BASIC ROUND

1. How should an equity issuing convertible debt allocate the proceeds?

a. To the equity component, an amount equal to its face and the residual amount to the liability
component.
b. To the liability account only
c. To the liability component equal to the fair value of a similar liability without conversion feature
and the residual amount to the equity component
d. Between the liability component and equity component on the basis of fair value

Answer: C

2. When 20% stock bonus issue is declared and issued,

a. Contributed capital increases, earned capital increases, and total shareholders' equity increases
b. Contributed capital increases, earned capital decreases, but total shareholders' equity is
unaffected
c. There is no effect on contributed capital, earned capital and total shareholders' equity
d. Contributed capital decreases, earned capital increases, but total shareholders' equity is
unaffected

Answer: B

3. When the bankruptcy court grants the order for relief:

a. The bankruptcy court confirms that the reorganization plan is fair an equitable.
b. The reorganization plan has been accepted by at least two-thirds in amount and over half in
number of claims.
c. Creditors may not seek payment of their claims directly from the debtor corporation.
d. The court discharges the debtor except for claims provided for in the reorganization plan.

Answer: C

4. Which of the following is not objective evidence of impairment of a financial asset?

a. A decline in the fair value of the asset below its previous carrying amount
b. A breach of contract, such as a default or delinquency in interest or principal payments.
c. Significant financial difficulty of the issuer or obligor.
d. Observable data indicating that there is a measurable decrease in the estimated future cash
flows from a group of financial assets although the decrease cannot yet be associated with any
individual financial asset.

Answer: A

5. Exchange differences arising from translation of financial statement of a foreign entity are
a. Recognized directly in retained earnings
b. Recognized as accumulated translation adjustments in the equity section
c. Recognized as accumulated translation adjustments in profit or loss
d. Capitalized if the differences resulted from severe devaluation of a currency

Answer: B
 6. When 20% stock bonus issue is declared and issued,
a. Contributed capital increases, earned capital increases, and total shareholders' equity
increases
b. Contributed capital increases, earned capital decreases, but total shareholders' equity is
unaffected
c. There is no effect on contributed capital, earned capital and total shareholders' equity
d. Contributed capital decreases, earned capital increases, but total shareholders' equity is
unaffected

Answer: B

7. How would a stock split affect each of the following?

a. Asset (Decrease); Stockholders' equity (Decrease); Additional paid in capital (Decrease)
b. Asset (No effect); Stockholders' equity (No effect); Additional paid in capital (Increase)
c. Asset (No effect); Stockholders' equity (No effect); Additional paid in capital (No effect)
d. Asset (Increase); Stockholders' equity (Increase); Additional paid in capital (No effect)

Answer: C

8. What is the practical limit to the number of reportable operating segments?

a. No precise limit but if the number increases above ten, the entity .shall consider whether a
practical limit has been reached.
b. Five segments
c. Ten segments
d. No precise limit but if the number increases above five, the entity shall consider whether a
practical limit has been reached

Answer: A

9. A company plans to raise the unit market price of its shares and reduce the number of shares
outstanding may be accomplished by means of
a. Stock split
b. Reverse split
c. Property dividend declaration
d. Purchase of treasury stock

Answer: B

10.An entity must disclose comparative information for

a. The previous comparable for all amount reported
b. The previous two comparable periods for all amounts reported.
c. The previous comparable period for all amounts reported, and for all narrative and descriptive
information when it is relevant to an understanding of the current period's financial statements
d. The previous comparable period for all amounts reported and for all narrative and descriptive
information
Answer: C

11. Conceptually, interim financial statements can be described as emphasizing

a. Comparability over neutrality
b. Timeliness over reliability
c. Reliability over relevance
d. Relevance over comparability

Answer: B

12. This creates a legal or constructive obligation that results in an enterprise having no realistic
alternative to settling the obligation is known as

Answer: Obligating event

Financial Accounting and Reporting - Provision and Contingent Liability (Average)

13. Under PAS 7 (statement of cash flows), which of the following item is not being added to profit
under the indirect method of computing operating cash flows?
a. Bad debt losses
b. Loss on sale of equipment
c. Increase in trade receivable
d. Depreciation expense

Answer: C

14. How would the declaration and subsequent issuance of a 30% stock dividend by the issuer affect
each of the following when the market value of the share exceeds the par value of the stock?
a. Common stock (No effect); Additional paid in capital (Increase); Retained earnings (Decrease);
Stockholders' equity (No effect)
b. Common stock (Increase); Additional paid in capital (No effect); Retained earnings (Decrease);
Stockholders' equity (No effect)
c. Common stock (Increase); Additional paid in capital (No effect); Retained earnings (Decrease);
Stockholders' equity (Decrease)
d. Common stock (No effect); Additional paid in capital (No effect); Retained earnings (No effect);
Stockholders' equity (No effect)

Answer B

15. Consistency and feedback relate most closely to which two of the following accounting
concepts, respectively?

a. Predictive value and confirmatory value

b. Recognition and full disclosure

c. Conservatism and cost/benefit

d. Recognition and matching

ANSWER: A.
Solution: Consistency is associated with predictive value since, when items are accounted for
consistently from one year to another, users can identify trends and use this information to anticipate
what might be expected to occur in the future. Feedback is associated with confirmatory value as
feedback, such as actual results, provides information as to the degree to which predictions made in the
past were accurate. Recognition relates to when items will appear on financial statements and full
disclosure relates to the completeness of information provided. Cost/benefit refers to the fact that an
entity should not incur a cost to obtain or provide information which exceeds the benefit of having that
information.

16. When applying the revenue test to determine if a segment is a reportable segment, the
segment’s revenues are compared to the total for the entity. Which of the following revenue
items should be included in the revenue calculation?

I. Sales to unaffiliated customers

II. Interest earned from loans to other segments

III. Intersegment sales of products

a. I, II, and III

b. I and III only

c. I and II only

d. I only

ANSWER: B.

Solution: In evaluating whether or not a business segment is a reportable segment, an entity will
compare the segment’s revenues to total revenues of all segments. Revenues include sales to
unaffiliated customers and to other segments. It does not, however, include interest earned, which is a
form of other income but not revenues.

17. When the allowance method of recognizing uncollectible accounts is used, which of the
following statements is true regarding the impact a collection of an account previously written
off would have on Accounts Receivable and Allowance for Doubtful Accounts balances?

a. Accounts Receivable would not change and Allowance for Doubtful Accounts would decrease.

b. Accounts Receivable would not change and Allowance for Doubtful Accounts would increase.

c. Accounts Receivable would increase and Allowance for Doubtful Accounts would decrease.

d. Accounts Receivable would increase and Allowance for Doubtful Accounts would not change.

ANSWER: B

Solution: The recovery of a receivable that was previously written off is recognized by first reversing the
entry to write it off with an increase to the allowance account and an increase in Accounts Receivable.
The collection is recorded with an increase in Cash and a decrease to Accounts Receivable. The net
 effect is an increase in the allowance account and an increase in Cash with no change to Accounts
Receivable.

18. Which of the following inventory valuation methods produce(s) the same dollar amount as the
balance in ending inventory under both periodic and perpetual inventory systems?

FIFO LIFO

a. Yes Yes

b. No Yes

c. Yes No

d. No No

ANSWER: C

Solution: Since FIFO assumes that ending inventory consists of the most recent purchases, the FIFO cost
flow assumption leads to the same ending inventory balance under both the perpetual and periodic
systems. Under the LIFO cost flow assumption, the most recent goods purchased are assumed to be sold
while older inventory is assumed to remain on hand. When using the periodic method under LIFO, it is
assumed that all sales occur at the end of the period and are taken from the latest purchases. Since
goods cannot be sold before they are purchased, the perpetual method will require that early sales be
charged against the most recent purchases as of the date of sale and will lead to a different ending
inventory balance.

19. Canterbury Co. issues a discounted, non-interest-bearing note in exchange for borrowed funds.
Choose whether the cash received will be higher or lower than the face value of the note, and
whether the effective annual interest rate will be higher or lower than the discount rate:

Cash Received vs. Face Value of Note Effective Rate vs. Discount Rate

a. Higher Lower

b. Lower Higher

c. Higher Lower

d. Lower Higher

ANSWER: B.
Solution: When a note is discounted, the issuer will receive the maturity value, which will be the face
amount when the note is noninterest bearing, reduced by the discount. As a result, cash received will be
lower than the face value of the note. The amount of the discount will be the discount rate multiplied by
the maturity value and adjusted for the length of time until the note matures. Upon repayment, the
effective rate paid will be higher than the discount rate. A $1,000 noninterest bearing note, for example,
maturing in one year that is discounted at 10% will result in cash received of $1,000 - $100 or $900. At
maturity, the borrower remits the $1,000 to the lender, which is repayment of the $900 received plus
the $100 discount. A cost of $100 to borrow $900 for one year would indicate an effective rate in excess
of 11%, higher than the 10% discount rate.

20. A company reacquired some of its own stock to be held as treasury stock and used for its
employee’s 401K plan. In their statement of cash flows how would this cash outflow be
reported?

a. Under operating activities.

b. Either under operating activities or financing activities.

c. Under financing activities.

d. Either under investing activities or financing activities.

ANSWER: C.

Solution: When a company reacquires its own stock it is consider treasury stock and is reported under
financing activities on the statement of cash flows.

21. Which of the following criteria is not required for a component’s results to be classified as
discontinued operations?

a. Management must have entered into a sales agreement.

b. The component is available for immediate sale.
c. The operations and cash flows of the component will be eliminated from the operations
of the entity as a result of the disposal.
d. The entity will not have any significant continuing involvement in the operations of the
component after disposal.

Answer: A

Solution: Management is not required to have entered into a sales agreement. It is sufficient if
management is committed to a disposal plan that is reasonable. The other items are all required for
presentation as discontinued operations.

22. Reversing entries apply to

a. All accruals
b. All closing entries
c. All deferrals
d. All adjusting entries
Answer: A

23. Simultaneous recognition of both a revenue and an expense may result from certain
transactions or events. An example of an expense so recognized may be
a. Electricity used to light offices.
b. Salespersons monthly salaries.
c. Expired portion of prepaid insurance.
d. Transportation to customers.

Answer: D

SOLUTION:

Transportation to customers is correct because the revenue transaction (sales of goods to customers)
directly causes the incurrence of the expense (transportation to customers).

24. When it is impracticable to determine the effect of an error for all periods, the entity
a. Restates comparative information prospectively from the earliest date practicable
b. Restates comparative information prospectively up to the latest date practicable
c. Restates comparative information retrospectively up to the latest date practicable
d. Restates comparative information retrospectively from the earliest date practicable

Answer: D

25. The proceeds from a bond issued with detachable share warrants should be accounted for as
follows:
a. Proceeds shall be assigned entirely to the bonds and no equity component for the share warrant
is to be recognized
b. Fair value is assigned to the bonds with any excess proceeds allocated to the share warrants
c. Fair value is assigned to the share warrants with any excess proceeds allocated to the bonds
d. Proceeds shall be allocated on a pro-rate basis to the bonds and share warrants based on their
relative fair value

Answer: B

26. Catastrophe Corp. has determined it is not a going concern, and will likely go bankrupt. Which
basis of accounting will Catastrophe adopt?

a. Tax basis

b. Remain with GAAP

c. Cash basis

d. Liquidation basis

ANSWER: D

Solution: When an entity has determined that it is not a going concern, which means that there is
substantial doubt that it will be able to meet its obligations as they become due for at least one year
from the date on which they issue their financial statements. Only when liquidation is imminent, which
means the entity has adopted a plan of liquidation or one is being imposed on it, will it switch to the
liquidation basis of accounting. Whether or not an entity is a going concern is not a factor as to whether
or not it will apply the tax or cash basis of accounting.

27. Candy Co. exchanged inventory with Dandy Co. in a transaction that lacks commercial
substance. Both Candy’s and Dandy’s inventory had fair values that exceeded their costs by 30%.
Since Dandy’s inventory was more valuable, however, Candy paid Dandy cash to compensate for
the difference. Who, if anyone, will recognize a gain on the exchange?

a. Candy only

b. Dandy only

c. Both Candy and Dandy

d. Neither Candy nor Dandy

ANSWER: B.

Solution: In an exchange that lacks commercial substance involving like and unlike assets, such as cash,
only the party receiving the unlike assets will recognize a gain. Since Candy paid cash to Dandy to
compensate for a difference in the values of the inventory exchanged, only Dandy will recognize a gain
on the exchange.

28. Which of the following statements is correct regarding donated assets?

a. Donated assets are not recorded on a company’s balance sheet if the donor requests that the
gift remain anonymous.

b. Donated assets are recorded at historical cost on a company’s balance sheet.

c. Under GAAP the donation of an asset will result in a credit to either revenue or gain.

d. Under GAAP no gain can be recorded on a donated asset until and unless it is sold to a third
party.

ANSWER: C.

Solution: When assets are received in a nonreciprocal transfer, under which neither equity nor other
assets are exchanged, the entity will recognize the assets at their fair values and recognize the total fair
value of assets received as a form of non-operating income.

29. A company reacquired some of its own stock to be held as treasury stock and used for its
employee’s 401K plan. In their statement of cash flows how would this cash outflow be
reported?

a. Under operating activities.

b. Either under operating activities or financing activities.

c. Under financing activities.

 d. Either under investing activities or financing activities.

ANSWER: C.

Solution: When a company reacquires its own stock it is consider treasury stock and is reported under
financing activities on the statement of cash flows.

30. Identify the correct statement(s) regarding stock warrants:

I. Additional paid-in capital is credited when a company issues warrants to existing shareholders
to purchase unissued stock at a given exercise price.

II. A company’s net income decreases upon the exercise of stock warrants issued to shareholders.

III. The expiration of stock warrants has no effect on equity accounts.

a. I and II only.

b. III only.

c. I and III only.

d. I only.

ANSWER: B.

Solution: When stock warrants are issued, such as when bonds are issued with detachable stock
purchase warrants, any proceeds allocated to them is recorded in additional paid-in capital. If issued to
existing shareholders, however, there are no proceeds and additional paid-in capital is not affected. If
the warrants are exercised, the proceeds will be recorded in common stock and additional paid-in
capital, with no effect on income. If they expire without being exercised, however, no entry is made.

INTERMEDIATE ROUND

1. Synthia Corp. factored ₱750,000 of accounts receivable to Thomas Company on December 3,

year 2. Control was surrendered by Synthia. Thomas accepted the receivables subject to
recourse for nonpayment. Thomas assessed a fee of 2% and retains a holdback equal to 4% of
the accounts receivable. In addition, Thomas charged 12% interest computed on a weighted
average time to maturity of the receivables of fifty-one days. The fair value of the recourse
obligation is ₱15,000. Assuming all receivables are collected, Synthia’s cost of factoring the
receivables would be

a. ₱12,575
b. ₱15,000
c. ₱27,575
d. ₱42,575

Answer: C
 Solution: If all receivables are collected, Synthia would eliminate its recourse liability and the
corresponding loss. The costs incurred by Synthia would include a fee of ₱15,000 (₱750,000 ×
.02) and interest expense of ₱12,575 (₱750,000 × .12 × 51/365) for a total of ₱27,575.

2. Dickie Corporation contracted to build a building for Dickson Company. The contract price was
P500,000 and Dickie estimated that construction costs would total P420,000. The construction
period lasted until September 1, 2015. Costs during the each period, estimated total cost of the
product at the end of the year, billings and cash collected during the year were as follows:

2015 2016 2017

Cost during the period 105,000 195,000 125,000

Estimated or actual total costs 420,000 425,000 425,000

Billings during the period 100,000 150,000 250,000

Cash collected during the period 80,000 140,000 260,000

The amount of gross profit recognized in 2016 using the percentage of completion method must be:

Answer: 32,942.50

SOLUTION:

Contract price 500,000

Total estimated costs 425,000

Estimated gross profit 75,000

Percentage of completion ((105,000 + 195,0000)/425,000) 70.59%

Gross profit realized to date 52,942.50

Less: Gross profit realized prior year

Contract price 500,000

Total estimated cost (420,000)

Estimated gross profit prior year 80,000

Percent of completion (105,000/420,000) 25% (20,000)

Gross profit realized 2015 32,942.50

Advanced Accounting - Construction Accounting (Difficult)

 3. On December 18, 2010, the statement of affairs of Paz Company, which is in bankruptcy
liquidation, included the following:

Assets pledged for fully secured liabilities 100,000

Assets pledged for partially secured liabilities 40,000

Free assets 120,000

Fully secured liabilities 80,000

Partially secured liabilities 50,000

Unsecured liabilities with priority 60,000

Unsecured liabilities without priority 90,000

Compute the estimated amount to be paid to the unsecured liabilities with priority:

Answer: 60,000

4. Emmanuel Corporation is the defendant in a breach of patent lawsuit. Its lawyers believe there
is a 70 per cent chance that the entity will successfully defend the case. However, if the court
rules in favour of the claimant, the lawyers believe that there is 60% chance that the entity will
be required to pay damages of P2 million (the amount sought by the claimant) and a 40%
chance that the entity will be required to pay damages of P1 million (the amount that was
recently awarded by the same judge in a similar case). Other amounts of damages are unlikely.

The court is expected to rule in December of the following year. There is no indication that the
claimant will settle out of court. A 7% risk adjustment factor to the cash flows is considered
appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate
is 5%. How much should the entity recognize as provision for damages at the end of the current
year?

Answer: 0

Financial Accounting and Reporting - Provision and Contingent Liability (Difficult)

5. A company reports the following information as of December 31:

Sales revenue $350,000

Cost of goods sold $150,000

Operating expenses $110,000

Foreign currency translation gain $ 25,000

Ignoring income taxes, what amount should the company report as comprehensive income as of
December 31?

ANSWER: $115,000

Comprehensive income includes net income plus other comprehensive income (OCI); or all
changes in equity during a period except those resulting from investments by owners and
distributions to owners. The company’s net income includes sales revenues of $350,000 minus
costs of goods sold of $150,000 minus operating expenses of $110,000, for a net amount of
$90,000. Other comprehensive income (OCI) includes the foreign currency translation gain of
$25,000. Therefore, comprehensive income equals $115,000 ($90,000 + $25,000).

6. X Company purchased a patent on January 3, 20X4 from Y Company for $145,000. An attorney
drew up the contract between X & Y at a total cost of $15,000, which was split equally by the
parties. The patent had a carrying value of $90,000 on Y’s books. X expects to be able to benefit
from the patent for 10 years, after which it is expected to be of little to no value.

What will be the carrying value of the patent on X Company’s December 31, 20X5 balance sheet?

ANSWER: $122,000

Solution: X Company will recognize the patent at its cost of $145,000 plus ½ of the attorney’s fee
of $15,000, or $7,500, for a total of $152,500. It will be amortized over the expected useful life
of 10 years at the rate of $15,250 per year. As of December 31, 20X5, after X held the patent for
2 years, accumulated amortization will be $15,250 x 2 or $30,500 and the carrying value of the
patent will be $152,500 - $30,500 or $122,000.

7. Very early in 20X3, while developing software for sale to others, after achieving technological
feasibility but before the commencement of commercial production, X Company incurred
$320,000 to produce product masters and to test the software. X Company estimated that the
software will be sold for a total of 10 years. After nearly a full year of selling, X had revenues
from software sales of $120,000 in 20X3. Sales in future periods are expected to amount to
$680,000. Costs associated with producing and packaging the software approximate 10% of
revenues.

What portion, if any, of the $320,000 will be recognized in income in 20X3?

a. $48,000

b. $32,000

c. $0

d. $320,000

ANSWER: A.

Solution: Costs incurred after reaching technological feasibility but before commercial production, such
as the production of product masters, are capitalized and amortized. The amount of amortization will be
the greater amount when calculated under both the straight-line method and the volume of output
approach. Under straight-line, amortization will be 10% of $320,000 or $32,000. Under the volume of
output approach the ratio of current sales, $120,000, to the total of current and estimated future sales,
$120,000 + $680,000 or $800,000, is multiplied by the $320,000 carrying value of the amortizable costs
to determine amortization of , $120,000/$800,000 x $320,000 = $48,000. Since it is larger, $48,000 will
be the amount of amortization in 20X3. In addition, X will determine if the carrying value of the software
exceeds its net realizable value from future sales. Future sales are expected to be $680,000. With costs
of only 10% or $68,000, the remaining $612,000 exceeds the carrying value of the software indicating no
need for further amortization.

8. At year end, Mayce Co. held investments with the intent of selling them in the near term. The
investments consisted of $300,000, 9%, seven-year bonds, purchased for $278,000, and equity
securities purchased for $75,000. At year end, the bonds were selling on the open market for
$320,000 and the equity securities had a market value of $90,000. What amount should Mayce
report as trading securities in its year-end balance sheet?

ANSWER: $410,000

Solution: Investments in trading securities are reported at their fair values as of the balance sheet date.
Since Mayce intends to sell both the bonds and the equity securities in the near term, both are trading
securities and the amount at which they will be reported on the balance sheet is their fair values of
$320,000 and $90,000 for total of $410,000.

9. Green Co. had net cash provided by operating activities of $209,000; net cash used by investing
activities of $354,000; and cash provided by financing activities of $190,000. Green’s cash
balance was $36,500 on January 1. During the year, there was a sale of equipment that resulted
in a gain of $7,200 and proceeds of $55,000 were received from the sale. What was Green’s
cash balance at the end of the year?

ANSWER: $81,500

Solution: Since cash provided by operating activities is $209,000, cash used by investing activities is
$354,000, and cash provided by financing activities is $190,000, the net increase in cash for the period is
$209,000 - $354,000 + $190,000 or $45,000. This is added to the beginning cash balance of $36,500 to
give an ending cash balance of $81,500. The proceeds from the sale of equipment would already be
included in cash flows from investing activities and the gain on sale would have been eliminated in
measuring cash flows from operating activities.

10. Bucca Warehousing Corporation bought a building at auction on June 30, 2017, for P1,000,000.
On July 2, 2017, before occupying the building, Bucca sold it to a triple-A rated company for
P1,200,000. Bucca received a cash down payment of P300,000 and a first mortgage note at the
market rate of interest, for the balance. No additional payments were required until 2018. On
September 1, 2017, an independent appraiser valued the property at P1,500,000. On its 2017
income tax return, Bucca reported the sale on the installment basis. How much gain should
Bucca recognize in its income statement for the year ended December 31, 2017?

Answer:200,000

SOLUTION:
 The installment method of recognizing revenue is not acceptable for financial reporting purposes unless
the circumstances are such that the collection of the sales price is not reasonably assured. Since the
property was sold to a triple-A rated company and the value of the property is appreciating, collection
can be assumed to be reasonably assured. Therefore, the entire gain should be recognized for financial
reporting purposes at the date of sale:

Sales price Cost of building = Gain recognized

P1,200,000 P1,000,000 = P200,000

Advanced Accounting - Installment Sales (Average)

11. On January 2, 2018, New Corporation pays P200,000 cash and also issues 18,000 shares of P10
par common stock with a market value of P330,000 for all the outstanding stock of Old
Company. In addition, New pays P30,000 for registering and issuing the 18,000 shares and
P70,000 for accounting and legal fees of the business combination, in which Old Corporation is
dissolved. Summary balance sheet information for the companies immediately before the
merger is as follows (in thousands):

New Book Old Book Old Fair

Value Value Value
Cash P350 P40 P40
Inventories 150 100 120
Property and equipment, 260 180 280
net
Total assets P760 P320 P440

Liabilities P240 P80 P70

Common stock 420 200
Retained earnings 100 40
P760 P320

What is the amount of goodwill to be recognized by New Corporation?

Answer: P160,000

12. Jent Company purchases bonds at a discount of ₱100,000. Subsequently, Jent sold these bonds
at a premium of ₱140,000. During the period that Jent hold this long term investment,
amortization of the discount amounted to ₱20,000. What amount should be recorded as gain on
sale of bonds?

Answer: ₱220,000

Discount ₱100,000

Less: Amortized Discount 20,000

 Total ₱80,000

Add: Premium on Sale of Bond 140,000

GAIN ON SALE ₱220,000

13. An entity purchased ₱5,000,000 of 8%, 5-year bonds on January 1, 2016 with interest payable on
June 30 and December 31. The bonds were purchased for ₱5,100,000 plus transaction cost of
₱108,000 at an effective interest rate of 7%. The business model for this investment is to collect
contractual cash flows and sell the bonds in the open market. On December 31, 2016, the bonds
were quoted at 106.

If the entity elected the fair value option, what total amount of income should be recognized for
2016?

Answer: ₱600,000

Market value on December 31, 2016 ₱5,300,000

Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value ₱200,000
Interest income (8% x 5,000,000) 400,000
Total income ₱600,000

14. On January 1, 2016, an entity purchased a building for the cash price of P8,000,000. The seller can
choose how the purchase is to be settled.

The choices are 50,000 shares with par value of P100 in one year’s time, or a cash payment
equal to the market value of 40,000 shares on December 31, 2016.

At grant date on January 1, 2016, the market price of each share is P120 and on the date of
settlement on December 31, 2016, the market price of each share is P150.

What is the interest expense to be recognized on December 31, 2016 if the seller has chosen the
cash alternative?

a. ₱1,200,000
b. ₱2,700,000
c. ₱1,000,000
d. ₱0

Answer A

Fair value of liability – 12/31/2016 (40,000 x 150) ₱6,000,000

 Fair value of liability – 1/1/2016 4,800,000

Interest expense ₱1,200,000

15. The following investment-related transactions were completed by Christine Corp. during 2020:

a. Purchased 3,000,000 of X Company 7% bonds, paying 102.5 plus accrued interest of 52,500. In
addition, the company paid brokerage fee 15,000. Christine classified these bonds as a trading
security.

b. Purchased 30,000 shares of Y Company ordinary shares at 125 per share plus brokerage fees of
28,500. Christine classified this stock as an available-for-sale security.

c. Received semiannual interest on the X Company bonds.

d. Sold 4,500 shares of Y Company at 132 per share.

e. Sold 480,000 of X Company 7% bonds at 102, plus accrued interest of 2,790.

The realized gain or loss on the sale of Y Company stock is

Answer: 27, 225 gain

SOLUTION:

Sales price (132 x 4,500 shares) 594,000

Less: Cost (3,778,500 x 4,500/30,000) 566,775

Realized gain on sale of stock 27,225

16. On December 31, 2013, Rojo Company’s board of directors canceled 5,000 shares of P25 par
value held in treasury at an average cost of P130 per share. Before recording the cancelation of
the treasury shares, Rojo had the following balances in the stockholders’ equity accounts:

Common stock 625,000

Additional paid in capital 750,000
Retained earnings 900,000
Treasury shares 650,000

In its balance sheet on December 31, 2013, Rojo should report capital stock outstanding of:

Answer: 500,000

SOLUTION:
 Common stock 625,000

Less: Par value of treasury shares retired (5,000 x 25) 125,000

Common stock outstanding 500,000

17. For the year ended December 31, 2015, Pering Co. reported pretax financial income of
$550,000. Its current tax expense was $144,000. Pering reported a difference between pretax
financial statement income and taxable income. This difference is due to accelerated
depreciation for income tax purposes. Pering’s effective income tax rate is 30% and Pering made
estimated tax payments during 2015 of $75,000. What amount did Paring report as taxable
income for 2015?

ANSWER: 480,000.

Solution: Current tax expense is calculated by multiplying taxable income by the tax rate. Therefore,
taxable income is calculated by dividing current tax expense of $144,000 by the tax rate of 30%. Taxable
income for 2015 is $480,000.

18. The Russel Company is a car dealer. On 1 January 2013, it entered into a finance lease
agreement with a customer under which the customer would pay P200,000 on 1 January each
year for 5 years, commencing in 2013. The car cost Russel P600,000 and its normal cash selling
price was P750,000. Russel paid legal fees of P20,000 to a law firm in connection with the
arrangement of the lease. Ignoring finance income, what net amount should Russel recognize in
profit or loss in the year ended 31 December 2013, according to PAS 17 Leases?
a. Nil
b. Net expense of P20,000
c. Net income of P130,000
d. Net income of P150,000

Answer: C

19. Enrico Corporation prepares its financial statements for its fiscal year ending December 31,
2012. Enrico estimates that its product warranty liability is P28,000 at December 31, 2012. On
February 12, 2013, before the financial statements were issued, Enrico received information
about a product defect that will require a recall of all units sold in 2012. It is expected that the
product recall will cost an additional P40,000 in warranty repairs. What should Enrico present in
its December 31, 2012 financial statements?
a. A footnote disclosure listing the estimated amount of P40,000 in warranty repairs and an
explanation of the recall.
b. An estimated warranty liability of P68,000.
c. A footnote disclosure explaining the product recall.
d. No disclosure is necessary.

Answer: B
 20. Pair Co. sells one product and uses the last-in, first-out (LIFO) method to determine inventory
cost. Information for the month of January 2014 follows:

Units Unit Cost

Beginning inventory, 1/1/14 3,000 $4.70

Purchases, 3/4/14 8,000 $3.90

Sales 7,500

Pair has determined that at January 31, 20X4, the replacement cost of its inventory was $4 per
unit and the net realizable value was $4.90 per unit. Pair’s normal profit margin is $1 per unit.
Pair applies the lower of cost of or market rule to total inventory and records any resulting loss.
At January 31, 20X4, what should be the net carrying amount of Pair’s inventory?

a. $16,050

b. $13,650

c. $14,000

d. $17,050

ANSWER: C

Solution: Under LIFO, it is assumed that the 7,500 units sold were all from the purchases on 3/4/14,
leaving ending inventory of 3,000 units from beginning inventory, at a cost of $4.70 each or $14,100,
and 500 units remaining from the purchase of 3/4 at $3.90 each or $1,950, for a total cost of $16,050.
Market is replacement cost of $4 per unit since it is between the ceiling, the net realizable value of
$4.90, and the floor, the net realizable value minus a normal profit, or $3.90. At $4 per unit, total market
is $14,000, which will be the carrying amount of inventory.

ADVANCED ROUND

1. A construction company is in the middle of a 2 year construction contract when it receives a

letter from the customer extending the contract by a year and requiring the construction
company to increase its output in proportion of the number of years of the new contract to the
previous contract period. This is allowed in recognizing additional revenue according to PAS 11 if

a. Negotiations have reached an advanced stage and it is probable that the customer will accept
the claim.
b. It is probable that the customer will approve the variation and the amount of revenue arising
from the variation, whether the amount of revenue can be reliably measured or not.
 c. It is probable that the customer will approve the variation and the amount of revenue arising
from the variation, and the amount of revenue can be reliably measured.
d. The contract is sufficiently advanced and it is probable that the specified performance standards
will be exceeded or met.

Answer: C

2. Which of the following statements is (are) false?

I PFRIC 12 specifies that the infrastructure to be recognized as property, plant and equipment of the operator
because the contractual service arrangement does not convey the right to control the use of the public service
infrastructure to the operator.

II The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in
accordance with the terms specified in the contract.

III Under the terms of the contractual arrangement, the operator acts as a service provider by constructing or
upgrading the infrastructure used to provide a public service, and operates and maintains that infrastructure
(operation services) for a specified period of time.

A. I and III only

B. II only
C. I and II only
D. I only

Answer: D

3. Anas Inc. granted a franchise to Mocca for the Makati area. The franchisee was to pay a
franchisee of P500,000, payable in five equal annual installments starting with the payment
upon signing of the agreement. The franchise was to pay monthly 3% of gross sales of the
preceding month. Should the operations of the outlet prove to be unprofitable, the franchise
may be canceled with whatever obligations owing Anas, Inc. in connection with the P500,000
franchise fee waived. The prevailing interest rate is 14%. The first year generated a gross sales of
P2,500,000.

What is the amount of unearned franchisee fee after the first year of operations?
a. 575,000
b. 391,400
c. 500,000
d. 291,400

Answer: D
SOLUTION:
Unearned franchise fee: p100,000 x 2.914 = P291,400 Since the franchise maybe canceled with
any outstanding balance to be waived, then that amount still to be collected is considered
unearned.
 Advanced Accounting - Franchise Accounting (Difficult)

4. Kenneth Company had a Swiss franc receivable resulting from exports to Switzerland and a
Mexican peso payable resulting from imports from Mexico. Kenneth recorded foreign exchange
gains related to both its franc receivable and peso payable. Did the foreign currencies increase
or decrease in Philippine peso value from the date of the transaction to the settlement date?
a. Franc (Increase); Mexican Peso (Increase)
b. Franc (Decrease); Mexican Peso (Decrease)
c. Franc (Decrease); Mexican Peso (Increase)
d. Franc (Increase); Mexican Peso (Decrease)

Answer: C

5. Significant change in the market value of trading securities occurring after the balance sheet
date should
a. Be considered in the valuation of securities at balance sheet date and disclosed in the notes to
the financial statements
b. Be treated as a prior period error in next year's financial statements
c. Result in an adjustment of the market value used in the lower of cost or market valuation at
balance sheet date
d. Not be considered in the valuation of the securities at the balance sheet date but disclosed in
the notes to the financial statements

Answer: D

6. During 2013, Jess Company engaged in the following transactions:

Salary expense to key employees who are also principal owners

100,000

Sales to affiliated enterprises 250,000

Which of the two transactions would be disclosed as related-party transactions in Jess' 2013 financial
statements?

a. Neither transaction.
b. The P100,000 transaction only.
c. The P250,000 transaction only.
d. Both transactions.

Answer: C

7. This is a procedure of eliminating a deficit without going through a formal liquidation and
reincorporation proceedings
Answer: Quasi-reorganization

Financial Accounting and Reporting - Quasi Reorganization (Average)

8. Capsule Corp. reported the following in 2014:

Beginning retained earnings $260,000

Ending retained earnings $290,000

Cash dividends declared $90,000

Beginning accumulated other comprehensive income $20,000

Ending accumulated other comprehensive income $15,000

What was Capstone’s comprehensive income for 2014?

ANSWER: $115,000.

Solution: Comprehensive income is equal to net income plus other comprehensive income (OCI). Ending
retained earnings of $290,000 consists of beginning retained earnings of $260,000 plus net income and
minus dividends of $90,000. Beginning retained earnings reduced by dividends gives a balance of
$170,000, requiring net income of $120,000 to give an ending balance of $290,000. Ending accumulated
other comprehensive (AOCI) of $115,000 equals beginning AOCI of $120,000 plus OCI. As a result, OCI is
equal to the reduction in AOCI of $5,000 and comprehensive income is $120,000 - $5,000 or $115,000.

9. Misk, Inc. received from a customer a one year, $750,000 note bearing annual interest of 9%.
After holding the note for six months, Misk discounted the note at National Bank at an effective
interest rate of 12%. What amount of cash did Mick receive from the bank?

a. $700,950

b. $719,400

c. $780,713

d. $768,450

ANSWER: D

Solution: Misk will first calculate the maturity value of the note, which will be the face value of $750,000
plus one year’s interest at 9% or $67,500. Since the note is being discounted after 6 months, the bank
will receive $817,500 after six months. The discount will be $817,500 X 12% X 6/12 or $49,050. As a
result, Misk will receive $817,500 - $49,050 or $768,450 from the bank.

10. OK Co. uses the equity method to account for its January 1, 20X4 purchase of FDL Inc.’s common
stock. On January 1, 20X4, the fair values of FDL’s FIFO inventory and plant exceeded their
carrying amounts. How do these excesses of fair values over carrying amounts affect OK’s
reported equity in FDL’s 20X4 earnings?
 Inventory excess Plant excess

a. Decrease Decrease

b. Decrease No effect

c. Increase Increase

d. Increase No effect
ANSWER: Answer (a) is correct. Under the equity method, the investor adjusts the portion of the
investee’s income recognized to account for differences between the book values of the investee’s
assets and liabilities and their fair values. Under FIFO, it is assumed that inventory on hand is sold first
and, if the fair value is greater than the carrying value, the difference increases cost of sales, decreasing
the investee’s income. Likewise, if the fair value of plant assets is greater than the carrying value, the
difference will be allocated over the asset’s depreciable life, increasing depreciation expense and further
reducing the investee’s income. The investor will then recognize a proportionate amount of the
investee’s adjusted income.

11. On December 31, 2016, Blue Co. leased a new machine from Green Co. with the following
pertinent information:

Lease term 5 years

Annual rental payable at beginning of each year $55,000

Useful life of machine 7 years

Blue’s incremental borrowing rate 12%

Implicit interest rate in lease (known by Blue) 10%

Present value of annuity of $1 in advance for 5 periods at

10% 4.17

12% 4.04
There is no bargain purchase option but title transfers to Blue Co. at the end of the lease. The cost of the
machine on Green’s accounting records is $294,500. At the beginning of the lease term, Blue Co. should
record a lease liability of

ANSWER: $229,350

Solution: Since title will transfer to the lessee at the end of the lease this is a capital lease. A lease
obligation will be recognized in an amount equal to the present value of the minimum lease payments
using the rate implicit in the lease since it is known to the lessee and lower than the lessee’s incremental
borrowing rate. As a result, the lease obligation will be $55,000 x 4.17 or $229,350.
 12. On January 1, 2016, Bartell Company sold its idle plant facility to Cooper, Inc. for P1,050,000.
On this date the plant had a net book value of P735,000. Cooper paid P150,000 cash on January
1, 2016, and signed a P900,000 note bearing interest at 10%. The note was payable in three
annual installments of P390,000 beginning January 1, 2017. This included interest of P90,000.
Bartell appropriately accounted for the sale under the installment method.
Cooper made a timely payment of the first installment on January 1, 2017. At December 31,
2017, Bartell has deferred gross profit of

Answer: 180,000

SOLUTION:

The total gross profit (GP) on the sale is P315,000 (selling price of P1,050,000 less depreciated
cost of P735,000), and the GP rate is 30% (P315,000/P1,050,000). GP recognized in 2016 is
P45,000 (30% x P150,000 down payment), and GP recognized in 2017 is P90,000 (30% x
(P390,000 - P90,000)). This leaves a balance of P180,000 in deferred GP.

Deferred gross profit

Recognized 2016 45,000 315,000 Total gross profit

Recognized 2017 90,000

180,000 Balance 12/31/2017

GP is recognized only on the portion of the sales price collected, not on the interest collected (P90,000).
A short-cut approach is to multiply the remaining balance in installment notes receivable by the GP rate
(P600,000 x 30% = P180,000).

Advanced Accounting - Installment Sales (Average)

13. On October 1, year 1, Park Co. purchased 200 of the ₱1,000 face value, 10% bonds of Ott, Inc.,
for ₱220,000, including accrued interest of ₱5,000. The bonds, which mature on January 1, year
8, pay interest semiannually on January 1 and July 1. Park used the straight-line method of
amortization and appropriately classified the bonds as held-to-maturity. On Park’s December 31,
year 2 balance sheet, the bonds should be reported at

Answer: ₱212,000

The bonds should be recorded at an original cost of ₱215,000 (₱220,000 less accrued interest of
₱5,000). The premium of ₱15,000 is amortized using the straight-line method over the period
from the 10/1/Y1 date of purchase to the 1/1/Y8 maturity date (seventy-five months). By
12/31/Y2, amortization has been recorded for fifteen months (10/1/Y1 to 12/31/Y2), so total
amortization is ₱3,000 (₱15,000 × 15/75). Therefore, the bonds should be reported on the
12/31/Y2 balance sheet at ₱212,000 (₱215,000 – ₱3,000).

14. West Co. recorded the following inventory information during the month of February:
 Units Unit Cost Total Cost Units on Hand

Balance on 2/1 800 $2 $1,600 800

Purchased on 2/8 1,000 $3 $3,000 1,800

Sold on 2/14 1,500 300

Purchased on 2/17 2,000 $1 $2,000 2,300

Sold on 2/23 1,600 700

Purchased on 2/28 800 $4 $3,200 1,500

West uses the LIFO method to cost inventory. What amount should West report as inventory at the end
of February under each of the following methods of recording inventory?

a. Perpetual: $3,700, Periodic: $4,200

b. Perpetual: $4,200, Periodic: $3,700

c. Perpetual: $3,700, Periodic: $3,700

d. Perpetual: $4,200, Periodic: $4,200

ANSWER: Answer (b) is correct. Under the perpetual method, purchases and sales are recognized as
they occur. As a result, the sale of 1,500 units on 2/14 would consist of the 1,000 units purchased on 2/8
and 500 of those in beginning inventory, leaving 300 from beginning inventory. The 1,600 units sold on
2/23 all would have come from the 2,000 purchased on 2/17, leaving 400 of those unites in ending
inventory. As a result, ending inventory would consist of 300 from beginning inventory at $2, or $600,
400 from the purchase on 2/17 at $1, or $400, and the 800 purchased on 2/28 at $4, or $3,200 for a
total of $4,200. Under the periodic method, it is assumed that all sales occurred at the end of the
period. As a result, the total sales of 3,100 units would have included the 800 purchased on 2/28, the
2,000 purchased on 2/17, and 300 of those purchased on 2/8. Ending inventory would consist of the 800
units in beginning inventory at $2 per unit, or $1,600, and the 700 remaining from the purchase on 2/8
at $3 per unit, or $2,100, for a total of $3,700.

15. The interest on a noninterest bearing note receivable is equal to

a. Zero
b. The excess of fair value over present value
c. The excess of face amount over present value
d. The excess of present value over face amount

Answer: C