AFAR | MQB FIFTH YEAR

Mock Quiz Bee #1 | AFAR EASY | QUESTION #1 GOOD LUCK!

A not-for-profit organization receives an asset for which they have little or no discretion over the use of the
asset. The organization should report the asset as a(n)
a. Contribution.
b. Agency transaction.
c. Exchange.
d. Conditional transfer
ANSWER: B | According to the Not-for-Profit Guide, when a not-for-profit organization has little or no
discretion over the use of the asset, the transaction is an agency transaction.
Mock Quiz Bee #1 | AFAR EASY | QUESTION #2 GOOD LUCK!
On November 30, 2017, Buffet, Inc. purchased for cash at ₱15 per share all 250,000 shares of the
outstanding common stock of Shaw Co. At November 30, 2017, Shaw’s balance sheet showed a carrying
amount of net assets of ₱3,000,000. At that date, the fair value of Shaw’s property, plant and equipment
exceeded its carrying amount by ₱400,000.

In its November 30, 2017 consolidated balance sheet, what amount should Buffet report as goodwill?
ANSWER: ₱350,000 | In an acquisition, the net assets of the acquired firm are recorded at their FV. The
excess of the cost of the investment over the FV of the net assets acquired is allocated to goodwill. The cost
of this investment is ₱3,750,000 (250,000 shares × ₱15), and the FV of the net assets acquired, excluding
goodwill is ₱3,400,000 (₱3,000,000 + ₱400,000). Therefore, the amount allocated to goodwill is ₱350,000
(₱3,750,000 – ₱3,400,000).
Mock Quiz Bee #1 | AFAR EASY | QUESTION #3 GOOD LUCK!
The year-end balance sheet and residual profit and loss sharing percentages for the Ara, Belle, and Grace
partnership on December 31, 2005, are as follows:

Cash P 30,000
Accounts payable P 200,000
Loan to Ara 40,000
Loan from Belle 50,000
Other assets 480,000
Ara, capital (25%) 70,000
Belle, capital (25%) 80,000
Grace, capital (50%) 150,000

The partners agree to liquidate the business and distribute cash when it becomes available. A cash
distribution plan for the Ara, Belle, and Grace partnership will show that cash available, after outside
creditors are paid, will initially go to
a. Ara in the amount of P20,000.
b. Belle in the amount of P45,000.
c. Belle in the amount of P55,000.
d. Grace in the amount of P90,000.
ANSWER: C
Vulnerability ranks:
Ara equity (P70,000 - P40,000)/.25 = P120,000 = 1
Belle equity (P80,000 + P50,0000/.25 = P520,000 = 3
Grace equity (P150,000/.5) = P300,000 = 2

Assumed loss absorption:

25% 25% 50%

Ara Belle Grace Total

Equities P30,000 P130,000 P150,000 P310,000

Loss to
 Eliminate (30,000) (30,000) (60,000) (120,000)
Subtotals 0 P100,000 P90,000 P190,000
Loss to
Eliminate (45,000) (90,000) (135,000)
Subtotals P55,000 P0 P55,000

Mock Quiz Bee #1 | AFAR EASY | QUESTION #4 GOOD LUCK!

Franchise fees are properly recognized as revenue
a. when received in cash.
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service
ANSWER: D | Franchisors record initial franchise fees as revenue only when and as they make “substantial
performance” of the services they are obligated to perform and when collection of the fee is reasonably
assured.
Mock Quiz Bee #1 | AFAR EASY | QUESTION #5 GOOD LUCK!
When remeasuring foreign currency financial statements into the functional currency, which of the following
items would be remeasured using historical exchange rate?
a. Inventories carried at cost.
b. Marketable equity securities reported at market values.
c. Bonds payable.
d. Accrued liabilities.
ANSWER: A | When an entity’s books are not maintained in the functional currency, it is necessary to use
historical exchange rates in the remeasurement process of certain accounts. Among the accounts listed is
inventories carried at cost. Only marketable equity securities reported at cost would be remeasured using
historical exchange rates. Bonds payable and accrued liabilities would be remeasured at the current rate.
Mock Quiz Bee #1 | AFAR EASY | QUESTION #6 GOOD LUCK!
BB Pauwi Na Ko, Inc. opens a sales agency in Makati City, and a working fund for ₱20,000 is established on
the imprest basis. The first payment from the fund is ₱3,000 for rent.

What is the journal entry, if any, that the home office should record for this transaction?
ANSWER: None / No entry | In adopting the imprest system for the agency working fund, the home office
writes a check to the agency for the amount of the fund. Establishment of the fund is recorded on the home
office books by a debit to the Agency working fund and credit cash. The agency will request fund
replenishment whenever the fund runs low and at the end of each fiscal period. Such a request is normally
accomplished by an itemized and authenticated statement of disbursements and the paid vouchers. Upon
sending the agency a check in replenishment of the fund, the home office debits expense.
Mock Quiz Bee #1 | AFAR EASY | QUESTION #7 GOOD LUCK!
JUMBO Hotdog Kaya Mo Ba ‘To Corp. uses the percentage-of-completion method of revenue recognition in
accounting for its long-term construction contracts. JUMBO Hotdog Kaya Mo Ba ‘To Corp.’s progress billings
account is a
a. Revenue account
b. Non-current liability account
c. Contra current asset account
d. Contra non-current asset account
ANSWER: C | In the construction industry, operating cycles for construction contracts generally exceed one
year. Therefore, the predominant practice is to classify all contract-related assets and liabilities as current.
On the balance sheet, the Construction in Progress (CIP) account is netted with the contra account,
progress billings. If CIP exceeds billings, the excess is reported as a current asset. If billings exceed CIP, the
excess is reported as a current liability.

Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #1 GOOD LUCK!

Watson Corp. (a Philippine-based company) sold parts to a foreign customer on December 1, 2017, with
payment of 10 million foreign currencies to be received on March 31, 2018. The following exchange rates
apply:
 Forward rate
Dates Spot Rate (for 3/31/2018)
Dec. 1, 2017 ₱0.0035 ₱0.0034 (4 months)
Dec. 31, 2017 0.0033 0.0032 (3 month)
March 31, 2018 0.0038 N/A
Watson’s incremental borrowing rate is 12%. The present value factor for three months at an annual rate of
interest of 12% (1% per month) is 0.9706.

Assuming that Watson entered into no forward contract, how much foreign exchange gain or loss should it
report on its 2017 income statement with regard to this transaction? Indicate if it is a gain or loss.
ANSWER: 2,000 loss | No forward contract, therefore, only the sale transaction:
(₱0.0035 - ₱0.0033 = ₱0.0002 loss x 10 million foreign currencies = ₱2,000 loss)
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #2 GOOD LUCK!
On January 1, 2016, Kaloka Corp. purchased all of Taranta Corp.’s common stock for P1,200,000. On that
date, the fair values of Taranta’s assets and liabilities equaled their carrying amounts of P1,320,000 and
P320,000, respectively. During 2016, Taranta paid cash dividends of P20,000. Selected information from the
separate balance sheets and income statements of Kaloka and Taranta as of December 31, 2016, and for the
year then ended follows:
Kaloka Taranta
Balance sheet accounts
Investment in subsidiary P1,320,000 --
Retained earnings 1,240,000 560,000
Total stockholders’ equity 2,620,000 1,120,000
Income statement accounts
Operating income 420,000 200,000
Equity in earnings of Sharp 140,000 --
Net income 400,000 140,000

In Kaloka’s December 31, 2016 consolidated balance sheet, what amount should be reported as total
retained earnings?
ANSWER: P1,240,000 | When the equity method of accounting is used, the parent company’s retained
earnings will be equal to the consolidated retained earnings balance. It can be determined that the equity
method is being followed because the account “Equity in earnings of Taranta” appears in the parent’s
income statement. In addition it is important to note that the balance sheet accounts presented are dated as
of the end of the year; therefore, the parent company’s retained earnings of P1,240,000, should already
include all income statement balance account adjustments. Thus, no additional income amounts will need to
be added to the P1,240,000 retained earnings balance, in order to determine the total retained earnings
balance.
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #3 GOOD LUCK!
To determine whether it controls an investee, an investor shall assess whether it has all the following, except:
a. the purpose and design of the investor
b. exposure, or rights, to variable returns from its involvement with the investee
c. the ability to use its power over the investee to affect the amount of the investor's returns
d. power over the investee.
ANSWER: A | Paragraph B.2 of the Appendices to IFRS 10, Consolidated Financial Statements, states on
how to assess and determine whether an investor controls an investee on which it has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor's returns.
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #4 GOOD LUCK!
Planet Company acquired a 70% interest in the Star Company in year 1. For the year ended December 31,
year 2, Star reported net income of ₱80,000. During year 2, Planet sold merchandise to Star for ₱10,000 at
a profit of ₱2,000. The merchandise remained in Star’s inventory at the end of year 2. For consolidation
purposes what is the non-controlling interest’s share of Star’s net income for year 2?
ANSWER: 24,400 | Because Planet owns 70% interest in Star, the non-controlling interest in star is 30%.
Therefore, the non-controlling interest’s share in Star’s net income of ₱80,000 is 30% × ₱80,000 = ₱24,000.
Planet’s sale of merchandise to Star for ₱10,000 will be eliminated on the consolidated worksheet, and
Planet’s income will be reduced by the intercompany profit of ₱2,000. This will not affect the non-controlling
interest’s share of income because it was a downstream sale from the parent to the subsidiary and is
eliminated by the parent.
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #5 GOOD LUCK!
Ryan, Ge, and Kim are partners with average capital balances during 2016 of ₱120,000, ₱60,000, and
₱40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting
salaries of ₱30,000 to Ryan and ₱20,000 to Kim, the residual profit or loss is divided equally. In 2016, the
partnership sustained a ₱33,000 loss before interest and salaries to partners. By what amount should
Ryan’s capital account change?
ANSWER: 7,000 increase | When dividing the partnership loss of ₱33,000, first interest and salaries are
allocated to the partners, increasing their capital balances. This allocation of interest and salaries will also
increase the amount of loss. This increased loss amount would then be allocated to the partners, decreasing
their capital accounts. The computations are shown below.

Ryan Ge Kim
Interest allowance (10% of avg. cap. balances) ₱12,000 ₱6,000 ₱4,000
Salaries 30,000 -- 20,000
Residual* (₱105,000 ÷ 3) _(35,000) (35,000) (35,000)
Increase (decrease) in cap. account ₱7,000 ₱(29,000) ₱(11,000)

* The residual loss of ₱105,000 is the loss resulting after the interest and salary allowances are deducted
[₱33,000 loss – (₱12,000 + ₱6,000 +₱4,000) – (₱30,000 + ₱20,000)]. Thus, Ryan’s account increases by
₱7,000.
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #6 GOOD LUCK!
A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an unrecognized
firm commitment, is classified as a
a. Fair value hedge.
b. Cash flow hedge.
c. Foreign currency hedge.
d. Underlying.
ANSWER: A | A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized
asset or liability or firm commitment.
Mock Quiz Bee #1 | AFAR AVERAGE | QUESTION #7 GOOD LUCK!
In IAS 21 The Effects of Changes in Foreign Exchange Rates, it is defined as the currency of the primary
economic environment in which the entity operates.
ANSWER: Functional Currency | Paragraph 8 of IAS 21 The Effects of Changes in Foreign Exchange Rates
defines functional currency as the currency of the primary economic environment in which the entity
operates.

Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #1 GOOD LUCK!

The governing board of Hirap Hospital, a nonprofit hospital affiliated with a religious organization, acquired
100 BaMI Company bonds for P103,000 on June 30, 2016.

The bonds pay interest on June 30 and December 30. On December 31, 2016, interest of P3,000 was received
from BaMI, and the fair value of the BaMI bonds was P105,000. The governing board acquired the BaMI bonds
with cash which was unrestricted, and it classified the bonds as trading securities at December 31, 2016, since
it intends to sell all of the bonds in January 2017.

As a result of the investment in BaMI bonds, what amount should be included in revenue, gains, and other
support on the statement of operations for the year ended December 31, 2016?
ANSWER: 5,000 | According to the AICPA Audit and Accounting Guide, Health Care Organizations,
unrealized gains on trading securities should be included as part of the amount reported for revenue, gains,
and other support on the statement of operations. These unrealized gains are included in the performance
indicator. Likewise, unrestricted revenues from interest and dividends are included as part of the amount
reported for revenue, gains, and other support on the statement of operations. Therefore, Hirap Hospital
should report both the P3,000 of interest revenue and the P2,000 unrealized holding gain (P105,000 less
P103,000) in the amount reported for revenue, gains, and other support on its statement of operations for
the year ended December 31, 2016.
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #2 GOOD LUCK!
The following condensed balance sheet is presented for the partnership of Erwin and Levi, who share profits
and losses in the ratio of 60:40, respectively:
Other Assets 450000
Erwin, Loan 20000
470000
Accounts
Payable 120000
Erwin, Capital 195000
Levi, Capital 155000
470000
The partners have decided to liquidate the partnership.

If the other assets are sold for P385,000, what amount of the available cash should be distributed to Erwin?
ANSWER: 136,000 | This situation represents a simple liquidation since all assets are distributed at one
point in time rather than in installments. In a simple liquidation all of the noncash assets are sold and the
proceeds from their sale are compared to their book value to compute the gain or loss. The gain or loss on
the assets is then distributed to the partners’ accounts before any of the cash is distributed. The partner loan
should not be considered a noncash asset for the purpose of determining gain or loss, thus, Erwin is
responsible to the partnership for the repayment of the entire amount of the loan. The repayment of the loan
reduces that partner’s (Erwin) distribution as follows:

Partner balances
before liquidation Erwin Levi Total
Loan (debit) P(20,000) -- P(20,000)
Capital (credit) 195,000 P155,000 350,000
Net balances P175,000 P155,000 P330,000
Loss on sale of other assets (450 – 385) 39,000 26,000 (65,000)
Cash available for partners P136,000 P129,000 P265,000
Cash available for credits 120,000
Total cash from sale of noncash assets $385,000
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #3 GOOD LUCK!
Milktea Tayo Hospital, a nonprofit affiliated with a religious group, reported the following information for the
year ended December 31, 2011:
● Gross patient service revenue at the hospital’s full established rates 980,000
● Bad debts expense 10,000
● Contractual adjustment with the third-party payors 115,000
● Allowance for discounts to hospital employees 15,000

On the hospital’s statement of operations for the year ended December 31, 2011, what amount should be
reported as net patient service revenue?
ANSWER: 850,000
Health Care Organizations, provides that for contractual adjustments and discounts is recognized on the
accrual basis and deducted from gross patient service revenue to determine net patient revenue. Bad debts
expense is reported as an operating expense, not as a contra to gross patient service revenue.
Thus,
Gross patient service revenue 980,000
 (115,000
Contractual adjustments )
Allowance for discounts - employees (15,000)
Net Patient Service Revenue 850,000
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #4 GOOD LUCK!
Albert University, a private not-for-profit university, had the following cash inflows during the year ended
June 30, 2016:
i. ₱500,000 from students for tuition.
ii. ₱300,000 from a donor who stipulated that the money be invested indefinitely.
iii. ₱100,000 from a donor who stipulated that the money be spent in accordance with the
wishes of Albert’s governing board.

On Albert University’s statement of cash flows for the year ended June 30, 2016, what amount of these cash
flows should be reported as operating activities?
ANSWER: 600,000 | In accordance with FASB ASC 958, nongovernmental not-for-profit organizations are
required to report a statement of cash flows. On this statement, cash flows are reported using the
classifications of operating, investing, and financing activities. Cash flows related to revenues and expenses
that are unrestricted should be reported in the operating activities section. The cash inflows from both tuition
(₱500,000) and the unrestricted contribution (₱100,000) are both unrestricted and should be reported as
operating activities.
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #5 GOOD LUCK!
In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a
business combination after the business combination has been completed in accordance with other applicable
IFRSs. However, which of the following that the International Financial Reporting Standards 3 Business
Combinations (IFRS 3) specifically provides accounting requirements?
a. reacquired rights
b. contingent liabilities
c. contingent consideration
d. insurance contracts.
ANSWER: D | Paragraph 17 of IFRS 3 Business Combinations provide one of the two exceptions of which
insurance contracts are covered by IFRS 4 Insurance Contracts.
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #6 GOOD LUCK!
If the Alaska Museum, a not-for-profit organization, received a contribution of historical artifacts, it need not
recognize the contribution if the artifacts are to be sold and the proceeds used to
a. Support general museum activities.
b. Acquire other items for collections.
c. Repair existing collections.
d. Purchase buildings to house collections.
ANSWER: B | An entity need not recognize the contributions of works of art and historical artifacts if the
collection is held for public exhibition rather than financial profit, cared for and preserved, and, if sold, the
proceeds are used to acquire other items for collections.
Mock Quiz Bee #1 | AFAR DIFFICULT | QUESTION #7 GOOD LUCK!
Mananalo Tayo Ventures operates a branch in Cebu City. Selected accounts taken from the May 31, 2016
statements of Mananalo Tayo and its branch follow:
Home Office Branch
Sales P380,000 P353,000
Shipments to branch 150,000 -
Shipments to branch-loading 39,500 -
Inventory, June 1, 2015 24,000 16,000
Purchases 300,000 60,000
Shipments from home office - 187,500
Inventory, May 31, 2016 28,000 20,700
The branch ending inventory included items costing P8,700 that were acquired from outside suppliers. What
is the realized markup on branch merchandise that would be recognized by the home office?
ANSWER: 37,100
Shipments to branch-loading/allowance for overvaluation 39,50
of merchandise before adjustments 0
Allowance for overvaluation of ending inventory (after (2,400
adjustment): (20,700-8,700)x25/125* )
37,10
Realized mark up on branch merchandise 0

*Since there are no shipments in transit and there was no error in recording shipments, therefore, the
shipments from office account was correctly recorded, so, to compute for the billing price would be:
187,500/150,000 = 25%. Markup on cost would be 25%