FIRST PREBOARD EXAMINATIONS

1. Regarding FRSC, which of the following statements is incorrect?

S1: FRSC members serve without compensation for a term of three years, which can be renewed for
another three years, which can be renewed for another three-year periods.
S2: FRSC is the current standard-setting body in the Philippines. The due process of standard
setting enables interested parties to express their views on issues under consideration, the first
step of which is to consider the pronouncements of the IAASB.
S3: FRSC members should be CPAs.
A. S3 only C. S2 and S3
B. S1 and S2 D. S1, S2 and S3

2. Which of the following is NOT true regarding conceptual framework?

A. Special purpose financial reports of a profit-oriented entity are within the scope of the
Conceptual Framework.
B. The FRSC recognizes that in a limited number of cases there may be a conflict between the
Conceptual Framework and a Philippine Financial Reporting Standard. In those cases where
there is a conflict, the requirements of the Philippine Financial Reporting Standard prevail over
those of the Conceptual Framework.
C. Under the Conceptual Framework, the concept of income encompasses both revenue and gains.

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D. The selection of the appropriate concept of capital by an entity should be based on the needs of
the users of its financial statements.

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3. Which of the following is true regarding cash and cash equivalents?
A. Not all items included in cash constitute legal tender money.
B. Time deposit is part of cash.
C.
D.
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A Cash Over and Short account is debited when the petty cash fund proves out over.
With the establishment of an imprest petty cash fund, one person is given the authority and
responsibility for issuing checks to cover minor disbursements.
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4. Which of the following receivables may be presented as part of current assets?
A. Receivable from a subscriber of the entitys own shares collectible within 12 months from end of
reporting period.
B. Advances to affiliates, the settlement date is not yet agreed upon.
C. Loan receivables from the entitys officers collectible beyond 12 months
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D. Long-term receivables of a construction firm. The firms normal operating cycle extends beyond
one year.

5. Which of the following is included in the inventories of an entity, to be reported in the statement of
financial position as of the year-end?
C

A. Goods purchased under a lay-away sale.

B. Goods received under a consignment arrangement.
C. Goods sold with buy-back option.
D. Goods sold under a bill and hold arrangement.
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6. Which of the following is incorrect regarding PAS 41, Agriculture?

A. Agricultural activity is the management by an entity of the biological transformation of biological
asset into agricultural produce or additional biological asset
B. There is a rebuttable presumption that the fair value of the biological assets can be determined
on initial recognition only.
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C. If a government grant related to a biological asset is conditional on certain events, the grant
shall be recognized as income when the grant becomes receivable.
D. Agricultural produce are measured at fair value less costs to sell at initial recognition and at
each subsequent reporting period.

7. Which of the following costs is capitalizable under PAS 16?

(1) Initial estimate of cost of dismantling, the outflow of which is to be made at the end of the life
of PPE. The entity is required by certain to contract to dismantle the PPE at the end of its life.
(2) Cost of introducing a new product to be produced by newly acquired equipment.
(3) Cost of employee benefits arising indirectly from the construction of factory machine.
A. 1 only D. 2 only
B. 1 and 3 E. 1 and 2
C. 2 and 3

8. Which of the following statements is incorrect regarding depreciation?

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 1

 A. PAS 16 requires management to choose the method that best reflects the expected pattern of
consumption of the future economic benefits embodied on the asset. PAS 16 allows revenue
method of depreciation.
B. An asset is still depreciated when it is temporarily idle or abandoned.
C. Since accumulated depreciation account by using group or composite method is not related to
any individual items of PPE, there is no gain or loss on disposal or sale of items of PPE.
D. All depreciation method will not result to a zero carrying amount if a depreciable item of PPE has
a residual value.

9. Which of the following are considered as government grants under PAS 20?
I. Free technical or marketing advice and the provision of guarantees
II. Government procurement policy that is responsible for increased sales of an enterprise
III. Provisions of infrastructure by improvements to the general transport and communication
network
IV. Supply of improved facilities (irrigation or water reticulation) which is available on an ongoing
indeterminate basis for the benefit of the entire local community
A. I and II only C. I, II, III, IV
B. I, II and III only D. None will qualify

10. Which of the following is a qualifying asset under PAS 23?

I. Bearer plants not yet ready for harvest

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II. Building under construction to be rented out under operating lease in the future accounted for
under the cost model.
III. Receivables not yet collected.

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A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III

11.

B.
C.
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Information needed to compute a depletion charge per unit includes the
A. estimated total amount of resources available for removal.
amount of resources removed during the period.
cumulative amount of resources removed.
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D. amount of resources sold during the period.

12. Which of the following can be capitalized as intangible assets?

A. Website development costs incurred during the content development stage.
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B. Development costs of customer lists.

C. Continuing franchise fees of franchises.
D. None from the choices.

13. In relation to investment in equity securities, which of the following statements is incorrect?
A. All investment in preference shares of another entity, regardless of ownership percentage, is
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governed and accounted for under PFRS 9.

B. Stocks received in lieu of cash dividends are recognized as dividend income.
C. Investments in shares of stocks held for trading are subsequently measured at fair value, gains
and losses on changes in fair value are presented within profit or loss.
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D. None from the choices.

14. Given the following, how is impairment loss computed?

X = carrying amount
Y = fair value less costs of disposal
Z = value in use
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A. Impairment loss = X – Y
B. Impairment loss = higher between of Y and Z minus X
C. Impairment loss = lower between of Y and Z minus X
D. Impairment loss = Z – Y

15. When the accounting policies used by the investor and the associate do not match
A. PAS 28 requires appropriate adjustments to the associates financial statements to conform
them to the investors accounting policies for reporting like transactions and other events in
similar circumstances.
B. PAS 28, does not require appropriate adjustments to the associates financial statements to
conform them to the investors accountin g policies for reporting like transactions and other
events in similar circumstances when it was not practicable to use uniform accounting policies
C. PAS 28 requires the entity to discontinue the use of the equity method
D. In no instance should the accounting policies used by the investor and the associate be
different.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 2

16. If the investment is measured at amortized cost, the transaction costs are
A. Amortized to profit or loss using the effective interest method
B. Recognized in profit or loss when the asset is derecognized or becomes impaired
C. Recognized in equity when the asset is derecognized or becomes impaired
D. Expensed immediately on acquisition date.

17. I. Investment properties under the fair value model are not subject to impairment
II. If services provided to the occupants of a building are significant in relation to the whole
arrangement, the building is classified as investment property.
III. Change from fair value model to cost model is not allowed by PAS 40.
A. True, false, false D. False, false, true
B. False, true, true E. True, true, true
C. True, false, true

18. If a sinking fund is used to purchase securities, the fund

A. Decreases when the securities are purchased
B. Is not affected by revenue earned on the securities
C. Increases when revenue is. earned on the securities
D. Decreases when revenue is earned on the securities

19. Share (stock) dividends payable

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A. are always presented as non-current liabilities
B. may or may not be presented as current liabilities depending on their expected dates of settlement
C. are not liabilities but rather presented as part of equity as a deduction to share capital.

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D. are not liabilities but rather presented as part of equity as addition to share capital.

20. Determine the correct classification of the following liabilities:

1) Liability due in 6 months, payable in non-cash assets.
2)

3)
balance sheet.
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Liability refinanced with long-term debt between the balance sheet date and date of issuance of

Liability which will be refinanced on a long-term basis between the balance sheet date and date
of issuance of balance sheet through an irrevocable agreement signed by debtor
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4) Liability paid between the balance sheet date and date of issuance of balance sheet with cash;
the cash is replenished with proceeds from long term debt also between the balance sheet date
and date of issuance of balance sheet.
A. All are current liabilities. C. Only No.4 is a current liability
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B. All are long-term liabilities D. Only No. 1 is a long-term liability

21. Determine which of the below statements regarding notes payable is incorrect?
I. Long-term notes payable with reasonable rate are initially recognized at face amount.
II. If the cash price equivalent of the non-cash consideration received in exchanged for the note is
available, the note payable is initially measured at this amount.
C

A. I only C. Both I and II

B. II only D. Neither I nor II

22. When bonds are redeemed by the issuer prior to their maturity date, any material gain or loss on the
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redemption, if material, is
A. amortized over the period remaining to maturity and reported as an extraordinary item in the
income statement.
B. amortized over the period remaining to maturity and reported as part of income from continuing
operations in the income statement.
C. reported in the income statement as an extraordinary item in the period of redemption.
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D. reported in the income statement as part of income from continuing operations in the period of
redemption.

23. In which of the following events shall a provision most likely be recognized?
A. An entity is sued for P 100,000,000 for damages caused by its product.
B. An entity receives inventory purchased under FOB destination.
C. An entitys building is razed after the reporting period but before the financial statements are
authorized for issue. The outflow is probable and can be measured reliably.
D. An entity sells a product. The entity has an implied policy of providing warranty for its products.
The entity can reliably estimate the probability of product returns and the cost of warranty.
24. An entity has decided to improve its defined pension scheme. The benefit payable will be determined
by reference to 60 years service rather than 80 years service. As a result, the defined benefit pension
liability will increase by P 10 M. The average remaining service lives of the employees is 10 years.
How should the increase in the pension liability by P10 M be treated in the financial statements?
A. The past service cost should not be recognized
B. The past service cost should be charged against retained profit

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 3

 C. The past service cost should be charged against profit or loss for the year
D. The past service cost should be spread over the remaining working lives of the employees

25. Are the following statements true or false, according to PAS 12 Income taxes?
(1) Development costs have been capitalized and will be amortized, but were deducted in
determining taxable profit in the period in which they were incurred. This will give rise to a
deferred tax asset.
(2) The tax base for a machine for tax purposes is greater than the carrying amount in the financial
statements up to the end of the reporting period. This will give rise to a deferred tax asset.
A. B. C. D.
Statement 1 True True False False
Statement 2 True False True False

26. The following information has been extracted from the accounting records of the MIRANA INC. at
December 31, 2014
(1) Cash on hand (undeposited sales receipts) P40,800
(2) Certificate of time deposit with maturity of 3 months 1,000,000
(3) Customers note receivable 40,000
(4) Reconciled balance in AA Bank checking account (14,000)
(5) Reconciled balance in BB Bank checking account 374,000
(6) Balance in CC savings account 342,400

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(7) Customers postdated check 54,000
(8) Employee travel advances 64,000
(9) Cash in bond sinking fund 48,000

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(10) Bond sinking fund investments 323,600
(11) Postage stamps 17,200
What total amount should MIRANA report as "cash" at December 31, 2014?

27.
A.
B.
P805,200
P743,200
C.
D.
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P757,200
P703,200

NECROLYTE INC. provided the following data for the month of January of the current year:
Balance per book, January 31 3,130,000
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Balance per bank statement, January 31 3,500,000
Collections on January 31 but undeposited 550,000
NSF check received from a customer returned by the
bank on February 5 with the January bank statement 50,000
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Checks outstanding on January 31 650,000

Bank debit memo for safety deposit box rental not recorded by depositor 5,000
A creditor check for P30,000 was incorrectly recorded in the depositors book as 300,000
A customer check for P200,000 was recorded by the depositor as 20,000
The depositor neglected to make an entry in its books for a check
drawn in payment of an account payable 125,000
C

What is the adjusted cash in bank on January 31?

A. 2,950,000 C. 3,400,000
B. 3,130,000 D. 3,500,000
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Use the following information in answering the next item(s): FA MILLAN 2016
The accountant for the LONE DRUID CORP. assembled the following data:
31-Mar 30-Apr
Book balance 400,000 540,000
Book debits 180,000
Book credits 40,000
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Bank balance 280,000 440,000

Bank debits 30,000
Bank credits 190,000
Credit memos 36,000 23,000
Bank charges 10,000 16,000
Deposit in transit 169,000 136,000
Outstanding checks 23,000 30,000

Additional information:
a. Disbursements in April, of P45,000 were recorded as P54,000.
b. Deposit in April amounting to P10,000 was erroneously credited by the bank to another
companys account.

28. How much is the adjusted receipts in April?

A. P167,000 C. P148,900
B. P175,000 D. P195,000

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 4

29. How much is the adjusted disbursements in April?
A. P55,000 C. P37,000
B. P61,000 D. P30,000

30. The following transactions of SELENA CORP. during 2019 are related to its receivables:
• SELENA factors P200,000 of its receivables to MINOTAUR COMPANY on a with recourse basis.
The agreement includes a factoring fee of 1.5% and a 4% holdback both based on the factored
accounts.
• SELENA discounted on a without recourse basis, a P300,000, 6 month, 9% note receivable
dated July 1, 2019 on September 1, 2019. The bank discounted the note at 12%.
What are the total net proceeds from the receivable financing of SELENA in 2019?
A. P497,960 C. P477,000
B. P489,960 D. P485,000

31. The following information was gathered from last year’s balance sheet of ALDOUS CORP.
December 31, 2018 Balance
Accounts receivable P400,000
Allowance for doubtful accounts 20,000
The following information is related to the current year, 2019, transactions on ALDOUS’ accounts
receivable:
• During the year, ALDOUS’ total sales is P300,000, 30% of which are cash sales.

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• Total cash collections during the year is P467,500 including the collection during the year of a
previously written-off account worth P10,000.
• The company determined that P40,000 of its accounts receivable are deemed worthless.

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• During the year, P50,000 worth of accounts receivable were settled by the customers through
issuance of promissory note. P10,000 of which was already paid during the year.
• Total sales returns on 2019 is P80,000, 20% of which pertains to cash sales.
• All credit sales of the company is with terms of 2/10 n/30 and 80% of the credit sales

•
collections are within the discount period.

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ALDOUS estimated that 10% of the gross accounts receivable will become uncollectible.
What is the net realizable value of the account receivable as of December 31, 2019?
A. P74,250 C. P85,250
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B. P67,500 D. P64,250

32. GRANGER COMPANY sold machinery to VALIR CORP. on January 1, 2014 for which the cash selling
price was P7,582,000. VALIR entered into an installment sale contract with GRANGER at an interest
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rate of 10%. The contract required payments of P2,000,000 a year over five years with the first
payment due on December 31, 2014. What amount of interest income should be reported in 2014?
A. 0 C. 758,200
B. 634,020 D. 1,000,000
C

33. BALMOND BANK loaned BELERICK CORP. P7,500,000 on January 1, 2012. The terms of the loan were
payment in full on January 1, 2016 plus annual interest payment at 11%. The interest payment was
made as scheduled on January 1, 2013. However, due to financial setbacks, BELERICK CORP. was
unable to make the 2014 interest payment. BALMOND BANK considered the loan impaired and
projected the cash flows from the loan on December 31, 2014. The bank accrued the interest on
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December 31, 2013, but did not continue to accrue interest for 2014 due to the impairment of the
loan. The projected cash flows are:
Date of cash flow Amount projected on December 31, 2014
December 31, 2015 500,000
December 31, 2016 1,000,000
December 31, 2017 2,000,000
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December 31, 2018 4,000,000

The PV of 1 at 11% is 0.90 for one period, 0.81 for two periods, 0.73 for three periods, and 0.66 for
four periods.
What is the loan impairment loss on December 31, 2013?
A. 2,140,000 C. 2,965,000
B. 2,240,000 D. 5,360,000

34. During the month of April, 2019, LANCELOT CORP. reported the following data in relation to its use of
retail inventory method:
Cost Retail
Beginning inventory 250,000 600,000
Purchases 1,000,000 1,500,000
Purchase discounts 50,000
Department transfer in 100,000 200,000
Freight-in 30,000
Freight-out 10,000

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 5

 Net mark-up 400,000
Net mark-down 200,000
Sales 2,000,000
Sales discounts 200,000
Sales returns 100,000
Employee discounts 50,000
Normal losses due to shrinkage 100,000
Under Conservative Method, what is estimated ending inventory at cost?
A. P221,625 C. P255,780
B. P239,400 D. P245,340

35. LOLITA COMPANY conducted its year-end inventory count last December 29, 2018 and based on the
physical count, the inventory has an unadjusted balance of P450,000. The following information was
available in determining the adjusted balance of the inventory account:
SALES TRANSACTIONS
INVOICE NO. SHIPPING DATE SHIPPING TERM INVOICE AMOUNT
120154 December 30, 2018 FOB Shipping Point P200,000
120153 December 27, 2018 FOB Shipping Point 150,000
120156 December 31, 2018 Consignment 100,000
120163 December 26, 2018 FOB Destination 200,000

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PURCHASES TRANSACTIONS
INVOICE NO. RECEIVING DATE SHIPPING TERM INVOICE AMOUNT
10001 December 28, 2018 FOB Shipping Point P120,000

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56809 January 3, 2019 FOB Shipping Point 250,000
33352 December 29, 2018 FOB Destination P100,000
The company’s average gross profit rate based on sales is 40%.
What is the adjusted balance of the inventory account to be presented on the statement of financial
position as of December 31, 2018?
A.
B.
P800,000
P850,000
C.
D. ev
P700,000
P600,000
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36. SOUTH SUDAN CORP.’s nature of business operations is in relation to agriculture. The following
information (at their fair values) was presented for evaluation:
Milking cows P100,000
Maize plants 50,000
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Fruit trees 80,000

Oil palms 90,000
Lumber trees 60,000
Tea bushes 40,000
Sheep 30,000
What is the total amount of biological assets?
C

A. P190,000 C. P410,000
B. P330,000 D. P240,000

Use the following information in answering the next item(s):

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PORTUGAL CORP. bought a piece of land and self-constructed a warehouse during 2015. The following
related costs were charged to property, plant, and equipment account:
Land purchase P12,000,000
Demolition of old building 300,000
Legal fees for land acquisition 150,000
Building permit fees 80,000
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Interest on loan for construction 270,000

Building construction costs 15,000,000
Landscaping costs 3,500,000
Equipment purchased for use in excavation 800,000
Fixed overhead allocated to building construction 100,000
Compensation for injury to construction worker (No insurance was carried) 140,000
Profit recognized on construction 1,200,000
Modifications to new building per instructions by city building inspectors 240,000

The following were credited to the account:

Sale of salvage from the demolished old building 70,000
Sale of excavation equipment 640,000
The modifications to the new building per instruction by the building inspectors resulted from poor
planning by the company.

37. How much is the cost of land?

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 6

 A. P13,050,000 C. P11,150,000
B. P12,380,000 D. P12,150,000

38. How much is the cost of building?

A. P15,840,000 C. P15,610,000
B. P16,480,000 D. P16,220,000

39. SPAIN CORP. uses the composite method of depreciation and has a composite rate of 25%. During
20x1, it sold assets with an original cost of ₱100,000 (residual value of ₱20,000) for ₱80,000 and
acquired ₱60,000 worth of new assets (residual value of ₱10,000). The original group of assets had
the following characteristics:
Total Cost ₱250,000
Total Residual Value 30,000
The above original group includes the assets sold in 20x8 but not the assets purchased in 20x8. How
much is the depreciation in 20x8?
A. ₱62,500 C. ₱47,500
B. ₱52,500 D. ₱46,500

40. TURKEY CORP. provided the following information relating to the revaluation of an equipment on
January 1, 2014.
Cost Replacement cost

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Equipment 6,500,000 9,200,000
Residual value 500,000 200,000
Useful life 12

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Age of the equipment 2
Accumulated depreciation ? ?
The equipment was sold on December 31, 2014 for P8,000,000.

What is the revaluation surplus on December 31, 2014?

A.
B.
1,980,000
2,200,000
C.
D. ev
2,250,000
2,430,000
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Use the following information in answering the next item(s):
On January 1, 2019, PARAGUAY CORP. received a grant of P8,000,000 to compensate for costs to be
incurred in planting trees over a period of 5 years. The entity will incur such costs at P1,500,000 for
2019, P3,000,000 for 2020, P6,000,000 for 2021, P8,000,000 for 2022, and P11,500,000 for 2023.
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On April 1, 2019 PARAGUAY received another government grant of P10,000,000 with a condition that
PARAGUAY shall construct a new factory. On June 30, 2019, the factory was completed with a total
cost of P30,000,000 to be depreciated using double-declining balance method over its useful life of 16
years.
41. What is the total expense for 2019 using gross and net presentation, respectively?
C

Gross Presentation Net Presentation

A. P3,750,000 Zero
B. P1,875,000 P4,000,000
C. P3,375,000 P2,350,000
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D. P2,812,500 P2,500,000
E. P4,312,500 P1,875,000

42. What is the balance of deferred income from government grant as of the year ended, December 31,
2019, under gross and net presentation?
Gross Presentation Net Presentation
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A. P16,975,000 Zero
B. P16,975,000 P7,600,000
C. P7,600,000 Zero
D. P15,003,125 P6,800,000
Use the following information in answering the next item(s):
On March 2, 2019, KIMMY CORP. started the construction of its new building. The building was
completed on August 31, 2019. The expenditures on building was made as follows:
March 1 1,500,000 June 30 150,000
May 1 300,000 July 31 300,000
June 1 300,000 August 31 50,000

The following were the borrowings made by the company which are all outstanding during 2019:
Principal Borrowing cost
8% bank loan 1,000,000 80,000
10% short-term note 2,000,000 200,000
11.25% long-term loan 1,600,000 180,000
4,600,000 460,000

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 The 8% bank loan relates specifically to finance the construction of the building. P12,000 interest
income was earned until June 30, 2019 from temporarily investing the funds to bond investments.

43. What is the borrowing cost to be capitalized as cost of new building using traditional method?
A. P79,500 C. P127,000
B. P75,000 D. P123,000

44. What is the borrowing cost to be capitalized as cost of new building using contemporary method?
A. P127,000 C. P79,500
B. P123,000 D. P75,000

Use the following information in answering the next item(s):

THOR MINING INC. bought a tract of land containing coal veils for P 9,075,000. The tract is expected
to yield 1,100,000 tons of coal. The company likewise expects that the quantity which shall be mined
in each of the succeeding years will be twice the quantity mined in the first year of operations.
During the latter part of 2015, installations with an estimated useful ten years were set up at a cost
of P 1,925,000. Mining equipment was purchased early in 2016 for P 4,400,000 and the equipment
has a useful life of eight years and can be transferred conveniently to another location. The
installations, on the other hand, shall be abandoned when the coal deposits are exhausted.
The company started operations in January 2016. By the end of the year, the company mined and

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sold 100,000 tons of coal.

45. How much should the company record as depletion expense for 2016?

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A. P1,650,000 C. P907,500
B. P1,000,000 D. P825,000
46. How much should the company record as total depreciation expense for 2016?
A. P262,500 C. P812,500
B. P550,000 D.

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P725,000

Use the following information in answering the next item(s):

The following transactions pertain to the intangible assets of CPA IN TRANSIT Inc. for the year 2018:
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• On January 1, 2018, CPA IN TRANSIT signed an agreement to operate as franchisee of CHICKEN
PORK ADOBO, Inc. for an initial franchise of P680,000. Of this amount, P200,000 was paid
when the agreement was signed and the balance was payable in four annual payments of
P120,000 each, beginning January 1, 2019. The agreement provides that the down payment is
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not refundable and no future services are required of the franchisor. The implicit rate for loan of
this type is 14%. The agreement also provides the 5% of the revenue from the franchise must
be paid to the franchisor annually. CPA IN TRANSIT’s revenue from the franchise for 2018 was
P8,000,000. CPA IN TRANSIT estimates that the useful life of the franchise to be ten years.

• On May 1, 2018 CPA IN TRANSIT acquired both a license to use a special type of container and
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a distinctive trademark to be printed on the container in exchange for 18,000 shares of CPA IN
TRANSIT’s no-par common stock selling for P50 per share. The license is worth twice as much
as the trademark, both of which may be used for 6 years.
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• In April 1, 2018, CPA IN TRANSIT started to develop a production process that reduces the
production time of its products. The following costs were incurred by the Company:
Research and development laboratory expenses P1,000,000
Expense of drawing required by the patent office to be submitted
with the patent application 350,000
Fees paid to the government patent office to process application 150,000
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The patent was granted on June 30, 2018 and has a useful life of 25 years with a residual value
of P50,000.
(Note: Round off all present value factors in 2 decimal places)

47. How much is the total expense for the year 2018?
A. 1,615,226 C. 1,547,420
B. 1,616,476 D. Answer not given

48. What is the carrying amount of CPA IN TRANSIT’s intangible assets as of December 31, 2018?
A. 1,781,780 C. 1,783,030
B. 1,949,200 D. 1,675,904

49. JAWHEAD CORP. acquired a machine on January 1, 2014 for P8,000,000. The machine had a 10-year
useful life, P500,000 residual value, and is to be depreciated using the straight line method. By the
end of 2015, the machine was damaged by a major accident occurring in the plant. The engineers

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 8

 and technicians could not repair this damage and therefore the machines performan ce was expected
to decline in the future. It is now determined that the machine had a remaining life of 5 years and a
zero residual value. On December 31, 2015, a test for recoverability revealed that the expected net
future undiscounted cash flows related to the continued use and eventual disposal of the machine
totaled P7,000,000. The fair value less cost of disposal of the machine on December 31, 2015 is
P6,600,000 while the discounted net future cash flows amount to P6,300,000. What amount of
depreciation should be recognized for 2016?
A. 1,260,000 C. 1,320,000
B. 1,300,000 D. 1,400,000

50. BLUE CORP. reported the following calculation relating to an impairment loss suffered on December
31, 2014:
Goodwill Net assets
Carrying amount 3,000,000 9,000,000
Impairment loss (3,000,000) (2,000,000)
Adjusted carrying amount - 7,000,000
There has been a favorable change in the estimate of the recoverable amount of the net assets. The
recoverable amount is now P8,000,000 on December 31,2015. The carrying amount of the net assets
would have been P7,200,000 on December 31,2015 if there was no impairment loss recognized on
December 31,2014. Assets are depreciated at 20% of reducing balance.
What gain on reversal of impairment should be recognized in 2015?

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A. 0 C. 1,600,000
B. 1,000,000 D. 2,400,000

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51. MAGINA CORP. with an income tax rate of 32% for current and future years, reported the following
investment in long-term marketable equity securities investment to other comprehensive incomes in
its December 31, 2016, statement of financial position:
Investment in non-current equity securities, at cost P 2,600,000
Fair value adjustment
Fair market value, December 31, 2016
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On December 31, 2017 the market value of the portfolio was P2,500,000.
(400,000)
P 2,200,000

What amount of unrealized gain or loss should the company disclose in the December 31, 2017
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statement of financial position?
A. P68,000 C. P272,000
B. P100,000 D. P300,000
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52. BANE CORP. purchased 50,000 shares (5% ownership) of ELEMENTAL INC. on January 15, 2016.
BANE received a share dividend of 15% on March 31, 2016 when the market price of the share is
P40. On November 30, On December 15, 2016 BANE received a cash dividend of P8 per share. In the
statement of comprehensive income for the year ended December 31, 2016, what amount should
BANE report as dividend income?
A. P60,000 C. P400,000
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B. P150,000 D. P460,000

53. On January 1, 2016 KARDEL CORP. acquired a 30% interest in SNIPER INC.’s 1,000,000 outstanding
shares for P 15,000,000. During the year KARDEL CORP. received P 300,000 cash dividend and
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300,000 share dividends. At December 31, 2016 SNIPER INC. reported a profit of P 5,500,000. On
January 2, 2017 SNIPER INC. issued 1,000,000 new shares tor P20 per share. KARDEL CORP. did not
acquire of those shares.
What is the amount of loss from the dilution should KARDEL recognize?
A. None C. P1,450,000
B. P1,250,000 D. P1,550,000
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54. On July 1, Year 2, OXYGEN CORP. purchased P10 million of NITROGEN INC.’s 8% bonds due on July 1,
Year 10. Based on the companys business model for the portfolio of investments, OXYGEN des ignates
the bonds as investments measured at amortized cost. The bonds, which pay interest semiannually
on January 1 and July 1 were purchased for P8,750,000 to yield 10%.

In its statement of comprehensive income for the year ended December 31, Year 2, OXYGEN should
report interest income of
A. P350,000 C. P437,500
B. P400,000 D. P500,000

55. MARC CORP. had a property with a carrying amount of P15,000,000 held for sale in the ordinary
course of business. On August 1, 2015, MARC commenced an operating lease with PINGRIS CORP.;
hence, the property was reclassified from inventory to investment property.
The fair value of this property on August 1, 2015 was P20,000,000 with cost to sell estimated at
P1,000,000.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 9

 If the investment property will be carried at fair value, what is the amount of revaluation to be
recognized in profit or loss in MARCs 2015 statement of comprehensive income as a result of this
reclassification?
A. P0 C. P4,000,000
B. P1,000,000 D. P5,000,000

56. WOW CORP. insured the life of its president for P2,000,000, the entity being the beneficiary of an
ordinary life insurance policy. The annual premium is P80,000 and the policy is dated January 1,
2011. The cash surrender values are PI5,000 on December 31, 2013 and P19,000 on December 31,
2014. The entity follows the calendar year as the fiscal period. The president died on October 1,2014
and the policy is settled on December 31, 2014.
What is the gain on life insurance settlement?
A. 1,961,000 C. 1,981,000
B. 1,962,000 D. 2,000,000

57. The following information relates to the obligations of CAGAYAN CORP. as of December 31, 2005:
• Accounts payable for goods and services purchased on open account amounted to P500,000 and
accrued expenses of P350,000 at December 31, 2005. On December 15, 2005, CAGAYAN
declared a cash dividend of P7 per common share, payable on January 15, 2006, to
shareholders of record as of December 31, 2005. CAGAYAN had 100,000 shares of common
stock issued and outstanding throughout 2005.

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• On July 1, 2005, CAGAYAN issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The
bonds mature on June 30, 2010, and pay interest annually every June 30. At December 31,
2005, the bonds were trading in the open market at 86 to yield 12%. CAGAYAN, uses the

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effective interest method to amortize bond discount.
• CAGAYAN’ 2005 pretax financial income was P8,500,000 and its taxable income was
P6,000,000. The difference is due to P1,000,000 permanent difference and P1,500,000 of
temporary difference which is neither related to current nor noncurrent assets but is expected to

A. 2,670,000 C.
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reverse within 2006. CAGAYAN is subject to the regular corporate income tax rate of 32% and
made estimated income tax payments during the year of P1,000,000.
CAGAYAN CORP. should report total current liabilities on December 31, 2005 at
3,150,000
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B. 2,690,000 D. 3,670,000

58. DAVAO CORP. prepared a draft of its 2016 balance sheet. The draft statement reported current
liabilities totaling P 2,000,000. However, none of the following items were included in this preliminary
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total at December 31, 2016:

Accounts payable - trade, P 300,000, bonds payable due in 2017, P 500,000; discount on bonds
payable. P 60,000; dividends payable due 2017, P 160,000; bond issue costs, P 20,000; deferred tax
liability, P 60,000 and notes payable, P 100,000. The notes payable is an issued debt instrument that
the entity intends to repurchase in the near term to make a gain from short-term movements in
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interest rates and has a current fair value of P 120,000.

The deferred tax liability is excess tax depreciation over financial that are expected to reverse in the
next three years. At what amount should Levers current liabilities correctly reported in the December
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31, 2016 statement of financial position?

A. P2,880,000 C. P3,000,000
B. P2,900,000 D. P3,110,000

59. On January 1, 2011, LAKERS CORP. signed a P100,000 noninterest-bearing note due in three years at
a discount rate of 10%. LAKERS elects to use the fair value option for reporting its financial liabilities.
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On December 31, 2011, LAKERS credit rating and risk factors indicated that the rate of interest
applicable to its borrowings was 9%. The present value factors at 10% and 9% are presented below.
PV factor 10%, 3 periods .751
PV factor 10%, 2 periods .826
PV factor 10%, 1 period .909
PV factor 9%, 3 periods .772
PV factor 9%, 2 periods .842
PV factor 9%, 1 period .917
At what amount should LAKERS present the note on the December 31, 2011 balance sheet?
A. P75,100 C. P82,610
B. P77,200 D. P84,200

60. On January 1, Year One, a company buys three acres of land for exactly P800,000 with the amount to
be paid on December 31, Year Three. Interest of 3 percent (P24,000) will be paid each December 31
although a 10 percent annual rate is viewed as reasonable. The present value of P1 in three years at
10 percent annual interest is .75. The present value of an ordinary annuity of P1 for three years at 10

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 10

 percent annual interest is 2.49. The present value of an annuity due of P1 for three years at 10
percent annual interest is 2.74. On a December 31, Year One balance sheet, at what amount should
the company report as the liability for this land? (M1)
A P353,414 C P701,736
B P636,000 D P856,000

61. On December 31, 2011, CHICAGO CORP. was indebted to BULLS CO. on a P1,000,000, 10% note.
Only interest had been paid to date, and the remaining life of the note was 2 years. Because
CHICAGO. was in financial difficulties, the parties agreed that CHICAGO would settle the debt on the
following terms:
• Settle one-half of the note by transferring land with a recorded value of P400,000 and a fair
value of P450,000.
• Settle one-fourth of the note by transferring 10,000, P1 par, ordinary shares with a fair market
value of P15 per share.
• Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5% for
the remaining 2 years and reducing the principal to P150,000.
What total gains should X Corp. record in 2011 from this troubled debt restructuring? (D)
A. P 0 C. P200,000
B. P135,000 D. P313,024

Use the following information in answering the next item(s):

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On January 1, 2015. BLACKWATER CORP. issued its 8%, 5-ycar convertible debt instrument with a
face amount of P 8,000,000 for P 7,700,000. Interest is payable every December 31 of each year. The
debt instrument is convertible into 50,000 ordinary shares with a par value of P100. When the debt

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instruments were issued, the prevailing market rate of interest for similar debt without conversion
option is 10%.

On December 31, 2017, all the convertible debt instruments were retired for P 8,000,000. The

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conversion option.
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prevailing rate of interest on a similar debt instrument as of December 31, 2017 is 9% without the

On the date of retirement, what amount of the payments represents the equity component?
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A. P136,878 C. P165,760
B. P140,729 D. P305,760

63. What amount of gain or loss that should be reported in the profit or loss on the retirement of the
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convertible debt instruments?

A. P136,957 C. P165,797
B. P138,420 D. P305,760

64. On January 1, 2001, PUREFOODS CORP. issued 7% term bonds with a face amount of P2 million due
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January 1, 2009. Interest is payable semi-annually on January 1 and July 1. On the date of issue,
investors were willing to accept an effective interest rate of 6%. Assume the bonds were issued on
January 1, 2001 for P2,125,618. Using the effective interest amortization method, PUREFOODS CORP.
recorded interest expense for the 6 months ended December 31, 2001 in the amount of
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A. P63,582 C. P70,000
B. P63,769 D. P140,000

65. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of
the contract of sale, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis of
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experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties.

Sales of ₱40 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold in
20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x2
outflows of economic benefits related to the warranty repairs and replacements take place on June
30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or
replacement costing 90% of sale price. The entity has no reason to believe future warranty claims will
be different from its experience.

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 11

 At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30,
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the
cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows.

How much is the warranty provision at December 31, 20x1?

A. 424,000 C. 800,000
B. 840,000 D. 752,000

66. As of December 31, 20x1, RAPTORS CORP. has adopted a detailed formal plan to close one of its toys
divisions and put up a new division to manufacture warfare weapons. The plan was communicated
through a public announcement and all of those affected by the closure were informed. RAPTORS
estimates the following costs in relation to the closure of the division:
Termination benefits of employees terminated as a
result of the closure ₱4,000,000
Costs of retraining and relocating retained employees 8,000,000
Payment for unpaid purchases made by the division 16,000,000
New systems and distribution networks for the weapons
division 80,000,000
Marketing costs for the weapons to be manufactured by
the new division 24,000,000
Expected losses during the first year of operations of

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the weapons division 80,000,000
How much is the provision to be recognized?
A. 4,000,000 C. 84,000,000

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B. 12,000,000 D. 20,000,000

67. Information on CLIPPERS CORP.’s defined benefit plan is as follows:

PV of DBO – Jan. 1, 20x1 2,000,000
FVPA – Jan.1, 20x1
PV of DBO – Dec. 31, 20x1
FVPA, end. – Dec. 31, 20x1
Current service cost
ev 1,800,000
2,900,000
2,600,000
400,000
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Actuarial loss 200,000
Return on plan assets 120,000
Discount rate 10%
How much is the component of the 20x1 defined benefit cost to be recognized in other comprehensive
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income – (income)/ loss?

A. (140,000) C. 260,000
B. 140,000 D. (260,000)

68. Entity A has 20 employees who are each entitled to one day paid vacation leave for each month of
service rendered. Unused vacation leaves are carried forward and can be used in future periods if the
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current period’s entitlement is not used in full. Moreover, employees are entitled to a cash payment
for unused entitlement when they leave the entity. All the employees have rendered service
throughout the current year and have taken a total of 150 days of vacation leaves. The average daily
rate of the employees in the current period is ₱1,000. However, a 5% increase in the rate is expected
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to take into effect in the following year. Based on Entity A’s past experience, the average annual
employee turnover rate is 20%. How much will Entity A accrue at the end of the current year for
unused entitlements?
A. 0 C. 90,000
B. 75,600 D. 94,500
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69. LOVE CORP. has one temporary difference at the end of 2014 that will reverse and cause taxable
amounts of P1,100,000 in 2015, P1,200,000 in 2016 and P1,200,000 in 2017. The entity has also a
deductible temporary difference of P1,500,000. The pretax accounting income for 2014 is P6,000,000
and the tax rate is 30%. There are no deferred taxes at the beginning of 2014. What is the net
deferred tax expense for 2014?
A. 450,000 C. 1,050,000
B. 600,000 D. 1,200,000

70. PATIENCE CORP. reported a pretax accounting income of P5,000,000 for the current year. The
following items are included in the determination of the accounting income:
Estimated litigation loss which will become tax
deductible when settled in the future 300,000
Dividend received - net of final tax 100,000
Revenue from an installment sale which will be recognized as
taxable income as received over the next three years 600,000
Income tax rate 30%

Financial Accounting & Reporting by Karim G. Abitago, CPA Page 12

 What amount should be reported as current tax expense for the current year?
A. 1,380,000 C. 1,500,000
B. 1,470,000 D. 1,560,000
- END OF EXAMINATION -

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