ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Qualifying round:

Easy

1. A not-for-profit entity has all of the following characteristics except that it will

a. Have positive fund balance

b. Not possess ownership interests like a corporation
c. Operate for purposes other than to provide goods or service
d. Receive significant contributions from providers who do not expect returns

Answer: A
A not-for-profit entity operates for purposes other than to provide goods or service at a
profit, does not possess ownership interests like a corporation and receive significant
contributions from providers who do not expect returns.

2. Under IFRS a parent may exclude a subsidiary from consolidation only if all of the following
conditions exist, except

a. Its parent prepares consolidated financial statements that comply with IFRS
b. It has one class of stock
c. It does not have any debt or equity instruments publicly traded
d. It is wholly owned as its owners do not object to nonconsolidation

Answer: B
The requirement is to identify the item that is not a condition to exclude a subsidiary from
consolidation under IFRS. Answer (c) is correct because it is not required that the
subsidiary have only one class of stock.

3. JUMBO Corp. uses the percentage-of-completion method of revenue recognition in accounting

for its long-term construction contracts. JUMBO Corp.’s progress billings account is a

a. Revenue account
b. Non-current liability account
c. Contra current asset account
d. Contra non-current asset account

Answer: C
In the construction industry, operating cycles for construction contracts generally exceed
one year. Therefore, the predominant practice is to classify all contract-related assets and
liabilities as current. On the balance sheet, the Construction in Progress (CIP) account is
netted with the contra account, progress billings. If CIP exceeds billings, the excess is
reported as a current asset. If billings exceed CIP, the excess is reported as a current
liability.
4. It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity
is
a. Less than 10% of total liabilities
b. Less than 50% of total assets
c. Less than 10% of total liabilities
d. Less than 25% of total assets

Answer: A
It is presumed that an entity with equity of less than 10% of total assets does not have
sufficient funding to finance its activities unless there is definitive evidence to the contrary

5. Sagip Kapatid Charities, a not-for-profit agency, receives free electricity on a continuous basis
from a local utility company. The utility company’s contribution is made subject to cancellation by
the donor. Sagip Kapatid Charities should account for this contribution as a(n)

a. Restricted revenue only.

b. Restricted revenue and an expense.
c. Unrestricted revenue only.
d. Unrestricted revenue and an expense.

Answer: D
A contribution of utilities, such as electricity, as a contribution of other assets, not a
contribution of services. A simultaneous receipt and use of utilities should be recognized
as both an unrestricted revenue and an expense in the period of receipt and use. The
revenue and expense should be measured at estimated fair value. This estimate can be
obtained from the rate schedule used by the utility company to determine rates charged to
a similar customer.

6. A partnership in liquidation has converted all assets into cash and paid all liabilities. The order of
payment

a. Will have amounts owed by partners other than for capital and profits take
precedence over amounts due to partners with respect to their capital accounts.
b. Will be by any manner that is both reasonable and rational for the partnership.
c. will be according to the partners’ residual profit and loss sharing ratios.
d. Will have amounts due to partners with respect to their capital accounts take
precedence over amounts owed by partners other than for capital and profits.

Answer: A
The order of payment upon liquidation of a partnership will have amounts owed by
partners other than for capital and profits take precedence over amounts due to partners
with respect to their capital accounts.

7. When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest
exceeded Mill’s capital balance. Under the bonus method, the excess

a. Was recorded as goodwill.

b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.

Answer: C
Under bonus method, the excess payment to the retiring partner shall reduce the capital
balances of the remaining partners.
8. The year-end balance sheet and residual profit and loss sharing percentages for the Ara, Belle,
and Grace partnership on December 31, 2005, are as follows:

Cash P 30,000
Accounts payable P 200,000
Loan to Ara 40,000
Loan from Belle 50,000
Other assets 480,000
Ara, capital (25%) 70,000
Belle, capital (25%) 80,000
Grace, capital (50%) 150,000

The partners agree to liquidate the business and distribute cash when it becomes available. A
cash distribution plan for the Ara, Belle, and Grace partnership will show that cash available, after
outside creditors are paid, will initially go to

a. Ara in the amount of P20,000.

b. Belle in the amount of P45,000.
c. Belle in the amount of P55,000.
d. Grace in the amount of P90,000.

Answer: C
Vulnerability ranks:
Ara equity (P70,000 - P40,000)/.25 = P120,000 = 1
Belle equity (P80,000 + P50,0000/.25 = P520,000 = 3
Grace equity (P150,000/.5) = P300,000 = 2

Assumed loss absorption:

25% 25% 50%

Ara Belle Grace Total

Equities P30,000 P130,000 P150,000 P310,000

Loss to
Eliminate (30,000) (30,000) (60,000) (120,000)
Subtotals 0 P100,000 P90,000 P190,000
Loss to
Eliminate (45,000) (90,000) (135,000)
Subtotals P55,000 P0 P55,000

9. Franchise fees are properly recognized as revenue

a. when received in cash.

b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.

Answer: D
Franchisors record initial franchise fees as revenue only when and as they make
“substantial performance” of the services they are obligated to perform and when
collection of the fee is reasonably assured.
10. A silent partner in a general partnership

a. Helps manage the partnership without letting those outside the partnership know this.
b. Retains unlimited liability for the debts of the partnership.
c. Both of the above are correct.
d. None of the above is correct.

Answer: B
A silent partner does not help manage the partnership but still has unlimited liability.
Average

1. Property was purchased on December 31, 2018 for 20 million baht. The general price index in the
country was 60.1 on that date. On December 31, 2020, the general price index had risen to
240.4. If the entity operates in a hyperinflationary economy, what would be the carrying amount in
the financial statements of the property after restatement?

a. 20 million baht
b. 1.2 million baht
c. 80 million baht
d. 4.808 million baht

Answer: C
20 million x 240.4 / 60.4 = 80 million baht

2. Certain balance sheet accounts in foreign subsidiary of Cherry Company at December 31, 2018,
have been stated into Philippine pesos as follows:

Stated at
Current rates Historical rates
Accounts receivable, short term ₱200,000 ₱220,000
Accounts receivable, long term 100,000 110,000
Prepaid insurance 50,000 55,000
Goodwill 80,000 85,000
₱430,000 ₱470,000

This subsidiary’s functional currency is a foreign currency. What total amount of the preceding
items should be included in Cherry’s balance sheet?

a. ₱430,000
b. ₱435,000
c. ₱440,000
d. ₱450,000

Answer: A
The foreign currency is the functional currency, so a translation method or closing rate
method is appropriate. All assets are translated at the current exchange rate of ₱430,000.

3. Holmes Corporation started operations on January 1, 2016 selling home appliances and furniture
sets both for cash and on installment basis. Data on the installment basis sales operations of the
Company gathered for the years ending December 31, 2016 and 2017 were as follows:

2016 2017
Installment sales ₱400,000 ₱500,000
Cost of installment basis 240,000 350,000
Cash collected on installment sales:
2014 installment sales 210,000 150,000
2015 installment sales 300,000

Additional information:
On January 5, 2018, an installment sales on 2016 was defaulted and the merchandise with an
appraised value of ₱5,000 was repossessed. Related installment receivable balance on
January 5, 2018 was ₱8,000.
 Recording the repossessed merchandise at its appraised value, gain or loss on the repossession
should be:

a. No gain or loss
b. ₱200 gain
c. ₱1,800 gain
d. ₱3,000 loss

Answer: B
Appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₱5,000
Less: Unrecovered cost:
Unpaid balance – 2016 . . . . . . . . . . . . . . . . . ₱8,000
Less: Deferred gross profit – 2016
(8,000 x 160/400) . . . . . . . . . . . . . . . . . ₱3,200 ₱4,800
Gain on repossession ₱ 200

4. Langdon Inc. manufactures a product that gives rise to a by-product called “Cerca.” The only
costs associated with Cerca are additional processing costs of ₱1.00 for each unit. Langdon
accounts for Cerca sales first by deducting its separable costs from such sales and then by
deducting this net amount from the cost of sales of the major product. For the past year, 2,000
units of Cerca were produced which were sold for ₱3.00 each.

Sales revenue and cost of goods sold from the main product were ₱500,000 and ₱400,000
respectively. Compute the gross margin after considering the by-product sales and costs.

a. ₱96,000
b. ₱100,000
c. ₱104,000
d. ₱106,000

Answer: C
₱500,000 - (₱400,000 - ₱4,000) = ₱104,000

5. On January 1, 2018, Augustus Company sold land that cost ₱60,000 for ₱80,000, receiving a
note bearing interest at 10%. The note will be paid in three annual installments of ₱32,170
starting on December 31, 2018. Because collection of the note is very uncertain, Colt will use the
cost recovery method. How much revenue (profit from sale and interest) from this sale should
Colt recognize in 2018?

a. ₱0
b. ₱6,000
c. ₱8,000
d. ₱20,000

Answer: A
Under the cost recovery method, no income is recognized on a sale until the cost of the
item sold is recovered through cash receipts. All cash receipts, both interest and principal
portions are applied first to the cost of the items sold. Then, all subsequent receipts are
reported as revenue. Because all costs have been recovered, the recognized revenue after
the cost recovery represents income (interest and realized gross profit). This method is
used only when the circumstances surrounding a sale are so uncertain that earlier
recognition is impossible.
6. Watson Corp. (a Philippine-based company) sold parts to a foreign customer on December 1,
2017, with payment of 10 million foreign currencies to be received on March 31, 2018. The
following exchange rates apply:
Forward rate
Dates Spot Rate (for 3/31/2018)
December 1, 2017 ₱0.0035 ₱0.0034 (4 months)
December 31, 2017 0.0033 0.0032 (3 month)
March 31, 2018 0.0038 N/A

Watson’s incremental borrowing rate is 12%. The present value factor for three months at an
annual rate of interest of 12% (1% per month) is 0.9706. Assuming that Watson entered into no
forward contract, how much foreign exchange gain or loss should it report on its 2017 income
statement with regard to this transaction?

a. ₱5,000 gain
b. ₱3,000 gain
c. ₱2,000 loss
d. ₱1,000 loss

Answer: C
No forward contract, therefore, only the sale transaction:
(₱0.0035 - ₱0.0033 = ₱0.0002 loss x 10 million foreign currencies = ₱2,000 loss)

7. The Milky Way Company owns 75% of The Andromeda Company. On December 31, 2018, the
last day of the accounting period, Andromeda sold to Milky Way a noncurrent asset for ₱200,000.
The asset’s original cost was ₱500,000 and on December 31, 2018 its carrying amount in
Andromeda’s books was ₱160,000. The group’s consolidated statement of financial position has
been drafted without any adjustments in relation to this noncurrent asset.

Under PAS 27 Consolidated and separate financial statements, what adjustments should be
made to the consolidated statement of financial statement figures for retained earnings and
non-controlling interest?

Retained earnings Non-controlling interest

a. Increase by ₱225,000 Increase by ₱75,000
b. Increase by ₱300,000 No change
c. Reduce by ₱30,000 Reduce by ₱10,000
d. Reduce by ₱40,000 No change

Answer: C
Upstream sales:
Selling price of non-current asset ₱200,000
Less: Book/carrying value, date of sale 160,000
Gain on intercompany sale ₱40,000

Incidentally, the eliminating entries (assuming books are already closed) would be as
follows:
Retained earnings - Parent (75% x ₱40,000) ₱30,000
Non-controlling interest (25% x ₱40,000) 10,000
Noncurrent asset ₱40,000

The profit on intragroup assets are to be eliminated in full. Only the group share of the
profits of the subsidiary are taken to group retained earnings.
This is because the subsidiary sold the asset to the parent. This gain is not realized from a
group perspective per PFRS 10 and must be removed in full. It is then allocated between
 the shareholders of the subsidiary, in the form of retained earnings (group share of the
gain) and the non-controlling interest.

8. If the Alaska Museum, a not-for-profit organization, received a contribution of historical artifacts, it

need not recognize the contribution if the artifacts are to be sold and the proceeds used to

a. Support general museum activities.

b. Acquire other items for collections.
c. Repair existing collections.
d. Purchase buildings to house collections.

Answer: B
An entity need not recognize the contributions of works of art and historical artifacts if the
collection is held for public exhibition rather than financial profit, cared for and preserved,
and, if sold, the proceeds are used to acquire other items for collections.

9. A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an
unrecognized firm commitment, is classified as a

a. Fair value hedge.

b. Cash flow hedge.
c. Foreign currency hedge.
d. Underlying.

Answer: A
A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized
asset or liability or firm commitment.

10. Planet Company acquired a 70% interest in the Star Company in year 1. For the year ended
December 31, year 2, Star reported net income of ₱80,000. During year 2, Planet sold
merchandise to Star for ₱10,000 at a profit of ₱2,000. The merchandise remained in Star’s
inventory at the end of year 2. For consolidation purposes what is the non-controlling interest’s
share of Star’s net income for year 2?

a. ₱23,400
b. ₱24,000
c. ₱24,600
d. ₱26,000

Answer: B
Because Planet owns 70% interest in Star, the non-controlling interest in star is 30%.
Therefore, the non-controlling interest’s share in Star’s net income of ₱80,000 is
30% × ₱80,000 = ₱24,000. Planet’s sale of merchandise to Star for ₱10,000 will be
eliminated on the consolidated worksheet, and Planet’s income will be reduced by the
intercompany profit of ₱2,000. This will not affect the non-controlling interest’s share of
income because it was a downstream sale from the parent to the subsidiary and is
eliminated by the parent.
Difficult

1. In general, an acquirer measures and accounts for assets acquired and liabilities assumed or
incurred in a business combination after the business combination has been completed in
accordance with other applicable IFRSs. However, which of the following that the International
Financial Reporting Standards 3 Business Combinations (IFRS 3) specifically provides accounting
requirements?

a. reacquired rights
b. contingent liabilities
c. contingent consideration
d. insurance contracts.

Answer: D
Paragraph 17 of IFRS 3 Business Combinations provide one of the two exceptions of
which insurance contracts are covered by IFRS 4 Insurance Contracts.

2. The governing board of Hirap Hospital, a nonprofit hospital affiliated with a religious organization,
acquired 100 BaMI Company bonds for P103,000 on June 30, 2016.

The bonds pay interest on June 30 and December 30. On December 31, 2016, interest of P3,000
was received from BaMI, and the fair value of the BaMI bonds was P105,000. The governing board
acquired the BaMI bonds with cash which was unrestricted, and it classified the bonds as trading
securities at December 31, 2016, since it intends to sell all of the bonds in January 2017. As a
result of the investment in BaMI bonds, what amount should be included in revenue, gains, and
other support on the statement of operations for the year ended December 31, 2016?

a. P0
b. P3,000
c. P2,000
d. P5,000

Answer: D
According to the AICPA Audit and Accounting Guide, Health Care Organizations,
unrealized gains on trading securities should be included as part of the amount reported
for revenue, gains, and other support on the statement of operations. These unrealized
gains are included in the performance indicator. Likewise, unrestricted revenues from
interest and dividends are included as part of the amount reported for revenue, gains, and
other support on the statement of operations. Therefore, Hirap Hospital should report both
the P3,000 of interest revenue and the P2,000 unrealized holding gain (P105,000 less
P103,000) in the amount reported for revenue, gains, and other support on its statement of
operations for the year ended December 31, 2016.

3. To determine whether it controls an investee an investor shall assess whether it has all the
following, except:

a. the purpose and design of the investor

b. exposure, or rights, to variable returns from its involvement with the investee
c. the ability to use its power over the investee to affect the amount of the investor's
returns
d. power over the investee.
 Answer: A
Paragraph B.2 of the Appendices to IFRS 10, Consolidated Financial Statements, states on
how to assess and determine whether an investor controls an investee on which it has all
the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor's
returns.

4. On January 1, 2016, Kaloka Corp. purchased all of Taranta Corp.’s common stock for P1,200,000.
On that date, the fair values of Taranta’s assets and liabilities equaled their carrying amounts of
P1,320,000 and P320,000, respectively. During 2016, Taranta paid cash dividends of P20,000.
Selected information from the separate balance sheets and income statements of Kaloka and
Taranta as of December 31, 2016, and for the year then ended follows:
Kaloka Taranta
Balance sheet accounts
Investment in subsidiary P1,320,000 --
Retained earnings 1,240,000 560,000
Total stockholders’ equity 2,620,000 1,120,000
Income statement accounts
Operating income 420,000 200,000
Equity in earnings of Sharp 140,000 --
Net income 400,000 140,000

In Kaloka’s December 31, 2016 consolidated balance sheet, what amount should be reported as
total retained earnings?

a. P1,240,000
b. P1,360,000
c. P1,380,000
d. P1,800,000

Answer: A
When the equity method of accounting is used, the parent company’s retained earnings
will be equal to the consolidated retained earnings balance. It can be determined that the
equity method is being followed because the account “Equity in earnings of Taranta”
appears in the parent’s income statement. In addition it is important to note that the
balance sheet accounts presented are dated as of the end of the year; therefore, the parent
company’s retained earnings of P1,240,000, should already include all income statement
balance account adjustments. Thus, no additional income amounts will need to be added
to the P1,240,000 retained earnings balance, in order to determine the total retained
earnings balance.
5. Which of the following is true?

a. In a joint arrangement, a single party controls the arrangement on its own.

b. An arrangement can be a joint arrangement when all of its parties have joint control of
the arrangement.
c. An entity that is a party to an arrangement shall assess whether the contractual
arrangement gives all the parties, or a group of the parties, control of the arrangement
individually.
d. A party with joint control of an arrangement can prevent any of the other parties, or a
group of the parties, from controlling the arrangement.

Answer: D
Answer A is incorrect because in a joint arrangement, no single party controls the
arrangement on its own.
Answer B is incorrect because an arrangement can be a joint arrangement even though
not all of its parties have joint control of the arrangement.
Answer C is incorrect because an entity that is a party to an arrangement shall assess
whether the contractual arrangement gives all the parties, or a group of the parties, control
of the arrangement collectively.

6. The following condensed balance sheet is presented for the partnership of Erwin and Levi, who
share profits and losses in the ratio of 60:40, respectively:

Other Assets 450000

Erwin, Loan 20000
470000
Accounts
Payable 120000
Erwin, Capital 195000
Levi, Capital 155000
470000

The partners have decided to liquidate the partnership. If the other assets are sold for P385,000,
what amount of the available cash should be distributed to Erwin?

a. P136,000
b. P156,000
c. P159,000
d. P195,000

Answer: A
This situation represents a simple liquidation since all assets are distributed at one point
in time rather than in installments. In a simple liquidation all of the noncash assets are
sold and the proceeds from their sale are compared to their book value to compute the
gain or loss. The gain or loss on the assets is then distributed to the partners’ accounts
before any of the cash is distributed. The partner loan should not be considered a
noncash asset for the purpose of determining gain or loss, thus, Erwin is responsible to
the partnership for the repayment of the entire amount of the loan. The repayment of the
loan reduces that partner’s (Erwin) distribution as follows:
 Partner balances
before liquidation Erwin Levi Total
Loan (debit) P(20,000) -- P(20,000)
Capital (credit) 195,000 P155,000 350,000
Net balances P175,000 P155,000 P330,000
Loss on sale of other assets (450 – 385) 39,000 26,000 (65,000)
Cash available for partners P136,000 P129,000 P265,000
Cash available for credits 120,000
Total cash from sale of noncash assets $385,000

7. IFRS 4 Insurance Contracts applies to the following except:

a. Insurance contracts
b. Product warranties issued directly by a manufacturer, dealer or retailer
c. Financial instruments that it issues with a discretionary participation feature
d. Reinsurance contracts.

Answer: B
IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions, Contingent
Liabilities and Contingent Assets are the applicable standards for product warranties
issued directly by a manufacturer, dealer or retailer.

8. HARLEY QUINN Hospital, a nonprofit affiliated with a religious group, reported the following
information for the year ended December 31, 2011:

 Gross patient service revenue at the hospital’s full established rates 980,000
 Bad debts expense 10,000
 Contractual adjustment with the third-party payors 115,000
 Allowance for discounts to hospital employees 15,000

On the hospital’s statement of operations for the year ended December 31, 2011, what amount
should be reported as net patient service revenue?

a. P840,000
b. P865,000
c. P850,000
d. P955,000

Answer: C
Health Care Organizations, provides that for contractual adjustments and discounts is
recognized on the accrual basis and deducted from gross patient service revenue to
determine net patient revenue. Bad debts expense is reported as an operating expense,
not as a contra to gross patient service revenue.
Thus,

Gross patient service revenue 980,000

Contractual adjustments (115,000)
Allowance for discounts - employees (15,000)
Net Patient Service Revenue 850,000
9. Matatalo Tayo Ventures operates a branch in Cebu City. Selected accounts taken from the May
31, 2016 statements of Matalo Tayo and its branch follow:
Home Office Branch
Sales P380,000 P353,000
Shipments to branch 150,000 -
Shipments to branch-loading 39,500 -
Inventory, June 1, 2015 24,000 16,000
Purchases 300,000 60,000
Shipments from home office - 187,500
Inventory, May 31, 2016 28,000 20,700

The branch ending inventory included items costing P8,700 that were acquired from outside
suppliers. What is the realized markup on branch merchandise that would be recognized by the
home office?

a. P39,500
b. P37,500
c. P37,100
d. P39,100

Answer: C
Shipments to branch-loading/allowance for overvaluation
of merchandise before adjustments 39,500
Allowance for overvaluation of ending inventory (after
adjustment): (20,700-8,700)x25/125* (2,400)
Realized mark up on branch merchandise 37,100

*Since there are no shipments in transit and there was no error in recording shipments,
therefore, the shipments from office account was correctly recorded, so, to compute for
the billing price would be: 187,500/150,000 = 25%. Markup on cost would be 25%

10. Zero, Inc. was involved in two default and repossession cases during the year:

I. A refrigerator was sold to Sweet Sixteen for P 18,000, including a 35% mark up on selling price.
Sweet made a down payment of 20%, four of the remaining 16 equal payments, and then
defaulted on further payments. The refrigerator was repossessed, at which time the fair value
was determined to be P 6,000.
II. An oven that cost P 12,000 was sold to Teen Eighteen for P 16,000 on the installment basis.
Teen made a down payment of P 2,400 and paid P 800 a month for six months, after which he
defaulted. The oven was repossessed and the estimated value at the time of repossession was
determined to be P 7,500.

What is the gain or loss on repossession that Zero, Inc. must report for financial reporting
purposes?

a. P1,100 loss
b. P1,020 loss
c. P 900 gain
d. P 120 loss
Answer: B
In Case A, the loss on repossession is computed as follows:
Fair value of repossessed merchandise P 6,000
Less: Unrecovered cost
(P18,000 - 3,600 - (900* x 4)) x 65% 7,020
Loss on repossession P 1,020
*Remaining equal payments (P18,000 x 80%) / 16 = P900
In Case B, there is a gain on repossession of P900. It is not reported in the financial
statements as the repossessed merchandise should be carried at the lower of cost or net
realizable value.
Final round:

Easy

1. According to the Conceptual Framework, recognition of an asset occurs if it is probable that future
economic benefits will flow to the entity and:

a. It is a current asset
b. It is a non-current asset
c. It has a value that can be measured with certainty
d. It has a value that can be measured with reliability

Answer: D

2. Which of the following is not a financial asset?

a. An equity instrument of another equity.

b. Cash
c. A contractual right exchange financial assets or financial liability with another entity
under conditions that are potentially favourable or unfavourable to the entity.
d. A contractual right to receive cash

Answer: C

3. Zero based budgeting

I. Is a process in the budget preparation which requires consideration of all programs,

projects and activities with the use of defined ranking procedures.
II. Refers to the yearly analysis, evaluation and justification of each activity or project
starting from zero performance.

a. II only
b. Both I and II
c. I only
d. Neither I nor II

Answer: B

4. When should an anticipated loss on a long term contract be recognized under the percentage of
completion method?

a. over life of project

b. contract complete
c. prorated when contract is completed
d. immediately
5. Stephanie Electronics makes all of its sales on credit and accounts to them using the installment
sales method. For simplicity, assume that all sales occur on the first day of the year and that all
cash collections are made on the last day of the year. Stephanie Electronics charges 18%
interest on the unpaid installment balance Data for 2015 and 2016 are as follows:

2015 2016
Sales 100,000 120,000
Cost of goods sold 60,000 80,000
Cash collections (principal and interest)
2015 sales 40,000 50,000
2016 sales 90,000

The interest income recognized in 2016 amounted to:

a. 35,640
b. 49,700
c. 14,000
d. 21,600

Answer: A
2015 Sales:(100,000 - (40,000 - (18% x 100,000))) x18% 14,040
2016 Sales: 120,000 x 18% 21,600
35,640

6. The following data relate to a construction job started by Ariel Company during 2016:

Total contract price 100,000

Actual Costs during 2016 20,000
Estimated remaining costs 40,000
Billed to customer during 2016 30,000
Received from customer during 2016 20,000

Any costs incurred are expected to be recoverable. Under the cost recovery method-construction
accounting (zero-profit approach), what amount should Ariel Company recognize as gross profit
for 2016:

a. 10,000
b. 4,000
c. 12,000
d. 0

Answer: D
Recognized Revenue in 2016 20,000 (a)
Less: Cost of long term construction (cost incurred in 2016) 20,000
Recognized gross profit in current year - 2016 −

(a) Revenue should be recognized only to the extent of the contract costs incurred that is
probable will be recoverable.
7. Salamat Construction Company uses the percentage of completion method of accounting, during
2016, Salamat contracted to build an apartment house for Clara for 10,000,000. Salamat
estimated that total costs would amount to 8,000,000 over the period of construction. In
connection with this contract, Salamat incurred 1,000,000 of construction costs during 2016,
Salamat billed and collected 1,500,000 from Clara in 2016. How much gross profit should
Salamat recognize in 2016?

a. 187,500
b. 300,000
c. 125,000
d. 250,000

Answer: D
Contract price 10,000,000
Less: Total Estimated Costs 8,000,000
Estimated gross profit 2,000,000
Multiplied by: percentage of completion (1,000,000/8,000,000) 12.5%
Recognized gross profit to date 250,000
Less: Recognized gross profit in prior year 0
Recognized gross profit in current year - 2016 250,000

8. The exchange rate at a point of time for immediate delivery of the currency in an exchange is
known as the:

a. temporal rate
b. point rate
c. spot rate
d. immediate rate

Answer: C

9. Which International Financial Reporting Standard would apply to those contracts that principally
transfer financial risk, such as a credit derivative?

a. IAS 18
b. PFRS 4, Insurance Contracts
c. IAS 23
d. IAS 39

Answer: D

10. If the construction in progress account has a balance of P1,000,000 while the Progress Billings
on Contracts accounts balance is P800,000, how should these accounts be reflected on the
balance sheet?

a. Progress Billings on Contracts will be shown as a current liability.

b. The difference between the two accounts will be reflected as a current asset.
c. The difference between the two accounts will be reflected as a current liability.
d. Construction in Progress will be shown as a current asset.

Answer: B
Average

1. This is defined as the "financial statements presented by a parent in which the investments are
accounted for on the basis of the direct equity interest".

a. Separate financial statements

b. Combined financial statements
c. Single financial statements
d. Consolidated financial statements

Answer: A

2. A construction contractor has a fixed price contract for P100,000 to construct a building (the
project).The contractor's initial estimate of total contract costs is P60,000. It will take two years to
construct the building. At the end of the first year of the project (31 December 2013) the
contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held
offsite. The entity's estimate of total contract costs has stayed the same.The contractor
determines the stage of completion of the construction contract by reference to the proportion that
costs incurred for work performed to date bear to the estimated total costs. If the contractor
determines the stage of completion of the construction contract by reference to independent
surveys of work performed. At the end of 2013 the project was certified to be 28 percent
complete.

a. 16,000
b. 18,000
c. 20,000
d. 12,000

Answer: B

3. A construction contractor has a fixed price contract for P100,000 to construct a building (the
project).The contractor's initial estimate of total contract costs is P60,000. It will take two years to
construct the building.At the end of the first year of the project (31 December 2013) the contractor
has incurred costs of P20,000 on the contract, including P2,000 on cement that is held offsite.
The entity's estimate of total contract costs has stayed the same.The contractor determines the
stage of completion of the construction contract by reference to the proportion that costs incurred
for work performed to date bear to the estimated total costs.

If the contractor determines the stage of completion of the construction contract by reference to
independent surveys of work performed. At the end of 2013 the project was certified to be 28
percent complete. Determine the revenue for the year 2013:

a. 29,200
b. 31,200
c. 27,000
d. 28,000

Answer: A
4. Johnson Limited estimated the net present value of future cash flows from specialised Plant
acquired under a business combination to be P30,000. A replacement cost for the Plant is
estimated to be P33,000. The Plant has been independently appraised at a value of P31,000. A
similar item of Plant cost the acquirer P29,000 last year. What is the fair value for recognition of
the Plant under a business combination?

a. 33,000
b. 29,000
c. 31,000
d. 30,000

Answer: C

5. Which of the following items is classified as a financial asset?

a. ordinary shares of the issuer

b. loans payable (owed by the borrower)
c. accounts receivable
d. inventory

Answer: C

6. The market approach valuation technique for measuring fair value requires which of the
following?

a. The price to replace the service capacity of the asset.

b. The weighted average of the present value of future cash flows.
c. Present value of future cash flows.
d. Prices and other relevant information of transactions from identical or comparable
assets.

Answer: D

7. A business combination may be structured in all of the following, except

a. One entity transfers its net assets to another entity

b. One or more businesses become subsidiaries of an acquirer
c. An entity acquires assets that are not a business.
d. A group of former owners of one of the combining entities obtains control of the
combined entity

Answer: C

8. Kenneth Company, Inc. franchisor, entered into a franchise agreement with Orville Trading,
franchisee on March 31,2013. The total franchise fee is P500,000, of which P100,000 is payable
upon signing and the balance in four equal annual installments. The downpayment is refundable
in the event the franchisor fails to render services and none thus far had been rendered. When
Kenneth Company prepares its financial statements on March 31, 2013, the franchise fee
revenue to be reported is:

a. nil
b. 400,000
c. 500,000
d. 100,000

Answer: A
9. The information contained within Appendix B of PFRS 3 in relation to disclosure:

a. is complementary to the main disclosure requirements within the body of PFRS 3

b. contains prescribed presentation formats for disclosure of business combinations
c. is an integral part of PFRS 3
d. is not mandatory, but contains optional additional disclosures

Answer: C

10. All of the following are characteristics of a derivative, except

a. It requires no initial investment or an initial net investment

b. It settled at a future date
c. It is acquired for the purpose of generating a profit from short-term fluctuations in
market factors
d. Its value changes in response to the change in a specified underlying

Answer: C
Difficult

1. Which of the following transfers of financial assets qualifies for derecognition?

a. A sale of a portfolio of short-term accounts receivables where the entity guarantees

to compensate the buyer for any losses in the portfolio.
b. A loan of a security to another entity.
c. A sale of a financial asset where the entity retains an option to buy the asset back at
its current fair value on the repurchase date.
d. A sale of a financial asset where the entity agrees to repurchase the asset in one
year for a fixed price plus interest.

Answer: C

2. A financial liability classified as fair value through profit and loss must be:

I a derivative (except for a derivative that is a financial guarantee contract or a

hedging instrument)
II acquired principally for the purpose of selling it in the near term
III part of a portfolio of identified financial instruments that are managed together
and for which there is evidence of a recent actual pattern of short-term profit-
taking
IV designated as such upon initial recognition

a. I, II and IV
b. II, III and IV
c. I, III and IV
d. I, II and III

Answer: C

3. Marceliano Sales Corp. accounts for sales on the installment basis. The balances of the control
accounts for Installment Contracts Receivable at the beginning and end of 2016 were:

Jan. 1, 2016 Dec. 31, 2016

Installment Contracts Receivable - 2014 24,020
Installment Contracts Receivable - 2015 344,460 67,440
Installment Contracts Receivable - 2016 410,090

During 2016, the company repossessed a refrigerator which had been sold in 2015 for 5,400 and
3,200 had been collected prior to default. The company sales and cost of sales figures are
summarized below.

2014 2015 2016

Net Sales 380,000 432,000 602,000
Cost of Sales 247,000 285,120 379,260

Marceliano Sales Corp. values the repossessed goods at market value. The resale price of the
repossessed merchandise amounted to 1,700.
The total realized gross profit (loss) on installment sales for the year 2016:

a. 71,006.70
b. (172,852.50)
c. (71,006.70)
d. 172,852.50
 Answer: D
Gain (loss) on repossession:
Estimated Selling Price 1,700
Less: Normal profit (1,700 x 37%) (a) 629
Fair Market Value of Repossessed merchandise 1,071

Less: Unrecovered Cost:

Installment accounts receivable - 2015, unpaid
balance (5,400-3,200) 2,200
Less: Deferred gross profit - 2015 (2,200 x 34%**) 748 1,452
Loss on repossession (381)

(a) Gross profit rate in the year of repossession (b) Gross profit rate where the year of
installment accounts receivable is related to. Gross profit rates:
2014 2015 2016
Installment sales 380,000 432,000 602,000
Less: Cost of installment 247,000 285,120 379,260
sales
Gross profit 133,000 146,880 222,740
Gross profit rate 35% 34% 37%

(2) Realized gross profit on installment sales - 2016;

2014 sales 2015 sales 2016 sales Total
Installment accounts receivable,
1/1/2016 (Installment Sales) 24,020 344,460 602,000
Less: Installment accounts
receivable 12/31/2016 − 67,440 410,090
Decrease in receivables 24,020 277,020 191,910
Less: Defaults, unpaid balance − 2,200 −
Collection in 2016 24,020 274,820 191,910
Multiplied by: Gross profit rate 35% 34% 37%
Realized gross profit in 2016 8,407.00 93,438.80 71,006.70 172,852.50

4. Philippine General Hospital’s accounting record disclosed the following information:

Net resources invested in plant assets 10,000,000

Board-designated funds 2,000,000

What amount should be included as part of unrestricted funds?

a. 10,000,000
b. 2,000,000
c. 0
d. 12,000,000

Answer: D
To be considered restricted, assets must be restricted by parties outside the hospital, not
within the hospital or its board of directors. As a result, both the plant assets of
P10,000,000 and the board - designated funds of P2,000,000 would be considered
unrestricted.
5. The effect that IFRIC Interpretation titled Agreements for the Construction of Real Estate will have
the following effect for entities that undertake off-the-plan real estate sales is that:

a. the amount of revenue recognised on such sales will increase.

b. the use of the completed contracts method of revenue recognition will be
discontinued.
c. the percentage of completion method of revenue recognition will be discontinued.
d. the amount of revenue recognised on such sales will reduce.

6. Utah Company holds 80% of the stock of a subsidiary company. The subsidiary issues 100
additional shares of stock to Utah Company at a price above book value per share. The
subsidiary does not issue any additional shares at the same time. How will Utah Company record
the purchase?

a. Utah Company increases additional paid-in capital

b. Utah Company decreases additional paid-in capital
c. Utah Company records a gain on sale of stock
d. Utah Company assigns any excess cost over book value acquired to increase
undervalued identifiable assets or goodwill as appropriate

Answer: D

7. On January 1, 2016, Conrad Company received a 2 - year, P600,000 loan, with interest payment
occurring at the end of each year and the principal to be repaid on December 31, 2017. The
interest rate for the first year is the prevailing market rate of 8% and the rate in 2017 will be equal
to the market interest rate on January 1, 2017. In conjunction with this loan, Conrad enters into an
interest rate swap agreement to receive a swap payment (based on P600,000) if the January 1,
2017 interest rate is greater than 8% and will make a swap payment if the rate is less than 8%.
The interest swap payment will be made on December 31, 2017. On December 31, 2016
(January 1, 2017), the interest is 7%. The amount to be debited/credit to equity account on
December 31, 2016 due to the swap agreement:

a. P5,607 debit
b. P5,607 credit
c. P5,241 debit
d. P6,000 credit

Answer: A
Conrad must make a swap payment of P6,000 (P6,000 x (8% - 7%)) at the end of 2017 under
the swap agreement. This payable has a present value of P5,607 computed as follows:
P6,000 x 0.93458 (PV of P1 @ 7% for 1 period) = P5,607. The entry to record the fair value
of interest swap on December 31, 2016 would be as follows:
Equity/OCI -Loss 5,607
Interest rate swap (Obligation under swap
Contract) - a liability 5,607

8. Which of the following is not an approach appropriate for hedge accounting?

a. Fair Value Hedge Accounting

b. Hedge of Net Investment in Foreign Subsidiary
c. Critical Term Hedge Accounting
d. Critical Term Hedge Accounting

Answer: C
9. At acquisition date, a wholly owned subsidiary had the following equity items:

Retained earnings 28,000

Share capital 60,000
Business combination revaluation reserve 12,000

In the year following the acquisition, the subsidiary transferred P20,000 from pre-acquisition
retained earnings to a general reserve account. At the reporting date following the reserve
transfer, the following consolidation adjustment is needed:

a. Debit: General reserve (20,000)

Credit: Shares in subsidiary (20,000)

b. Debit: Retained earnings (20,000)

Credit: General reserve (20,000)

c. Debit: General reserve (20,000)

Credit: Retained earnings (20,000)

d. Debit: Shares in subsidiary (20,000)

Credit: Retained earnings (20,000)

Answer: C

10. On November 30, 2016, Malou Basil, an alumnus of Santo School, a private, not-for-profit high
school, contributed P 15,000, with the stipulation that the donation be used for faculty travel
expenses during 2017. During 2017 Santo spent of the donation in accordance with Malou’s
wishes. For the year ended December 31, 2017, what was the effect of the donation on
unrestricted and temporarily restricted net assets?

a. Unrestricted net assets (Increase); Temporary restricted net assets (No effect)
b. Unrestricted net assets (No effect); Temporary restricted net assets (No effect)
c. Unrestricted net assets (Increase), Temporary restricted net assets (decrease)
d. Unrestricted net assets (No effect); Temporary restricted net assets (decrease)

Answer: D
Reclassifications are reported on the statement of activities as “net assets released from
restrictions. “Net assets released from restrictions of P 15,000 are reported as a negative
amount for temporarily restricted nets assets in 2017, while net assets released from
restrictions of P 15,000 are reported as a positive amount for unrestricted net assets for
2017. The P15,000 of travel expense is reported on the reported on the statement of
activities as decreases in unrestricted net assets. This means that the use of the donation
for faculty travel had no effect on unrestricted net assets in 2017. Note that, when the
donation was received in 2016, temporarily restricted net assets increased by P15,000 on
the statement of activities prepared for 2016.