ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Problem Portion

Numbers 1 and 2 (Partnership Formation)

A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with
assessed value of P100,000 with historical cost of P800,000 and accumulated depreciation of
P600,000. A day after the partnership formation, the equipment was sold for P 300,000.

B will contribute a land and building with carrying amount of P1,200,000 and fair value of P1,500,000.
The land and building are subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership. The partners agreed that B will have 60% capital interest in the partnership. The partners
also agreed that C will contribute sufficient cash to the partnership.

1. What is the total agreed capitalization of the ABC Partnership?

A. 1,500,000
B. 2,000,000
C. 2,500,000
D. 3,000,000

2. What is the cash to be contributed by C in the ABC Partnership?

A. 500,000
B. 600,000
C. 700,000
D. 800,000

Numbers 3 and 4 (Partnership Operation – Capital Account Transactions)

On January 1, 2018, A, B and C formed ABC Partnership with total agreed capitalization of
P1,000,000. The capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio is
3:2:5, respectively for A, B and C.

During 2018, A and B made additional investments of P200,000 and P500,000, respectively. At the end
of 2018, B and C made drawings of P300,000 and P100,000, respectively. On December 31, 2018, the
capital balance of B is reported at P200,000.

3. What is the net income or net loss of ABC Partnership for the year ended December 31, 2018?
A. 500,000 loss
B. 1,000,000 loss
C. 800,000 income
D. 1,200,000 income

4. What is the capital balance of C on December 31, 2018?

A. 150,000
B. 50,000
C. 200,000
D. 250,000
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Numbers 5, 6, and 7 (Partnership Operation – Distribution of profit or loss)

On January 1, 2018, A, B and C formed ABC Partnership with original capital contribution of
P300,000, P500,000 and P200,000. A is appointed as managing partner.

During 2018, A, B and C made additional investments of P500,000, P200,000 and P300,000,
respectively. At the end of 2018, A, B and C made drawings of P200,000, P100,000 and P400,000,
respectively. At the end of 2018, the capital balance of C is reported at P320,000. The profit or loss
agreement of the partners is as follows:

 10% interest on original capital contribution of the partners.

 Quarterly salary of P40,000 and P10,000 for A and B, respectively.
 Bonus to A equivalent to 20% of Net Income after interest and salary to all partners
 Remainder is to be distributed equally among the partners.

5. What is the partnership profit for the year ended December 31, 2018?
A. 900,000
B. 1,020,000
C. 1,050,000
D. 960,000

6. What is A’s share in partnership profit for 2018?

A. 190,000
B. 340,000
C. 540,000
D. 200,000

7. What is B’s share in partnership profit for 2018?

A. 200,000
B. 290,000
C. 50,000
D. 90,000
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Number 8 (Admission of partner by purchase)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 1:6:3:
Current Assets 1,000,000 Total Liabilities 600,000
Noncurrent Assets 2,000,000 A, Capital 900,000
B, Capital 800,000
C, Capital 700,000

On January 1, 2019, D is admitted to the partnership by purchasing 40% of the capital interest of B at a
price of P500,000.

What is the capital balance of B after the admission of D on January 1, 2019?

A. 540,000
B. 480,000
C. 420,000
D. 300,000

Number 9 (Retirement of partner)

On December 31, 2018, ABC Partnership’s Statement of Financial Positions shows that A, B and C
have capital balances of P500,000, P300,000 and P200,000 with profit or loss ratio of 1:3:6. On
January 1, 2019, C retired from the partnership and received P350,000. At the time of C’s retirement,
an asset of the partnership is undervalued.

What is the capital balance of A after the retirement of C?

A. 462,500
B. 537,500
C. 562,500
D. 525,000

Number 10 (Retirement of partners)

On December 31, 2018, ABC Partnership’s Statement of Financial Position shows that A, B and C
have capital balances of P400,000, P300,000 and P100,000 with profit or loss ratio of 1:4:5. On
January 1, 2019, C retired from the partnership and received P80,000. At the time of C’s retirement, the
assets and liabilities of the partnership are properly valued.

What is the capital balance of B after the retirement of C?

A. 284,000
B. 308,000
C. 316,000
D. 320,000
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Number 11 (Partnership Dissolution – Admission of New Partner by Investment)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 1:6:3:
Current Assets 1,300,000 Total Liabilities 300,000
Noncurrent Assets 2,000,000 A, Capital 1,400,000
B, Capital 700,000
C, Capital 900,000
On January 1, 2019, D is admitted to the partnership by investing P1,000,000 to the partnership for
20% capital interest.
If the all the assets of the existing partnership are properly valued, what is the capital balance of C after
the admission of D?
A. 960,000
B. 900,000
C. 840,000
D. 1,200,000

Numbers 12 and 13 (Admission of new partner by investment)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 5:1:4:
Current Assets 1,500,000 Total Liabilities 500,000
Noncurrent Assets 2,000,000 A, Capital 1,100,000
B, Capital 1,200,000
C, Capital 700,000
On January 1, 2019, D is admitted to the partnership by investing P500,000 to the partnership for 10%
capital interest. The total agreed capitalization of the new partnership is P3,000,000.

12. What is the capital balance of D after his admission to the partnership?
A. 500,000
B. 300,000
C. 350,000
D. 400,000

13. What is the capital balance of C after the admission of D to the partnership?
A. 580,000
B. 820,000
C. 500,000
D. 780,000
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Numbers 14 and 15 (Partnership Liquidation – Lump Sum Liquidation)

On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss
ratio of 6:1:3 of partners A, B and C respectively, revealed the following data:

Cash 1,000,000 Other Liabilities 2,000,000

Receivable from A 500,000 Payable to B 1,000,000
Other noncash assets 2,000,000 Payable to C 100,000
A, Capital 700,000
B, Capital (650,000)
C, Capital 350,000
On January 1, 2019, the partners decided to liquidate the partnership. All partners are legally declared
to be personally insolvent. The other noncash assets were sold for P1,500,000. Liquidation expenses
amounting to P100,000 were incurred.

14. How much cash was received by B at the end of partnership liquidation?
A. 250,000
B. 150,000
C. 290,000
D. 270,000

15. How much cash was received by C at the end of partnership liquidation?
A. 270,000
B. 150,000
C. 350,000
D. 220,000

Page 6
Numbers 16, 17 and 18 (Partnership Liquidation – Installment Liquidation)

On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss
ratio of 5:3:2 of respective partners A, B and C. showed the following information:

Cash 1,600,000 Total Liabilities 2,000,000

Noncash assets 1,400,000 A, Capital 100,000
B, Capital 500,000
C, Capital 400,000

On January 1, 2019, the partners decided to liquidate the partnership in installment. All partners are
legally declared to be personally insolvent.

As of January 31, 2019, the following transactions occurred:

 Noncash assets with a carrying amount P1,000,000 were sold at a gain of P100,000.
 Liquidation expenses for the month of January amounting to P50,000 were paid.
 It is estimated that liquidation expenses amounting to P150,000 will be incurred for the month
of February, 2019.
 20% of the liabilities to third persons were settled.
 Available cash was distributed to the partners.

As of February 28, 2019, the following transactions occurred:

 Remaining noncash assets were sold at a loss of P100,000.
 The final liquidation expenses for the month of February amounted to P100,000.
 The remaining liabilities to third persons were settled at a compromise amount of P1,500,000.
 Remaining cash was finally distributed to the partners.

16. What is the amount of cash received by partner C on January 31, 2019?
A. 260,000
B. 240,000
C. 300,000
D. 350,000

17. What is the share of B in the maximum possible loss on January 31, 2019?
A. 275,000
B. 110,000
C. 120,000
D. 165,000

18. What is the amount of total cash withheld on January 31, 2019?
A. 550,000
B. 1,600,000
C. 1,750,000
D. 1,700,000

Page 7
Numbers 19, 20 and 21 (Corporate Liquidation)

Cagayan Company is experiencing financial problems which resulted to ultimate bankruptcy. The
statement of financial position of the entity before liquidation is presented below:
Cash 100,000 Income tax payable 200,000
Inventory 300,000 Salaries payable 300,000
Land 200,000 Note payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
Deficit (1,700,000)

 The note payable is secured by the inventory with net realizable value of P250,000.
 The mortgage payable is secured by the land with fair value of P120,000.

19. What is the amount received by the holder of the note payable at the end of corporate liquidation?
A. 320,000
B. 300,000
C. 250,000
D. 260,000

20. What is the amount received by the holder of the mortgage payable at the end of corporate
liquidation?
A. 120,000
B. 200,000
C. 150,000
D. 100,000

21. What is the amount received by the employees at the end of corporate liquidation concerning their
salaries?
A. 100,000
B. 120,000
C. 72,000
D. 300,000

Page 8
Numbers 22 and 23 (Corporate Liquidation)

Surigao Company is bankrupt and has undergone corporate liquidation. Presented below is its
statement of financial position before the start of liquidation:

Cash 300,000 Accounts Payable 100,000

Machinery 500,000 Salaries Payable 200,000
Building 1,200,000 Income tax Payable 300,000
Loan Payable 400,000
Mortgage payable 500,000
Contributed capital 800,000
Deficit (300,000)

 Liquidation expenses amounting to P600,000 were paid.

 The loan payable is secured by the machinery with fair value of P300,000.
 The mortgage payable is secured by the building.
 At the end of liquidation, the holder of loan payable received P340,000.

22. What is the amount received by the holder of accounts payable at the end of liquidation?
A. 85,000
B. 15,000
C. 40,000
D. 60,000

23. What is the amount of net free assets available at the end of liquidation?
A. 80,000
B. 40,000
C. 120,000
D. 200,000

Page 9
Numbers 24, 25 and 26 (Joint Arrangement classified as Joint Operation)

Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the

incorporating entities as component for their final products of cellular phones and tablets.

The contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of
60:40. At the end of first operation of Entity C, the financial statements provided the following data:

Inventory 1,000,000 Accounts payable 2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the
assets and liabilities of Entity C:
 Entity A owns the land and incurs the loan payable of Entity C.
 Entity B owns the building and incurs the note payable of Entity C.
 The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their
capital interest in Entity C.
 The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000
and P2,000,000, respectively. As of the end of the first year, Entity A and Entity B were able to
resell 30% and 60% of the inventory coming from Entity C to third persons.

24. What is the amount of total assets to be reported by Entity A concerning its interest in Entity C?
A. 5,400,000
B. 3,000,000
C. 3,600,000
D. 5,000,000

25. What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C?
A. 1,800,000
B. 2,200,000
C. 2,800,000
D. 2,400,000

26. What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C?
A. 2,300,000
B. 2,100,000
C. 3,000,000
D. 2,500,000

Page 10
Numbers 27 and 28 (Joint Arrangement classified as Joint Venture Equity Method)

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C
which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities
provided that the decisions on relevant activities of Entity C will require the unanimous consent of
both entities. Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of Entity C. The financial statements of Entity C provided the following data for its two-year
operation:
Net income (loss) Dividends declared
2018 200,000 100,000
2019 (2,000,000) -

27. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of
Financial Position on December 31, 2019?
A. 1,080,000
B. 1,040,000
C. 240,000
D. 200,000

28. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of
Financial Position on December 31, 2019?
A. 1,500,000
B. 1,620,000
C. 360,000
D. 900,000

Page 11
Numbers 29 and 30 (Joint venture - Intercompany Transaction)

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C by
investing P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of
the incorporating entities provided that the decisions on relevant activities of Entity C will require the
unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C.

The financial statements of Entity C provided the following data for 2018:

 Entity C reported net income of P1,000,000 for 2018 and paid cash dividends of P400,000 on
December 31, 2018.

 During 2018, Entity C sold inventory to Entity A with gross profit of P50,000. Eighty percent of
those inventories were resold by Entity A to third persons during 2018 and the remainder was
resold to third persons during 2019.

 On July 1, 2018, Entity C sold a machinery to Entity B at a loss of P20,000. At the time of sale, the
machinery has remaining useful life of 2 years.

29. What is the investment income to be reported by Entity A for the year ended December 31, 2018?
A. 603,000
B. 606,000
C. 594,000
D. 597,000

30. What is the balance of Investment in Entity C to be reported by Entity B on December 31, 2018?
A. 2,242,000
B. 2,241,000
C. 2,238,000
D. 2,248,000

Page 12
Numbers 31 and 32 Joint Venture – IFRS for SMEs (Fair Value Model or Equity Method)

On January 1, 2018, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled
entity by investing P500,000 each in exchange for 10,000 ordinary shares each of Entity C. Entity A
and Entity B each incurred P20,000 transaction costs.
The contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will
have rights to the net assets of Entity C.
For the year ended December 31, 2018, Entity C reported net income of P100,000 and declared
dividends in the amount of P30,000.
On December 31, 2018, the ordinary shares of Entity C are quoted at P56.

31. If Entity A elected fair value model to account its investment in Entity C, what is the net effect on
Entity A’s profit or loss for the year ended December 31, 2018?
A. 55,000 net profit
B. 60,000 net profit
C. 15,000 net profit
D. 40,000 net profit

32. If Entity B elected equity method to account its investment in Entity C, what is the carrying amount
of Entity B’s Investment in Entity C on December 31, 2018?
A. 520,000
B. 540,000
C. 535,000
D. 555,000

Numbers 33 and 34 Joint Venture – IFRS for SMEs (Cost Method or Equity Method)

On January 1, 2018, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled
entity by investing P200,000 each in exchange for 20,000 ordinary shares each of Entity C. Entity A
and Entity B each incurred P10,000 transaction costs.
The contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will
have rights to the net assets of Entity C.
For the year ended December 31, 2018, Entity C reported net income of P50,000 and declared
dividends in the amount of P10,000.
On December 31, 2018, the investment in Entity C has value in use of P215,000.

33. If Entity A elected cost method to account its Investment in Entity C, what is the carrying amount
of Entity A’s Investment in Entity C on December 31, 2018?
A. 210,000
B. 215,000
C. 230,000
D. 200,000

34. If Entity B elected equity method to account its Investment in Entity C, what is the net effect in
Entity B’s profit or loss for the year ended December 31, 2018?
A. 25,000 net profit
B. 5,000 net profit
C. 10,000 net profit
D. 15,000 net profit

Page 13
Number 35 (Installment sales)

Nikko Company, which began operations on January 5, 2018, appropriately uses the installment
method of revenue recognition. The following information pertains to the operations for 2018 and
2019:

2018 2019
Sales 300,000 450,000
Collections from :
2018 sales 100,000 50,000
2019 sales - 150,000
Accounts written off from
2018 sales 25,000 75,000
2019 sales - 150,000
Gross profit rates 30% 40%

What amount should be reported as deferred gross profit on December 31, 2019?
A. 75,000
B. 80,000
C. 112,000
D. 125,000

Numbers 36 and 37 ( Installment sales)

Appliance Company reports gross profit on the installment basis. The following data are available:

2018 2019 2020

Installment sales 240,000 250,000 300,000
Cost of goods – installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000

Collections
2018 installment contracts 45,000 75,000 72,500
2019 installment contracts 47,500 80,000
2020 installment contracts 62,500

Defaults
Unpaid balance of 2018 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2019 installment contracts 16,000
Value assigned to repossessed merchandise 9,000

36. What is the realized gross profit before loss on repossession for 2020?
A. 49,775
B. 57,625
C. 48,975
D. 56,625

1. What is the loss on repossession for 2020?

A. 5,250
B. 2,600
C. 7,850
D. 9,000
 Page 14

Number 38 (Installment sales)

Davao Company uses the installment method of income recognition. The entity provided the following
pertinent data:

2018 2019 2020

Installment sales 300,000 375,000 360,000
Cost of goods sold 225,000 285,000 252,000

Balance of Deferred Gross Profit at Year end

2018 52,500 15,000 -
2019 54,000 9,000
2020 72,000

What is the total balance of the Installment Accounts Receivable on December 31, 2020?
A. 270,000
B. 277,500
C. 279,000
D. 300,000

Numbers 39 and 40 (Installment Sales)

On January 1, 2018, an entity sold a car to a customer at a price of P400,000 with a production cost of
P300,000. It is the entity’s policy to employ installment method to recognize gross profit from
installment sales.

At the time of sale, the entity received cash amounting to 25% of the selling price and old car with
trade-in allowance of P50,000. The said old car has fair value of P150,000. The customer issued a
5-year note for the balance to be payable in equal annual installments every December 31 starting
2018. The note payable is interest bearing with 10% rate due on the remaining balance of the note.

The customer was able to pay the first annual installment and corresponding interest due. However,
after the payment of the second interest due, the customer defaulted on the second annual installment
which resulted to the repossession of the car sold with appraised value of P110,000. On December 31,
2019, the repossessed car was resold for P140,000 after reconditioning cost of P10,000.

39. What is the entity’s realized gross profit for the year ended December 31, 2018?
A. 50,000
B. 120,000
C. 108,000
D. 128,000

40. What is the loss on repossession for the year ended December 31, 2019?
A. 30,000
B. 20,000
C. 10,000
D. 40,000
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Numbers 41, 42 and 43 (Revenue Recognition – Franchise Fees)

On January 1, 2018, an entity granted a franchise to a franchisee. The franchise agreement required the
franchisee to pay a nonrefundable upfront fee in the amount of P400,000 and on-going payment of
royalties equivalent to 5% of the sales of the franchisee. The franchisee paid the nonrefundable upfront
fee on January 1, 2018.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the
following performance obligations:

 To construct the franchisee’s stall with stand-alone selling price of P200,000.

 To deliver 10,000 units of raw materials to the franchisee with stand-alone selling price of
P250,000.
 To allow the franchisee to use the entity tradename for a period of 10 years starting January 1, 2018
with stand-alone selling price of P50,000.

On June 30, 2018, the entity completed the construction of the franchisee’s stall. On December 31,
2018, the entity was able to deliver 3,000 units of raw materials to the franchisee. For the year ended
December 31, 2018, the franchisee reported sales revenue amounting to P100,000.

The entity had determined that the performance obligations are separate and distinct from one another.

41. What is the amount of nonrefundable upfront fee to be allocated to the construction of the
franchisee’s stall?
A. 200,000
B. 160,000
C. 250,000
D. 120,000

42. What is the amount of revenue to be recognized in relation to the use of delivery of raw materials
for the year ended December 31, 2018?
A. 100,000
B. 200,000
C. 60,000
D. 75,000

43. What is the amount of revenue to be recognized in relation to the use of entity’s tradename for the
year ended December 31, 2018?
A. 5,000
B. 4,000
C. 50,000
D. 10,000
 Page 16

Numbers 44 and 45 (Revenue Recognition – Net Income of Franchisor)

On January 1, 2018, an entity granted a franchise agreement to a franchisee. The contract provided that
the franchisee shall pay an initial franchise fee of P500,000 and on-going payment of royalties
equivalent to 8% of the sales of the franchisee.

On January 1, 2018, the franchisee paid downpayment of P200,000 and issued a 3-year noninterest
bearing note for the balance payable in three equal annual installments starting December 31, 2018.
The note has present value of P240,183 with effective interest rate of 12%.

On June 30, 2018, the entity completed the performance obligation of the franchise at a cost of
P352,146. Aside from that, the entity incurred indirect cost of P22,009.

The franchisee started operation on July 1, 2018 and reported sales revenue amounting to P50,000 for
the year ended December 31, 2018. The franchisee paid the first installment on its due date.

44. If the collection of the note receivable is reasonably assured, what is the gross profit to be
recognized by the entity for the year ended December 31, 2018 in relation to the initial franchise
fee?
A. 66,028
B. 44,014
C. 22,009
D. 88,037

45. If the collection of the note receivable is reasonably assured, what is the net income to be reported
by the entity for the year ended December 31, 2018?
A. 98,850
B. 94,850
C. 70,028
D. 92,037
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Numbers 46, 47 and 48 (Construction contract - Percentage of Completion Method)

On January 1, 2018, Solid Company accepted a long-term construction project for an initial contract
price of P1,000,000 to be completed on June 30, 2020. On January 1, 2019, the contract price was
increased to P1,500,000 by reason of change in the design of the project. The outcome of the
construction contract can be estimated reliably. The project was completed on December 31, 2020
which resulted to penalty amounting to P200,000. The entity provided the following data concerning
the direct costs related to the said project for 2018 and 2019:

2018 2019
Costs during the year 440,000 680,000
Remaining estimated costs to complete at year-end 660,000 280,000

46. What is the construction revenue for the year ended December 31, 2018?
A. 340,000
B. 400,000
C. 440,000
D. 360,000

47. What is the realized gross profit for the year ended December 31, 2019?
A. 200,000
B. 80,000
C. 180,000
D. 100,000

48. What is the balance of construction in progress on December 31, 2019?

A. 1,200,000
B. 1,020,000
C. 1,120,000
D. 900,000
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Numbers 49, 50 and 51 (Construction contract - Cost Recovery Method)

On January 1, 2018, Hardrock Company started the construction of a building at a fixed contract price
of P1,000,000. On the same date, the customer paid a mobilization fee equal to 5% of contract price
that will be deductible from the first billing. The outcome of construction contract cannot be estimated
reliably

During 2018, the entity billed the customer equivalent to 30% of the contract price. During 2019, the
entity billed again the customer amounting to 20% of the contract price. During 2020, the entity billed
again the customer amounting to 40% of the contract price. The remaining billing was made at the year
of completion of the project.

The entity made collection from the customer at the end of 2018, 2019 and 2020, in the amount of
P120,000, P450,000 and P180,000, respectively. The entity provided the following data concerning the
direct costs related to the said project:

2018 2019 2020

Cumulative costs incurred at year-end 360,000 800,000 870,000
Remaining estimated costs to complete at year-end 840,000 250,000 50,000

49. What is the realized gross profit for the year ended December 31, 2019?
A. 50,000
B. 200,000
C. 150,000
D. 0

50. What is the excess of construction in progress over progress billings or excess of progress billings
over construction in progress on December 31, 2020?
A. 30,000 excess billings
B. 80,000 excess billings
C. 20,000 excess construction in progress
D. 50,000 excess construction in progress

51. What is the balance of accounts receivable on December 31, 2020?

A. 150,000
B. 100,000
C. 120,000
D. 50,000
 Page 19

Numbers 52, 53 and 54 (Home Office, Branch and Agency Transactions)

Siargao Company set up a branch in a province. The entity and its branch provided the following data
for the second year of branch operation:

Home Office Branch

Sales revenue to outside customer 1,000,000 500,000
Beginning inventory 50,000 30,000
Purchases from outside supplier 400,000 100,000
Shipment to branch 200,000
Shipment from home office 250,000
Ending inventory 80,000 50,000
Operating expenses 150,000 40,000

 The home office to branch markup based on cost is 25% this year and last year.
 20% of the beginning inventory of the branch came from outside supplier.
 24% of the ending inventory of the branch came from the last year’s shipment from the home
office while 50% of the ending inventory of the branch came from current year’s shipment from the
home office.

52. What is the net income reported by the branch in its separate income statement for the current year?
A. 130,000
B. 124,000
C. 114,000
D. 95,000

53. What is the ending inventory to be reported by the entity in its combined statement of financial
position?
A. 128,000
B. 115,000
C. 130,000
D. 122,600

54. What is the overstatement in the cost of goods sold reported by the branch in its separate income
statement for the current year?
A. 54,000
B. 50,000
C. 52,000
D. 47,400
 Page 20

Number 55 (Home office and branch)

The home office in Quezon City ships and bills merchandise to its provincial branch at cost. The
branch carries its own accounts receivable and makes its own collections. The branch also pays its
expenses. The branch transactions for 2018 are reflected in the following information:

Cash 20,000
Accounts receivable 80,000
Home Office 180,000
Shipments from Home Office 250,000
Sales 225,500
Expenses 55,500
December 31, 2018 inventory 65,000

What is the balance of the Investment in Branch account in the home office book?
A. 180,000
B. 195,000
C. 165,000
D. 175,000

Numbers 56 and 57 (Home office and branch)

Coffee Company decided to open a branch in Manila. Shipments of merchandise to the branch totaled
P54,000 which included a 20% markup on cost. All accounting records are kept at the home office. The
branch submitted the following report summarizing the operations for the year ended December 31,
2018:

Sales on account 74,000

Sales on cash basis 22,000
Collections of accounts receivable 60,000
Expenses paid 38,000
Expenses unpaid 12,000
Purchase of merchandise for cash 26,000
Inventory on hand, December 31; 80% from home office 30,000
Remittance to home office 55,000

56. What is the branch inventory on December 31, 2018 at cost?

A. 25,000
B. 20,000
C. 26,000
D. 10,000

57. What is the branch net income for the current year?
A. 1,000
B. 4,000
C. 800
D. 500
 Page 21

Numbers 58, 59, 60 and 61 (Business Combination - Acquisition of Net Assets)

Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares with par value of P10
and bonds payable with face amount of P500,000. The bonds are classified as financial liability at
amortized cost.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand,
the bonds payable are trading at 110.

Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A also paid P40,000
acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:

Entity A Entity B
Current assets 1,000,000 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 200,000 400,000
Noncurrent liabilities 300,000 500,000
Ordinary shares 500,000 200,000
Share premium 1,200,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the
noncurrent assets of Entity B have fair value of P1,300,000. On the same date, the current liabilities of
Entity B have fair value of P600,000 while the noncurrent liabilities of Entity A have fair value of
P500,000.

58. What is the goodwill or gain on bargain purchase arising from business combination?
A. 50,000 goodwill
B. 150,000 gain on bargain purchase
C. 120,000 goodwill
D. 70,000 gain on bargain purchase

59. What total amount should be expensed as incurred at the time of business combination?
A. 20,000
B. 70,000
C. 30,000
D. 50,000

60. What is Entity A’s amount of total assets after the business combination?
A. 4,520,000
B. 4,810,000
C. 4,750,000
D. 4,440,000

61. What is Entity A’s amount of total liabilities after the business combination?
A. 2,240,000
B. 2,510,000
C. 2,320,000
D. 2,130,000
 Page 22

Numbers 62 and 63 (Business Combination – Acquisition of majority shares)

Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B which enabled the
former to obtain control of the latter at an acquisition price of P1,000,000. Entity A paid P100,000
acquisition related costs and P50,000 indirect costs of business combination.

At the date of acquisition, the net assets of Entity B are reported at P1,600,000. An asset of Entity B is
overvalued by P60,000 while one liability is undervalued by P40,000.

62. What is the initial measurement of noncontrolling interest in net assets in the consolidated
statement of financial position?
A. 320,000
B. 300,000
C. 250,000
D. 316,000

63. What is the goodwill or gain on bargain purchase arising from business combination?
A. 250,000 gain on bargain purchase
B. 150,000 gain on bargain purchase
C. 50,000 goodwill
D. 200,000 gain on bargain purchase

Numbers 64 and 65 (Step Acquisition)

On January 1, 2018, Entity A acquired 30,000 out of 100,000 outstanding ordinary shares of Entity B
for P90,000 or 30% interest. For the six months ended June 30, 2018, Entity B reported net income of
P40,000.

On July 1, 2018, Entity A acquired additional 60,000 ordinary shares of Entity B or 60% interest at a
price of P4 per share or total cost of P240,000. Entity A paid P20,000 acquisition related costs and
P10,000 indirect costs of business combination.

The acquisition price per share of the additional shares clearly reflected the fair value of the existing
interest of Entity A in Entity B. It is the policy of Entity A to initially measure the noncontrolling
interest in net assets of the acquiree at fair value. The fair value of the noncontrolling interest in net
assets of the acquiree is reliably measured at P50,000.

At the acquisition date, the net assets of Entity B were reported at P400,000. An asset of Entity B was
overvalued by P50,000 while one liability wass overvalued by P30,000.

64. What is the gain on remeasurement of the existing Investment in Entity B as a result of step
acquisition?
A. 18,000
B. 30,000
C. 24,000
D. 12,000

65. What is the goodwill or gain on bargain purchase as a result of the business combination?
A. 18,000 goodwill
B. 20,000 gain on bargain purchase
C. 24,000 goodwill
D. 30,000 goodwill
 Page 23

Numbers 66, 67 and 68 (Consolidated Financial Statements)

On January 1, 2018, Entity A acquired 70% of outstanding ordinary shares of Entity B at a price of
P210,000. On the same date, the net assets of Entity B were reported at P260,000. On January 1, 2018
Entity A reported retained earnings of P2,000,000 while Entity B reported retained earnings of
P200,000.

All the assets and liabilities of Entity B are fairly valued except machinery which is undervalued by
P80,000 and inventory which is overvalued by P10,000. The said machinery has remaining useful life
of four years while 40% of the said inventory remained unsold at the end of 2018.

For the year ended December 31, 2018, Entity A reported net income of P1,000,000 and declared
dividends of P200,000 in the separate financial statements while Entity B reported net income of
P150,000 and declared dividends of P20,000 in the separate financial statements.

Entity A accounted the investment in Entity B using cost method in the separate financial statements.

66. What is the noncontrolling interest in net assets on December 31, 2018?
A. 124,800
B. 130,200
C. 126,000
D. 133,800

67. What is the consolidated net income attributable to parent shareholders for the year ended
December 31, 2018?
A. 1,102,200
B. 1,162,200
C. 1,141,200
D. 1,095,200

68. What is the amount of consolidated retained earnings on December 31, 2018?
A. 3,012,200
B. 2,991,200
C. 2,952,200
D. 2,945,200
 Page 24

Numbers 69, 70, 71 and 72 (Consolidated Financial Statements - Intercompany sales)

On January 1, 2019, Entity A acquired 60% of outstanding ordinary shares of Entity B at a gain on
bargain purchase of P40,000. For the year ended December 31, 2020, Entity A and Entity B reported
sales revenue of P2,000,000 and P1,000,000 in their respective separate income statements. At the
same year, Entity A and Entity B reported cost of goods sold of P1,200,000 and P700,000 in their
respective separate income statements.

During 2019, Entity A sold inventory to Entity B at a selling price of P280,000 with gross profit rate of
40% based on cost. On the other hand, Entity B sold inventory to Entity A at a selling price of
P400,000 with gross profit rate of 30% based on sales during 2020.

On December 31, 2019, 25% of the goods coming from Entity A remained in Entity B’s inventory but
all were eventually sold to third persons during 2020. As of December 31, 2020, 40% of the goods
coming from Entity B were eventually sold to third persons.

For the year ended December 31, 2020, Entity A reported net income of P500,000 while Entity B
reported net income of P200,000 and distributed dividends of P50,000. Entity A accounted for its
inventory in Entity B using cost method in its separate financial statements.

69. What is the consolidated sales revenue for the year ended December 31, 2020?
A. 2,600,000
B. 2,320,000
C. 3,000,000
D. 2,720,000

70. What is the consolidated gross profit for the year ended December 31, 2020?
A. 1,120,000
B. 1,048,000
C. 1,028,000
D. 1,152,000

71. What is the noncontrolling interest in net income for the year ended December 31, 2020?
A. 100,800
B. 59,200
C. 51,200
D. 88,000

72. What is the consolidated net income attributable to parent’s shareholders for the year ended
December 31, 2020?
A. 766,800
B. 596,800
C. 606,800
D. 626,800
 Page 25

Numbers 73, 74, 75 and 76 (Consolidated Statements-Intercompany gain or loss on disposal)

On January 1, 2019, Entity A acquired 80% of outstanding ordinary shares of Entity B at a gain on
bargain purchase of P180,000. The following intercompany transactions occurred for between the two
entities:

 On January 1, 2019, Entity B sold a land to Entity A with a cost of P1,000,000 at a selling price of
P1,100,000. The land was eventually sold by Entity A to third persons during 2020.

 On January 1, 2019, Entity A sold a white machinery to Entity B with a cost of P200,000 and
accumulated depreciation of P40,000 at a selling price of P180,000. The machinery is already 4
years old at the date of sale. The residual value of white machinery is immaterial.

 On July 1, 2020, Entity B sold a black machinery to Entity A at with a cost of P270,000 and
accumulated depreciation of P180,000 at a selling price of P60,000. The machinery is already 6
years old at the date of sale. The residual value of black machinery is immaterial.

For the year ended December 31, 2020, Entity A reported net income of P800,000 while Entity B
reported net income of P500,000 and distributed dividends of P150,000. Entity A accounted for its
inventory in Entity B using cost method in its separate financial statements.

73. What is the consolidated depreciation expense of machinery for 2020?

A. 40,000
B. 55,000
C. 61,667
D. 42,333

74. What is the consolidated carrying amount of machinery on December 31, 2020?
A. 225,000
B. 215,000
C. 200,000
D. 210,000

75. What is the noncontrolling interest in net income for 2020?

A. 124,000
B. 105,000
C. 125,000
D. 104,000

76. What is the consolidated net income attributable to parent shareholders for 2020?
A. 1,538,750
B. 1,518,750
C. 1,398,750
D. 1,418,750
 Page 26

Separate Financial Statements - Cost Method and Fair Value Model or Equity Method

Numbers 77, 78, 79 and 80

On January 1, 2020, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of
P900,000. Entity A paid P20,000 costs related to acquisition of shares.

At the acquisition date, the net assets of Entity B were reported at P950,000. All the assets of Entity B
are properly valued except for a machinery which is undervalued by P150,000. The machinery has a
remaining useful life of 5 years.

For the year ended December 31, 2020, Entity B reported net income of P200,000 and declared
dividends in the amount of P30,000.

The fair value of Investment in Entity B on December 31, 2020 is P1,000,000 while the cost of
disposal is 5%.

Entity A voluntarily prepared its separate financial statements.

77. If Entity A elects cost method to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?
A. 900,000
B. 920,000
C. 1,000,000
D. 950,000

78. What is the investment income for 2020 if Entity A elects cost method to account its Investment
in Entity B in its separate financial statements?
A. 7,000
B. 27,000
C. 180,000
D. 107,000

79. If Entity A elects fair value model to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?
A. 900,000
B. 920,000
C. 1,000,000
D. 950,000
80. What is the net effect in profit or loss for 2020 if Entity A elects fair value model to account its
Investment in Entity B in its separate financial statements?
A. 7,000
B. 27,000
C. 180,000
D. 107,000
 Page 27

Numbers 81, 82 and 83 (Nonprofit Organization – Statement of Financial Position)

In the first year of operations of a nonprofit organization, the following transactions occurred:

 The nonprofit organization received P1,000,000 fund from a donor who stipulated that it shall be
invested indefinitely and the dividend from such investment shall be used for research project of
the organization. Dividend amounting to P150,000 was received during the year but only P50,000
was spent for the research project.

 The nonprofit organization received P300,000 fund from a donor who stipulated that it shall be
used for the acquisition of service car. The nonprofit organization used P100,000 of the fund for the
acquisition of a service car with useful life of 5 years. The car was acquired at the middle of the
year.

 The nonprofit organization received P500,000 fund who stipulated that it shall be used based on the
discretion of the Board of Trustees of the nonprofit organization. The nonprofit organization used
P100,000 for the acquisition of souvenir items which were sold by the nonprofit organization for
P150,000. The remaining P400,000 was designated by the Board of Trustees for future fundraising
projects.

81. What is the amount of permanently restricted net assets at the end of the first year?
A. 1,100,000
B. 1,300,000
C. 1,200,000
D. 1,000,000

82. What is the amount of temporarily restricted net assets at the end of the year?
A. 100,000
B. 300,000
C. 200,000
D. 700,000

83. What is the amount of unrestricted net assets at the end of the year?
A. 640,000
B. 540,000
C. 590,000
D. 630,000
 Page 28

Nonprofit Organization – Statement of Activities and Statement of Cash Flows

Numbers 84, 85, 86 and 87

On January 1, 2020, a nonprofit organization received P1,000,000 cash donation from a donor who
stipulated that the amount should be invested indefinitely in revenue producing investment. The deed
of donation also provided that the dividend income shall be used for the acquisition of computers of
the nonprofit organization.

On December 31, 2020, the nonprofit organization received P100,000 cash as dividend income from
the investment of the fund.

On January 1, 2021, the nonprofit organization acquired a computer at a cost of P20,000 with a useful
life of 5 years without residual value.

84. In the statement of activities of the NPO for the year ended December 31, 2020, which of the
following is the proper effect of the transactions?
A. Increase in temporarily restricted net assets by P100,000.
B. Increase in unrestricted net assets by P1,000,000.
C. Increase in unrestricted net assets by P16,000.
D. Decrease in temporarily restricted net assets by P20,000.

85. In the statement of activities of the NPO for the year ended December 31, 2021, which of the
following is the proper effect of the transactions?
A. Increase in temporarily restricted net assets by P100,000.
B. Increase in unrestricted net assets by P1,000,000.
C. Increase in unrestricted net assets by P16,000.
D. Decrease in temporarily restricted net assets by P100,000.

86. How should the cash flows be reported in NPO’s Statement of Cash Flows for the year ended
December 31, 2020?
A. Cash receipts from operating activities by P100,000.
B. Cash receipts from financing activities by P1,100,000.
C. Cash disbursements for investing activities by P50,000.
D. Cash disbursements for financing activities by P1,000,000

87. How should the cash flows be reported in NPO’s Statement of Cash Flows for the year ended
December 31, 2021?
A. Cash receipts from operating activities by P100,000.
B. Cash receipts from financing activities by P1,100,000.
C. Cash disbursements for investing activities by P20,000.
D. Cash disbursements for investing activities by P100,000.
 Page 29
Number 88
Government Accounting Manual
On December 31, 2018, the Department of Finance billed its lessee on one of its buildings in the
amount of P10,000. On January 31, 2019, the Department of Finance collected all of the accounts
receivable. On February 28, 2019, the Department of Finance remitted the entire collected amount to
the Bureau of Treasury. What is the journal entry to record the remittance by the Department of
Finance to the Bureau of Treasury?
A. Debit – Accounts Receivable P10,000 and Credit – Rent Income P10,000
B. Debit – Accounts Receivable P10,000 and Credit – Retained Earnings P10,000
C. Debit – Cash Collecting Officers P10,000 and Credit – Accounts Receivable P10,000
D. Debit – Cash – Treasury/Agency Deposit, Regular – P10,000 and
Credit Cash – Collecting Officer – P10,000

Numbers 89 and 90
On January 1, 2018, the Department of Public Works and Highways (DPWH) received a P10,000,000
appropriation from the national government for the acquisition of machinery. On February 1, 2018,
DPWH received the allotment from the Department of Budget and Management. On March 1, 2018,
DPWH entered into a contract with CAT Inc. for the acquisition of the machinery with a price of
P8,000,000. On April 1, 2018, DPWH received the Notice of Cash Allocation from Department of
Budget and Management net of 1% withholding tax for income tax of supplier and 5% withholding of
Final Tax on VAT of supplier. On May 1, 2018, CAT Inc. delivered the machinery to DPWH. On June
1, 2018, DPWH paid the obligation to CAT Inc. On July 1, 2018, DPWH remitted the withheld income
tax and final VAT to BIR.

89. What is the journal entry on March 1, 2018?

A. No entry but just posting to appropriate RAPAL
B. No entry but just posting to appropriate RAPAL and to RAOD
C. No entry but just posting of ORS (Obligation Request and Status) to appropriate RAOD
D. Debit Machinery P8,000,000 and credit Accounts Payable P8,000,000

90. What is the journal entry on April 1, 2018?

A. Debit Cash-MDS, Regular P7,520,000 and Credit Subsidy Income from National
Government P7,520,000.
B. Debit Machinery P8,000,000 and Credit Accounts Payable P8,000,000
C. Debit Accounts Payable P8,000,000 and Credit Due to BIR P480,000 and Cash-MDS,
Regular P7,520,000.
D. Debit Due to BIR P480,000 and Credit Subsidy Income from National Government
P480,000.

Number 91
Department of Health (DOH) received Notice of Cash Allocation in the amount of P100,000 from
Department of Budget and Management. DOH made a total cash disbursements in the amount of
P95,000. What is the journal entry to recognize reversion of unused Notice of Cash Allocation by DOH
in its books?
A. Debit Subsidy Income from National Government P5,000 and credit Cash-MDS, Regular
P5,000.
B. Debit Retained Earnings of DFA P5,000 and credit Cash-MDS, Regular P5,000.
C. Debit Expenses of DFA P5,000 and credit Cash-MDS, Regular P5,000.
D. Debit Investment of DFA P5,000 and credit Cash-MDS, Regular P5,000.

Number 92
The Bureau of Treasury received P20,000 cash remittance from Department of Agrarian Reform
(DAR) from its miscellaneous income. What is the journal entry of the Bureau of Treasury in its
accounting books to record the receipt of cash remittance from the income of a national government
agency?
A. Debit Cash in Bank, Local Bank P20,000 and Credit Cash-Treasury/Agency Deposit, Regular
P20,000.
B. Debit Cash in Bank, Local Bank P20,000 and Credit Miscellaneous Income of DA P20,000.
C. Debit Cash in Bank, Local Bank P20,000 and Credit Savings of DA, Regular P20,000.
D. Debit Cash in Bank, Local Bank P20,000 and Credit Cash-Collecting Officer, DA P20,000.
Page 30

Number 93 (Foreign currency transaction)

On September 1, 2018, Bain Company received an order for equipment from a foreign customer for
300,000 local currency units (LCU) when the US dollar equivalent was $96,000. Bain shipped the
equipment on October 15, 2018, and billed the customer for 300,000 LCU when the US dollar
equivalent was $100,000. Bain received the customer remittance in full on November 16, 2018, and
sold the 300,000 LCU for $105,000. In the income statement for the year ended December 31, 2018,
what amount should Bain report as part of net income a foreign exchange transaction gain?
A. $ 0
B. $4,000
C. $5,000
D. $9,000

Number 94 (Foreign currency transaction)

On September 1, 2018, Cano Company, a US corporation, sold merchandise to a foreign firm for
250,000Botswana pula. Terms of the sale require payment in pula on February 1, 2019.. On September
1, 2018, the spot exchange rate was $.20 per pula. At December 31, 2018, Cano’s year-end, the spot
rate was $.19, but the rate increased to $.22 by February 1, 2019, when payment was received. How
much should Cano report as foreign exchange transaction gain or loss as part of 2019 income?
A. $ 0
B. $2,500 loss
C. $5,000 gain
D. $7,500 gain

Number 95 (Foreign currency transaction)

Hunt Company purchased merchandise for £300,000 from a vendor in London on November 30, 2018.
Payment in British pounds was due on January 30, 2019. The exchange rates to purchase one pound
were as follows:

November 30, 2018 December 31, 2018

Spot-rate $1.65 $1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

In the income statement, what amount should Hunt report as foreign exchange transaction gain as part
of net income?
A. $12,000
B. $ 9,000
C. $ 6,000
D. $ 0
 Page 31

Number 96 (Foreign currency transaction)

Ball Company had the following foreign currency transactions during 2018:

 Merchandise was purchased from a foreign supplier on January 20, 2018, for the US dollar
equivalent of $90,000. The invoice was paid on March20, 2018, at the US dollar equivalent of
$96,000.

 On July 1, 2018, Ball borrowed the US dollar equivalent of $500,000 evidenced by a note payable
in the lender’s local currency on July 1, 2020. On December 31, 2018, the US dollar equivalents of
the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the
note is 10% per annum.

In Ball’s 2018 income statement, what amount should be included as foreign exchange transaction loss
as part of net income?
A. $ 0
B. $ 6,000
C. $21,000
D. $27,000

Number 97 (Foreign currency transaction)

On November 30, 2018, Tyrola Publishing Company, located in Colorado, executed a contract with
Ernest Blyton, an author from Canada, providing for payment of 10% royalties on Canadian sales of
Blyton’s book. Payment is to be made in Canadian dollars each January 10 for the previous year’s
sales. Canadian sales of the book for the year ended December 31, 2019, totaled $50,000 Canadian.
Tyrola paid Blyton his 2019 royalties on January 10, 2020. Tyrola’s 2019 financial statements were
issued on February 1, 2020. Spot rates for Canadian dollars were as follows:

November 30, 2018 $.87

January 1, 2019 $.88
December 31, 2019 $.89
January 10, 2020 $.90

How much should Tyrola accrue for royalties payable at December 31, 2019?
A. $4,350
B. $4.425
C. $4,450
D. $4,500
 Page 32

Numbers 98, 99, 100 and 101 (Foreign Currency Transaction)

On November 1, 2020, an entity acquired on account goods from a foreign supplier at a cost of $1,000.
The accounts payable are paid on January 30, 2021.

On December 1, 2020, an entity sold on account the said goods to a foreign customer at a selling price
of $1,500. The accounts receivable are collected on February 28, 2021.

The entity is operating in Philippine economy wherein the functional currency is the Philippine Peso.

The following direct exchange rates are provided:

Buying spot rate Selling spot rate

November 1, 2020 P40 P42
December 1, 2020 39 40
December 31, 2020 45 47

98. What is the sales revenue for 2020?

A. 58,500
B. 60,000
C. 67,500
D. 72,000

99. What is the carrying amount of accounts receivable on December 31, 2020?
A. 58,500
B. 60,000
C. 67,500
D. 72,000

100. What is the carrying amount of accounts payable on December 31, 2020?
A. 40,000
B. 42,000
C. 45,000
D. 47,000

101. What is the net foreign currency gain for 2020?

A. 4,000
B. 5,000
C. 3,000
D. 6,000
 Page 33

Translation of Financial Statements in Functional Currency to Presentation Currency

Numbers 102, 103, 104 and 105

Entity A owns majority of the outstanding ordinary shares of Entity B which is operating in United
States of America wherein the functional currency is the USA $. However, the presentation currency of
Entity B is the Philippine Peso because that is the presentation currency of Entity A. For the year ended
December 31, 2020, Entity B presented its Statement of Financial Position in its functional currency of
USA $:
Current assets $10,000 Current liabilities $10,000
Noncurrent assets 40,000 Noncurrent liabilities 20,000
Ordinary share capital 5,000
Preference share capital 8,000
Retained earnings 7,000
Total Assets $50,000 Total Liabilities and shareholders $50,000

 The ordinary shares are issued on January 1, 2019 while the preference shares are issued on July 1,
2019.
 B reported $1,000 net income during 2020 and declared dividends in the amount of $200 on
December 1, 2020.
 The translated amount of retained earnings on December 31, 2019 is P300,000.

The following direct exchange rates are provided:

January 1, 2019 P40

July 1, 2019 42
December 31, 2019 43
December 1, 2020 41
December 31, 2020 45
Average rate 2020 44

102. What is the amount of net assets in US dollars on December 31, 2019?
A. 19,200
B. 20,000
C. 19,000
D. 20,200

103. What amount of translation gain as component of other comprehensive income should be
presented in the of statement of comprehensive income for the year ended December 31, 2020?
A. 38,600
B. 39,200
C. 40,400
D. 41,800

104. What is the translated retained earnings balance on December 31, 2020?
A. 300,000
B. 335,800
C. 344,000
D. 281,800

105. What is the cumulative translation credit that should to be presented in the statement of financial
position on December 31, 2020?
A. 25,400
B. 28,200
C. 26,800
 D. 24,600
Page 34

Numbers 106 and 107 (Standard Costing – Direct material variance)

Negros Company recently set-up its standard costs for its direct materials. The entity sets the
benchmark at 3 units of direct materials per product at a standard price of P5 per unit of direct material.

During the year, the entity acquired 400 units of direct materials at a total cost of P2,400 or P6 per unit.
The entity also manufactured 100 products using 250 units of direct materials.

106. What is the direct material price variance?

A. 250 unfavorable
B. 300 favorable
C. 350 favorable
D. 400 unfavorable

107. What is the direct material usage variance?

A. 150 unfavorable
B. 300 unfavorable
C. 250 favorable
D. 350 favorable

Numbers 108 and 109 (Standard costing - Direct labor variance)

Bacolod Company recently set-up its standard costs for its direct labor. The entity sets the benchmark
at 2 direct labor hours per product at a standard rate of P100 per direct labor hour.

During the year, the entity manufactured 10 products using 30 direct labor hours at total direct labor
costs of P2,400 or P80 per direct labor hour.

108. What is the direct labor rate variance?

A. 600 favorable
B. 400 unfavorable
C. 200 favorable
D. 800 unfavorable

109. What is the direct labor efficiency variance?

A. 400 favorable
B. 1,000 unfavorable
C. 600 unfavorable
D. 200 favorable
 Page 35
Number 110 (Job Order Costing)
Simple Company employs actual costing for its production. The entity provided the following data
concerning its production during the year:
Decrease in direct materials during the year 500,000
Labor cost during the year 400,000
Actual factory overhead during the year 300,000
Increase in work in process during the year 200,000
Decrease in finished goods during the year 100,000
What is the cost of goods manufactured during the year?
A. 1,200,000
B. 1,000,000
C. 1,400,000
D. 1,100,000

Numbers 111, 112 and 113 (Job order costing)

Marawi Company employs normal costing for its production. The following data are provided during
the current year:

Net purchases of raw materials during the year 500,000

Total labor costs during the year 800,000
Depreciation of factory assets during the year 100,000
Utilities on the factory during the year 300,000
Beginning Ending
Raw materials inventory 200,000 300,000
Work in process inventory 500,000 200,000
Finished goods inventory 600,000 300,000
 The entity uses a single account for its direct material and indirect materials. Indirect material used
is one-fourth of the total direct material used.
 The indirect labor cost is 1/8 of the total labor costs.
 The overhead application rate is 80% of direct labor costs.
 Any over or under application of overhead is considered material.

111. What is the total manufacturing cost during the current year?
A. 1,560,000
B. 1,500,000
C. 1,640,000
D. 1,740,000

112.What is the cost of goods manufactured during the current year?

A. 2,040,000
B. 1,860,000
C. 1,940,000
D. 1,800,000

113. What is the over or under application of overhead?

A. 60,000 over application
B. 140,000 under application
C. 40,000 under application
D. 160,000 over application
 Page 36

Numbers 114, 115 and 116 (Joint Product and By-Product Costing)

Silay Company is conducting a joint production at a total costs of P500,000. The joint production
results to the following inventories:

Alt Tab Del

Units produced 20,000 units 10,000 units 5,000 units
Selling price at split off P150 P200 P5

Alt and Tab are considered main products while Del is considered by-product. The entity considers its
by-product as material. The by-product requires additional processing cost per unit of P0.80 and its
cost of disposal is P0.20 per unit.

114. What is the value to be given to product Del?

A. 25,000
B. 21,000
C. 24,000
D. 20,000

115. What is the joint cost allocated to product Alt if the entity employs physical method?
A. 333,333
B. 316,667
C. 317,333
D. 320,000

116. What is the joint cost allocated to product Tab if the entity employs relative sales value method?
A. 300,000
B. 200,000
C. 192,000
D. 288,000
 Page 37

Number 117 (Just-in-Time Inventory and Backflush Costing)

Talisay Company is employing backflush costing in connection with just-in-time production process.
The entity provided the following production data for the year:

 The entity acquired direct materials during the year at a cost of P100,000
 The entity reported direct labor cost of P200,000.
 The actual factory overhead incurred during the year amounted to P170,000.
 The standard factory overhead application rate is 75% of direct labor cost.
 The ending finished goods inventory is reported at P120,000.

What is the cost of goods sold under backflush costing?

A. 470,000
B. 350,000
C. 330,000
D. 300,000

Numbers 118, 119 and 120 (Backflush costing)

Panay Company has a cycle of 3 days, uses a Raw and In Process Account (RIP) and charges all
conversion costs to cost of goods sold. At the end of each month, all inventories are counted,
conversion costs components are estimated and inventory account balances are adjusted. Raw material
cost is backflushed from Raw and in Process (RIP) Account to finished goods. The following
information is provided for the month of June:

Beginning Balance of RIP account, including P1,000 conversion cost 5,000

Beginning Balance of finished goods account including P6,000 conversion cost 10,000
Raw materials received on credit 400,000
Direct labor cost 300,000
Factory overhead applied 500,000
Ending RIP inventory per physical count, including P7,000 conversion cost 20,000
Ending finished goods inventory per physical count, including P4,000 conversion cost 6,000

118.What is the amount of conversion cost included cost of goods sold in June?
A. 802,000
B. 796,000
C. 794,000
D. 800,000

119.What is the amount of direct materials backflushed from RIP to finished goods?
A. 391,000
B. 404,000
C. 387,000
D. 395,000

120. What is the amount of direct materials backflushed from finished goods to cost of goods sold?
A. 395,000
B. 400,000
C. 393,000
D. 389,000
 Page 38

Numbers 121 and 122 (Activity Based Costing)

Romblon Company is choosing between traditional costing and activity-based costing. The following
data are provided:

Activity-Based Costing

Activity center Cost driver Amount of activity Center cost

Material handling Kilos handled 100,000 kg. 200,000
Painting Units painted 50,000 units 300,000
Assembly Machine hours 10,000 hours 500,000

Traditional Costing
Traditional Labor hours 100,000 hours 1,000,000

Job 1 contains 3,000 units. It weighs 10,000 kilos and uses 300 machine hours. The direct labor hours
on the job total 7,000 hours.

121. What is the applied overhead under traditional costing?

A. 70,000
B. 60,000
C. 80,000
D. 50,000

122. What is the applied overhead under Activity Based Costing?

A. 53,000
B. 56,000
C. 45,000
D. 43,000
 Page 39

Numbers 123, 124, 125 and 126 (Process Costing without Spoilage)

Tacloban Company is employing process costing regarding its production cycle.

Conversion costs are added uniformly during the production process while direct materials are added
10% at the start of production process, 50% at the middle of the production process and the remainder
at the end of production process.

The production data of the entity during the year are:

Beginning Work in Process Inventory 10,000 units (30% incomplete as to conversion costs)
Units started during the year 30,000 units
Ending Work in Process Inventory 5,000 units (75% incomplete as to conversion costs)

 There is no spoilage during the period.

 The costs of beginning inventory consist of P103,000 costs of direct materials and P107,500
conversion costs.
 The total manufacturing costs consist of P252,000 costs of direct materials and P146,250
conversion costs.

123. What is the cost per unit of direct material under average process costing?
A. 10
B. 9
C. 8
D. 7

124. What is the cost per unit of conversion cost under average process costing?
A. 10
B. 9
C. 8
D. 7

125. What is the cost per unit of direct material under FIFO process costing?
A. 10
B. 9
C. 8
D. 7

126. What is the cost per unit of conversion cost under FIFO process costing?
A. 5
B. 9
C. 8
D. 7
 Page 40

Numbers 127, 128, 129, 130 and 131 (Process Costing with Spoilage)

Samar Company is employing process costing regarding its production cycle.

Conversion costs are added uniformly during the production process while direct materials are added
20% at the start of production process, 45% at the middle of the production process and the remainder
at the end of production process. Normal spoilage is 10% of units started during the year.

The entity is conducting inspection when the production process is at 45% of conversion cost. The
entity provided the following production data during the year:

Beginning Work in Process Inventory 10,000 units (40% incomplete as to conversion costs)
Units started during the year 40,000 units
Ending Work in Process Inventory 5,000 units (80% complete as to conversion costs)
Units completed during the period 38,000 units

127. What is the abnormal spoilage in units during the year?

A. 7,000 units
B. 4,000 units
C. 3,000 units
D. 2,000 units

128. What is the equivalent unit of production for direct material under average process costing?
A. 42,650 units
B. 41,150 units
C. 38,250 units
D. 43,750 units

129. What is the equivalent unit of production for conversion cost under average process costing?
A. 44,650 units
B. 45,150 units
C. 43,250 units
D. 46,150 units

130. What is the equivalent unit of production for direct material under FIFO costing?
A. 35,150 units
B. 37,250 units
C. 36,150 units
D. 38,450 units

131. What is the equivalent unit of production for conversion cost under FIFO costing?
A. 39,150 units
B. 41,250 units
C. 37,450 units
D. 38,650 units
 Page 41

Numbers 132, and 133 (Foreign currency hedge)

On December 1, 2020, Entity A imported goods at a price of $1,000 payable on March 1, 2021. In
order to hedge this foreign currency denominated importation, Entity A entered into a forward contract
with a bank to purchase $1,000. Entity A is operating in Philippine economy where the functional
currency is Philippine peso. The following direct exchange rates are given:

December 1, 2020 December 31, 2020 March 1, 2021

Buying spot P43 P40 P41
Selling spot 45 44 49
132. What is the foreign currency gain or loss on the hedged item for 2020?
A. 2,000 loss
B. 1,000 gain
C. 3,000 gain
D. 4,000 gain
133. What is the foreign currency gain or loss on the hedging instrument for 2021?
A. 4,000 gain
B. 2,000 loss
C. 1,000 loss
D. 3,000 gain
 Page 42

Numbers 134 and 135 (Hedging)

Kline Company purchased inventory on November 30, 2018 for $10,000 payable March 1, 2019. On
December 1, 2018, the entity entered into a forward contract to purchase $10,000in 90 days to hedge
the purchase of inventory on November 30, 2018. The relevant exchange rates are:

Spot rate Forward rate

November 30, 2018 P45 P47
December 1, 2018 46 48
December 31, 2018 50 51

134. What amount of foreign currency transaction gain from the forward contract should be included
in net income for 2018?
A. 50,000
B. 40,000
C. 30,000
D. 0

135. What amount of foreign currency transaction loss should be included in income from the
revaluation of accounts payable for 2018?
A. 40,000
B. 50,000
C. 10,000
D. 0

Number 136 (Hedging)

On December 1, 2018 Winston Company entered into a forward contract to purchase $10,000 in 90
days to hedge a commitment to purchase equipment being manufactured to the entity’s specifications.
The expected delivery date is March 1, 2019, at which time settlement is due to the manufacturer. The
hedge qualifies as a fair value hedge. The relevant exchange rates are:

Spot rate Forward rate

December 1, 2018 P48 P49
December 31, 2018 52 51

What amount of foreign currency transaction gain from the forward contract should be included in net
income for 2018?
A. 20,000
B. 40,000
C. 10,000
D. 0
 Page 43

Numbers 137 and 138 (Fair value hedge)

On November 1, 2020, Entity A entered into a firm commitment for the exportation of goods at a price
of $2,000. Delivery will happen on January 31, 2020. In order to hedge this foreign currency
denominated firm commitment, Entity A entered into a forward contract with a bank to sell $2,000.
Entity A is operating in Philippine economy where the functional currency is Philippine peso. Entity A
elects to use fair value hedge to account this hedge of firm commitment. The following direct exchange
rates are given:

November 1, 2020 December 31, 2020 January 31, 2021

Spot rate P43 P40 P44

90-day forward rate 41 43 44
60-day forward rate 45 42 41
30-day forward rate 47 46 42

137. What is the carrying amount of firm commitment asset or liability on December 31, 2020?
A. 4,000 liability
B. 10,000 liability
C. 2,000 liability
D. 6,000 liability

138. What is the foreign currency gain or loss on hedging instrument for 2021?
A. 4,000 gain
B. 2,000 loss
C. 6,000 loss
D. 8,000 gain
 Page 44

Numbers 139, 140, 141 and 142 (Cash flow hedge)

On November 1, 2020, Entity A anticipated the purchase of equipment on January 31, 2021 at a price
of $1,200. In order to hedge this highly probable forecasted importation, Entity A entered into a
forward contract with a bank to purchase $1,200. Entity A is operating in Philippine economy where
the functional currency is Philippine peso. The following direct exchange rates are made available:

November 1, 2020 December 31, 2020 January 31, 2021

Spot rate P45 P44 P43
90-day forward rate 42 41 43
60-day forward rate 46 45 40
30-day forward rate 48 44 40

139. What is the unrealized holding gain or loss to be recognized as component of other
comprehensive income in the statement of comprehensive income for the year ended December
31, 2020?
A. 2,400 gain
B. 1,200 gain
C. 3,600 loss
D. 4,800 gain

140. What is the unrealized holding gain or loss to be recognized as component of other
comprehensive income in the statement of comprehensive income for the year ended December
31, 2021?
A. 4,800 loss
B. 1,200 loss
C. 3,600 gain
D. 2,400 gain

141. What is the cumulative unrealized gain or loss before reclassification to be reported as
component of other comprehensive income in the Statement of Changes in equity on December
31, 2021?
A. 1,200 gain
B. 1,800 loss
C. 2,400 gain
D. 0

142. What is the cost of equipment in Philippine peso on January 31, 2021?
A. 48,000
B. 50,400
C. 49,200
D. 51,600
 Page 45

Numbers 143, 144 and 145 (Cash Flow Hedge using option contract)

On November 1, 2020, Entity A anticipated the purchase of inventory on January 31, 2021 at a price of
$1,000. In order to hedge this highly probable forecasted importation, Entity A acquired a call option
from a bank giving it the right to purchase $1,000 at an option price of P40 by paying an option
premium of P300. Entity A is operating in Philippine economy where the functional currency is
Philippine peso. The following data are provided:

November 1, 2020 December 31, 2020 January 31, 2021

Spot rate P40 P 44 P43
Fair value of call option ? 4,500 ?

Entity A imported the goods on the date anticipated. Afterwards, Entity A was able to resell 30% of the
goods imported during 2021.

143. What is the unrealized holding gain or to be recognized as component of other comprehensive
income in the of statement of comprehensive income for the year ended December 31, 2020?
A. 4,000
B. 4,500
C. 4,300
D. 4,200

144. What is the unrealized holding gain to be recognized in the profit or loss in the statement
comprehensive income for the year ended December 31, 2020?
A. 300
B. 200
C. 500
D. 100

145. What is the unrealized holding loss to be recognized as component of other comprehensive
income in the statement of comprehensive income for the year ended December 31, 2021?
A. 3,000
B. 2,000
C. 1,000
D. 4,000

END