FINANCIAL ACCOUNTING AND REPORTING

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.

2. Given the following information, calculate Zion Corporation’s Net Income

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?

Beginning Retained Earnings: ₱ 500,000

Net Income: ₱ 100,000
Dividends Paid: ₱ 150,000

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

a. Matching of periodic expense to periodic revenue

b. Objectivity in the calculation of periodic expense.
c. Recognition of assets and liabilities.
d. Consistency of tax expense measurements with actual tax planning strategies.

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:

Cash (cash received)

Common stock (par)

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

Temporary differences amount to

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

1. Statement 1: In periodic system, inventory is counted periodically and then priced.

Statement 2: For periodic system, the ending inventory is usually recorded in the cost of goods
sold (CGS) entry.
Statement 3: In 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.

a. All are false

b. All are true
c. Statements 1 and 2 are True
d. Statements 1 and 3 are True

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.

Ending inventory (EI) xx

CGS (plug)
Beginning inventory (BI) xx
Purchases xx

(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)

2. Gerald Inc. had the following activities during year 1:

 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

Purchase of inv. in stock (P260,000)

Sale of inv. in stock 350,000
Acquisition of Certificate of deposit (500,000)
Net cash used (410,000)

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.

3. Which of the following statements is correct?

a. Depreciation amount is the systematic allocation of the depreciable amount of an

asset over its useful life.
b. Fair value is the higher of an asset’s fair value less cost to sell and its value in use.
c. An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount.
d. Cost is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.

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.

Allowance for doubtful account

260,000 Beginning
180,000 Expense (2% of P9M)
Write-offs 325,000
115,000 Ending

6. Pandanon Company’s current ratio is 4:1. Which of the following transactions would normally
increase its current ratio?

a. Purchasing inventory on account.

b. Collecting an account receivable.
c. Selling inventory on account.
d. Purchasing machinery for cash.

Answer: C
The formula to compute the current ratio is

Current assets
Current ratio = --------------------------
Current liabilities

The following entries would be recorded when inventory is sold on account:

Accounts receivable sales } Sales price of merchandise

Cost of goods sold inventory } Cost of merchandise

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

a. Outstanding loan commitments written.

b. Recourse obligations on receivables.
c. Warranty obligations
d. Futures contracts.

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

a. Both the current and acid-test ratios.

b. Only the current ratio.
c. Only the acid-test ratio.
d. Neither the current nor the acid-test ratios.

Answer: B
Current ratio formula:
Current ratio =Current assets/Current liabilities
The write-off of inventory would decrease current assets and the current ratio.

Acid-test (quick) ratio formula:

Acid-test ratio = (Cash + Net receivables + Marketable securities)/Current liabilities
The write-off of inventory has no effect on the acid-test ratio.
10. Walter Corporation owns 2,000 shares of Alpha Mart, Inc.’s 20,000 shares of P100 par, 6%
cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Alpha Mart’s common
stock. During year 2, Alpha Mart declared and paid dividends of P240,000 on preferred stock. No
dividends had been declared or paid during year 1. In addition, Walter received a 5% common
stock dividend from Alpha Mart when the quoted market price of Alpha Mart’s common stock was
P10 per share. What amount should Walter report as dividend income in its year 2 income
statement?

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

1. Recognize if the statements are True or False:

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:

a. True, False, True

b. True, True, False
c. True, False, False
d. False, False, False

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:

Sales to unaffiliated customers P2,000,000

Intersegment sales of products
similar to those sold to unaffiliated
customers 600,000
Interest earned on loans to other industry
segments 40,000

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.

a. All statements are false

b. All statements are true
c. Statement 1 is true
d. Statement 2 is true

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:

Carrying amount of liability liquidated P150,000

Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 800,000

What amount should Gwen report as a gain (loss) on restructuring of payables?

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.

The restructuring gain is P700,000 (P1,500,000 – P800,000).

The journal entry is

Liability 1,500,000
Loss on transfer 200,000
Real estate 1,000,000
Gain on restructuring 700,000

7. The following costs were incurred by ABC Company during 2016.

 Searching for applications of new research findings P57,000

 Trouble-shooting in connection with the breakdowns
during commercial production 87,000
 Adaption of an existing capability to a particular
requirement or customer’s need as a part of continuing
commercial activity 39,000
 Engineering follow-through in an early phase of
commercial production 45,000
 Radical modification of the formulation of a glassware
product 78,000
 Laboratory research aimed at discovery of new
knowledge 204,000
 Testing for evaluation of new products 72,000
 Quality control during commercial production,
including routine testing of products 174,000
 Materials consumed in research and development
projects 177,000
 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
 Materials purchased for future research and
development projects 102,000
 Research and development costs reimbursable under a
contract to perform research and development
for XYZ Corporation 1,050,000
 Design, construction and testing of preproduction
prototypes and models 870,000
 Routing on-going efforts to refine, enrich or otherwise
improve upon the qualities of existing product 750,000
P4,539,000
 What is the total amount to be classified and expensed as research and development for 2016?

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:

Carrying amount Tax base

Accounts receivable P1,500,000 P1,750,000
Motor vehicles 1,650,000 1,250,000
Provision for warranty 120,000 0
Deposits received in advance 150,000 0

 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.

Compute for the taxable temporary difference:

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:

Feb. 15 Issued 100,000 new shares at P5

Mar. 31 Paid quarterly dividends of P2,550,000
May 13 Converted bonds with aggregate face value of P2,000,000 to ordinary shares at
the rate of 100 shares per P1,000 bond
June 16 Issued an 11% stock dividend
June 30 Paid quarterly dividends. The dividend per share is the same as that paid in the
first quarter.

No other equity transactions occurred after June 30.

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

Dividend rate = 2,550,000 / (1600,000+100,000)

= P1.50

P1.50 x 2,109,000= P3,163,500

Final round:

Easy

1. IFRS requires changes in accounting principles to be reported

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

Straight-line method Production or use method

a. Yes No
b. Yes Yes
c. No No
d. No Yes

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.

3. Amortization of patent includes a credit to

a. The patent account

b. An accumulated amortization account
c. An accumulated depreciation account
d. An expense account

Answer: A

Amortization of patents includes a credit to the patent account. There is no accumulated

amortization account.
4. Joy Corp. has outstanding accounts receivable totaling P6.5 million as of December 31 and sales
on credit during the year of P24 million. There is also a credit balance of P12,000 in the
allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables
will be uncollectible, what will be the amount of bad debt expense recognized for the year?

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

P720,000 + P500,000 – (P250,000 + P110,000) – X = P582,000. X = P278,000.

8. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair values. Each will use
the other’s goods to promote their own products. The retail price of the car that Vik gave up is
less than the retail price of the clothes received. Assuming the transaction has commercial
substance, what profit should Vik recognize for the nonmonetary exchange?

a. A profit is not recognized.

b. A profit equal to the difference between the retail prices of the clothes received and the
car.
c. A profit equal to the difference between the retail price and the cost of the car.
d. A profit equal to the difference between the fair value and the cost of the car.

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.

9. In analyzing a company’s financial statements, which financial statement would a potential

investor primarily use to assess the company’s liquidity and financial flexibility?

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

1. Witt Co. incurred the following infrequent losses during year 1:

• P175,000 from a major strike by employees.
• P150,000 from an earthquake (unusual).
• P125,000 from the abandonment of equipment used in the business.

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

a. Other comprehensive income.

b. Retained earnings.
c. Profit and loss.
d. Revaluation surplus.

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.

3. Which of the following differences would result in future taxable amounts?

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

a. The bonds were sold at a premium.

b. The bonds were sold at a higher effective interest rate
c. The bonds were issued at par plus accrued interest
d. No explanation is possible without knowing the maturity date of the bond issue

Answer: C
Par value ₱2,500,000
Accrued interest
₱2.5M x 6% x 4/6 100,000
Issued price ₱2,600,000

7. All of the following statements about Consolidated financial statements except

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.
8. The third year of a construction project of Concepcion Company began with a P3,000,000 balance
in construction in progress. Included in that figure is P600,000 of interest capitalized in the first
two years. Construction expenditures during the third year were P8,000,000 which were incurred
evenly throughout the entire year. The entity had P30,000,000 in interest-bearing debt
outstanding in the third year at an interest rate of 9%. What amount of interest for the third year is
capitalized?

a. 360,000
b. 630,000
c. 936,000
d. 990,000

Answer: B

Balance, beg of the year 3,000,000

+Cost incurred during the year (8,000,000/2)* 4,000,000
=Average capital expenditures 7,000,000
Actual interest (30,000,000 x 9%) 2,700,000
Borrowing cost ( 7,000,000x 9%) 630,000
Capitalizable borrowing cost ( whichever is lower) 630,000

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

a. Its historical cost.

b. Its net selling price.
c. The greater of its net selling price or its value in use.
d. Its replacement cost.

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?

a. Only the first statement

b. Only the second statement
c. Both statements
d. None of the statements
Answer: B

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

1. An entity provided the following pension plan information:

Projected benefit obligation – January 1, 2016 3,500,000

Fair value of plan assets – January 1, 2016 2,800,000
Pension benefits paid during the year 250,000
Current service cost for 2016 1,750,000
Past service cost for 2016 (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%

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

FVPA – January 1 2,800,000

Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000)
FVPA – December 31 4,230,000

FVPA – December 31 4,230,000

PBO – December 31 (5,975,000)
Prepaid/accrued benefit cost – December 31 (1,745,000)

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.

On January 1, 2017, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity 3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2017
What is the net investment in the lease?

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

3. All of the following statements about Consolidated financial statements except

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:

Trade accounts receivable P 93,000

Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit
(November 2017) 3,000
Selling price of unsold goods sent by TOA on
consignment at 130% of cost (not included
in TOA’s ending inventory) 26,000
Security deposit on lease of warehouse used
for storing some inventories 30,000
Total P150,000
At December 31, 2017, the correct total of TOA’s current net receivables was

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.

5. PFRS for SMEs strictly requires disclosure of information about:

a. Related party transactions

b. Earnings per share
c. Segment information
d. Interim financial reports

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.

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
Loan 2 1,000,000 1,000,000
Loan 3 1,000,000 800,000
Total 3,000,000 3,000,000 ?? ??

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:

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

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

a. By multiplying the item by the effective income tax rate.

b. As the difference between the tax computed based on taxable income without including
the item and the tax computed based on taxable income including the item.
c. As the difference between the tax computed on the item based on the amount used for
financial reporting and the amount used in computing taxable income.
d. By multiplying the item by the difference between the effective income tax rate and the
statutory income tax rate.

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.

Quoted market prices of shares are as follows.

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