FINANCIAL ACCOUNTING AND REPORTING

1. Which of the following accounts is reported under equity of the statement of financial position?
a. Dividend declared and paid
b. Share capital–ordinary
c. Revenue
d. All of the choices are reported in the equity section of the statement of financial position

2. Revenue is
a. Impacted by debit and credit in the same way that expenses are impacted by debit and credit.
b. A subdivision of equity, providing information about why equity increased.
c. Reported in the statement of financial position as a current item.
d. All of the choices are correct regarding revenue.

3. A document prepared to prove the equality of debits and credits after all adjustments is the
a. Adjusted statement of financial position
b. Adjusted trial balance
c. Adjusted financial statements
d. Post-closing trial balance

4. A cash refund to a customer for merchandise returned should be entered in

a. Sales journal
b. Purchases journal
c. Cash payments journal
d. Cash receipts journal

5. All of the following adjusting entries affect both the statement of financial position and income
statement, except
a. Accrued expenses
b. Prepaid expenses using the asset method
c. Unearned income using the income method
d. All of these affects both the statement of financial position and income statement.

6. The second level of the Conceptual Framework

a. Provides conceptual building blocks that explain the qualitative characteristics of accounting
information
b. Defines the elements of financial statements
c. Serves as a bridge between the “why” and the “how” of accounting
d. All of the choices are correct

7. The IASB has given entities the option of using fair value to report all of the following, except
a. Receivables
b. Investments
c. Financial liabilities
d. All of the choices can be measured at fair value.

8. Which of the following is a benefit of providing financial information?

a. Potential litigation
b. Auditing
c. Disclosure to competition
d. Improved allocation of resources

9. Which statement is incorrect in relation to the concept of capital?

a. The selection of the appropriate concept of capital should be based on the needs of the users
of financial statements.
b. The principal difference between the financial capital concept and the physical capital
concept is the treatment of the effects of changes in the prices of assets and liabilities.
c. The concept of capital maintenance determines the accounting model used in the preparation
of the financial statements.
d. The physical capital concept is adopted by most entities in preparing financial statements.

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10. Which of the following represents a form of communication through financial reporting but not
through financial statements?
a. Statement of financial position
b. President's letter
c. Income statement
d. Notes to financial statements

11. What would be an advantage of having all countries adopt and follow the same accounting
standards?
a. Consistency
b. Comparability
c. Lower preparation costs
d. Comparability and lower preparation costs

12. An objective of financial reporting is to provide

a. Information about the investors in the business entity.
b. Information about the liquidation value of the resources held by the entity.
c. Information that is useful in assessing cash flow prospects.
d. Information that will attract new investors.

13. The statement of financial position information is useful for all of the following, except
a. Assessing risk
b. Evaluating liquidity
c. Evaluating financial flexibility
d. Determining free cash flows

14. The statement of financial position

a. Omits many items that are of financial value.
b. Makes very limited use of judgment and estimate
c. Uses fair value for most assets and liabilities.
d. All of the choices are correct regarding the statement of financial position.

15. Which is a noncurrent asset?

a. Amount due from customer within a period of 12 to 18 months in accordance with normal
credit terms.
b. Equity investment acquired principally for generating a profit from short-term fluctuation in
price
c. Goods in process of production for sale in the ordinary course of business
d. Cash fund set aside for payment of equipment to be delivered a month after reporting period.

16. Limitations of the income statement include all of the following, except
a. Items that cannot be measured reliably are not reported.
b. Only actual amounts are reported in determining net income.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting method employed.

17. The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of an entity
b. Evaluate the solvency of an entity
c. Estimate future cash flows
d. Estimate future financial flexibility

18. Which of the following is an example of managing earnings down?

a. Changing estimated bad debts from higher percent to lower percent of sales.
b. Revising the estimated life of equipment from ten years to five years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.

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19. Which of the following is an example of managing earnings up?

a. Decreasing estimated residual value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.

20. What might a manager do during the last quarter of a fiscal year if the intent is to improve
current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.

21. Investors and creditors use income statement information for each of the following,
except
a. To evaluate the future performance of the entity.
b. To provide a basis for predicting future performance.
c. To help assess the risk and uncertainty of achieving future cash flows.
d. All of these are provided by an income statement.

22. IFRS requires that a single amount be disclosed within the income statement for
a. The post-tax profit or loss on discontinued operations and the pretax gain or loss on the
disposal of discontinued operational assets.
b. The pretax profit or loss on discontinued operations and the post-tax gain or loss on the
disposal of discontinued operational assets.
c. The pretax profit or loss on discontinued operations and the pretax gain or loss on the
disposal of discontinued operational assets.
d. The post-tax profit or loss on discontinued operations and the post-tax gain or loss on the
disposal of discontinued operational assets.

23. Which statement is correct in relation to the income statement?

a. Additional disclosure is required for the function of expense when the nature of expense
classification is used.
b. Additional disclosure is required for the nature of expense when the function of expense
classification is used.
c. No additional disclosure is required for nature of expense under any circumstance
d. Additional disclosure is always required for the function of expense.

24. The results of discontinued operations should be presented as a single amount after tax in
a. Statement of financial position
b. Statement of changes in equity
c. Income statement separately from income from continuing operations
d. Income statement as component of income from continuing operations

25. Which criterion is not required to be met in order for an operation to be classified as
discontinued?
a. The operation should represent a separate major line of business or geographical area.
b. The operation is part of a single plan to dispose of a separate major line of business or
geographical area.
c. The operation is a subsidiary acquired exclusively with a view to resale.
d. The operation must be sold within three months after the reporting period.

26. Disposal group is defined to include

a. Current assets and directly associated liabilities
b. Noncurrent assets and directly associated liabilities
c. Current assets and noncurrent assets
d. Current assets, noncurrent assets and directly associated liabilities

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27. All of the following are required to appear in the statement of changes in equity, except
a. Cumulative effect of change in accounting policy and correction of error
b. Total comprehensive income
c. Profit or loss
d. Net cash received from issue of shares during the period

28. Financing cost is reported in which section of the statement of comprehensive income?
a. Gross profit
b. Noncontrolling interest
c. Operating activities
d. Income from continuing operation.

29. Application of the full disclosure principle

a. Is theoretically desirable but not practical because the costs of complete disclosure exceed
the benefits.
b. Is violated when important financial information is buried in the notes.
c. Is demonstrated by supplementary information presenting the effects of changing prices.
d. Requires that the financial statements be consistent and comparable.

30. The full disclosure principle is best described by which of the following?
a. All information related to an entity's business and operating objectives is required to be
disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to be
included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a person wishing to
invest in the shares of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an
informed reader.

PROBLEM 31 – 34

The following trial balance of an entity on December 31, 2022 has been adjusted except for
income taxexpense.

Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000
126,000,000 126,000,000

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During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax
rate is
30% on all types of revenue. Inventory and accounts payable included goods purchased in transit,
FOB destination, costing P500,000, and unsold goods held on consignment at year-end, costing
P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on
December 31, 2023.

31. What amount should be reported as current assets on December 31, 2022?

a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000

32. What amount should be reported as current liabilities on December 31, 2022?

a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000

33.What is the net income for 2022?

a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000

34. What amount should be reported as total shareholders’ equity on December 31, 2022?

a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000

PROBLEM 35- 3 8

On December 31, 2022, an entity showed the following current assets:

Cash 500,000
Accounts receivable 2,500,000
Inventory 2,000,000
Prepaid expenses 100,000
Total current assets 5,100,000
Cash on hand including customer postdated check of P20,000 and employee
IOU of P10,000
130,000
Cash in bank per bank statement (outstanding checks on December 31,
2022, P70,000) 370,000
Total cash 500,000
Customers’ debit balances, net of customer deposit of P50,000 1,900,000
Allowance for doubtful accounts ( 150,000)

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Sale price of goods invoiced to customers at 150% of cost on December 29,
2022 but delivered on January 5, 2023 and excluded from reported
inventory 750,000
Total accounts receivable 2,500,000

35. What is the adjusted cash

balance?a. 500,000
b. 470,000
c. 430,000
d. 400,000

36. What is the net realizable value of accounts receivable?

.

a. 1,970,000
b. 1,820,000
c. 1,800,000
d. 1,950,000

37. What is the adjusted inventory?

a. 2,000,000
b. 2,375,000
c. 2,500,000
d. 2,750,000

38. What total amount of current assets should be reported?

a. 4,900,000
b. 4,830,000
c. 4,780,000
d. 4,630,000

PROBLEM 39 – 43
An entity reported the following data for the current year:

Net sales 9,500,000

Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow hedge 400,000
Increase in projected benefit obligation due to actuarial assumptions 300,000
Foreign translation adjustment – debit 100,000
Revaluation surplus 2,500,000

39. What amount should be reported as income from continuing operations?

a. 3,100,000
b. 2,300,000
c. 1,800,000

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d. 2,900,000

40. What net amount should recognize in other comprehensive income for the year?

a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000

41. What net amount in OCI should be presented as “may not be recycled to profit or loss?

a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000

42. What amount should be reported as net income?

a. 2,900,000
b. 2,300,000
c. 3,100,000
d. 2,400,000

43. What amount should be reported as comprehensive income?

a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000

PROBLEM 44 – 47

An entity acquired 40% of another entity’s shares on January 1, 2022 for P15,000,000. The
investee’sassets and liabilities at that date were as follows:

Carrying amount Fair value

Cash 1,000,000 1,000,000
Accounts receivable 4,000,000 4,000,000
Inventory – FIFO 8,000,000 9,000,000
Land 5,500,000 7,000,000
Plant and equipment – net 14,000,000 22,000,000
Liabilities 7,000,000 7,000,000

The plant and equipment have a 10-year remaining useful life. The inventory was all sold in
2022. Theentity sold the land in 2023 for P8,000,000 and reported a gain of P2,500,000.

The investee reported net income of P3,000,000 for 2022 and P5,000,000 for 2023. The investee
paidP1,000,000 cash dividend on December 31, 2022 and P2,000,000 on December 31, 2023.

44. What is the implied a goodwill arising from the acquisition?

a. 200,000
b. 600,000
c. 800,000
d. 400,000

45. What is the investment income for 2022?

a. 880,000
b. 480,000

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c. 400,000
d. 580,000

46. What is the investment income for 2023?

a. 1,080,000
b. 2,280,000
c. 1,680,000
d. 2,880,000

47. What is the carrying amount of the investment in associate on December 31, 2023?

a. 15,360,000
b. 15,000,000
c. 16,560,000
d. 13,800,000

PROBLEM 48 – 51
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2022 with interest payable
on June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost
of P108,000 at an effective interest rate of 7%.

The business model for this investment is to collect contractual cash flows and sell the bonds
in theopen market. On December 31, 2022, the bonds were quoted at 106.

48. What amount of interest income should be reported for 2022?

a. 400,000
b. 200,000
c. 364,560
d. 363,940

49.What is the adjusted carrying amount of the investment on December

31, 2022?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

50. What amount should be recognized in OCI in the statement of comprehensive income for
2022?
a. 300,000
b. 125,440
c. 128,060
d. 92,000

51. If the entity elected the fair value option, what total amount of income should be
recognized for 2022?
a. 400,000
b. 492,000
c. 600,000
d. 200,000

ROSALIE R. MAKIL, CPA, LPT, MBA

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PROBLEM 52 – 55
January 1, 2022, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000

During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* A plant facility consisting of land and building was acquired in exchange for 200,000 shares
of the entity. On the acquisition date, each share had a quoted price of P45 on a stock
exchange. The plant facility was carried on the seller’s books at P1,600,000 for land and
P5,400,000 for the building at the exchange date. Current appraised values for the land and
the building, respectively, are P2,000,000 and P8,000,000. The building has an expected life
of forty years with a P200,000 residual value.

* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional
costs incurred were freight and unloading P100,000 and installation P300,000. The
equipment has a useful life of ten years with no residual value.

* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at the
entity’s various plant locations. These expenditures had an estimated useful life of fifteen
years.

* Research and development costs were P1,100,000 for the year.

* A machine costing P200,000 on January 1, 2015 was scrapped on June 30, 2022. Straight
line depreciation had been recorded on the basis of a 10-year life with no residual value.

* A machine was sold for P500,000 on July 1, 2022. Original cost of the machine sold was
P700,000 on January 1, 2019, and it was depreciated on the straight line basis over an
estimated useful life ofeight years and a residual value of P50,000.

52. What is the total cost of land on December 31, 2022?

a. 7,800,000
b. 7,600,000
c. 8,000,000
d. 6,800,000

53. What is the total cost of land improvements on December 31,

2022?
a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000

54. What is the total cost of buildings on December 31, 2022?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000

55. What is total cost of machinery and equipment on December 31, 2022?
a. 12,400,000
b. 11,500,000
c. 11,000,000

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d. 11,700,000

PROBLEM 56 - 58

An entity had the following financial statement elements for which the December 31, 2022
carrying amount is different from the December 31, 2022 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000

The difference between the carrying amount and tax basis of the equipment is due to
accelerated depreciation for tax purposes.

The accrued liability is the estimated health care cost that was recognized as expense in 2022
but deductible for tax purposes when actually paid.

In January 2022, the entity incurred P3,000,000 of computer software cost. Considering the
technical feasibility of the project, this cost was capitalized and amortized over 3 years for
accounting purposes. However, the total amount was expensed in 2022 for tax purposes.

The pretax accounting income for 2022 is P15,000,000. The income tax rate is 30% and there are
nodeferred taxes on January 1, 2022.

56. What amount should be reported as current tax expense for 2022?

a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

57. What amount should be reported as total tax expense for 2022?

a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000

58. What amount should be reported as deferred tax liability on December 31, 2022?

a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000

PROBLEM 59 - 60 BENEFIT COST

An entity provided the following pension plan information:

Projected benefit obligation – January 1 3,500,000

Fair value of plan assets – January 1 2,800,000

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Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
200,000
Actuarial loss due to change in assumptions on projected benefit obligation
Discount or settlement rate 10%
59. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000

60. What is the net remeasurement loss for the current year?

a. 200,000
b. 100,000
c. 300,000
d. 400,000

ROSALIE R. MAKIL, CPA, LPT, MBA