52. Retained earnings (before appropriation for treasury shares)
    A. P14,872,500 B. P14,895,000 C. P14,740,800 D. P14,902,500

What are the balances of the following accounts on December 31, 2026?
53. Share premium
A. P10,964,100 B. P10,838,100 C. P10,328,100 D. P10,683,900

54. Retained earnings (before appropriation for treasury shares)
    A. P17,665,000 B. P17,098,400 C. P16,944,862 D. P16,790,662
55. Preference Shares Ordinary Shares
    A. P1,954,200 || P2,002,500
    B. 1,800,000 || 2,002,500
    C. 1,954,200 || 1,875,000
    D. 1,800,000 || 1,875,000

Answer 8

51. A
52. B
53. B
54. D
55. A

Question 8

Situation 2

The following independent situations describe facts concerning the ownership of various assets.
(a) Dikit Company purchased a tooling machine in 2010 for P255,000. The machine was being depreciated on the straight-line method over an estimated useful life of 30 years with no salvage value. At the beginning of 2025, when the machine had been in use for 15 years, Dikit Company paid P51,000 to overhaul the machine. As a result of this improvement, Dikit Company estimated that the useful life of the machine would be extended an additional five years.

(b) Andres Manufacturing Co., a calendar-year company, purchased a machine for P150,000 on January 1, 2023. At the date of purchase, Andres incurred the following additional costs:
Loss on sale of old machinery ……………P9,000
Freight cost …………………………………………2,700
Installation cost …………………………………….5,700
Testing costs prior to regular operation ….2,400

The estimated salvage value of the machine was P24,000, and Andres estimated that the machine would have a useful life of 15 years, with depreciation being computed using the straight-line method. In January 2025, accessories costing P8,775 were added to the machine to reduce its operating costs. These accessories neither prolonged the machine’s life nor did they provide any additional salvage value.

(c) On July 1, 2025, Step Corporation purchased equipment at a cost of P144,000. The equipment has an estimated salvage value of P18,000 and is being depreciated over an estimated life of five years under the double-declining balance method of depreciation. For the six months ended December 31, 2025, Step Corporation recorded a half-year’s depreciation.

(d) On January 2, 2025, Queen Company acquired a tract of land containing an extractable natural resource for P15,000,000. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons and that the land will have a value of P2,500,000 after restoration. The entity is legally required to restore the land to its original condition at a discounted amount of P1,000,000.

Early in 2025, Queen Company roads were constructed and other development costs were incurred to facilitate the extraction and transportation of mined natural resource at a cost of P3,000,000. In 2025, 200,000 tons of natural resource were mined and sold.

A new geological survey at the end of 2026 indicated that 2,500,000 tons were available for mining. In 2026, 112,500 tons were mined and sold.

(e) In January 2025, Brando Corporation entered into a contract to acquire a new machine for its factory. The machine, which had a cash price of P450,000, was paid for as follows:
Down payment ………….P 120,000
1,200 of Brando Corporation ordinary shares with an agreed-upon value of P325 per share …….390,000
……………………………… P510,000

Prior to the machine’s use, installation costs of P30,000 were incurred. The machine has an estimated useful life of 16 years and an estimated salvage value of P60,000. The straight-line method of depreciation is used.

Questions:
56. What amount of depreciation expense should be recognized by Dikit Company for 2025?
A. P11,050 B. P11,900 C. P6,375 D. P8,925

57. What amount of depreciation expense should be recognized by Andres Manufacturing Co. for 2025?
    A. P11,198 B. P9,705 C. P9,120 D. P9,795
58. What amount of depreciation expense should be recognized by Step Corporation for 2025?
    A. P50,400 B. P25,200 C. P28,800 D. P57,600
59. What amount of depletion expense should be recognized by Queen Company for 2026?
    A. P738,612 B. P705,375 C. P675,000 D. P464,062
60. What amount of depreciation expense should be recognized by Brando Corporation for 2025?
    A. P31,875 B. P28,125 C. P30,000 D. P26,250

Answer 8

56. D
57. D
58. C
59. C
60. D

Question 8

Situation 3
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:

Date Activity Cost
2015-2016 Research conducted to develop device…………………..P1,259,100
Jan. 2017 Design and construction of a prototype………………………..262,800
Mar. 2017 Testing of models………………………………………………………126,000
Jan. 2018 Legal and other fees to process patent application; patent granted June 2008 …………186,150
Nov. 2019 Engineering activity necessary to advance the design of the device to the manufacturing stage ……….244,500
April 2021 Research aimed at modifying the design of the patented device ……………………………129,000
May 2025 Legal fees paid in a successful patent infringement suit against a competitor ………..102,000

Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2023, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2025.

Compute the carrying value of Patent No. 112170 on each of the following dates:
61. December 31, 2018
A. P180,675 B. P186,150 C. P293,788 D. P175,200

62. December 31, 2022
    A. P223,200 B. P52,560 C. P131,400 D. P122,640
63. December 31, 2025
    A. P120,560 B. P78,840 C. P52,560 D. P98,550

Answer 8

61. D
62. C
63. C

Question 9

Situation 4
BARTOLO COMPANY has provided information on intangible assets as follows:
* A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting records at a net book value of P4,000,000 when Valenzuela sold it to Bartolo.
* During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for 10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the franchise for 2015 was P5,000,000. Bartolo takes a full year amortization in the year of purchase.
* The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
. P866,000
Bartolo estimates that these costs will be recouped by December 31, 2018. The materials
and equipment purchased have no alternative uses.
* On January 1, 2015, because of recent events in the field, Bartolo estimates that the remaining
life of the patent purchased on January 1, 2014 is only 5 years from January 1, 2015.

64. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?
    A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
65. As a result of the facts above, compute the total amount of charges against income for the year ended December 31, 2015?
    A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

Answer 9

64. A
65. B

Question 10

Situation 5
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the employees remaining in the entity’s employ during the vesting period.

The shares will vest at the end of year 1 if the entity’s earnings increase by more than 18 percent; at the end of year 2 if the entity’s earnings increase by more than an average of 13 percent per year over the two-year period; and at the end of year 3 if the entity’s earnings increase by more than an average of 10 percent per year over the three-year period.

The shares have a fair value of P20 per share at the start of year 1, which equals the share price at grant date.

By the end of year 1, the entity’s earnings have increased by 14 percent, and 20 employees have left. The entity expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further 30 employees will leave during year 2.

By the end of year 2, the entity’s earnings have increased by only 10 percent and therefore the shares do not vest at the end of year 2. 42 employees have left during the year. The entity expects that a further 15 employees will leave during year 3, and that the entity’s earnings will increase by at least 6 percent, thereby achieving the average 10 percent per year.

By the end of year 3, 10 employees have left and the entity’s earnings had increased by 8 percent, resulting in an average of 10.67 percent per year.

Based on the foregoing, answer the following:
66. What amount of compensation expense should be recognized in year 1?
A. P450,000 B. P480,000 C. P300,000 D. P320,000

67. What amount of compensation expense should be recognized in year 2?
    A. P104,000 B. P134,000 C. P114,000 D. P244,000
68. What amount of compensation expense should be recognized in year 3?
    A. P302,000
    B. P432,000
    C. P292,000
    D. P312,000
69. What amount should be reported as share options outstanding at the end of year 2?
    A. P564,000
    B. P584,000
    C. P544,000
    D. P614,000
70. What amount should be reported as share options outstanding at the end of year3?
    A. P900,000
    B. P980,000
    C. P1,000,000
    D. P856,000

Answer 10

66. A
67. C
68. C
69. A
70. D