FAR - Region 11
FAR - Region 11
FAR - Region 11
Qualifying round:
Easy
1. Which of the following is not true about accounting for inventory under IFRS?
a. FIFO is allowed.
b. Interest costs may be capitalized if there is a lengthy production period to prepare
goods for sale
c. Inventories are always valued at net realizable value.
d. The weighted-average method is acceptable.
Answer: C
The requirement is to identify the statement that is not correct about accounting for
inventories under IFRS. Letter (c) is answer because inventories are not always valued at
net realizable value. They are valued at the lower of cost or net realizable value.
Sales ₱ 100,000
Cost of Sales ₱ 50,000
Operating Expenses ₱ 25,000
a. ₱ 100,000
b. ₱ 25,000
c. ₱ 50,000
d. ₱ 75,000
Answer: B
Sales ₱ 100,000
Less: Cost of Sales ₱ 50,000
Gross Profit ₱ 50,000
Less: Operating Expenses ₱ 25,000
Net Income ₱ 25,000
3. Which of the following is not disclosed as cash and cash equivalents on the balance sheet?
a. Checking accounts
b. Treasury stocks
c. Treasury bills
d. Money market funds
Answer: B
Checking accounts, treasury bills, money market funds are disclosed as cash and cash
equivalents items on the balance sheet. Treasury stock is in equity section.
4. Using the following information, what is the ending balance of Retained Earnings?
a. ₱ 450,000
b. ₱ 150,000
c. ₱ 250,000
d. ₱ 400,000
Answer: A
Beginning Retained Earnings ₱ 500,000
Add: Net Income ₱ 100,000
Retained earnings before dividends paid ₱ 600,000
Less: Dividends Paid ₱ 150,000
Retained Earnings, End ₱ 450,000
5. Justification for the method of determining periodic deferred tax expense is based on the concept
of
Answer: C
The objective of accounting for income taxes is to recognize the amount of current and
deferred taxes payable or refundable at the date of the financial statements. The standard
further states that this objective is implemented through recognition of deferred tax
liabilities or assets. Deferred tax expense results from changes in deferred tax assets and
liabilities.
6. On February 2, year 3, Jomar Company consigned 8 freezers to Kenvi Company for sale at
P10,000 each and paid P8,000 in transportation costs. On December 31, year 3, Kenvi reported
the sale of 2 freezers and remitted P18,500. The remittance was net of the agreed 15%
commission. What amount should Jomar recognize as consignment sales revenue for year 2?
a. P80,000
b. P12,000
c. P18,500
d. P20,000
Answer: D
A consignor recognizes sales revenue from consignments when the consignee sells the
consigned goods to the ultimate customer.
Sales commissions earned by the consignee (20,000 × 15% = 1,500) are reported as a
selling expense by the consignor and are not netted against sales revenue. Therefore,
sales revenue is reported at the total selling price of 20,000 (2 × P10,000). Note that the
transportation costs (P8,000) do not affect sales either; one-fourth (2/8) is reflected in cost
of goods sold and three-fourths (6/8) is included in ending inventory.
7. Adrian Corporation was organized in January 3, 2017 with authorized capital of P100 par value
common stock. On February 1, 2017, shares were issued at par for cash. On March 1, 2017 the
corporation’s attorney accepted 5,000 shares of the common stock in settlement for legal
services with a fair value of P100,000. Additional paid-in capital would increase on
2/1/17 3/1/17
a. No Yes
b. No No
c. Yes Yes
d. Yes No
Answer: A
On February 1, when shares were issued at par for cash, the following journal entry would
have been made:
On March 1, year 1, however, the issuance of 5,000 shares in settlement for legal services
rendered would have been recorded as follows:
Legal fees 100,000
Common stock
(P100 × 5,000 shares) 50,000
Addl. paid-in capital 50,000
Stock issued for services (i.e., in a nonmonetary transaction) should be recorded at the
fair market value of those services (in this case P100,000).
8. Merry Co. purchased a machine costing P125,000 for its manufacturing operations and paid
shipping costs of P20,000. Merry spent an additional P10,000 testing and preparing the machine
for use. What amount should Merry record as the cost of the machine?
a. P155,000
b. P145,000
c. P135,000
d. P125,000
Answer: A
The cost of machinery includes all expenditures incurred in acquiring the asset and
preparing it for use. Cost includes the purchase price, freight and handling charges,
insurance on the machine while in transit, cost of special foundations, and costs of
assembling, installation, and testing. All of the costs given in this problem are properly
recorded as the cost of the machine.
Therefore the cost to be recorded is P155,000 (P125,000 + P20,000 + P10,000).
9. Denver Corporation purchased bonds at a discount on the open market as an investment and
intends to hold these bonds to maturity. Assume that Denver elects the fair value option. Bing
should account for these bonds at
a. Cost
b. Amortized cost
c. Fair value
d. Lower of cost or market
Answer: C
A company may elect to value held-to-maturity securities at fair value. Any increase or
decrease in value is reported as a gain or loss and included in earnings for the period.
Answer (a) is incorrect because bonds are recorded at cost, but reported at amortized cost
at year-end. Answer (b) is incorrect because Denver elected the fair value option. Answer
(d) is incorrect because investments are not recorded at lower of cost or market.
10. Among the items reported on Galaxy, Inc.’s income statement for the year ended December 31,
2016, first year of operation, were the following:
Payment of penalty P 50,000
Insurance premium on life of an
officer with Cord as owner and
beneficiary P 100,000
a. P0
b. P100,000
c. P50,000
d. P150,000
Answer: A
Temporary differences are differences between taxable income and accounting income
which originate in one period and reverse in one or more subsequent periods. The
payment of a penalty (P50,000) and insurance premiums where the corporation is the
beneficiary (P100,000) are not temporary differences because they never reverse. These
are examples of permanent differences, which are items that either enter into accounting
income but never into taxable income (such as these two items), or enter into taxable
income but never into accounting income.
Average
Answer: C
The determination of cost of goods sold and inventory under each of the cost flow
assumptions depends upon the method used to record the inventory: periodic or
perpetual.
a. Periodic system. Inventory is counted periodically and then priced. The ending
inventory is usually recorded in the cost of goods sold (CGS) entry.
(1) CGS = Purchases – (the change in inventory). For example, if ending inventory
decreases, all of the purchases and some of the beginning inventory have been sold. If
ending inventory increases, not all of the purchases have been sold.
b. Perpetual system. A running total is kept of the units on hand (and possibly their value)
by recording all increases and decreases as they occur. When inventory is purchased, the
inventory account, rather than purchases, is debited. As inventory is sold, the following
entry is recorded.
CGS (cost)
Inventory (cost)
Acquired 2,0000 shares of stock in Maebel, Inc. for P260,000. Gerald intends to hold
the stock as a long-term investment.
Sold an investment in Ace Motors for P350,000 when the carrying value was
P330,000.
Acquired a P500,000, four-year certificate of deposit from a bank. (During the year,
interest of P37,500 was paid to Gerald.)
Collected dividends of P12,000 on stock investments
In Gerald’s year 1 statement of cash flows, net cash used in investing activities should be
a. P 410,000
b. P 398,000
c. P 380,500
d. P 372,500
Answer: A
Investing activities include all cash flows involving assets, other than operating items.
The investing activities are
The gain on sale of investment in Ace Motors (P350,000 – P330,000 = P20,000), the interest
earned (P37,500), and dividends earned (12,000) are all operating items. Note that the sale
of investment is reported in the investing section at the cash inflow amount (P350,000),
not at the carrying value of the investment (P330,000). If the Certificate of Deposit had
been for three months instead of four years, it would be part of “Cash and Cash
equivalents” and would not be shown under investing activities.
Answer: C
Letter A, B and D are false statements.
The correct phrase for the following are:
a. Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
b. Recoverable amount is the higher of an asset’s fair value less cost to sell and its value
in use.
c. Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
4. Enteng Company leases computer equipment to customers under direct-financing leases. The
equipment has no residual value at the end of the lease and the leases do not contain bargain
purchase options. Enteng wishes to earn 8% interest on a five year lease of equipment with a fair
value of P323,400. The present value of an annuity due of P1 at 8% for five years is 4.312. What
is the total amount of interest revenue that Enteng will earn over the life of the lease?
a. P 51, 600
b. P 75,000
c. P129,360
d. P139,450
Answer: A
The annual lease payment is P75,000 (P323,400 ÷ 4.312).
After five years, total lease payments will be P375,000 (5 × $75,000). The total interest
revenue over the life of the lease is the excess of total lease payments over the fair value
of the leased asset (P375,000 – P323,400 = P51,600).
5. At January 1, year 2, Artemio Corporation had a credit balance of P260,000 in its allowance for
doubtful accounts. Based on past experience, 2% of Artemio’s credit sales have been doubtful.
During year 2 Artemio wrote off P325,000 of doubtful accounts. Credit sales for year 2 were
P9,000,000. In its December 31, year 2 balance sheet, what amount should Jamin report as
allowance for doubtful accounts?
a. ₱115,000
b. ₱180,000
c. ₱245,000
d. ₱440,000
Answer: A
To compute the 12/31/Y2 allowance for doubtful accounts, the solutions approach is to set
up a T-account for the allowance.
6. Pandanon Company’s current ratio is 4:1. Which of the following transactions would normally
increase its current ratio?
Answer: C
The formula to compute the current ratio is
Current assets
Current ratio = --------------------------
Current liabilities
Since the selling price (increase to AR) is normally higher than the cost of the
merchandise sold (decrease to merchandise inventory) the sale would normally cause a
net increase in current assets, and therefore, a net increase in the current ratio.
When the existing current ratio is greater than one, increases of equal amounts to the
numerator (inventory, a component of current assets) and denominator (accounts payable,
a component of current liabilities) will reduce the ratio. When an account receivable is
collected, cash (a current asset) is increased by the same amount that accounts receivable
(another current asset) is decreased. Thus, the transaction has no impact on the current
ratio. When machinery (a noncurrent asset) is purchased for cash (a current asset), there
is a decrease in the current ratio.
7. Examples of financial instruments with off-balance-sheet risk include all of the following except
Answer: C
The value of derivative financial instruments is typically derived from the value of an
underlying asset or is tied to an index. As the price of the underlying asset changes, the
price of the derivative changes. Outstanding loan commitments written, recourse
obligations on receivables, and futures contracts are all tied to an asset account. Warranty
obligations are the result of the sale of goods.
8. During the first quarter of year 2, Bente Co. had income before taxes of P2,000,000, and its
effective income tax rate was 15%. Bente’s year 1 effective annual income tax rate was 25%, but
Bente expects its year 2 effective annual income tax rate to be 30%. In its first quarter interim
income statement, what amount of income tax expense should Bente report?
a. P0
b. P300,000
c. P500,000
d. P600,000
Answer: D
The tax provision for an interim period is the tax for the year to date (estimated effective
rate for the year times year-to-date income) less the total tax provisions reported for
previous interim periods. In this case, the requirement is to calculate the tax provision for
the first quarter interim income statement. The tax expense is P600,000 (P2,000,000 ×
30%).
9. Handumon Co. wrote off P100,000 of obsolete inventory at December 31, 2016. The effect of this
write-off was to decrease
Answer: B
Current ratio formula:
Current ratio =Current assets/Current liabilities
The write-off of inventory would decrease current assets and the current ratio.
a. P24,500
b. P12,000
c. P24,000
d. P12,500
Answer: C
Alpha Mart’s annual preferred stock dividend is P120,000 (P2,000,000 × 6%).
The P240,000 dividend paid includes P120,000 dividends in arrears from year 1 and
P120,000 for year 2. Therefore, Walter would receive P24,000 of cash dividends (P200,000
× 6% × 2) which would be reported as dividend income in year 2 (preferred dividends in
arrears are not recognized as income until declared). No dividend income is recognized
when an investor receives a proportional stock dividend, because the investor continues
to own the same proportion of the investee as before the stock dividend, and the investee
has not distributed any assets to the investor.
Difficult
i. Debt securities include corporate debt, convertible bonds, US Treasury and municipal
securities, redeemable preferred stock, commercial paper, and other secured debt
instruments.
ii. Debt securities exclude unsecured trade receivables and consumer loans and notes
receivable because they are not normally traded on organized exchanges and because
of cost/benefit considerations.
iii. Debt securities include ownership interests (common, preferred, and other capital stock),
rights to acquire ownership interests (rights, warrants, call options), and rights to dispose
of ownership interests (put options).
Choices are:
Answer: B
A. Concepts of Accounting and Investment Percentage
1. Debt securities are “any security representing a creditor relationship with an entity.”
a. This includes corporate debt, convertible bonds, US Treasury and municipal
securities, redeemable preferred stock, commercial paper, and other secured debt
instruments.
b. Excluded are unsecured trade receivables and consumer loans and notes
receivable because they are not normally traded on organized exchanges and
because of cost/benefit considerations.
c. Investments in debt securities are classified into three categories: trading
securities, available-for-sale securities, and held-to-maturity securities.
2. Equity securities include ownership interests (common, preferred, and other capital
stock), rights to acquire ownership interests (rights, warrants, call options), and rights to
dispose of ownership interests (put options).
a. The accounting rules for investments in the common stock of another
corporation are generally based on the percentage of the voting stock obtained.
2. The following information pertains to Aria Corp. and its operating segments for the year ended
December 31, year 1:
Aria and all of its divisions are engaged solely in manufacturing operations and evaluates
divisional performance based on controllable contribution. Aria has a reportable segment if that
segment’s revenue exceeds
a. P 264,000
b. P 260,000
c. P 204,000
d. P 200,000
Answer: B
Selected data for a segment is reported separately if one of three criteria is met. One of
these criteria is met when a segment’s revenue is greater than or equal to 10% of the
combined revenues of all industry segments. Combined revenue includes sales to
unaffiliated customers and intersegment sales or transfers. Thus, Aria has a reportable
segment if that segment’s revenues exceed P260,000 [(P2,000,000 + P600,000) × 10%]. The
P40,000 interest would not be included in combined revenue because it is not controllable
at the division level.
3. Gabby, Inc. acquired 30% of Senny Co.’s voting stock for P2,000,000 on January 2, year 1.
Gabby’s 30% interest in Senny gave Gabby the ability to exercise significant influence over
Senny’s operating and financial policies. During year 1, Senny earned P800,000 and paid
dividends of P500,000. Senny reported earnings of P1,000,000 for the six months ended June
30, year 2, and P2,000,000 for the year ended December 31, year 2. On July 1, year 2, Gabby
sold half of its stock in Senny for P1,500,000 cash. Senny paid dividends of P600,000 on October
1, year 2. Gabby does not elect the fair value option to report this investment.
Before income taxes, what amount should Gabby include in its year 1 income statement as a
result of the investment?
a. P150,000
b. P240,000
c. P500,000
d. P800,000
Answer: B
This investment should be accounted for using the equity method since Gabby owns a
30% interest and can exercise significant influence over Senny.
Gabby’s share of Senny’s year 1 earnings (30% × P800,000 = P240,000) would be
recognized as investment revenue under the equity method.
If there was any excess of cost over book value of assets with finite useful lives, resulting
from the purchase of the investment, it would be amortized, reducing investment revenue.
However, not enough information was given to determine if there was an excess.
The dividends received by Gabby (30% × P500,000 = P150,000) do not affect investment
revenue using the equity method; they are recorded as a reduction of the investment
account.
4. For the purpose of estimating income taxes to be reported in personal financial statements,
assets and liabilities measured at their tax bases should be compared to assets and liabilities
measured at their
Assets Liabilities
a. Historical cost Estimated current amount
b. Estimated current value Historical cost
c. Historical cost Historical cost
d. Estimated current value Estimated current amount
Answer: D
In personal financial statements assets should be stated at their estimated current values
and liabilities should be stated at the lower of the discounted value of their future cash
payments or their current cash settlement amounts. These current amounts will differ from
their tax bases and will give rise to unrealized tax gains and losses. A provision for
estimated income taxes on these unrealized amounts should be incorporated into
personal financial statements because when the unrealized gains and losses are realized,
the related income taxes will have to be either paid or received.
5. Statement 1: In nonmonetary exchanges, losses are only recognized when cash is received in
the transactions.
Statement 2: Expenditures to improve the efficiency or extend the useful life of an asset should
be capitalized.
Answer: D
Statement 1 is false because losses on nonmonetary exchanges are recognized.
Statement 2 is true - Expenditures to improve capital assets should be capitalized.
6. The following information pertains to the transfer of real estate pursuant to a troubled debt
restructuring by Gwen Company to Albert Corporation in full liquidation of Gwen’s liability to
Albert:
a. P200,000
b. P0
c. P500,000
d. P700,000
Answer: D
In this restructure, the debt is retired by the transfer of real estate to the creditor. A gain or
loss is recognized on the transfer of real estate, and a gain or loss is recognized on the
restructuring.
The loss on the transfer of assets is the excess of the real estate’s carrying amount over
its FV (P1,000,000 – P800,000 = P200,000). The restructuring gain is the excess of the
carrying amount of the liability over the FV of the real estate transferred.
a. P3,342,000
b. P2,292,000
c. P2,394,000
d. P2,220,000
Answer: B
Searching for applications of new research findings P57,000
Radical modification of the formulation of a glassware 78,000
product
Laboratory research aimed at discovery of new 204,000
knowledge
Testing for evaluation of new products 72,000
Materials consumed in research and development 177,000
projects
Consulting fees paid to outsiders for research and
development projects 300,000
Personnel costs of persons involved in research and
development projects 384,000
Indirect costs reasonably allocable to research and
development projects 150,000
Design, construction and testing of preproduction
prototypes and models 870,000
P2,292,000
8. Orange Company acquires 7,200 shares of common stock of Dalandan Corp. on Feb. 12,2016.
The P100 par stock, costing P819,000, is included in the company’s available-for-sale securities
portfolio. The following transactions related to this investment occurred during 2016:
On June 15, Dalandan Corp. announces that rights are to be issued. One right is to be
received for each share owned.
The rights mentioned in the previous transaction are received on july 10; 3,600 shares of
P100 par stock may be purchased with these rights at par. The stock is currently for P120
per share. Market value of the stock right is P20 per right.
On August 8, 4,200 rights are exercised.
On August 20, the remaining rights are sold for P23 per right
On September 30, Orange Company sells 1,500 shares of those acquired February 12,
at P124 a share.
What is the total cost of the stock acquired by Orange Company on August 8?
a. ₱210,000
b. ₱619,500
c. ₱294,000
d. ₱278,250
Answer: D
Solution:
Total cost of stock acquired on August 8 = (819,000/140)/7,200X4,200/2X100
=P278,250
9. You were able to extract the following information from the records of Grey Corporation in
connection with the audit of Grey’s financial statements for the year ended December 31, 2016:
The company uses straight-line method of depreciation for financial reporting purposes and
sum-of-the-years’-digits method for income tax purposes.
Deposits are taxable when received and warranty costs are deductible when actually paid.
A provision for doubtful accounts of Php250,000 was recognized for financial reporting
purposes but such provision can only be claimed as deduction for tax only when receivables
were proven as uncollectible and were written off from the books.
Taxable income in 2016 amounted to Php1,000,000. Income tax paid for the first three
quarters in 2016 amounted to Php175,000.
a. P400,000
b. P150,000
c. P650,000
d. P520,000
Answer: A
(Taxable)/Deductible
Carrying amount Tax base
temporary differences
Accounts receivable Php1,500,000 Php1,750,000 Php250,000
Motor vehicles 1,650,000 1,250,000 (400,000)
Provision for warranty 120,000 − 120,000
Deposits received in
advance 150,000 − 150,000
10. Amber Company has been paying regular quarterly dividends to its shareholders. The company
has 1,600,000 P=2 par value ordinary shares outstanding at the beginning of the year. The
following equity transactions took place during the year:
How much should Amber pay in the second quarter in order to have the same dividend rate as
that of the first quarter?
a. P2,850,000
b. P2,997,000
c. P3,163,500
d. P3,585,300
Answer: C
Jan. 1 P
= 1,600,000
Feb. 15 100,000
May 13 200,000
June 16 209,000
No. of outstanding shares as of June 30 P
= 2,109,000
Easy
a. On a prospective basis.
b. On a retrospective basis.
c. By restating the financial statements.
d. By a cumulative adjustment on the income statement.
Answer: B
The requirement is to identify the item that describes how changes in accounting
principles are reported under IFRS. Answer (b) is correct because IFRS requires changes
in accounting principles to be reported by giving retrospective application to the earliest
period presented.
2. Net income is understated if, in the first year, estimated salvage value is excluded from the
depreciation computation when using the
Answer: B
The depreciable base used to compute depreciation expense under both the straight-line
and production methods is equal to the cost less estimated salvage value of the asset.
Depreciation expense is overstated and net income is, therefore, understated when the
estimated salvage value is excluded from the depreciation computation under both of
these methods.
Answer: A
a. P 532,000.
b. P 520,000.
c. P1,920,000.
d. P 508,000.
Answer: D
(P6,500,000 × .08) – P12,000 = P508,000.
5. On January 2, 2012, Fine Co. bought a trademark from Good, Inc. for P1,200,000. An
independent research company estimated that the remaining useful life of the trademark was 10
years. Its unamortized cost on Good’s books was P900,000. In Fine’s 2012 income statement,
what amount should be reported as amortization expense?
a. P120,000.
b. P 90,000.
c. P 60,000.
d. P 45,000.
Answer: A
P1,200,000 ÷ 10 = P120,000.
6. The use of a discount lost account implies that the recorded cost of an inventory is
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
Answer: D
In recording inventories, two methods can be used, the gross and the net method. Under
gross method, the cost of the inventory is its invoice price while under the net method the
cost of inventory is its invoice price less the purchase discount allowable whether taken
or not. In case the purchase discount is forfeited, a debit to purchase discount lost
account should be made.
7. The balance in retained earnings at December 31, 2017 was P720,000 and at December 31,
2018 was P582,000. Net income for 2018 was P500,000. A stock dividend was declared and
distributed which increased common stock P250,000 and paid-in capital P110,000. A cash
dividend was declared and paid. The amount of the cash dividend was
a. P248,000.
b. P278,000.
c. P388,000.
d. P638,000.
Answer: B
Answer: D
Nonmonetary exchanges of assets that are deemed to have commercial substance are
accounted for on the basis of fair values, and both gains and losses recognized. The gain
(or loss) for Vik is calculated as the difference between the fair value and cost of the car.
Note that the retail/list price of an asset is not always representative of the fair value of the
asset. An asset can often be purchased for less than the retail/list price.
a. Balance sheet.
b. Income statement.
c. Statement of retained earnings.
d. Statement of cash flows.
Answer: A
Although the statement of cash flows provides information about liquidity, solvency, and
financial flexibility, a potential investor would primarily use the balance sheet to assess
liquidity and financial flexibility. The balance sheet helps users analyze the company’s
ability to use current assets to pay current liabilities (liquidity) and the company’s ability to
alter the amounts and timing of future cash flows to adapt to unexpected needs or to take
advantage of opportunities (flexibility).
10. A material loss should be presented separately as a component of income from continuing
operations when it is
a. An extraordinary item.
b. A discontinued component of the business.
c. Unusual in nature and infrequent in occurrence.
d. Not unusual in nature but infrequent in occurrence.
Answer: D
A material gain or loss that is unusual in nature or infrequent in occurrence, but not both,
should be presented as a separate component of income or loss from continuing
operations. Both discontinued operations and extraordinary items are reported separately
after income from continuing operations.
Average
In Witt’s year 1 income statement, the total amount of infrequent losses not considered
extraordinary should be
a. P275,000
b. P300,000
c. P325,000
d. P450,000
Answer B
Extraordinary items are material items which are both unusual in nature and infrequent in
occurrence. The effect of a strike (P175,000) and a gain or loss from sale or abandonment
of equipment (P125,000) is not considered extraordinary. The loss from the earthquake
would be considered unusual and infrequent. Therefore the P150,000 loss is extraordinary,
and the total amount of infrequent losses not considered extraordinary is P300,000 (P175,000
+ P125,000).
2. Under IFRS if a company uses the fair value method for accounting for an investment any
changes in fair value are recognized in
Answer: C
The requirement is to identify how changes in fair value are recognized for an investment
accounted for under IFRS. Answer (c) is correct because gains or losses are recognized in
profit and loss of the period.
a. Expenses or losses that are deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Expenses or losses that are deductible before they are recognized in financial income.
d. Revenues or gains that are recognized in financial income but are never included in
taxable income.
Answer: C
Expenses or losses that are deductible before they are recognized in financial income
would result in future taxable amounts. For example, the cost of an asset may have been
deducted for tax purposes faster than it was depreciated for financial reporting. In future
years, tax depreciation will be less than financial accounting depreciation, meaning future
taxable income will exceed future financial accounting income. Answers (a) and (b) are
temporary differences that would result in future
4. On January 1, year 1, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased
additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August
1, year 1. During October year 1, Iona declared and paid a cash dividend on all of its outstanding
common stock. Point uses the equity method to account for its investment in Iona.
How much income from the Iona investment should Point’s year 1 income statement report?
a. 10% of Iona’s income for January 1 to July 31, year 1, plus 40% of Iona’s income for
August 1 to December 31, year 1.
b. 40% of Iona’s income for August 1 to December 31, year 1 only.
c. 40% of Iona’s year 1 income.
d. Amount equal to dividends received from Iona.
Answer: A
The requirement is to determine the amount of investment income to be reported in the year
1 income statement. When an investment which has been accounted for using a different
method qualifies for the use of the equity method, due to a change in ownership level (such
as 10% to 40%), then the change to the equity method should be reported retroactively. At
the date of the change, the investment account and the retained earnings account are
adjusted as if the equity method had been used all along. Therefore answer (a) is correct as
Point owned 10% of Iona’s stock from January 1 to July 31, year 1, and 40% of Iona’s stock
from August 1 to December 31, year 1. Answers (b) and (c) are incorrect because income
should be recognized under the equity method according to the percentage of ownership
existing during each of the periods. Answer (d) is incorrect because when Iona reports its
earnings to Point, Point will record its share of the revenue. When Point receives the
dividends, (which may be in a different period than Point recognized its share of Iona’s
income), the carrying amount of the investment will be reduced by the amount received.
Therefore, the income recognized does not usually equal the dividends received.
5. In its 2017 financial statements, Cris Co. reported interest expense of ₱85,000 in its income
statement and cash paid for interest of ₱68,000 in its cash flow statement. There was no prepaid
interest or interest capitalization either at the beginning or end of 2017. Accrued interest at
December 31, 2016, was ₱15,000. What amount should Cris report as accrued interest payable in
its December 31, 2017 balance sheet?
a. ₱ 2,000
b. ₱15,000
c. ₱17,000
d. ₱32,000
Answer: D
The solutions approach is to analyze the interest payable T-account for year 2, assuming all
interest payments flow through interest payable.
Interest Payable
15,000 12/31/16
2017 Int. paid 68,000 85,000 2017 Expense
? 12/31/17
The beginning interest payable balance (₱15,000) is increased by interest expense (debit
interest expense, credit interest payable for ₱85,000) and decreased by interest paid (debit
interest payable, credit cash for ₱68,000), resulting in a 12/31/Y2 balance of ₱32,000
(₱15,000 + ₱85,000 − ₱68,000).
6. Bonds with a par value of ₱2.5M carrying a stated interest rate of 12% payable semi-annually on
June 30 and December 31 were issued on October 31. The total proceeds from the issue
amounted to ₱2.6M. The best explanation for the excess amount received over the par is
Answer: C
Par value ₱2,500,000
Accrued interest
₱2.5M x 6% x 4/6 100,000
Issued price ₱2,600,000
a. Consolidated financial statements combine like items of assets, liabilities, equity, income,
expenses and cash flows of the parent with those of its subsidiaries.
b. When it is impracticable to have the same reporting dates for parent and subsidiaries, the
most recent financial statements of the subsidiary are used, adjusted for the effects of
significant transactions or events between the reporting dates of the subsidiary and
consolidated financial statements. The difference between the date of the subsidiary's
financial statements and that of the consolidated financial statements shall be no more than
one month.
c. Consolidated Financial statements offset (eliminate) the carrying amount of the parent's
investment in each subsidiary and the parent's portion of equity of each subsidiary
d. Consolidated financial statements eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between entities of the group
(profits or losses resulting from intragroup transactions that are recognized in assets, such
as inventory and fixed assets, are eliminated in full).
Answer: B
a. 360,000
b. 630,000
c. 936,000
d. 990,000
Answer: B
9. Under PFRS, an intangible asset is considered to be impaired if its carrying value is greater than
its recoverable amount. The recoverable amount is
Answer: C
Recoverable amount as defined under PAS 39, is the higher between the fair value less cost
to sell (or the net selling price) and the value in use.
10. For financial liabilities designated as FVTPL using the Fair Value Option,
I. The amount of change in the fair value of such financial liabilities that is attributable to changes in
credit risk must be presented in OCI.
II. The change in fair value that is not attributable to changes in credit risk is presented in OCI,
unless presentation in profit or loss of the fair value change in respect of the liability’s credit risk
would create or enlarge an accounting mismatch in OCI.
Which is/are incorrect?
Under PFRS 9, the amount of change in the fair value of financial liabilities designated as
FVTPL using the Fair Value Option that is attributable to changes in credit risk must be
presented in OCI. The remainder of the change in fair value is presented in profit or loss,
unless presentation in OCI of the fair value change in respect of the liability’s credit risk
would create or enlarge an accounting mismatch in profit or loss.
Difficult
What amount should be reported as accrued benefit cost on December 31, 2016?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d. 700,000
Answer: A
PBO – January 1 3,500,000
Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid ( 250,000)
PBO – December 31 5,975,000
2. An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity
expects a 12% return. At the end of the lease term, the equipment will revert to the lessor.
a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000
Answer: B
PV of rentals (900,000 x 5.56) 5,004,000
PV of residual value (600,000 x .40) 240,000
Net investment 5,244,000
a. Consolidated financial statements combine like items of assets, liabilities, equity, income,
expenses and cash flows of the parent with those of its subsidiaries.
b. When it is impracticable to have the same reporting dates for parent and subsidiaries, the
most recent financial statements of the subsidiary are used, adjusted for the effects of
significant transactions or events between the reporting dates of the subsidiary and
consolidated financial statements. The difference between the date of the subsidiary's
financial statements and that of the consolidated financial statements shall be no more
than one month.
c. Consolidated Financial statements offset (eliminate) the carrying amount of the parent's
investment in each subsidiary and the parent's portion of equity of each subsidiary
d. Consolidated financial statements eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between entities of the group
(profits or losses resulting from intragroup transactions that are recognized in assets,
such as inventory and fixed assets, are eliminated in full).
Answer: B
According to PFRS 10, Consolidated financial statements:
combine like items of assets, liabilities, equity, income, expenses and cash flows of
the parent with those of its subsidiaries
offset (eliminate) the carrying amount of the parent's investment in each subsidiary
and the parent's portion of equity of each subsidiary (IFRS 3 Business Combinations
explains how to account for any related goodwill)
eliminate in full intragroup assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group (profits or losses
resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full).
The parent and subsidiaries are required to have the same reporting dates, or
consolidation based on additional financial information prepared by subsidiary,
unless impracticable. Where impracticable, the most recent financial statements of
the subsidiary are used, adjusted for the effects of significant transactions or
events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements
and that of the consolidated financial statements shall be no more than three
months.
4. On the December 31, 2017 balance sheet of TOA Co., the current receivables consisted of the
following:
a. P 94,000
b. P120,000
c. P124,000
d. P150,000
Answer: A
The 12/31/17 current net receivables would include the trade receivables, net of the allowance
account (P93,000 – P2,000 = P91,000). The claim against a shipper for goods lost in transit
(P3,000) is also a valid receivable at yearend. Therefore, the total current net receivables are
P94,000 (P91,000 + P3,000). The unsold goods on consignment do not represent a receivable
until sold. Therefore, the P26,000 should be removed from receivables and sales and the cost
(P26,000 ÷ 130% = P20,000) should be removed from cost of goods sold and reported as
ending inventory. The security deposit (P30,000) should be reported as a long-term receivable.
Answer: A
PFRS for SMEs states that the combined financial statements shall disclose the following:
(a) the fact that the financial statements are combined financial statements.
(b) the reason why combined financial statements are prepared.
(c) the basis for determining which entities are included in the combined financial
statements.
(d) the basis of preparation of the combined financial statements.
(e) the related party disclosures required by Section 33 Related Party Disclosures.
6. Given the table below, compute for the total net exposure and the financial effect of collateral or
credit enhancement to the maximum exposure to credit risk for PFRS 7 Disclosures.
a. 0; 0
b. 200,000; 2,800,000
c. -200,000; 2,000,000
d. 0; 3,000,000
Answer: B
Solution:
Gross Maximum FV of Collateral or Net Exposure Financial effect of
Exposure to Credit Credit collateral or credit
Risk Enhancement enhancements
Loan 1 1,000,000 1,200,000 - 1,000,000
Loan 2 1,000,000 1,000,000 - 1,000,000
Loan 3 1,000,000 800,000 200,000 800,000
Total 3,000,000 3,000,000 200,000 2,800,000
7. Machu Picchu reported the following data for the current year:
What net amount in OCI should be presented as “may not be recycled to profit or loss”?
a. P3,400,000
b. P2,700,000
c. P3,700,000
d. P3,100,000
Answer: D
Unrealized gain on equity investment at FVOCI P900,000
Actuarial loss on PBO (300,000)
Revaluation surplus 2,500,000
Net amount of OCI not reclassified to profit or loss P3,100,000
8. The amount of income tax applicable to transactions that are not reported in the continuing
operations section of the income statement is computed
Answer: B
Income tax expense must be associated with (i.e., allocated among) income from
continuing operations, discontinued operations, extraordinary items, cumulative effect of
an accounting change, and prior period adjustments. The tax effect to be associated with
any of the special items (other than income from continuing operations) is computed by
determining the income tax on overall taxable income and comparing it with the income
tax on continuing operations. If more than one special item exists, the difference between
tax on ordinary operations and tax on overall taxable income must be allocated
proportionately among the special items.
9. During the calendar year 2016, Lala Company purchased an equity security designated as
investment to OCI. As of December 31, 2016 the fair market value of the securities was ₱250,000
and the amount of unrealized loss was ₱34,000 net of the deferred tax asset of ₱16,000. On
February 15, 2017 Lala Company sold all of the equity security it holds for ₱390,000. Lala
Company incurred ₱2,500 broker’s commission in relation to the sale of equity security. What
amount of gain should Lala Company disclose in the statement of comprehensive income in
2017?
a. None
b. ₱93,500
c. ₱137,500
d. ₱140,000
Answer: B
Net selling price (₱390,000 – ₱2,500) ₱387,500
Carrying value of security sold 250,000
Change in fair value gain ₱137,500
X net of tax rate 68%
Net of tax increase ₱93,500
10. On January 1, 2016, an entity granted the employees option to buy 200,000 shares with P20 par
for P30 per share. The employees exercised the options on January 1, 2019.
2016 34
2017 39
2018 42
2019 44
The service period is for two years beginning January 1, 2016. The fair value of the share options
cannot be measured reliably.
What amount should be credited to share premium upon exercise of the share options on January
1, 2019?
a. 3,800,000
b. 4,400,000
c. 4,800,000
d. 0
Answer: B
6,000,000
Option price (200,000 x 30)
Share options outstanding 2,400,000
Total consideration 8,400,000
Par value (200,000 x 20) 4,000,000
Share premium 4,400,000