No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

AFAR PREWEEK MATERIALS – PART 1

Acquired : Business combination---separate FS, Consolidation FS

Problem 1
On January 1, 20298, Entity A acquired 90% of outstanding ordinary shares of Entity B. On July
1, 20298, Entity A purchased 80% of outstanding ordinary shares of Entity C. Entity A, Entity B
and Entity C reported the following sales and cost of goods sold for the years ended December 31,
2029, and December 31, 2030:
Entity A Entity B Entity C
2029 Sales P5,000,000 P3,000,000 P2,000,000
2029 Cost of Sales 3,000,000 2,100,000 1,600,000

2030 Sales P6,000,000 P4,000,000 P3,000,000

2030 Cost of Sales 4,200,000 3,200,000 1,800,000

The following intercompany sales of goods involving different set of inventories occurred during
2029 and 2030:
➢ During 2029, Entity C sold inventory to Entity A at a price of P200,000. ¼ of those
inventories were resold by Entity A to third persons during 2029 while the
remainders were resold to third persons during 2030.
➢ During 2029, Entity B sold inventory to Entity C at a price of P300,000. 1/3 of
those inventories were resold by Entity C to third persons during 2029 while the
remainders were resold to third persons during 2030.
➢ During 2030, Entity C sold inventory to Entity B at a price of P400,000. 1/5 of
those inventories remained in the ending inventory of Entity B at the end of
December 31, 2030.
➢ During 2030, Entity A sold inventory to entity B at a price of P500,000. 2/5 of those
inventories were resold by Entity B to third persons during 2030.

1. What is the consolidated sales to be reported by Entity A in its Consolidated Statement of

Comprehensive Income for the year ended December 31, 2030?
a. P12,500,000
b. P12,600,000
c. P12,100,000
d. P11,600,000

2. What is the consolidated cost of sales to be reported by Entity A in its Consolidated

Statement of Comprehensive Income for the year ended December 31, 2030?
a. P8,302,000
b. P8,912,000 CORRECT ANSWER: 8,332,000
c. P8,532,000
d. P8,652,000
Acquired : Business combination---separate FS, Consolidation FS
Problem 2
On January 1, 2030, Entity A acquired 80% of the outstanding common stocks of Entity B at a
gain on bargain purchase of P100,000. At the date of acquisition, all the assets of Entity B are
property valued except for a building that is overvalued of P50,000 and an inventory that is
undervalued by P30,000. The said overvalued building has a remaining useful life of 5 years on
January 1, 2030 while 1/3 of the said undervalued inventory remained unsold as of December 31,
2030. The following intercompany transactions occurred during the year:4

• On July 1, 2030, Entity B leased a machinery to Entity A at an annual rental of

P120,000.
• On October 1, 2030, Entity A rendered management services to Entity B at a
consideration of P40,000.

1|P a g e R. FERRER/P. DE JESUS/A.TANG

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Entity A accounted its Investment in Entity B using cost method in its separate financial
statements. For the year ended December 31, 2030, Entity A reported net income of P1,000,000
and declared dividends of P200,000 in its separate financial statements while Entity B
reported P500,000 and declared dividends of P100,000 in its separate financial statements.

3. What is the consolidated net income attributable to Entity A's shareholders to be

reported by Entity A in its Consolidated Income Statement for the year ended December
31, 2030?
a. P1,354,000
b. P1,452,000
c. P1,416,000
d. P1,282,000

4. Using the same data from preceding number, what is the net income attributable to non-
controlling interest to be reported by Entity A in its Consolidated Income Statement for the
year ended December 31, 2030?
a. P94,000
b. P106,000
c. P86,000
d. P96,000

Problem 3

On January 1, 2030, Entity A acquired 70% of outstanding ordinary shares of Entity B at

a price of P1,000,000. Entity A incurred P200,000 cost related to acquisition. At acquisition
date, the book value of net assets of Entity B is P2,500,000 but a machinery with useful
life of 10 years is overstated by P500,000. For the year ended December 31, 2030, Entity
B reported net income of P350,000 and declared dividend in the amount of P100,000 to its
ordinary shareholders. The fair value of the Investment in Entity B is measured at
P1,800,000 on December 31, 2030 with cost to sell of 15% while its value in use is
discounted at P1,750,000.

5. If Entity A accounted its Investment in Entity B using equity method in its separate
financial statements, what is the book value of Investment in Entity B to be reported by
Entity A on December 31, 2030 in its separate statement of financial position?
a. P1,750,000
b. P1,800,000
c. P1,530,000
d. P1,610,000

6. Using the same data in preceding number, what is the net effect in Entity A's net profit in
its separate income statement assuming it accounted its Investment in Entity B using fair
value model through profit or loss in its separate income statement?
a. Increase in profit by P670,000
b. Increase in profit by P870,000
c. Increase in profit by P600,000
d. Increase in profit by P800,000

7. Using the same data in preceding number, what is the book value of Investment in Entity
B to be reported by Entity A on December 31, 2030 in its separate statement of financial
position assuming it accounted its Investment in Entity B using cost method?
a. P1,800,000
b. P1,530,000
c. P1,200,000
d. P1,000,000

2|P a g e R. FERRER/P. DE JESUS/A.TANG

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Problem 4

SM Holdings Inc. owns 90% of ordinary shares of SM Prime Inc., a company whose shares of
stocks are publicly traded in Philippine Stock Exchange. SM Prime Inc., owns 80% of ordinary
shares of SM Cinema Inc. The chief accountants of the aforementioned corporations record and
recognize all dividends received from different companies as dividend income. The parent
corporations use cost method in their separate financial statements in accounting for their
respective investment in subsidiaries. For the year ended December 31, 2030, the following data
are obtained from the accounting records of the three corporations concerning its dividends:

SM Holdings Inc. SM Prime Inc. SM Cinema Inc.

Dividends Declared P2,000,000 P1,000,000 P500,000
during the year
Reported Dividend P1,500,000 P1,200,000 P800,000
Income during the
year
Dividends received P200,000 P? P500,000
from Associate
during the year
Dividends received P? P100,000 P?
from Fair Value
Investments during
the year

8. What is the dividend income to be presented for the year ended December 31, 2030 in the
respective Consolidated Statement of Comprehensive Income of SM Prime Inc. and SM
Holdings Inc.?
a. P400,000 and P800,000 respectively
b. P300,000 and P500,000 respectively
c. P400,000 and P500,000 respectively
d. P500,000 and P900,000 respectively

Problem 5

On December 31, 2030, PNB reported contributed capital of P5,000,000 and retained earnings of
P3,000,000 with total liabilities of P4,000,000 while Allied Bank reported total assets of
P6,000,000 with total liabilities of P2,000,000. On January 1, 2031, PNB and Allied Bank entered
into merger whereby PNB will issue 1,000,000 ordinary shares with par value of P2 and quoted
price of P3 on January 1, 2031 to incumbent shareholders of Allied Bank. Aside from shares of
stocks, PNB will issue bonds payable classified as financial liability at amortized cost with face
value of P1,500,000 and fair market value of P1,200,000 on January 1, 2031.

On January 1, 2031, the independent appraiser determined that the current asset of PNB has fair
value of P1,000,000 although its book value recorded is only P800,000. On the other hand, the
noncurrent asset of Allied Bank has carrying amount of P4,000,000 with fair value of P3,500,000.
On the same date, the noncurrent liabilities of PNB have fair value of P2,500,000 which is above
its carrying value by P500,000. On the other hand, the current liabilities of Allied Bank have book
value of P1,500,000 an amount which is above its fair market value by P1,000,000.

On January 1, 2031, PNB incurred and paid acquisition related to business combination cost
amounting to P200,000. Aside from that, PNB incurred and paid stock issuance costs amounting
to P300,000 and bond issue costs amounting to P100,000.

9. Compute for the following amount in PNB’s Statement of Financial Position immediately
after the business combination:

3|P a g e R. FERRER/P. DE JESUS/A.TANG

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Total Assets Total Liabilities Stockholder’s Equity

a. P17,100,000 P6,000,000 P10,700,000
b. P16,900,000 P6,100,000 P10,800,000
c. P17,200,000 P6,200,000 P11,000,000
d. P17,100,000 P6,600,000 P10,500,000

Problem 6
On July 1, 2030, SM Holdings acquired 80% of common stocks of China Bank at a price of
P2,000,000. The book value of net assets of China Retail on July 1, 2030 amounted to P3,300,000.
The assets and liabilities of China Retail are properly valued except to the inventories which have
fair value of P200,000 and book value of P500,000. On October 1, 2030, China Retail sold an
equipment to SM Holdings at a price of P360,000 when its book value is P120,000. The equipment
has remaining life of 2 years on the said date. As of December 31, 2030, P150,000 out of the said
P500,000 overstated inventory remained in China Retail’s ending inventory. For the year ended
December 31, 2030, China Retail reported net income of P1,000,000 and declared dividends of
P300,000. On December 31, 2030, the fair value of the Investment in China Retail is determined
to be P2,500,000 while its cost to sell is 10% of the fair value. The discounted value of cash flows
from the possible disposal and dividends of the said Investment in China Retail on December 31,
2030 is P1,800,000.

10. In the Separate Statement of Financial Position of SM Holdingson December 31, 2030,
what amount shall be presented as Investment in China Bank under the following >>share in net income
- ito ung only affect to you
models? capital balance less withdrawal
>>total income
Cost Method Fair Value Model Equity Method included share net income
a. P1,800,000 P2,250,000 P2,560,000 + salary + bonus
even expense mo cya
b. P2,000,000 P2,500,000 P2,250,000 bec natanggap mo pa rin
c. P2,250,000 P1,800,000 P2,572,000 nmn
d. P2,500,000 P2,000,000 P1,800,000

Partnership
11. On January 1, 2020, Mike, Jay and Bong organized MJB partnership by investing P5M, 2M
5M and P3M for capital interest ratio of 4:5:1 respectively. Bong has been appointed as managing
2M
3M
partner. During year 2020, MJB partnership reported net income of P3,000,000. Their
=10M profit/loss distribution and drawing agreement are presented below:
-will be 1st allocated i. 20% interest on beginning capital Basis: 10,000,000 x 4%,5%,1%,,,, then multiple by 20% each [trick question]
base on capital interest
ii. P10,000, P20,000 and P50,000 monthly salary, respectively
rate (4:5:1)
iii. 25% bonus of net income after interest and salary to managing partner B= 25%(NI - I-S0
BONUS COMPUTATION: iv. The remainder will be divided equally among the partners.
Before--ignore v. The partners must withdraw at the end of the year 50% of their share in net income
after -less for the period. >>be careful in using P/L ratio
ang given reported
What is the capital balance of Bong on December 31, 2020? >>if its salary & interest treated as expense exclude
net income a. P1,410,000 c. P1,610,000 at your distribution of net income and not included @
cya ung total b. P3,410,000 d. P3,610,000 bonus
but it after net income meaning you will put net income sa remainder >>under weighted ave method will use only permanent
withdrawal
temporary 12. H and I are partners sharing profits and losses in the ratio of 6:4 respectively. On January 2,
withdrawal the partners decided to admit J as a new partner upon his investment of P96,000. On this date,
meaning the interest in the partnership of H and I are as follows: H, P138,000; I, P111,600. Assuming
your withdrwal if from
share in net income
that the new partner is given a 1/4 interest in the firm. The agreed capital of the partnership is
"cash" P360,000. The admission of a new partner will result to which of the following:
a. Revaluation is P20,400 TCC TAC
permanent withdrawal
b. Bonus from I is P2,400
from capital
then need to adjust c. Bonus to J is P6,000
at the end of period d. Capital balance of H after admission is P150,240
"capital account"
ADMISSION BY INVESTMENT ---- record all

4|P a g e R. FERRER/P. DE JESUS/A.TANG

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

meaning collateral
NPO
13. ABC, an NPO, received funds during its annual campaign that were specifically pledged by
the donor to another NPO health organization. How should ABC record the funds?
a. Increase in assets and increase in liabilities --Agency fund
Dr. Cash
b. Decrease in assets and decrease in liabilities Cr. Liability
c. Increase in asset and increase in deferred revenues
d. Increase in assets and increase in revenues

14. Which if the following categories are used in an NPO statement of financial position?
a. Income, expenses and unrestricted net assets
b. Net assets, income and expenses
c. Changes in unrestricted, temporarily restricted and permanently restricted net assets --statement of activities
---statement of financial position
d. Assets, liabilities and net assets asset
liability
Government net asset----temporary restricted, permanently restricted
15. The approved appropriation of Department XYZ for 2022 was P3,600,000. 85% of this
appropriation was allotted by the Department of Budget and Management (DBM)
accompanied with Notice of Cash allocation (80%) of the allotment. During the year, the
amount of obligations incurred was equivalent to 90% of the NCA but only 70% of these
3,600,000
obligations were paid by checks. 85%--for appropriation
80%---accompanied by NCA for allotment ony
90% ---incurred obligation(liability)
What is the entry to record the incurrence of obligation?
if you receive for allocation
70%----paid

that is the time a. No entry, Posting to appropriate Registries of Budget, Utilization and Disbursements
you will record (RBUD)
b. No entry, Posting to appropriate Obligation Request and Status (ORS)
c. No entry, Posting to appropriate Registry of Allotments, Obligations and Disbursements
(RAOD) ---alotment received, ---obligation, and actual disbursement , special budget---kapag nangutang nah
d. No entry, Posting to appropriate Registries of Appropriations and Allotments (RAPAL) --use only original,
---allotment sumplement,

16. Entity A constructed a building by administration with total costs of P1,048,000, consisting of
construction materials [inclusive of VAT; labor costs and various overhead expenses
amounting to P448,000; P350,000 and P250,000, respectively. The journal entry to recognize
the payment of construction materials would be: perspective is you are the gov't
Construction in Progress - Investment Property,
a. Bldg. 448,000
Construction Materials Inventory 448,000
b. Construction Materials Inventory 448,000
Due to BIR ---input vat 24,000
Cash - MDS, Regular 424,000
c. Accounts Payable 448,000
Cash - MDS, Regular 448,000
d. Accounts Payable 424,000
Due to BIR 24,000
Cash - MDS, Regular 448,000

5|P a g e R. FERRER/P. DE JESUS/A.TANG

 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

Process
17. Yoder Company uses the weighted-average method in its process costing system. The
following data pertain to operations in the first processing department for a recent month:

Work in process, beginning:

Units in process ............................. 40,000
Percent complete with respect to
materials .................................... 70%
Percent complete with respect to
conversion ................................. 60%
Costs in the beginning inventory:
Materials cost ............................. P8,600
Conversion cost.......................... P4,800
Units started into production during
the month ...................................... 750,000
Units completed and transferred out
during the month........................... ?
Costs added to production during
the month:
Materials cost ................................ P223,000
Conversion cost ............................. P149,000
Work in process, ending:
Units in process ............................. 30,000
Percent complete with respect to
materials .................................... 40%
Percent complete with respect to
conversion ................................. 30%

What was the cost per equivalent unit for materials during the month?
a. P0.30
b. P0.25
c. P0.20
d. P0.15

18. How much cost, in total, was assigned to the ending work in process inventory?
a. P2,600
b. P4,300
c. P15,000
d. P5,400

FOREX
19. Paul Corporation issued a promissory note denominated in foreign currency for the purchase
made from a supplier in England on December 1, for a 60-day, 18% promissory note for
108,000 pounds, at a selling rate of 1FC to P74.20. On December 31, the selling spot rate is
1FC to P74.85. On January 30, the selling spot rate is 1FC to P75.75.

On the settlement date, how much is the foreign exchange gain/loss?

a. P172,422 gain c. P172,422 loss
b. P100,116 loss d. P98,658 loss

6|P a g e R. FERRER/P. DE JESUS/A.TANG