Handouts PDF

MCQ - Theory
Basic Concepts
1. These are all forms of consideration given by an entity in exchange for services rendered by employees.
A. Employee benefits C. Fringe benefits
B. Employee compensation D. Salaries and wages FA 2 © 2014
2. These are employee benefits which are payable after completion of employment.
A. Termination benefits
B. Short-term employee benefits
C. Other long-term employee benefits
D. Postemployment employee benefits FA 2 © 2014
3. Postemployment employee benefits include all of the following, except

A. Long-term disability benefits
B. Postemployment medical care
C. Postemployment life insurance
D. Retirement benefits, such as pensions Valix 2012
4. Vested benefits
A. Are defined by all of these.
B. Are not contingent upon additional service under the plan.
C. Are those that the employee is entitled to receive even if fired.
D. Usually require a certain minimum number of years of service. K,W&W
5. An employer's obligation for postretirement health benefits that are expected to be provided to an employee must
be fully accrued by the date the
A. Benefits are paid
B. Employee retires
C. Benefits are utilized
D. Employee is fully eligible for benefits Wiley 2012
6. What is a postemployment benefit plan under Philippine law?

A. R.A. 7641 only
B. Social Security System only
C. Both Social Security System and R.A. 7641
D. Neither Social Security System nor R.A. 7641 FA 2 © 2014
7. A multiemployer plan is defined as

A. A defined contribution plan or a defined benefit plan.
B. A defined contribution plan that pools the assets contributed by various entities.
C. A defined benefit plan that provides benefits to employees of more than one entity.
D. A defined contribution plan or defined benefit plan that pools the assets contributed by various entities that
are not under common control and uses those assets to provide benefits to employees of more than one
entity. FA 2 © 2014
Defined contribution plan

8. It is a benefit plan under which an entity pays a fixed contribution into a separate fund and will have no legal or
constructive obligation to pay further contribution if the fund becomes insufficient to pay employee benefits.
A. Defined benefit pain C. Multiemployer plan FA 2 © 2014
B. Defined contribution plan D. Postemployment benefit plan
9. When an entity pays insurance premiums to fund a postemployment benefit plan and the entity has no legal or
constructive obligation on the policy, the postemployment benefit plan shall be treated as
A. Multiemployer plan
B. Defined benefit plan
C. Defined contribution plan
D. Either defined contribution plan or defined benefit plan FA 2 © 2014
10. Which of the following statements characterizes defined contribution plans?

A. The investment risk is borne by the employer.
B. Contributions are made in equal amounts by employer and employees.
C. Defined contribution plans are more complex in construction than defined benefit plans.
D. The employer's obligation is satisfied by making the appropriate amount of periodic contribution. S&S 19e
11. Which of the following is not a characteristic of a defined contribution plan?

A. The employer contribution each period is based on a formula.
B. The accounting for a defined contribution plan is straightforward and uncomplicated.
C. The benefits to be received are usually determined by an employee's highest salary.
D. The benefit of gain or the risk of loss from the assets contributed to the plan are borne by the employee.
FA 2 © 2014
12. Which is incorrect concerning the recognition and measurement of a defined contribution plan?
A. The contribution shall be recognized as expense in the period it is payable.
B. Any unpaid contribution at the end of the period shall be recognized as accrued liability.
C. An entity shall not disclose the amount recognized as expense for a defined contribution plan. FA 2 ©
2014
D. Any excess contribution shall be recognized as prepaid expense but only to the extent that the prepayment
will lead to a reduction in future payments or a cash refund.
13. A formula in a defined contribution plan

A. Ensures that enough fund would be available at retirement.
B. Ensures that the defined benefit cost and funding are different.
C. Defines the benefits that the employee will receive at the time of retirement. FA 2 © 2014
D. Requires an employer to contribute a certain sum each period based on the formula.
14. The report of a defined contribution plan shall contain

I. A statement of net assets available for benefits.
II. A description of the funding policy.
A. I only C. Both I and II
B. II only D. Either I or II Valix 2012
15. An entity contributes to an industrial pension plan that provides a pension arrangement for its employees. A large
number of other employers also contribute to the pension plan, and the entity makes contributions in respect of
each employee. These contributions are kept separate from corporate assets and are used together with any
investment income to purchase annuities for retired employees. The only obligation of the entity is to pay the
annual contributions. This pension scheme is a
A. Defined benefit plan only.
B. Defined contribution plan only.
C. Multiemployer plan and a defined benefit scheme.
D. Multiemployer plan and a defined contribution scheme. FA 2 © 2014
Defined benefit plan

16. Which of the following statements characterizes defined benefit plans?
A. The investment risk is borne by the employee.
B. Retirement benefits are based on the plan's benefit formula.
C. Retirement benefits depend on how well pension fund assets have been managed.
D. Defined benefit plans are comparatively simple in construction and raise few accounting issues for
employers. FA 2 © 2014
17. In rare circumstances, when a retirement benefit plan has attributes of both defined contribution and defined
benefit plan, it is deemed
A. Defined benefit plan
B. Defined contribution plan
C. Both defined benefit plan and defined contribution plan
D. Neither defined benefit plan nor defined contribution plan FA 2 © 2014
18. It is an insurance policy issued by an insurer that is not a related party of the reporting entity and the proceeds of
the policy can be used only to pay or fund employee benefits under a defined benefit plan.
A. Aggregate policy C. Qualifying insurance policy FA 2 © 2014
B. Annuity D. Unconditional insurance policy
19. These are the entity's best estimate of the variables that will determine the ultimate cost of providing
postemployment benefits.
A. Actuarial assumptions C. Demographic assumptions
B. Actuarial computations D. Financial assumptions FA 2 © 2014
20. Which of the following statements is incorrect concerning the actuarial assumptions?
A. Actuarial assumptions shall be unbiased and mutually compatible.
B. Actuarial assumptions are unbiased if they are neither imprudent nor excessively conservative.
C. Actuarial assumptions comprise of demographic assumptions and financial assumptions.
D. Postemployment benefit obligations shall be measured on a basis that reflects current salary and ignores
future salary increases. FA 2 © 2014
Brad Company provided the following information for the current year:
Current service cost 520,000
Actual return on plan assets 810,000
Interest expense on PBO 590,000
Interest income on plan assets 350,000
Loss on plan settlement 240,000
Past service cost during the year 360,000
Contribution to the plan 1,500,000
i. What is the employee benefit expense for the current year?

A. 1,350,000 C. 1,470,000
B. 1,360,000 D. 1,710,000
ii. What is the remeasurement gain or loss?

A. 220,000 gain C. 460,000 gain
B. 220,000 loss D. 460,000 loss
iii. What is the total defined benefit cost?

A. 740,000 C. 960,000
B. 900,000 D. 1,820,000
iv. What is the prepaid or accrued benefit cost for the year?
A. 140,000 accrued C. 600,000 accrued
B. 140,000 prepaid D. 600,000 prepaid
i. Answer is (B).
Interest expense on PBO 590,000
Interest income on plan assets (350,000)
Loss on plan settlement 240,000
Past service cost 360,000
Employee benefit expense 1,360,000
ii. Answer is (C).

Interest income on plan assets 350,000
Remeasurement gain 460,000
iii. Answer is (B).

Remeasurement gain (460,000)
Total defined benefit cost 900,000
iv. Answer is (D).

Total defined benefit cost 900,000
Prepaid benefit cost - overfunding 600,000
(Bonus Computation) Mateo Corp. Pays bonuses to its sales manager and two sales agents. The company had
income for 20x9 for P3,000,000 before bonuses and income taxes. Assume –
a. The Sales Manager gets 8% and each sales agent gets 6% of income before tax and bonuses.
b. Each bonus is 12% of net income after income tax and bonuses.
c. Sales manager gets 12% and each sales agent gets 10% of income after bonuses but before income taxes.
REQUIRED: Determine the amount of bonus for the sales manager and for each sales agent under the
given independent assumptions. Assume the tax rate is 30%.
a. Bonus to sales manager = .08 x 3,000,000 = 240,000

Bonus to each sales agent = .06 x 3,000,000 = 180,000
b. Total Bonus = .36 {3,000,000 – B – T )

T = .30 {3,000,000 – B }
B = .36 {3,000,000 – B - .30 (3,000,000 – B)}
B = .36 {3,000,000 – B – 900,000 + .30B}
B = 756,000 - .252B
B = 756,000/1.252 = 603,834 (total)
B (Each): 603,834 / 3 = 201,278
c. B = .32 {3,000,000 – B }
B = 960,000 - .32B
B = 960,000/1.32 = 727,273 (total)
B (Sales Manager): 727,273 x 12/32 = 272,727
B (Each Sales Agent): 727,273 x 10/32 = 227,273
(Actuarial valuation method - Projected unit credit method) A director of Abacus Company shall receive a
retirement benefit of 10%. Of the final salary per annum for a contractual period of three years. The director does
not contribute to the scheme. The anticipated salary over three years is P1,000,000 for 20x3, P1,200,000 for 20x4
and P1,440,000 for 20x5. The discount rate is 5%.
Required: Using the projected unit credit method, what is the estimated pension liability on December 31, 20x4?
The Annual benefit is 10% of P1,440,000 or P144,000 or a total of P432,000 for three years.
The present value of 1 at the discount rate of 5% is as follows:
For one period .9524
For two periods .9070
The annual benefit is discounted from the end of 20x5, which is the year of retirement.
Thus, the 20x3 benefit is two years away from 20x5 and discounted for two periods and the 20x4 benefit is one
year away from 20x5 and discounted for one period.
(a) (b) (a x b)
Benefit PV factor Present value
20x3 144,000 .9070 130,608
20x4 144,000 .9524 137,146
20x5 144,000 1.0000 144,000
432,000 411,754
The projected benefit obligation at the end of each year is as follows:

Current Interest Present
Date service cost cost value
12/31/20x3 130,608 - 130,608
12/31/20x4 137,146 6,530 274,284Answer
12/31/20x5 144,000 13,716 432,000
The interest cost is 5% of the beginning balance. Thus, for 20x4, 5% times P130,608 equals P6,530, and for 20x5,
5% time's P274,284 equals P13,714. There is a difference of P2 between the interest cost of P13,716 and P13,714
due to rounding of PV factor
On January 1,2013, Shiela Company had the following balances related to a defined benefit plan:
Fair value of plan assets 5,750,000
Projected benefit obligation 6,500,000
The actuary provided the following data for the current year:
Past service cost (vesting period 5 years) 300,000
Settlement discount rate 10%
Expected return on plan assets 8%
Contribution to the plan 900,000
Benefits paid to retirees 100,000
Required:
1. What is the employee benefit expense?
2. What is the remeasurement gain on plan assets?
3. What is the defined benefit cost?
4. What is the prepaid/accrued benefit cost on December 31?
(Employee Benefit Expense)

Current service cost Interest income on FVPA, beginning
Interest expense on DBO Gain on settlement of DBO
Past service cost
Loss on settlement of DBO
Interest expense on effect of asset ceiling beginning
xxx
Defined Benefit Cost = Retirement benefit expense + Actuarial gain –Actuarial loss
Service cost : (recognized in P/L)

a. Current service cost Xxx
b. Past service cost Xxx
xxx/(xxx
c. Any (gain) or loss on settlement*** ) xxx
Gain or (Loss) on settlement:

Settlement price
Add: Plan assets transferred
Add: Payments made directly by the entity
Less: Present value of defined benefit obligation settled
***Loss (or Gain) on settlement
Net interest on the net defined benefit liability (asset) : (recognized in P/L)
a. Interest income on plan assets (Discount rate x FVPA, beginning) (xxx)
b. Interest cost on the DBO (Discount rate x DBO, beginning) Xxx
c. Interest on the effect of the asset ceiling (Discount rate x EAC, beg.) Xxx xxx
xx
Defined benefit cost –P&L (EMPLOYEE BENEFIT EXPENSE) (A) x
Remeasurement of the net defined benefit liability (asset) : (recognized in OCI) (B)
a. Actuarial (gains) and losses Xxx
b. Difference between return on plan assets and interest
income on plan assets Xxx
c. Difference between the change in the effect of the asset
ceiling and interest on the effect of the asset ceiling Xxx xxx
Total Defined Benefit Cost (A + B ) xxx

Interest expense (10% x 6,500,000) 650,000
Interest income (10% x 5,750,000) (575,000)
Employee benefit expense 675,000
Note that the expected return of 8% on plan assets is ignored completely. There is no more concept of
expected return under PAS 19R.
Components of defined benefit cost

1. Service cost which comprises:
a. Current service cost
b. Past service cost
c. Any gain or loss on plan settlement
2. Net interest which comprises:
a. Interest expense on defined benefit liability
b. Interest income on plan assets
c. Interest expense on the effect of asset ceiling
3. Remeasurements which comprise:
a. Actuarial gain and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the effect of asset ceiling
The service cost and net interest are included in profit or loss as component of employee benefit
expense.
The net interest expense or net interest income is the difference between the interest expense on defined
benefit obligation and interest income on plan assets using the same discount rate. Accordingly, the
defined benefit cost is partly profit or loss representing service cost and net interest, and partly other
comprehensive income or OCI representing the remeasurements.

Interest income on fair value of plan assets 575,000
Remeasurement gain on plan assets 125,000
The amount of remeasurement is equal to the actual return on plan assets minus the interest income
on the fair value of the plan assets at the beginning of the reporting period.
Note that if the actual return on plan assets is higher than interest income, the difference is a
remeasurement gain. However, if the interest income is higher than the actual return on plan assets,
the difference is a remeasurement loss.

Remeasurement gain on plan assets (125,000)
Defined benefit cost 550,000
Contribution to the plan 900,000
Overfunding - prepaid 350,000
Journal entry
Prepaid/accrued benefit cost 350,000
Cash 900,000
Remeasurement gain - OCI 125,000
Prepaid/accrued benefit cost - January 1 (credit) (750,000)

Debit adjustment 350,000
Prepaid/accrued benefit cost - December 31 (credit) (400,000)
FV of plan assets
Beginning balance Payments to early retirees (settlement price of DBO)
Actual return (Expected return + Actuarial gain – Loss) Benefits paid
Contributions to the fund Ending balance
PV of defined benefit obligation

Beginning balance
Carrying Value - settled (Benefits settled early retirees)(PV of DBO settled) Current Service Cost
Benefits paid Past Service Cost
Actuarial gain - decreases in obligation Interest Cost
Ending balance Actuarial loss - increase in obligation
The projected unit credit method (sometimes known as the accrued benefit method pro-rated on service
or as the benefit/years of service method) sees each period of service as giving rise to an additional unit of
benefit entitlement and measures each unit separately to build up the final obligation.
Problem 1: XYZ Company is a dealer in machinery. On January 1, 20x5, a machinery was leased to another entity
with the following provisions:
Annual rental payable at the end of each year P 800,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery P2,000,000
Estimated residual value P 200,000
Initial direct costs paid by lessor P100,000
Implicit interest rate 10%
Present value of an ordinary annuity of 1 for 5 periods at 10% 3.7908
Present value of 1 for 5 periods at 10% 0.6209
At the end of the lease term on December 31, 20x9, the machinery will revert to XYZ Company. The perpetual
inventory system is used. (Prepare the necessary journal entries in the books of Lessor)
Guaranteed Residual Value Unguaranteed Residual Value
Gross rentals 4,000,000 Gross rentals 4,000,000

Add: Guaranteed residual value 200,000 Add: unguaranteed residual value 200,000
Gross Lease Receivables 4,200,000 Gross Lease Receivables 4,200,000
PV of Gross rentals 3,032,640 PV of Gross rentals

Add: PV of Guaranteed residual value 124,180 Add: PV of Unguaranteed residual value
MLP 3,156,820 MLP 3,156,820
PV of Gross rentals PV of Gross rentals

Add: PV of Guaranteed residual value
Total Sales=PV of MLP 3,156,820 Total Sales= PV of rentals 3,032,640
Cost of machinery Cost of machinery

Less: PV of Unguaranteed residual value
Add: Initial direct cost Add: Initial direct cost
Cost of sales 2,100,000 Cost of sales 1,975,820
Amortization Table (Whether guaranteed or unguaranteed)
10% x PV Payment – Interest

Payment Interest Principal Present value
Jan. 1, 20x5 3,156,820
Dec. 31,
20x5 800,000 315,682 484,318 2,672,502
Dec. 31,
2006 800,000 267,250 532,750 2,139,752
Dec. 31,
2007 800,000 213,975 586,025 1,553,727
Dec. 31,
2008 800,000 155,373 644,627 909,100
Dec. 31,  (Bal) Res.
20x9 800,000 90,910 709,090 200,000 Value
When the lease expires on Dec. 31, 20x9, the machinery will revert to the lessor.
Guaranteed Unguaranteed
Dec. 31,
20x9 Inventory 200,000 200,000
Lease receivable 200,000 200,000
Assume, Dec. 31, 20x9, Fair value of machinery is P180,000, the machinery will revert
the lessor
Guaranteed
Unguaranteed
Cash 20,000 Zero
Inventory 180,000 180,000
Loss on finance lease Zero 20,000
Problem 1: XYZ Company is a dealer in machinery. On January 1, 20x5, a machinery was leased to another entity
with the following provisions:
Annual rental payable at the end of each year P 800,000
Lease term 5 years
Useful life of machinery 5 years
Cost of machinery P2,000,000
Estimated residual value P 200,000
Initial direct costs paid by lessor P100,000
Present value of an ordinary annuity of 1 for 5 periods at 10% 3.7908
Present value of 1 for 5 periods at 10% 0.6209
At the end of the lease term on December 31, 20x9, the machinery will revert to XYZ Company. The perpetual
inventory system is used. (Prepare the necessary journal entries in the books of Lessor)
Guaranteed Residual Value Unguaranteed Residual Value
Gross rentals 4,000,000 Gross rentals 4,000,000

Add: Guaranteed residual value 200,000 Add: unguaranteed residual value 200,000
Gross Lease Receivables 4,200,000 Gross Lease Receivables 4,200,000
PV of Gross rentals 3,032,640 PV of Gross rentals

Add: PV of Guaranteed residual value 124,180 Add: PV of Unguaranteed residual value
MLP 3,156,820 MLP 3,156,820
PV of Gross rentals PV of Gross rentals

Add: PV of Guaranteed residual value
Total Sales=PV of MLP 3,156,820 Total Sales= PV of rentals 3,032,640
Cost of machinery Cost of machinery

Less: PV of Unguaranteed residual value
Add: Initial direct cost Add: Initial direct cost
Cost of sales 2,100,000 Cost of sales 1,975,820
Amortization Table (Whether guaranteed or unguaranteed)
10% x PV Payment – Interest

Payment Interest Principal Present value
Jan. 1, 20x5 3,156,820
Dec. 31,
20x5 800,000 315,682 484,318 2,672,502
Dec. 31,
2006 800,000 267,250 532,750 2,139,752
Dec. 31,
2007 800,000 213,975 586,025 1,553,727
Dec. 31,
2008 800,000 155,373 644,627 909,100
Dec. 31,  (Bal) Res.
20x9 800,000 90,910 709,090 200,000 Value
When the lease expires on Dec. 31, 20x9, the machinery will revert to the lessor.
Dec. 31,
20x9 Inventory 200,000 200,000
Assume, Dec. 31, 20x9, Fair value of machinery is P180,000, the machinery will revert
the lessor
Guaranteed
Unguaranteed
Cash 20,000 Zero
Inventory 180,000 180,000
Loss on finance lease Zero 20,000

Questions 1 thru 3 are based on the following information.
Vanderbilt Company is a dealer in machinery. On January 1,2013, a machinery was leased to another entity with the
following provisions:
Annual rental payable at the end of each year 3,000,000
Lease term and useful life of machinery 5 years
Cost of machinery 8,000,000
Residual value-unguaranteed 1,000,000
PV of an ordinary annuity of 1 for 5 periods at 12% 3.60
PV of 1 for 5 periods at 12% 0.57
At the end of the lease term on December 31,2017, the machinery will revert to Vanderbilt. Vanderbilt incurred initial
direct cost of P300,000 in finalizing the lease agreement.
i. What is the unearned interest income on January 1,2013?

A. 3,630,000 C. 4,630,000
B. 4,200,000 D. 5,200,000
ii. What amount should be reported as gross profit on sale in 2013?

A. 2,500,000 C. 3,370,000
B. 3,070,000 D. 7,700,000
iii. What is the interest income for 2013?

A. 926,000 C. 1,364,400
B. 1,296,000 D. 1,800,000
i. Answer is (C).
Gross rentals ( 3,000,000 x 5) 15,000,000
Residual value - unguaranteed 1,000,000
Gross investment 16,000,000
Present value or net investment:
Rentals (3,000,000 x 3.60) 10,800,000
Residual value (1,000,000 x .57) 570,000 11,370,000
Unearned interest income - January 1, 2013 4,630,000
The difference between the gross investment and net investment is the unearned interest income. The gross
investment is the sum in absolute amount of the gross rentals and the residual value, whether guaranteed or
unguaranteed. In a sales type lease, the net investment is equal to the present value of rentals plus the present
value of the residual value, whether guaranteed or unguaranteed. Thus, whether the residual value is guaranteed
or unguaranteed the unearned interest income is the same.
ii. Answer is (B).

Sales 11,370,000 10,800,000
Cost of sales (8,000,000) (7,430,000)
Initial direct cost ( 300,000) (300,000)
Gross profit on sale 3,070,000 3,070,000
The amount of sales is equal to the net investment or sum of the present value of the rentals and the present
value of the residual value.
Note that whether the residual value is guaranteed or unguaranteed, the profit on sale is the same. The only
difference is in the reporting of sales and cost of sales. If the residual value is guaranteed, the sales and cost of
sales should include the present value of the residual value. Otherwise, as in this case, if the residual value is
unguaranteed, the sales and cost of sales should exclude the present value of the residual value.
In a sales type lease, the initial direct cost incurred by the lessor is expensed immediately as component of cost
of sales.
iii. Answer is (C).

Interest income for 2013 (11,370,000 x 12%) 1,364,400
Rent receivable
i. On January 1, 2014, Abba Company leased a building to Bee Company under a four-year operating lease. The
monthly rental for 2014, 2015, 2016 and 2017 is P100,000, P150,000, P200,000 and P250,000, respectively.
Rentals are payable at the end of each month. All rental payments within the year were made when due. What
amount should be reported as rent receivable from Bee Company on December 31, 2015?
A. 600,000 C. 1,000,000
B. 900,000 D. 1,200,000
ii. On July 1, 2013, Gee Company leased a delivery truck from Man-Company under a 3-year operating lease. Total
rent for the term of the lease will be P360,000, payable as follows:
12 months at P 5,000 = P 60,000
12 months at P 7,500 = 90,000
12 months at PI7,500 = 210,000
All payments were made when due. On June 30,2015, what amount should be reported as accrued rent
receivable?
A. 0 C. 120,000
B. 90,000 D. 210,000
i. Answer is (D).
2014 (100,000 x 12) 1,200,000
2015 (150,000 x 12) 1,800,000
2016 (200,000 x 12) 2,400,000
2017 (250,000 x 12) 3,000,000
Total rent over the lease term 8,400,000
Average annual rental (8,400,000 / 4) 2,100,000
Rent income for 2014 and 2015 (2,100,000 x 2) 4,200,000
Rent collected in 2014 and 2015 (1,200,000 + 1,800,000) (3,000,000)
Rent receivable – 12/31/2015 1,200,000
ii. Answer is (B).

Average annual rent revenue (360,000/3) 120,000
Rent revenue from July 1, 2013 to June 30, 2015
(120,000 x 2) 240,000
Less: Rentals received:
First 12 months 60,000
Second 12 months 90,000 150,000
Rent receivable - June 30, 2015 90,000
On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal
annual payments of €160,000 each, payable beginning January 2, 2018. Brick Co. agrees to
guarantee the €150,000 residual value of the asset at the end of the lease term. The expected
value of the residual value is €50,000. Brick’s incremental borrowing rate is 10%, however it
knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at
January 2, 2018 to record the lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Right-of-Use Asset 598,449
Lease Liability 598,449
b. Right-of-Use Asset 758,449
Cash 160,000
c. Right-of-Use Asset 689,940
Cash 160,000
d. Right-of-Use Asset 707,342
Cash 160,000
On January 2, 2018, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal
annual payments of €160,000 each, payable beginning January 2, 2018. Brick Co. agrees to
guarantee the €150,000 residual value of the asset at the end of the lease term. The expected
value of the residual value is €50,000. Brick’s incremental borrowing rate is 10%, however it
knows that Gold Star’s implicit interest rate is 8%. What journal entry would Brick Co. make at
January 1, 2019 to record the second lease payment?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 .68508
10%, 5 periods 4.16986 3.79079 .62092
a. Lease Liability 112,124
Interest Expense 47,876
Cash 160,000
b. Lease Liability 117,604
Cash 160,000
c. Lease Liability 160,000
Cash 160,000
d. Lease Liability 116,212
Cash 160,000
Questions 1 & 2 are based on the following information.
Rachelleen Company provided the following information during 2013:
January 1 December 1
Fair value of plan assets 6,000,000 7,900,000
Projected benefit obligation 5,000,000 5,900,000
Prepaid/accrued benefit cost - surplus 1,000,000 2,000,000
Asset ceiling 700,000 1,200,000
Effect of asset ceiling 300,000 800,000
During the current year, the following data are gathered:

Decrease in projected benefit obligation due change in actuarial assumptions 500,000
Discount rate 10%
i. What is the employee benefit expense?

A. 800,000 C. 870,000
B. 830,000 D. 900,000
ii. What is the net remeasurement gain?

A. 300,000 C. 500,000
B. 330,000 D. 800,000
i. Answer is (B).
Interest expense on PBO (10% x 5,000,000) 500,000
Interest income on FVPA (10% x 6,000,000) (600,000)
Interest expense on effect of asset ceiling (10% x 300,000) 30,000
Note that the interest expense on the effect of the asset ceiling is a component of net interest and included in
employee benefit expense.
ii. Answer is (B).

Actual return 900,000
Interest income 600,000
Decrease in PBO - actuarial gain 500,000
Effect of asset ceiling - December 31 800,000
Effect of asset ceiling - January 1 300,000
Total change in the effect of asset ceiling 500,000
Interest expense on effect of asset ceiling (10% x 300,000) ( 30,000)
Remeasurement loss on the effect of asset ceiling 470,000
The interest on the effect of the asset ceiling is part of the total change in the effect of the asset ceiling and is
determined by multiplying the effect of the asset ceiling at the beginning of the period by the discount rate.
The difference between the total change in the effect of the asset ceiling and the interest on the effect of the asset
ceiling is considered the remeasurement
Actuarial gain on PBO 500,000
Remeasurement loss - asset ceiling (470,000)
Net remeasurement gain 330,000
Reassessment of the lease liability
After the commencement date, a lessee shall remeasure the lease liability to reflect changes to the
lease payments. A lessee shall recognise the amount of the remeasurement of the lease liability as
an adjustment to the right-of-use asset. However, if the carrying amount of the right-of-use
asset is reduced to zero and there is a further reduction in the measurement of the lease
liability, a lessee shall recognise any remaining amount of the remeasurement in profit or loss.
A lessee shall remeasure the lease liability by discounting the revised lease payments using
a revised discount rate, if either:
a. there is a change in the lease term. A lessee shall determine the revised lease
payments on the basis of the revised lease term; or
b. there is a change in the assessment of an option to purchase the underlying
asset, assessed considering the events and circumstances in the context of a
purchase option. A lessee shall determine the revised lease payments to reflect the
change in amounts payable under the purchase option.
A lessee shall determine the revised discount rate as the interest rate implicit in the lease
for the remainder of the lease term, if that rate can be readily determined, or the lessee’s
incremental borrowing rate at the date of reassessment, if the interest rate implicit in the
lease cannot be readily determined.
A lessee shall remeasure the lease liability by discounting the revised lease payments using
an unchanged discount rate, if either:
a. there is a change in the amounts expected to be payable under a residual value
guarantee. A lessee shall determine the revised lease payments to reflect the
change in amounts expected to be payable under the residual value guarantee.
b. there is a change in future lease payments resulting from a change in an index or
a rate used to determine those payments, including for example a change to
reflect changes in market rental rates following a market rent review. The lessee
shall remeasure the lease liability to reflect those revised lease payments only when
there is a change in the cash flows (ie when the adjustment to the lease payments
takes effect).
A lessee shall determine the revised lease payments for the remainder of the lease term
based on the revised contractual payments. In applying paragraph IFRS 16.42, a lessee
shall use an unchanged discount rate, unless the change in lease payments results from
a change in floating interest rates. In that case, the lessee shall use a revised discount rate
that reflects changes in the interest rate.
Remeasurement of Lease Liability
Present Value of New Lease Liability = Present Value of New Lease Liability = Revised
Revised Lease Payment x Revised Discount Lease Payments x Unchanged Discount Rate
Rate
Change in the Change in the amounts Change in future lease

Change in the assessment of an expected to be payments resulting
lease term option to purchase payable under a from a change in
the underlying asset residual value index or a rate used
guarantee to determine those
payments.
Problem 1: (Reassessment of the Lease Liability) Assume the following data before remeasurement of lease
liability:
Present value of the lease liability before remeasurement P1,300,000
Carrying amount of the right of use asset 740,000
Required: Prepare the necessary journal entry.
Case 1: Assume that the present value of lease liability as remeasured amounted to P1,400,000.
Case 2: Assume that the present value of lease liability as remeasured amounted to P140,000.
Case 1:
Right of use asset P100,000
Lease liability P100,000
To record the increase in lease liability.
Case 2:
Lease liability P1,160,000
Income from remeasurement of lease liability 410,000
To record the decrease in lease liability
Lease modifications Lessee
Lease modification may either be:

1. Accounted for as a separate lease
2. Not accounted for as a separate lease
Accounted for as a separate Lease

A lessee shall account for a lease
modification as a separate lease if
both:
a. The modification increases
the scope of the lease by
adding the right to use one or
more underlying assets; and
b. The consideration for the
lease increases by an
amount commensurate with
the stand-alone price for the
increase in scope and any
appropriate adjustments to
that stand-alone price to
reflect the circumstances of
the particular contract.
Not Accounted for as a separate

lease
Not accounted for as a separate lease
may either be:
1. Decrease in the scope of lease
term
2. Other lease modification
3.
For a lease modification that is not
accounted for as a separate lease,
at the effective date of the lease modification a lessee shall:
a. allocate the consideration in the modified contract;
b. determine the lease term of the modified lease and
c. remeasure the lease liability by discounting the revised lease payments using a revised
discount rate. The revised discount rate is determined as the interest rate implicit in the
lease for the remainder of the lease term, if that rate can be readily determined, or the
lessee’s incremental borrowing rate at the effective date of the modification, if the interest
rate implicit in the lease cannot be readily determined.
For a lease modification that is not accounted for as a separate lease, the lessee shall account for
the remeasurement of the lease liability by:
a. (Decrease in the scope of lease term) decreasing the carrying amount of the right-of-
use asset to reflect the partial or full termination of the lease for lease modifications that
decrease the scope of the lease. The lessee shall recognise in profit or loss any gain or loss
relating to the partial or full termination of the lease.
b. (Other lease modification) making a corresponding adjustment to the right-of-use asset
for all other lease modifications.
Accounted for as a separate Lease
Problem 1: (Accounted for as a Separate Lease) On January 1, 20x18, Lessee Company enters into a 10-year
lease for 5,000 square meter of office space for annual lease payment of P150,000 every December 31. The lessee’s
incremental borrowing rate at the commencement date is 10%. On January 1, 20x22, when the present value of
the lease liability is P653,289 and the carrying amount of the right-of-use asset is P553,011, Lessee and Lessor agree
to amend the original lease for the remaining six years to include an additional 3,000 square meters of office space
in the same building for additional payment of P90,000 per year. The increase in total consideration for the lease is
commensurate with the current market rate for the new 3,000 square meters of office space, adjusted for the discount
that Lessee receives reflecting that lessor does not incur costs that it would otherwise have incurred if leasing the
same space to a new tenant (for example, marketing costs). Assume that the lessee’s incremental borrowing rate
did not change.
Required: Prepare the journal entry to record the lease of the 3,000 square meters is treated as a separate lease.
Right of use asset (P90,000 x *4.35526) P391,973

*Present value of ordinary annuity for six periods using 10% rate.
The total present value of lease liability is computed as follows:

Present value of lease liability-original lease P653,289
Add: Present value of a separate lease (P90,000 x 4.35526) 391,973
Total present value of the lease liability P1,045,263
The total carrying amount of the right of use asset is computed as follows:
Carrying amount of the right of use asset P553,011
Add: Present value of a separate lease (P90,000 x 4.35526) 391,973
Total carrying amount of the right of use asset P944,984
Problem 2: (Modification that increases the scope of the lease by extending the contractual lease term)
On January 1, 20x18, Lessee Company enters into a 10-year lease for 5,000 square meters of office space for annual
lease payment of P150,000 every December 31. The lessee’s incremental borrowing rate at the commencement
date is 10%. On January 1, 20x22, when the present value of the lease liability is P653,289 and the carrying amount
of the right-of-use asset is P553,011, Lessee and Lessor agree to amend the original lease by extending the
contractual lease term by five years.
Required: Prepare the journal entry to record the increase in lease liability.
The annual lease payments are unchanged (P150,000 payable at the end of 5th to 15th year). Lessee’s incremental
borrowing rate at the beginning of 20x22 is 12% per annum.
Present value of the modified lease liability (P150,000 x 5.9377) P890,655

Less: Present value of lease liability – original lease (653,289)
Increase in the lease liability P237,366
Present value of ordinary annuity using 12% for 11 periods (10-4+5) = 11 periods.

Not accounted for as a separate Lease
Problem 3: (Modification that decreases the scope of the lease) On January 1, 20x18, Lessee Company enters
into a 10-year lease for 5,000 square meters of office space for annual lease payment of P150,000 every December
31. The lessee’s incremental borrowing rate at the commencement date is 10%. On January 1, 20x22, when the
present value of the lease liability is P653,289 and the carrying amount of the right-of-use asset is P553,011, Lessee
and Lessor agree to amend the original lease to reduce the space to only 2,500 square meters of the original space
starting from the end of the first quarter of 20x22. The annual fixed lease payments (from January 1, 20x22 to
December 31, 20x27) are P90,000. Lessee’s incremental borrowing rate at the beginning of 20x22 is 12% per
annum.
Required: Prepare the necessary journal entries.
Decrease in lease liability is computed as follows:

Present value of lease liability – original lease P653,289
Multiply by: Proportionate decrease in carrying amount (2,500/5,000) 50%
Decrease in the lease liability P326,645
Decrease in the carrying amount of the right-of use asset is computed as follows:
Carrying amount of right of use asset P553,011
Multiply by: Proportionate decrease in carrying amount (2,500/5,000) 50%
Decrease in the carrying amount of the right-of-use asset P276,506
The journal entry is:

Gain on lease modification 50,139
To record the decrease in lease liability.
Increase in liability is computed as follows:

Less: Present value of remaining lease liability (P90,000 x 4.1114) (326,645)
Increase in the lease liability P43,382
*Present value of ordinary annuity using 12% using revised discount rate for 6 periods.

Problem 4: (Modification that is a change in consideration only) On January 1, 20x18, Lessee Company
enters into a 10-year lease for 5,000 square meters of office space for annual lease payment of P150,000 every
December 31. The lessee’s incremental borrowing rate at the commencement date is 10%. On January 1, 20x22,
when the present value of the lease liability is P653,289 and the carrying amount of the right-of-use asset is
P553,011, Lessee and Lessor agree to amend the original lease to reduce the lease payments from P150,000 per
year to P100,000 per year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental
borrowing rate at the beginning of 20x22 is 12% per annum. The annual lease payments are payable at the end of
each year.
Required: Prepare the necessary journal entries.

Less: Present value of remaining lease liability – original lease 653,289
Decrease in the lease liability (P242,149)
Present value of ordinary annuity of the revised payment using 12% (revised discount rate) for 6 periods.

Lease modifications - Lessor
A lessor shall account for a

modification to a finance lease as a
separate lease if both:
a. the modification increases
the scope of the lease by
adding the right to use one
or more underlying assets;
and
b. the consideration for the
lease increases by an
amount commensurate
with the stand-alone price
for the increase in scope
and any appropriate
adjustments to that stand-
alone price to reflect the
circumstances of the
particular contract.
For a modification to a finance lease

that is not accounted for as a
separate lease, a lessor shall
account for the modification as
follows:
a. if the lease would have
been classified as an
operating lease had the
modification been in effect at the inception date, the lessor shall:
1. account for the lease modification as a new lease from the effective date of the
modification; and
2. measure the carrying amount of the underlying asset as the net investment in the lease
immediately before the effective date of the lease modification.
b. otherwise, the lessor shall apply the requirements of IFRS 9.
How does this apply to a modification to a finance lease that is a not a separate lease and that would
have been classified as a finance lease if the modification had been in effect at inception?
When a modified finance lease is not accounted for as a separate lease and would have been classified as a finance
lease had the modification been in effect at the inception date, the new standard requires the lessor to apply IFRS
9. However, a number of issues arise due to conceptual differences between the two standards. It is unclear how
to apply that guidance in practice. These differences include the following (the list is not exhaustive).
Under IFRS 16 Under IFRS 9

Measurement on initial A finance lease receivable is A new financial asset is measured at
recognition measured at an amount equal to the an amount equal to fair value plus
net investment in the lease.
directly attributable transaction
costs.
Discount rate A finance lease receivable is A financial asset in the scope of IFRS
measured using the interest rate 9 that is classified as measured at
implicit in the lease. amortised cost is accounted for using
an effective interest rate. This is the
rate that, on initial recognition,
equalises the fair value of the
financial asset plus transaction costs
to the future cash flows.
Cash flows Only certain types of cash flows are Cash flows are determined based on
considered when determining the the estimated amounts by
net investment in the lease. Many of considering all contractual terms and
the variable cash flows (e.g. variable include the estimate of all variability
lease payments not depending on in cash flows. Estimated cash flows
indexes or rates) are ignored. are revised when there is a change
Reassessment of cash flows is made in the underlying facts and
only in certain circumstances (e.g. if circumstances of cash flows.
there is a change in the non-
cancellable period of a lease).
Unguaranteed residual value Unguaranteed residual value is No equivalent is included in the

included in the measurement of the measurement of a financial asset in
finance lease receivable. the scope of IFRS 9.
Lessor modifications to operating leases

IFRS 16.87 A lessor accounts for a modification to an operating lease as a new lease from the effective date of
the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the
lease payments for the new lease.
Recall the following concepts:

Accounting for leases by a lessor:
Finance lease Operating lese
Statement of financial position Statement of financial position
 Derecognize leased asset and recognized net  Continue to recognize leased asset (and its
investment in the lease depreciation).
 Does not recognize net investment in the
lease.
Statement of P/L and OCI Statement of P/L and OCI
 Recognize interest income and in the case of  Recognize lease payments as income using
a sales type lease, a manufacturer or dealer straight line basis (or another more
profit at the commencement date appropriate basis) over the lease term.
Problem 1: (Actual sale of leased asset) On January 1, 20x1, ABC Co. leased equipment to XYZ, Inc.. Information
on the lease is shown below.
Cost of equipment P303,735
Useful life of equipment 5 years
Lease term 4 years
Annual rent payable at the end of each year 110,000
Maintenance cost, included in annual rent 10,000
Interest rate implicit in the lease 12%
Additional information:
 The maintenance services are considered separate performance obligation under PFRS 15 Revenue from
Contracts with Customers. The P10,000 cost reflects the stand-alone selling price.
 The lease is classified as a direct financing lease.
Solution:
Initial measurement
Total consideration allocated to lease payments (110,000 – 10,000) = P100,000.
Under PFRS 15, the transaction price is allocated to each performance obligation identified in a contract based on the
relative stand alone prices of the distinct goods or services promised to be transferred.
Fixed lease payments P100,000

Multiply by: PV of ordinary annuity of P1 @ 12%, n=4 3.03735
Net investment in the lease P303,735
Subsequent measurement
Amortization table:
Date Collection Interest Amortization Present value
1/1/x1 303,735
12/31/x1 100,000 36,448 63,552 240,183
12/31/x2 100,000 28,822 71,178 169,005
12/31/x3 100,000 20,281 79,719 89,286
12/31/x4 100,000 10,714 89,286 0
Lease modification (Not accounted for as a separate lease)
On January 1, 20x3, due to cash flow problems, ABC agreed to sell outright the equipment to XYZ, Inc. for P150,000.
Jan. 1, 20x3 Cash 150,000

Unearned interest (200,000 – 169,005) 30,995
Loss (squeeze) 19,005
Finance lease receivable (100,000x2) 200,000
Alternatively, the gain or loss may also be computed as follows:
Sale price P150,000

Carrying amount of receivable (see amortization table above) (169,005)
Loss (19,000)
LESSOR ACCOUNTING
Lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of
leases differently. PFRS 16 also requires disclosures to be provided by lessors that will improve information
disclosed about a lessor’s risks exposure, particularly to residual value risk.
Sublease. A transaction
for which an underlying
asset is re-leased by a
lessee (‘intermediate
lessor’) to a third party,
and the lease (‘head
lease’) between the
head lessor and lessee
remains in effect.
Sublease
classification
In classifying a sublease,
an intermediate lessor
shall classify the
sublease as a finance
lease or an operating
lease as follows:
a. If the head
lease is a short-
term lease that
the entity, as a
lessee, has
accounted for
the sublease
shall be
classified as an
operating lease.
b. Otherwise, the sublease shall be classified by reference to the right-of use asset arising from the head
lease, rather than by reference to the underlying asset (for example, the item of property, plant or
equipment that is the subject of the lease).
Problem (Sublease classified as a finance lease) On January 1, 20x18, Lessee Company enters into a 10-year
lease for 5,000 square meters of office space for annual lease payment of P150,000 every December 31. The rate
implicit in the lease at the commencement date is 10%. On January 1, 20x22, when the present value of the lease
liability is P653,289 and he cost of right of use asset is P921,685 and accumulated depreciation of P368,674, the
Lessee (intermediate lessor) subleases the 5,000 square meters of office space for the remaining terms of 6 years
to the sublessee for P180,000 when the implicit rate of 9%.
Required:
Case 1: Assuming the intermediate lessor treats the sublease as a finance lease.
Case 2: Assuming the intermediate lessor treats the sublease as an operating lease.
Case 1: Sublease as finance lease
The journal entry on the part of intermediate lessor is:

1/01/20x22 Lease Receivable (180,000x 6) P1,080,000
Accumulated depreciation 368,674
Unearned interest income (1,080,000 – 807,465) 272,535
Gain on subleasing 254,454
12/31/20x22 Cash 180,000

Lease receivable 180,000
Unearned interest income 72,672

Interest income (807,465 x 9%) 72,672
Note: Present value of the net investment is P807,465 computed as P180,000 x 4.4859, which is the present value
of 9% for the remaining 6 periods.
When the intermediate lessor enters into the sublease, the intermediate lessor.
a. Derecognizes the right of use asset relating to the head lease that it transfers to the sublease in profit or
loss; and
b. Recognizes any difference between the right of use asset and the net investment in the sublease in profit
or loss; and
c. Retains the lease liability relating to the head lease in its statement of financial position, which represents
the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognizes both finance income on the sublease and interest
expense on the head lease.
The journal entry on the part of the sublessee is:

1/1/20x22 Right of use asset P807,465
12/31/20x22 Depreciation expense 134,577

Accumulated depreciation (807,465 / 6) 134,577
Interest expense (807,465 x 9%) 72,672

Lese liability (180,000 – 72,672) 107,328
Cash 180,000
Case No. 2: Sublease as operating lease
The journal entry on the part of intermediate lessor is:

1/1/20x22 No journal entry
12/31/20x22 Cash 180,000

Rent income 180,000
Depreciation (P921,685/10) 92,169

During the term of the sublease, the intermediate lessor.

a. Recognizes a depreciation charge for the right of use asset and interest on the lease liability; and
b. Recognizes lease income from the sublease.
The journal entry on the part of the sublessee is:

1/1/20x22 Right of use asset P807,465
12/31/20x22 Depreciation expense 134,577

Accumulated depreciation (807,465 / 6) 134,577
Interest expense (807,465 x 9%) 72,672

Lese liability (180,000 – 72,672) 107,328
Cash 180,000
On December 31,2013, the accounts of Simple Company have the same basis for accounting and tax purposes, except
the following:
Carrying amount Tax base Difference

Computer software cost 4,000,000 0 4,000,000
Equipment 15,000,000 12,000,000 3,000,000
Accrued liability-health care 2,000,000 0 2,000,000
In January 2013, the entity incurred cost of P6,000,000 in relation to the development of a computer software product.
The software cost was appropriately capitalized and amortized over 3 years for accounting purposes using straight
line. However, the total amount was expensed in 2013 for tax purposes. The equipment was acquired on January
1,2013 for P20,000,000. The useful life is 4 years with no residual value. The equipment is depreciated using the
straight line for accounting purposes and sum of years' digits method for tax purposes.
In January 2013, the entity entered into an agreement with the employees to provide health care benefits. The cost of
such plan for 2013 was P2,000,000. This amount was accrued as expense in 2013 for accounting purposes. However,
health care benefits are deductible for tax purposes only when actually paid. The pretax accounting income for 2013
is P13,000,000. The tax rate is 30% and there are no deferred taxes on January 1, 2013.
i. What is the current tax expense for 2013?

A. 1,500,000 C. 3,300,000
B. 2,400,000 D. 3,900,000
ii. What is the deferred tax expense for 2013?

A. 600,000 C. 2,100,000
B. 1,500,000 D. 2,700,000
iii. What is the total tax expense for 2013?

A. 1,500,000 C. 4,500,000
B. 3,900,000 D. 5,100,000
i. Answer is (B).
Pretax accounting income 13,000,000
Future taxable amount (7,000,000)
Future deductible amount 2,000,000
Taxable income 8,000,000
Current tax expense (30% x 8,000,000) 2,400,000
ii. Answer is (B).

Computer software cost 4,000,000
Equipment 3,000,000
Total taxable temporary difference 7,000,000
Deferred tax liability- 12/31/2013 (30% x 7,000,000) 2,100,000
If the carrying amount of an asset is higher than tax base, the difference is a future taxable amount and
therefore, there is a deferred tax liability.
Deferred tax asset - 12/31/2013 (30% x 2,000,000) 600,000
If the carrying amount of a liability is higher than tax base, the difference is a future deductible amount and therefore,
there is a deferred tax asset.
Increase in deferred tax liability 2,100,000
Increase in deferred tax asset ( 600,000)
Deferred tax expense 1,500,000
iii. Answer is (B).

Total tax expense (30% x 13,000,000) 3,900,000
Another approach
Current tax expense 2,400,000
Deferred tax expense 1,500.000
Total tax expense 3,900,000
i. Pat Company reported a pretax accounting income of P5,000,000 for the current year.
The following items are included in the determination of the accounting income:
Estimated litigation loss which will become tax
deductible when settled in the future 300,000
Dividend received - net of final tax 100,000
Revenue from an installment sale which will be recognized as
taxable income as received over the next three years 600,000
Income tax rate 30%
What amount should be reported as current tax expense for the current year?
A. 1,380,000 C. 1,500,000
B. 1,470,000 D. 1,560,000
i. Answer is (A).
Pretax accounting income 5,000,000
Dividend received (100,000)
Financial income subject to tax 4,900,000
Estimated litigation loss 300,000
Revenue from installment sale (600,000)
Taxable income 4,600,000
Current tax expense (30% x 4,600,000) 1,380,000
Matching accounting changes to situations.: The three types of accounting changes, including error
correction, are:
Code
a. Change in accounting policy.
b. Change in accounting estimate.
c. Error correction.
Instructions
Following are a series of situations. You are to enter a code letter to the left to indicate the type of
change. 1. Change due to understatement of inventory.
___ 2.Change due to charging a new asset directly to an expense account.
____ 3. Change from expensing to capitalizing certain costs, due to a change in periods
benefited.
____ 4. Change from FIFO to average-cost inventory procedures.
____ 5. Change due to failure to recognize an accrued (uncollected) revenue.
____ 6. Change in amortization period for an intangible asset.
____ 7. Change in expected recovery of an account receivable.
____ 8. Change in the loss rate on warranty costs.
____ 9. Change due to failure to recognize and accrue income.
____ 10. Change in residual value of a depreciable plant asset.
____ 11. Change from an unacceptable to an acceptable accounting policy.
____ 12. Change in both estimate and acceptable accounting policies.
____ 13. Change due to failure to recognize a prepaid asset.
___ 14. Change from straight-line to sum-of-the-years'-digits method of depreciation.
____ 15. Change in life of a depreciable plant asset.
____ 16. Change from one acceptable policy to another acceptable policy.
REVIEW QUESTIONS
Problem 1: (Allocate Transaction Price) Baby Company manufactures equipment. Baby’s products range from simple automated
machinery to complex systems containing numerous components. Unit selling prices range from P200,000 to P1,500,000 and are
quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require
proprietary information about the equipment in order for the installed equipment to perform to specifications. Baby has the following
arrangement with Shark Inc.
• Shark purchases equipment from Baby for a price of P1,000,000 and contracts with Baby to install the equipment. Baby charges the
same price for the equipment irrespective of whether it does the installation or not. Using market data, Baby determines installation
service is estimated to have a standalone selling price of P50,000. The cost of the equipment is P600,000.
• Shark is obligated to pay Baby the P1,000,000 upon the delivery and installation of the equipment. Baby delivers the equipment on
June 1, 20x1, and completes the installation of the equipment on September 30, 20x1. The equipment has a useful life of 10 years.
Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.
Instructions
(a) How should the transaction price of P1,000,000 be allocated among the service obligations?
(b) Prepare the journal entries for Baby for this revenue arrangement on June 1, 20x1 and September 30, 20x1, assuming Baby
receives payment when installation is completed.
(a) The total revenue of P1,000,000 should be allocated to the two performance obligations based on their standalone selling prices.
In this case, the standalone selling price of the equipment should be considered P1,000,000 and the standalone selling price of
the installation fee is P50,000. The total standalone selling price to consider is P1,050,000 (P1,000,000 + P50,000). The
allocation is as follows.
Equipment (P1,000,000 / P1,050,000) X P1,000,000 = P952,381

Installation (P50,000 / P1,050,000) X P1,000,000 = P 47,619
(b) Baby makes the following entries.
June 1, 20x1
Accounts Receivable ........................................................................ 1,000,000

Unearned Service Revenue (Installation) ................................. 47,619
Sales Revenue (Equipment) ................................................... 952,381
Cost of Goods Sold .......................................................................... 600,000

Inventory............................................................................. 600,000
September 30, 20x1
Unearned Service Revenue ............................................................... 47,619

Service Revenue (Installation) ................................................ 47,619
Cash ............................................................................1,000,000
Accounts Receivable .............................................................. 1,000,000
The sale of the equipment should be recognized upon delivery, as the customer controls the asset and therefore Baby's
performance obligation is met. Service revenue for the installation is recognized on September 30, 20x1 - the services have
been provided and the performance obligation is satisfied.
Problem 2: (Allocate Transaction Price) Refer to the revenue arrangement in Problem 1.
Instructions: Repeat requirements (a) and (b) assuming Baby does not have market data with which to determine the standalone
selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is P36,000;
Baby prices these services with a 25% margin relative to cost.
(a) The total revenue of P1,000,000 should be allocated to the two performance obligations based on their standalone selling prices.
In this case, the standalone selling price of the equipment should be considered P1,000,000 and the standalone selling price of
the installation fee, assuming a cost-plus approach is P45,000 [(P36,000 + (25% X P36,000)]. The total standalone selling
price to consider is P1,045,000 (P1,000,000 + P45,000). The allocation is as follows.
Equipment (P1,000,000 / P1,045,000) X P1,000,000 = P 956,938

Installation (P45,000 / P1,045,000) X P1,000,000 = P 43,062
(b) Baby makes the following entries.
June 1, 20x1
Accounts Receivable ........................................................................ 1,000,000

Unearned Service Revenue (Installation) ................................ 43,062
Sales Revenue (Equipment) ................................................... 956,938
Cost of Goods Sold .......................................................................... 600,000

Inventory............................................................................. 600,000
September 30, 20x1
Unearned Service Revenue ............................................................... 43,062

Service Revenue ................................................................... 43,062
Cash .......................................................................................... 1,000,000

Accounts Receivable .............................................................. 1,000,000
Income and Expense Recognition-Batch May 2020 Page 1 of 2

Philippine Interpretations Committee (PIC) Q&A No. 2019 – 1 Accounting for service charges under PFRS 15, Revenue from
Contracts with Customers
Issue: Should service charge be excluded from the transaction price in a contract to sell services to a restaurant customer or hotel
guest?
Consensus
Under PFRS 15, revenue is measured at the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer and should exclude amounts collected on behalf of third parties. Treatment
of the service charge should be as follows:
 Portion due to the employees (85%*** of the collected service charge) – should be excluded from the transaction price
Paragraph 47 of PFRS 15 defines transaction price as “the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third
parties”. The 85% of the collected service charge represents benefits that are directly distributable / attributable to the
employees as required by the Labor Code of the Philippines. Given the mandate of the law, the 85% of the collected service
charge does not form part of the transaction price. It should be recognized as a liability to the employees.
 Remaining portion (15% or lower if the customary business practice of the company is to remit more than 85% to the
employees) - should be included in the transaction price because this is an additional consideration in exchange for the
goods and services provided and benefits directly inure to the hotel/restaurant.
*** If the hotel or restaurant has made it a practice to remit a higher percentage of the service charge to the
employees (e.g., 90%), then this becomes the percentage that the hotel/restaurant is legally bound to continually
remit to the employees. The hotel/restaurant cannot just decide to reduce it as it would be a violation of the principle
of “non-diminution of benefits” that is provided for in the Labor Code.
Note:
Currently, a minimum of 85% of the collected service charge is distributed to covered employees every month (bi-monthly for some
hotels). Commonly, employees entitled for service charge distribution are the local regular employees of the hotels and restaurants.
The service charge distributed to employees is subjected to withholding taxes on compensation. The remaining service charge is
retained by the hotels and restaurants and is ultimately recognized as income. The portion retained by the hotels and restaurants
is normally used to cover for breakages incurred by the hotel and restaurant employees (i.e., damaged operating equipment).
There are also certain hotels who are distributing more than the 85% requirement (e.g. about 90% to 95%) of the collected
service charge to the covered employees. Hotel and restaurant establishments that distribute more than the 85% minimum
requirement cannot just reduce the rate of distributed service charge as it would violate the “non-diminution of benefits” principle
of the Labor Code.
REVIEW QUESTIONS
1. Restaurant establishment
A bill was presented to a customer for food and beverage consumption in a restaurant with the following information:
Food and beverage Php500
Service charge 50
The service charge is allocated as follows: Employees 85%; Entity 15%
Required: In accordance with PIC Q&A 2019, the entity should recognize revenue of_____
The transaction price will be Php507.50 (Food and beverage of Php500 + management’s share on the service charge = 15% x
Php50).
The restaurant prepares the following journal entry to record revenue upon rendering of services:
Particulars Dr Cr
Cash / Receivable Php550.00
Revenue Php507.50
Liability for employees’ share in service charge 42.50
2. Hotel room accommodation

A guest folio was presented to the hotel guest upon check-out for a one (1) night room stay in the hotel. Breakdown of
the guest folio amount is presented below:
Room night Php7,500
Service charge 750
The service charge is allocated as follows: Employees 85%; Entity 15%
Required: In accordance with PIC Q&A 2019, the entity should recognize revenue of_____
The transaction price will be Php7,612.50 (Room night of Php7,500 + management’s share of the service charge = 15% x Php750).
The hotel prepares the following journal entry to record revenue upon rendering of services:
Particulars Dr Cr
Cash / Receivable Php8,250.00
Revenue Php7,612.50
Liability for employees’ share in service charge 637.50
Page 2 of 2
10. Illustrate the computation of cost of sales of a merchandising concern.
The cost of sales of a merchandising concern is computed as follows (all amounts are assumed):
Beginning inventory 500,000

Net purchases . 2,000,000
Goods available for sale 2,500,000
Ending inventory ( 300,000)
Cost of sales 2,200,000
Gross purchases 1,900,000
Freight in , 150,000
Total 2,050,000
Purchase returns, allowances and discounts ( 50,000)
Net purchases 2,000,000
11. Illustrate the computation of cost of goods sold of a manufacturing concern.
The cost of goods sold of a manufacturing concern is computed as follows (all amounts are assumed):
Beginning raw materials 500,000

Raw materials available for use 2,500,000
Ending raw materials ( 300,000)
Raw materials used 2,200,000
Direct labor 3,000,000
Factory overhead 1,300,000
Total manufacturing cost 6,500,000
Beginning goods in process 900,000
Total cost of goods in process 7,400,000
Ending goods in process (1,000,000)
Cost of goods manufactured 6,400,000
Beginning finished goods 1,600,000
Ending finished goods (1,500,000)
Cost of goods sold 6,500,000
17. Illustrate the functional presentation or cost of sales method of presenting income statement.
"Functional" income statement (amounts are assumed)

EXAMPLAR COMPANY
Income Statement
Year ended December 31,2013
Net sales 9,000,000
Cost of sales (5,400,000)
Gross income 3,600,000
Other income 900,000
Investment income 500,000
Total income 5,000,000
Expenses:
Distribution costs 1,350,000
Administrative expenses 1,000,000
Other expenses 320,000
Finance cost 200,000 2,870,000
Income before tax 2,130,000
Income tax expense 580,000
Net income 1,550,000
18. Illustrate the natural presentation.
"Natural" presentation (amounts are assumed)
EXAMPLAR COMPANY
Income Statement
Net sales 9,000,000

Expenses:
Increase in inventory ( 500,000)
Employee benefit cost 1,400,000
Sales commission 180,000
Advertising 100,000
Supplies expense 120,000
Delivery expense 250,000
Depreciation 240,000
Taxes and licenses 20,000
Doubtful accounts 40,000
Finance cost 200,000 8,270,000
19. Which form of income statement is required by the standard?
PAS 1 does not prescribe any format. Paragraph 105 simply states that "because each method of presentation
has merit for different types of entities, management is required to select the presentation that is reliable and
more relevant".
20. Illustrate a statement of comprehensive income.

Using the net income in the preceding illustration, the statement may appear as follows:
EXAMPLAR COMPANY
Statement of Comprehensive Income
Other comprehensive income:
Foreign currency translation gain 150,000
Unrealized loss on derivative contract
designated as cash flow hedge (100,000) 50,000
Comprehensive income 1,600,000
Comprehensive income for a period includes the net income or loss for the period plus or minus the components
of other comprehensive income.
However, the comprehensive income of Pi,600,000 is not carried to retained earnings. Only the net income of
PI,550,000 is included in the determination of retained earnings unappropriated.
The net other comprehensive income of P50,000 is carried to "reserves" or shown separately in the statement of
changes in equity.
21. Illustrate a "single" statement of comprehensive income.
The single statement of comprehensive income following the "functional presentation" may appear as follows
EXAMPLAR COMPANY
Statement of Comprehensive Income
Year ended December 31, 2013
Net sales 9,000.000
Expenses:
Finance cost 200,000 2,870,000
Foreign currency translation gain ' 150,000
Unrealized loss on derivative contract
designated as cash flow hedge ( 100,000) 50,000
22. What is a statement of retained earnings?
The statement of retained earnings shows the changes affecting directly the retained earnings of an entity and
relates the income statement to the statement of financial position.
The important data affecting the retained earnings that should be clearly disclosed in the statement of retained
earnings are:
a. Profit or loss for the period

b. Prior period errors
c. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings
23. Illustrate a statement of retained earnings.
Illustration (all amounts are assumed)

EXAMPLAR COMPANY
Statement of Retained Earnings
Retained earnings, January 1 1,000,000

Correction of error resulting
from prior year underdepreciation ( 100,000)
Change in accounting policy from weighted average
to FIFO inventory valuation resulting in increase 300,000
Corrected beginning balance 1,200,000
Net income for the period 1,550,000
Dividends declared during the year ( 400,000)
Appropriated for contingencies ( 200,000)
Retained earnings, December 31 2,150,000
24. What is a statement of changes in equity?
The statement of changes in equity is a basic statement that shows the movements in the elements or
components of the shareholders' equity.
Under PAS 1, the holders of instruments classified as equity are simply known as "owners".
The statement of retained earnings is no longer a required basic statement but it is a part of the statement of
changes in equity.
25. What are the components of the statement of changes in equity?
a. Comprehensive income for the period.
b. For each component of equity, the effects of changes in accounting policies and corrections of errors.
c. For each component of equity, a reconciliation between the carrying amount at the beginning and end of
the period, separately disclosing changes from:
1. Profit or loss
2. Each item of other comprehensive income
3. Transactions with owners in their capacity as owners showing separately contributions by and
distributions to owners
26. Illustrate a statement of changes in equity.

Illustration - all amounts are assumed
EXAMPLAR COMPANY
Statement of Changes in Equity
Year ended December 31, 2013
Share Retained
capital Reserves earnings
Balances - January 1 5,000,000 2,000,000 1,000,000
Correction of error resulting from prior
year underdepreciation ( 100,000)
Change in accounting policy from
weighted average to FIFO - credit 300,000
Issuance of 10,000 ordinary shares
with P100 par at P150 per share 1,000,000 500,000
Issuance of 5,000 preference shares
with P50 par at P100 per share 250,000 250,000
Comprehensive income:
Other comprehensive income 50,000
Dividends declared during the year ( 400,000)
Current appropriation for
contingencies 200,000 ( 200,090)
Balances - December 31 6,250,000 3,000,000 2,150,000
Gross sales
i. Tactful Company reported that the operating expenses other than interest expense for the current year amount
to 40% of cost of sales but only 20% of sales. Interest expense is 5% of sales. The amount of purchases is
120% of cost of sales. Ending inventory is twice as much as the beginning inventory. The income after tax of
30% for the current year is P560,000. What is the amount of sales for the current year?
A. 1,485,000 C. 2,285,000
B. 2,080,000 D. 3,200,000 P1 © 2014
ii. The expenses other than interest expense of Maria Company for the current year is 40% of cost of sales but only
20% of sales. Interest expense is 5% of sales. The amount of purchases is 120% of cost of sales. Ending
inventory is twice as much as the beginning. The income after tax of 30% for the current year is P350,000. What
is the amount of sales for the current year?
A. 1,300,000 C. 2,000,000
B. 1,625,000 D. 2,500,000 FA © 2014
iii. Bicolano Company provided the following information for the current year:
Inventory, January 1 2,000,000
Purchases 7,500,000
Purchase returns and allowances 500,000
Sales returns and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate on net sales 20%
What is the amount of gross sales for the current year?
A. 7,000,000 C. 8,500,000
B. 7,750,000 D. 9,125,000 FA © 2014
Gross purchases
iv. Hiligaynon Company provided the following information for the current year
Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000
The cost of goods sold is six times the selling expenses.
What is the amount of gross purchases?
A. 6,500,000 C. 8,000,000
B. 6,700,000 D. 8,200,000 FA © 2014
Direct labor
v. Mercury Company showed cost of goods sold of P4,320,000 in its statement of comprehensive income after the
first year of operations. The total manufacturing cost comprised 50% materials used, 30% direct labor incurred, and
20% manufacturing overhead. Goods in process at year-end were 10% of the total manufacturing cost. Finished goods
at year-end amounted to 20% of the cost of goods manufactured. What is the amount of the direct labor cost incurred?
A. 1,800,000 C. 3,000,000
B. 2,400,000 D. 5,400,000 FA © 2014
Cost of good manufactured

vi. Sheraton Company reported the following information for the current year.
Ending goods in process 1,000,000
Depreciation on factory building 320,000
Factory supervisor's salary 560,000
Depreciation on headquarters building 210,000
Ending raw materials 340,000
Indirect labor 360,000
Purchases of raw materials 2,300,000
What is the cost of goods manufactured for the current year?
A. 5,340,000 C. 5,580,000
B. 5,550,000 D. 5,820,000 FA © 2014
vii. Argentina Company incurred the following costs and expenses during the current year:
Raw material purchases 4,000,000
Indirect labor - factory 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation - factory building 300,000
Taxes on salesroom and general office 150,000
Depreciation - sales equipment 50,000
Advertising 400,000
Sales salaries 500,000
Office salaries 700,000
Utilities (60% applicable to factory) 500,000
Beginning Ending
Raw materials 300,000 450,000
Work in process 400,000 350,000
Finished goods 500,000 700,000
What is the cost of goods manufactured for the current year?
A. 6,900,000 C. 7,200,000
B. 7,100,000 D. 7,300,000 P1 © 2014
viii. Vane Company provided the following income statement accounts for the current year:
Debit Credit
Sales 5,750,000
Administrative expenses 700,000
Loss on sale of equipment 100,000
Sales commissions 500,000
Interest revenue 250,000
Freight out 150,000
Loss on early retirement of long-term debt 200,000
Uncollectible accounts expense 150,000 .
4,200,000 6,000,000
Finished goods inventory:
January 1 4,000,000
December 31 3,600,000
What amount should be reported as cost of goods manufactured?
A. 2,000,000 C. 2,800,000
B. 2,150,000 D. 2,950,000 P1 © 2014
Cost of goods sold

ix. Mite Company provided the following data for the current year:
Finished goods inventory, January 1 1,000,000
Finished goods inventory, December 31 1,200,000
Loss on sale of plant equipment 100,000
What is the cost of goods sold for the current year?
A. 4,800,000 C. 5,200,000
B. 4,900,000 D. 5,300,000 FA © 2014
x. Dell Company provided the following information for the current year:
Purchases 5,300,000
Purchase discounts 100,000
Beginning inventory 1,600,000
Ending inventory 2,150,000
Freight out 400,000
A. 4,650,000 C. 5,050,000
B. 4,750,000 D. 5,850,000 FA © 2014
xi. Bart Company provided the following information for the current year:
Disbursements for purchases 5,800,000
Increase in trade accounts payable 500,000
Decrease in merchandise inventory 200,000
A. 5,100,000 C. 6,100,000
B. 5,500,000 D. 6,500,000 FA © 2014
xii. Diane Company provided the following information in relation to cost of goods sold for the current year:
Purchases 6,000,000
Loss on inventory writedown 1,500,000
Inventory, December 31 at net realizable value 1,000,000
The inventory writedown is due to an unexpected and unusual technological advance by a competitor. In the
income statement, what amount should be reported as cost of goods sold after inventory writedown?
A. 8,000,000 C. 9,250,000
B. 9,000,000 D. 9,500,000 FA © 2014
xiii. Kay Company provided the following information for the current year:
Increase in goods in process inventory 500,000
Increase in raw materials inventory 150,000
Decrease in finished goods inventory 350,000
Raw materials purchased 4,300,000
Direct labor payroll 2,000,000
Freight out 450,000
A. 8,650,000 C. 9,150,000
B. 9,000,000 D. 9,300,000 FA © 2014
xiv. Kay Company provided the following information for the current year:
Increase in raw materials inventory 150,000
Decrease in goods in process inventory 200,000
Decrease in finished goods inventory 350,000
Direct labor payroll 2,000,000
Freight out 450,000
Freight in 250,000
A. 9,150,000 C. 9,550,000
B. 9,250,000 D. 9,950,000 P1 © 2014
xv. Condo Company reported the following total debits and total credits in selected accounts after closing entries
were posted:
Debits Credits
Materials 600,000 200,000
Goods in process 500,000 300,000
Material purchases 2,500,000 2,500,000
Purchase discount 100,000 100,000
Transportation in 200,000 200,000
Direct labor 3,000,000 3,000,000
Manufacturing overhead 1,500,000 1,500,000
What is the cost of goods sold for the year?
A. 6,900,000 C. 7,100,000
B. 7,000,000 D. 7,400,000 FA © 2014
xvi. Baker Company reported the following inventories:

Beginning Ending
Raw materials 220,000 300,000
Goods in process 400,000 480,000
During the current year, the following costs were incurred:
Taxes and depreciation of factory building 200,000
Taxes and depreciation on sales room and office 150,000
Utilities (60% applicable to factory, 20% to storeroom, and 20% to office) 500,000
A. 5,140,000 C. 5,220,000
B. 5,210,000 D. 5,390,000 FA © 2014
Gross profit
xvii. Jericho Company showed net income of P480,000 in its income statement for the current year. Selling
expenses were equal to 15% of sales and also 25% of cost of sales. All other expenses were 13% of sales. What is
the gross profit for the current year?
A. 1,600,000 C. 2,400,000
B. 2,000,000 D. 4,000,000 FA © 2014
xviii. Vigor Company provided the following information for the current year:
Net accounts receivable at January 1 900,000
Net accounts receivable at December 31 1,000,000
Account receivable turnover 5 to 1
Inventory at January 1 1,100,000
Inventory at December 31 1,200,000
Inventory turnover 4 to 1
What is the gross margin for the current year?
A. 150,000 C. 300,000
B. 200,000 D. 400,000 P1 © 2014
Total distribution costs

xix. Brock Company reported operating expenses in two categories, namely distribution and general and administrative.
The adjusted trial balance at year-end included the following expense and loss accounts for current year:
Accounting and legal fees 1,200,000
Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers' salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000
One-half of the rented premises is occupied by the sales department.
What amount should be reported as total distribution costs?
A. 3,600,000 C. 4,000,000
B. 3,700,000 D. 4,800,000 P1 © 2014
xx. Parker Company reported operating expenses as distribution cost and general or administrative. The adjusted
trial balance at the end of the current year included the following expense accounts:
Accounting and legal fees 1,450,000
Freight out 750,000
Interest 600,000
Loss on sale of long-term investment 300,000
Property taxes and insurance 300,000
One-half of the rented premises is occupied by the sales department. What total amount should be included in
distribution costs for the current year?
A. 3,650,000 C. 4,900,000
B. 4,550,000 D. 6,000,000 FA © 2014
Administrative expenses
xxi. Griff Company reported the following data for the current year:
Accounting and legal fees 250,000
Freight in 1,750,000
Freight out 1,600,000
Insurance 850,000
Sales representative salaries 2,150,000
What amount should be reported as administrative expenses?
A. 2,600,000 C. 6,350,000
B. 5,500,000 D. 8,100,000 P1 © 2014
xxii. Grim Company incurred the following costs during the current year:
Property taxes 250,000
Freight in 1,750,000
Doubtful accounts 1,600,000
Insurance 850,000
Sales representative salaries 2,150,000
What amount of these costs should be reported as administrative expenses?
A. 2,600,000 C. 4,200,000
B. 3,950,000 D. 5,950,000 FA © 2014
General & administrative expenses

xxiii. Lee Company reported the following data for the current year:
Legal and audit fees 1,700,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing equipment 350,000
The office space is used equally by the sales and accounting departments.
What amount should be classified as general and administrative expenses?
A. 2,900,000 C. 4,100,000
B. 3,250,000 D. 5,000,000 P1 © 2014
Gain on involuntary conversion

xxiv. Ocean Company has a comprehensive insurance policy that allows assets to be replaced at current value. The
policy has a P250,000 deductible clause. One of the entity's waterfront warehouses was destroyed in a winter
storm. Such storms occur approximately every four years. The entity incurred P100,000 of cost in dismantling
the warehouse and plans to replace it. The following data relate to the warehouse:
Current carrying amount 1,500,000
Replacement cost 5,500,000
What amount of gain should be reported as a component of income from continuing operations?
A. 0 C. 3,900,000
B. 3,650,000 D. 5,150,000 P1 © 2014
Income from continuing operations

xxv. Remy Company had the following events and transactions during 2014:
 Depreciation for 2012 was understated by P300,000.
 A litigation settlement resulted in a loss of P250,000.
 The inventory on December 31,2012 was overstated by P200,000.
 The entity disposed of a recreational division at a loss of P500,000.
The income tax rate is 30%. What is the effect of these events on the income from continuing operations for
2014?
A. 175,000 C. 525,000
B. 385,000 D. 665,000 P1 © 2014
xxvi. Ocean Company had a comprehensive insurance policy that allowed assets to be replaced at current value. The
policy has a P250,000 deductible clause. One of the waterfront warehouses was destroyed in a storm surge.
Such storm surge occurs approximately every four years. The entity incurred P100,000 in dismantling the
warehouse and plans to replace it. The following data relate to the warehouse:
Current carrying amount 1,500,000
What amount of gain should be reported as a component of income from continuing operations?
A. 0 C. 3,900,000
B. 3,650,000 D. 5,150,000 FA © 2014
xxvii. Rosebud Company provided the following information for the current year:
Sales 5,000,000
Foreign translation adjustment - credit 400,000
Selling expenses 700,000
Unusual and infrequent gain 400,000
Correction of inventory error 200,000
General and administrative expenses 600,000
Gain on sale of investment 50,000
Proceeds from sale of land at cost 800,000
Dividends 300,000
What amount should be reported as income from continuing operations?
A. 1,200,000 C. 1,600,000
B. 1,350,000 D. 2,000,000 FA © 2014
xxviii.Bangladesh Company provided the following information for the current year:
Sales 50,000,000
General and administrative expenses 4,000,000
Interest expense 2,000,000
Gain on early extinguishment of long-term debt 500,000
Correction of inventory error, net of income tax - credit 1,000,000
Investment income - equity method 3,000,000
Gain on expropriation 2,000,000
Income tax expense 5,000,000
Dividends declared 2,500,000
What is the income from continuing operations?
A. 7,000,000 C. 9,000,000
B. 8,000,000 D. 9,500,000 FA © 2014
xxix. Corazon Company provided the following information for the current year
Sales 7,000,000
Utilities expense 1,000,000
Casualty loss due to earthquake 50,000
Finance cost 200,000
Salaries expense 600,000
Loss on sale of investments 50,000
A. 1,400,000 C. 1,600,000
B. 1,550,000 D. 2,350,000 P1 © 2014
xxx. Igloo Company provided the following information for the current year:
Uncollectible accounts expense 2,000,000
Loss on sale of equipment 1,500,000
Loss from typhoon 3,000,000
Sales 90,000,000
Interest income 4,000,000
Sales commissions 7,000,000
Finished goods inventory, December 31 55,000,000
Income tax rate 30%
A. 18,900,000 C. 27,000,000
B. 19,500,000 D. 30,000,000 P1 © 2014
xxxi. Karla Company reported the following trial balance of income statement accounts for the current year:
Sales 3,000,000
Loss on sale of equipment 180,000
Commissions to salespersons 200,000
Freight out 60,000
Loss on disposal of a major division 200,000
Doubtful accounts 60,000 .
2,200,000 3,100,000
Finished goods inventory:
January 1 2,000,000
December 31 1,800,000
In the income statement for the current year, what is the income from continuing operations before tax?
A. 900,000 C. 1,800,000
B. 1,100,000 D. 1,900,000 FA © 2014
Income before tax

xxxii. Pearl Company reported income before tax of P5,000,000 for the current year. The auditor questioned the
following amounts that had been included in income before tax:
Equity in earnings of Cinn Company - 40% interest 1,600,000
Dividend received from Cinn Company 320,000
Adjustment of profit of prior year for arithmetical error in depreciation (1,400,000)
What amount should be reported as income before tax?
A. 3,400,000 C. 4,800,000
B. 4,680,000 D. 6,080,000 FA © 2014
Net income
xxxiii.Zeno Company maintains a markup of 60% based on cost. The entity's distribution and administrative expenses
average 30% of sales. Sales amounted to P9,600,000 for current year. What is the net income for the current
year?
A. 720,000 C. 2,880,000
B. 960,000 D. 3,600,000 FA © 2014
xxxiv.Ronalyn Company reported that the financial records were destroyed by fire at the end of the current year. However,
certain statistical data related to the income statement are available.
Interest expense 20,000
Sales discount 100,000
The beginning inventory was P400,000 and decreased 20% during the year. Administrative expenses are 25% of cost
of goods sold but only 10% of gross sales. Four-fifths of the operating expenses relate to sale activities. Ignoring
income tax, what is the net income for the current year?
A. 330,000 C. 400,000
B. 380,000 D. 480,000 FA © 2014
xxxv. Dahlia Company provided the following information for the current year:
Sales 9,500,000
Gain sale of equipment 100,000
Revaluation surplus during the year 1,200,000
Share of profit of associate 350,000
Distribution costs 500,000
Translation loss on foreign operation 200,000
What is the net income for the current year?
A. 2,100,000 C. 3,300,000
B. 2,300,000 D. 4,200,000 P1 © 2014
xxxvi. Lotus Company provided the following data for the current year:
Sales 9,750,000
Decrease in inventory of finished goods 250,000
Raw materials and consumables used 3,500,000
Translation gain on foreign operation 300,000
Impairment loss 800,000
Other operating expenses 900,000
Unrealized gain on interest rate swap designated as a cash flow hedge 200,000
What is the net income for the current year?
A. 1,850,000 C. 2,500,000
B. 2,000,000 D. 2,900,000 P1 © 2014
Adjusted net income

xxxvii. Thorpe Company reported net income of P7,410,000 for the current year. The auditor raised questions about
the following amounts that had been included in net income:
Unrealized loss on foreign currency translation ( 540,000)
Gain on early retirement of bonds payable 2,200,000
Adjustment of profit of prior year for error in depreciation (net of tax effect) (750,000)
Loss from fire (1,400,000)
What amount should be reported as adjusted net income?
A. 6,500,000 C. 8,160,000
B. 6,610,000 D. 8,700,000 FA © 2014
Comprehensive income
xxxviii. Alladin Company provided the following for the current year:
Unrealized gain on derivative contract 250,000
Foreign currency translation adjustment - debit 50,000
Revaluation surplus 1,000,000
What is the comprehensive income for the current year?
A. 3,700,000 C. 4,700,000
B. 4,500,000 D. 4,800,000 P1 © 2014
xxxix. Rose Company, an investment entity, provided the following income and expenses for the current year:
Dividend income from investments 9,200,000
Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
Income from dealing in securities and derivatives held for trading 600,000
Write-down of securities and derivatives held for trading 150,000
Administrative staff costs 3,800,000
Sundry administrative costs 1,200,000
What is the comprehensive income for the current year?
A. 3,800,000 C. 4,600,000
B. 4,200,000 D. 9,200,000 P1 © 2014
Comprehensive
Questions 1 thru 3 are based on the following information. P1 © 2014
Mount lsarog Company provided the following data for the current year:
Dividends 1,000,000
Sales 8,350,000
Dividend income 100,000
Purchases 3,720,000
Salaries 1,540,000
Contribution to employees' pension fund 280,000
Delivery 205,000
Miscellaneous expense 125,000
Doubtful accounts expense 10,000
Depreciation expense 85,000
Loss on sale of securities 40,000
Loss on inventory writedown 150,000
Income tax 735,000
Inventory on December 31 was valued at P700,000 (P850,000 less P150,000 writedown of obsolete inventory).
xl. What is the cost of goods sold?

A. 3,910,000 C. 4,210,000
B. 4,060,000 D. 4,760,000
xli. What is the income from continuing operations?

A. 1,370,000 C. 1,520,000
B. 1,410,000 D. 2,105,000
xlii. What is the balance of retained earnings on December 31?

A. 3,370,000 C. 4,370,000
B. 3,520,000 D. 4,520,000
i. Answer is (D).
Income before income tax (560,000 / 70%) 800,000
Sales 100%
Cost of sales (20% / 40%) (50%)
Operating expenses (20%)
Interest expense (5%)
Income before income tax 25%
Sales (800,000 / 25%) 3,200,000
ii. Answer is (C).

Cost of sales = 20% / 40% = 50%
Sales (500,000 / 25%) 100% 2,000,000
Cost of sales 50% 1,000,000
Gross income 50% 1,000,000
Expenses 20% 400,000
Interest expense 5% 100,000
Income before income tax (350,000 / 70%) 25% 500,000
Income tax (30% x 500,000) 150,000
Net income 350,000
iii. Answer is (C).

Inventory - January 1 2,000,000
Purchases 7,500,000
Purchase returns and allowance ( 500,000)
Inventory - December 31 (2,800,000)
Net sales (6,200,000 / 80%) 7,750,000
Gross sales 8,500,000
iv. Answer is (D).

Gross purchases (SQUEEZE) 8,200,000
Freight in 300,000
Purchase returns (900,000)
Ending inventory ( 500,000)
Cost of goods sold (1,250,000 x 6) 7,500,000
v. Answer is (A).
Total manufacturing cost 100% 6,000,000
Less: Goods in process - 12/31 10% 600,000
Cost of goods manufactured 90% 5,400,000
Less: Finished goods - 12/31 (20% x 90%) 18% 1,080,000
Cost of goods sold 72% 4,320,000
Total manufacturing cost (4,320,000 / 72%) 6,000,000
Direct labor cost (30% x 6,000,000) 1,800,000
vi. Answer is (A).

Purchases of raw materials 2,300,000
Ending raw materials (340,000)
Factory overhead:
Depreciation on factory building 320,000
Factory supervisor's salary 560,000
Indirect labor 360,000 1,240,000
Total goods in process 6,340,000
Ending goods in process (1,000,000)
vii. Answer is (B).

Raw materials used (4,000,000 + 300,000 - 450,000) 3,850,000
Factory overhead:
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation - factory building 300,000
Utilities (60% x 500,000) 300,000 1,700,000
Beginning work in process 400,000
Ending work in process ( 350,000)
viii. Answer is (A).

Finished goods inventory- January 1 4,000,000
Cost of goods manufactured (SQUEEZE) 2,000,000
Finished goods inventory - December 31 (3,600,000)
The cost of goods manufactured is "squeezed" by working back from the cost of sales.
ix. Answer is (A).

Good available for sale 6,000,000
Finished goods inventory, December 31 (1,200,000)
x. Answer is (A).
Beginning inventory 1,600,000
Purchases 5,300,000
Purchase discounts ( 100,000)
Ending inventory (2,150,000)
xi. Answer is (D).

Disbursements for purchases 5,800,000
Increase in trade accounts payable 500,000
Purchases 6,300,000
Decrease in inventory 200,000
xii. Answer is (D).

Purchases 6,000,000
Less: Inventory – December 31 1,000,000
Cost of goods sold after writedown 9,500,000
xiii. Answer is (B).

Increase in raw materials (150,000)
Increase in goods in process (500,000)
Decrease in finished goods 350,000
xiv. Answer is (D).

Freight in 250,000
Increase in raw materials ( 150,000)
Decrease in goods in process 200,000
Decrease in finished goods 350,000
xv. Answer is (C).

Beginning materials 200,000
Net purchases (2,500,000 – 100,000 + 200,000) 2,600,000
Ending raw materials (600,000 – 200,000) (400,000)
Manufacturing overhead 1,500,000
Ending work in process (500,000 – 300,000) (200,000)
Beginning finished goods 400,000
Ending finished goods (700,000 – 400,000) (300,000)
xvi. Answer is (B).

Ending raw materials 300,000
Factory overhead: (600,000 + 200,000 + 500,000 x 60%) 1,100,000
Beginning work in process 400,000
Ending work in process (480,000)
Beginning finished goods 250,000
Ending finished goods (180,000)
xvii. Answer is (A).

Sales 100%
Cost of sales ( 15% /25%) (60%)
Selling expenses ( 15%)
Other expenses ( 13%)
Net income 12%
Sales ( 480,000/12%) 4,000,000
Cost of sales (60% x 4,000,000) 2,400,000
Gross profit 1,600,000
xviii. Answer is (A).

Net sales = Average accounts receivable x accounts receivable turnover
= 950,000 x 5
= 4,750,000
Cost of sales = Average inventory x inventory turnover
= 1,150,000x4
= 4,600,000
Gross margin = 4,750,000 - 4,600,000
= 150,000
xix. Answer is (D).

Freight out 800,000
Rent (2,200,000x1/2) 1,100,000
Total distribution costs 4,800,000
xx. Answer is (B).

Freight out 750,000
Total distribution costs 4,550,000
xxi. Answer is (A).

Accounting and legal fees 250,000
Insurance 850,000
Total general and administrative expenses 2,600,000
xxii. Answer is (C).

Property taxes 250,000
Doubtful accounts 1,600,000
Insurance 850,000
Total administrative expenses 4,200,000
xxiii. Answer is (A).

Legal and audit fees 1,700,000
Rent (2,400,000 x 1/2) 1,200,000
Total general and administrative expenses 2,900,000
xxiv. Answer is (B).

Deductible clause ( 250,000)
Proceeds of insurance policy 5,250,000
Less: Carrying amount 1,500,000
Cost of dismantling 100,000 1,600,000
Gain on involuntary conversion 3,650,000
The gain on involuntary conversion is reported separately as a component of income from continuing
operations.
xxv. Answer is (A).

After-tax effect of litigation loss (250,000 x 70%) 175,000
The depreciation error is treated retrospectively. The inventory error is counterbalancing. The loss on disposition
is part of discontinued operations.
xxvi. Answer is (B).

Deductible clause ( 250,000)
Proceeds of insurance policy 5,250,000
Less: Carrying amount 1,500,000
Cost of dismantling 100,000 1,600,000
Gain on involuntary conversion 3,650,000
The gain on involuntary conversion is reported separately as a component of income from continuing
operations.
xxvii. Answer is (A).

Sales 5,000,000
Cost of goods sold (2,800,000)
Other income (400,000 + 50,000) 450,000
Expenses:
Selling expenses 700,000
General and administrative expenses 600,000 1,300,000
Income before income tax 1,350,000
Income tax expense ( 150,000)
Income from continuing operations 1,200,000
The credit balance in the foreign translation adjustment account is a component of other comprehensive income.
xxviii.Answer is (D).
Sales 50,000,000
Gain on expropriation 2,000,000
Investment income 3.000,000
Expenses:
General and administrative 4,000,000
Finance cost 1,500,000 10,500,000
Income tax expense ( 5,000,000)
Interest expense 2,000,000
Gain on early extinguishment ( 500,000)
Finance cost 1,500,000
xxix. Answer is (B).

Net sales (7,000,000-100,000) 6,900,000
Expenses:
Utilities expense 1,000,000
Salaries expense 600,000
Casualty loss 50,000
Loss on sale of investments 50,000
Finance cost 200,000 1,900,000
xxx. Answer is (A).

Sales 90,000,000
Interest income 4,000,000
Expenses:
Uncollectible accounts 2,000,000
Sales commissions 7,000,000
Loss on sale of equipment 1,500,000
Loss from typhoon 3,000,000 27,000,000
Income tax (30% x 27,000,000) ( 8,100,000)
xxxi. Answer is (B).

Sales 3,000,000
Total revenue 1,900,000
Expenses (200,000 + 60,000 + 300,000 + 60,000 + 180,000) (800,000)
Income from continuing operations before tax 1,100,000
xxxii. Answer is (D).

Reported income before tax 5,000,000
Add: Adjustment of profit of prior year 1,400,000
Total 6,400,000
Less: Dividend received from Cinn 320,000
Corrected income before tax 6,080,000
The prior period error is added back to income because it is shown as a deduction in the statement of retained
earnings. The dividend received from Cinn is deducted from income because it is treated as a return of investment
since the interest is 40% and therefore the equity method is used. The equity in earnings of Cinn Company is
properly part of income because the entity is applying the equity method.
xxxiii.Answer is (A).
Sales 9,600,000
Cost of sales (9,600,000 / 160%) 6,000,000
Distribution & administrative expenses (30% x 9,600,000) 2,880,000
Net income 720,000
xxxiv. Answer is (B).

Cost of goods sold (10% / 25%) 40%
Sales (2,000,000/40%) 5,000,000

Sales discount ( 100,000)
Net sales 4,900,000
Gross profit 2,900,000
Administrative expenses (10% x 5,000,000) (500,000)
Distribution costs (2,000,000)
Interest expense (20,000)
Income before income tax 380,000
Operating expenses ( 500,000 /1/5) 2,500,000
Administrative expenses (500,000)
xxxv. Answer is (B).

Sales 9,500,000
Other income (250,000+ 100,000) 350,000
Expenses:
Distribution costs 500,000
Finance cost 150,000 950,000
xxxvi. Answer is (B).

Sales 9,750,000
Cost of sales (250,000 + 3,500,000) 3,750,000
Expenses:
Other operating expenses 900,000
Impairment loss 800,000 3,550,000
xxxvii. Answer is (D).

Net income per book 7,410,000
Add: Unrealized loss as component of
other comprehensive income 540,000
Adjustment of profit of prior year 750,000 1,290,000
Adjusted net income 8,700,000
xxxviii. Answer is (C).

Foreign currency translation loss ( 50,000)
Revaluation surplus 1,000,000 1,200,000
xxxix. Answer is (C).

Dividend income from investments 9,200,000
Distribution income from trusts 500,000
Interest income on deposits 700,000
Income from bank treasury bills 100,000
Income from dealing in securities and derivatives held
for trading, net (600,000 - 150,000) 450,000
Expenses:
Administrative staff costs 3,800,000
Sundry administrative costs 1,200,000
Finance cost 300,000 5,300,000
xl. Answer is (B).

Purchases 3,720,000
Inventory - December 31 ( 850,000)
Cost of goods sold before inventory writedown 3,910,000
Loss on inventory writedown 150,000
Cost of goods sold after inventory writedown 4,060,000
xli. Answer is (A).

Sales 8,350,000
Dividend income 100,000
Expenses:
Salaries 1,540,000
Contribution 280,000
Delivery 205,000
Miscellaneous expense 125,000
Doubtful accounts 10,000
Depreciation 85,000
Loss on sale of securities 40,000 2,285,000
Income tax ( 735,000)
xlii. Answer is (A).

Retained earnings - January 1 3,000,000
Total 4,370,000
Dividends (1,000,000)
Retained earnings - December 31 3,370,000
16. Illustrate the presentation of a discontinued operation.
ZETA COMPANY
Income Statement
Sales 5,000,000
Expenses (1,000,000)
Income from discontinued operation, net of tax 510,000
The notes to financial statements shall include the following disclosure with respect to the discontinued operation.
Sales - discontinued operation 3,000,000

Expenses ( 500,000)
Impairment loss (200,000)
Employee termination cost ( 150,000)
Income tax ( 240,000)
Income from discontinued operation 510,000
i. Flame Company has two divisions, North and South. Both qualify as business components. In 2014, the entity
decided to dispose of the assets and liabilities of division South and it is probable that the disposal will be
completed early next year. The revenue and expenses of Flame Company for 2014 and 2013 are as follows:
2014 2013
Sales-North 5,000,000 4,600,000
Total nontax expenses-North 4,400,000 4,100,000
Sales-South 3,500,000 5,100,000
Total nontax expenses-South 3,900,000 4,500,000
During the later part of 2014, the entity disposed of a portion of division South and recognized a pretax loss of
P2,000,000 on the disposal. The income tax rate is 30%. What amount should be reported as loss from
discontinued operation in 2014?
A. 1,400,000 C. 2,000,000
B. 1,680,000 D. 2,400,000 FA © 2014
i. Answer is (B).
Sales - South 3,500,000
Expenses - South 3,900,000
Operating loss ( 400,000)
Loss on disposal (2,000,000)
Total loss (2,400,000)
Tax saving (30% x 2,400,000) 720,000
Loss from discontinued operation (1,680,000)
Gain on reversal of impairment

i. On April 1, 2014, Brandy Company has a machine with a cost of PI,000,000 and accumulated depreciation of
P750,000. On April 1, 2014, the entity classified the machine as held for sale and decided to sell the machine
within 1 year. On April 1,2014, the machine had an estimated selling price of PI 00,000 and a remaining useful
life of 2 years. It is estimated that selling cost associated with the disposal of the machine will be PI0,000. On
December 31, 2014, the estimated selling price of the machine had increased to P150,000 with estimated selling
cost of P20,000. What amount should be recognized as gain on reversal of impairment on December 31, 2014?
A. 40,000 C. 73,750
B. 60,000 D. 93,750 P1 © 2014
INANCIAL ACCOUNTING AND REPORTING
1. Which statement is true about the Conceptual Framework for Financial Reporting?
A. The Conceptual Framework is not a Standard
B. The Conceptual Framework describes the objective of financial reporting and the concepts for general purpose financial
statements
C. In cases of conflict, the requirements of the relevant IFRS prevail over those of the Conceptual Framework
D. All of these statements are true about the Conceptual Framwork
2. The revised conceptual framework comprises how many chapter?

A. Five B. Six C. Seven D. Eight
3. Which is not a purpose of the revised conceptual framework?

A. To assist the IASB to develop IFRS based on consistent concepts
B. To assist preparers to develop consistent accounting policy when no standard applies to a particular transactions or when
standard allows a choice of accounting policy
C. To assist all parties to understand and interpret the standards
D. To assist regulatory agencies in issuing rules and regulations for a particular industry
4. What provides “the why” or the goal and purpose of accounting?

A. Measurement and recognition concept
B. Qualitative characteristics of accounting information
C. Element of financial statements
D. Objective of financial reporting
5. The objective of financial reporting in the conceptual framework

A. Is the foundation for the conceptual framework
B. Includes the qualitative characteristics that make accounting information useful
C. Is not found in the conceptual framework
D. All of the choices are correct regarding the objective of financial reporting
6. The overall objective of financial reporting is to provide information

A. That is useful for decision making
B. About asset, liability and equity
C. About financial performance
D. That allows owners to assess management performance
7. Which statement is not a specific objective of financial reporting?

A. To provide information that is useful in investment and credit decisions
B. To provide information about entity resources claims against those resources and changes in those resources
C. To provide information on the liquidation value of an entity
D. To provide information that is useful in assessing cash flows prospects.
8. The assumption that an entity will not be sold or liquidated in the near future is known as
A. Economic entity assumption C. Time period assumption
B. Monetary unit assumption D. Going concern assumption
9. Which statement is an implication of the going concern assumption?

A. The historical cost principle is credible
B. Depreciation and amortization policies are justifiable and appropriate
C. The current-noncurrent classification of assets and liabilities is justifiable and significant
D. All of these imply the going concern assumption
10. The economic entity assumption

A. Is inapplicable to unincorporated business
B. Recognizes the legal aspects of business organization
C. Requires periodic income statement
D. Is applicable to all forms of business organizations
11. Consolidated financial statements are prepared when a parent-subsidiary relationship exists
A. Economic entity assumption
B. Legal entity assumption
C. Consolidation standard
D. Neutrality
12. During the lifetime of an entity, accountants produce financial statements at arbitrary or artificial points in time in accordance with
which basic accounting concepts?
A. Objectivity B. Time period assumption C. Materiality D. Economic entity
13. Inflation is ignored in accounting due to

A. Economic assumption
B. Going concern assumption
C. Monetary unit assumption
D. Periodicity assumption
14. In the conceptual framework, qualitative characteristics

A. Are considered either fundamental or enhancing
B. Contribute to the decision-usefulness of financial reporting information
C. Distinguish better information from inferior information for decision-making purposes
D. All of the choices are correct
15. Fundamental qualitative characteristics of accounting information are

A. Relevance and comparability
B. Comparability and consistency
C. Faithful representation and relevance
D. Neutrality and verifiability
Conceptual Framework-Batch May 2020 Page 1 of 4

16. Enhancing qualitative characteristics of accounting information include
A. Relevance, faithful representation and materiality
B. Comparability, understandability, timeliness and verifiability
C. Faithful representation and timeliness
D. Materiality and understandability
17. Where there is agreement between measure or description and the phenomenon it purports to represent, the information possess
with characteristic?
A. Faithful representation
B. Completeness
C. Neutrality
D. Free from error
18. The quality of faithful representation includes

A. Predictive value and confirmatory value
B. Completeness, free from error and neutrality
C. Comparability and understandability
D. Timeliness and verifiability
19. Which is the best description of faithful representation?

A. Influence on the economic decision of users
B. Inclusion of a degree of caution
C. Freedom from material error and bias
D. Comprehensibility to users
20. The financial information is directed toward the common needs of users and is independent of presumptions about particular needs
and desires of specific users
A. Comparability
B. Verifiability
C. Neutrality
D. Completeness
21. Neutrality is supported by the exercise of prudence. Prudence is the exercise of care and caution when dealing with uncertainties
in the measurement process such that
A. Assets and income are overstated
B. Liabilities and expenses are understated
C. Assets and income are not overstated and liabilities and expenses are not understated
D. Assets, liabilities, income and expenses are not overstated
22. What is the underlying concept governing GAAP in recording gain contingency?
A. Conservatism
B. Understandability
C. Completeness
D. Free from error
23. The qualitative characteristics of relevance includes

A. Predictive value and confirmatory value
B. Completeness and neutrality
C. Comparability and understandability
D. Verifiability and timeliness
24. Accounting information is considered relevant when it

A. Can be depended on to represent the economic conditions that it is intended to represent
B. Is capable of making a difference in a decision
C. Is understandable by reasonably informed users of accounting information
D. Is verifiable and neutral
25. Which of the following statements about materiality is not correct?

A. An item must make a difference or it need not be disclosed
B. Materiality is a matter of absolute size
C. An item is material if omitting, misstating or obscuring it could reasonably be expected to influence the economic decision of
primary users
D. Materiality is a subquality of relevance
26. What is meant by comparability when discussing financing accounting information?

A. Information has predictive and feedback value
B. Information is reasonably free from error
C. Information is measured and reported in a similar fashion across entities
D. Information is timely
27. What is meant by consistency when discussing financial accounting information?

A. Information is measured and reported in a similar fashion across points in time
B. Information is timely
C. Information is measured similarly across the industry
D. Information is verifiable
28. The enhancing quality of understandability means the information should be understood by
A. Experts in the interpretation of financial statements
B. Users with reasonable understanding of business and economic activities
C. Financial analysis
D. CPAs
29. According to the Revised Conceptual Framework, verifiability implies

A. Legal evidence
B. Logic
C. Consensus
D. Legal verdict
30. Which concept holds that financial statements shall be based on arm’s length transaction to the maximum extend possible?
A. Verifiability
B. Completeness
C. Free from error
D. Neutrality
31. When an entity has started placing its quarterly financial statements on its website, thereby reducing ample time to get information
to users, the qualitative concept involved is
A. Comparability
B. Understandability
C. Verifiability
D. Timeliness
32. The conceptual framework includes which constraint?

A. Prudence
B. Conservatism
C. Cost
D. All of the choices are constraints in the conceptual framework
33. Which of the following best describes the cost-benefit constraint?

A. The benefit of the information must be greater than the cost of providing it
B. Financial information should be free from cost to users of the information
C. Cost of providing financial information is not always evident or measurable but must be considered
D. All of the choices are correct
34. Which statement is not true about a reporting entity?

A. A reporting entity is an entity that is required or chooses to prepare financial statements
B. A reporting entity can be a single entity or a portion of that entity or can comprise more than one entity
C. A reporting entity is not necessarily a legal entity
D. A reporting entity may be a corporation, partnership or proprietorship
35. Which statement is true about financial statements of a reporting entity?

A. If the reporting entity comprises both the parent and its subsidiaries, the financial statements are referred to as consolidated
financial statements
B. If the reporting entity is the parent alone, the financial statements are referred to as unconsolidated financial statements
C. If the reporting entity comprises two or more entities that are not linked by a parent-subsidiary relationship, the financial
statements are referred to as combined financial statements
D. All of these statements are true about the financial statements of a reporting entity
36. What is the new definition of an asset under the revised conceptual framework?
A. A resource controlled by the entity as a result of past event from which future economic benefit is expected to flow to the
entity.
B. A resource controlled by the entity and from which future economic benefit is expected to flow to the entity.
C. A present economic resource controlled by the entity as a result of past event
D. A present economic resource controlled by the entity as a result of past event and from which future economic benefit is
expected to flow to the entity
37. Which is not a characteristic of an asset under the revised conceptual framework?
A. An asset is a present economic resource
B. The economic resource is a right that has the potential to produce economic benefits
C. The economic resource is controlled by the entity as a result of past event
D. Future economic benefit is expected to flow to entity and must be probable or certain
38. What is the new definition of liability under the revised conceptual framework?
A. A present obligation of the entity arising from past event the settlement of which is expected to result in an outflow of
economic benefit
B. A present obligation of the entity arising from present event
C. A present obligation of the entity to transfer an economic resource as a result of past event
D. An obligation that the entity has practical ability to avoid
39. Under the revised conceptual framework, which of the following criteria need not be satisfied for a liability to exist?
A. The entity has a duty or responsibility that it has no practical ability to avoid
B. The obligation is to transfer an economic resource and not the ultimate outflow of economic benefit
C. The obligation is a present obligation that exists as a result of past event
D. The settlement of the obligation is expected to result in an outflow of economic benefit
40. Which statement is not true about income and expenses?

A. Income is increase in asset or decrease in liability that result in increase in equity other than that relating to contribution from
equity holders
B. Expense is decrease in asset or increase in liability that result in decrease in equity other than that relating to distribution to
equity holders
C. Income and expenses are the elements that relate to financial position
D. Income encompasses revenue and gain
41. It is the process of capturing for inclusion in the statement of financial position or the statement of financial performance an item
that meets the definition of an element of the financial statements
A. Recognition B. Measurement C. Derecognition D. Disclosure
42. Under the revised conceptual framework, what is the recognition principle?
A. It is probable that any future economic benefit associated with the item will flow to or from the entity
B. The item has a cost or value that can be measured with reliability
C. It is probable that any future economic benefit will flow to or from the entity and the element can be measured reliably
D. Only items that meet the definition of an asset, liability, equity, income and expense are recognize

43. Which statement is not true about derecognition?
A. Derecognition is the removal of a recognized asset or liability from the statement of financial position
B. Derecognition is the removal of a recognized income or expense from the income statement
C. Derecognition for an asset normally occurs when the entity loses control of the recognized asset
D. Derecognition for a liability normally occurs when the entity no longer has a present obligation for the recognized liability
44. Under the revised conceptual framework, the measurement bases include
A. Historical cost
B. Current value
C. Assessed value
D. Historical cost and current value
45. Current value includes

A. Fair value
B. Value in use
C. Fulfillment value
D. Fair value, value in use, fulfilment value and current cost
46. Which statement is not true about current value measurement?

A. Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between market participants
at the measurement date
B. Value in use is the present value of the cash flows expected to be derived from the use and ultimate disposal of an asset
C. Fulfillment value is the amount of cash expected to be transferred for the payment of liability
D. Current cost is the cost of an equivalent asset at reporting date comprising the consideration paid and transaction cost
47. The term revenue recognition conventionally refers to

A. The process of identifying transaction to be recorded as revenue in an accounting period
B. The process of measuring and relating revenue and expenses of an entity for an accounting period
C. The earning process which give rise to revenue realization
D. The process of identifying those transactions that result in an inflow of assets from customers
48. Which of the following is not an acceptable basis for the recognition of expense?
A. Systematic and rational allocation
B. Cause and effect association
C. Immediate recognition
D. Cash disbursement
49. Which capital maintenance concept is applied to net income and other comprehensive income?
A. Financial capital
B. Physical capital
C. Financial capital for net income and physical capital for other comprehensive income
D. Physical capital for net income and financial capital for other comprehensive income
50. Financial capital is defined as the

A. Net assets or equity of an entity in monetary terms
B. Net assets or equity of in terms of physical productive capacity
C. Legal capital
D. Share capital issued and outstanding

i. Royal Company provided the following data for the current year:
Sales 10,000,000
Cost of goods sold   5,300,000
Operating expenses 3,800,000
December 31 January 1
Prepaid operating expenses 1,000,000 700,000
Accounts payable 1,350,000 1,200,000
Inventory   2,500,000 2,100,000  
Accounts receivable 1,400,000 1,375,000
Under cash basis, what amount should be reported as purchases for the current year?
A. 5,150,000 C. 5,700,000
B. 5,550,000 D. 5,850,000
i. Answer is (B).
Purchases under accrual basis (SQUEEZE) 5,700,000
Inventory - December 31 (2,500,000)
Accounts payable - January 1 1,200,000

Purchases - accrual basis 5,700,000
Total 6,900,000
Accounts payable - December 31 (1,350,000)
Cash paid for purchases - cash basis 5,550,000
i. Elaine Company experienced the following changes in selected accounts for the current year:
Accrual sales 5,000,000
Accounts receivable:
January 1 800,000
December 31 500,000
Advances from customers:
January 1 300,000
December 31 400,000
What total amount of cash was received from customers during the year?
A. 4,600,000 C. 5,300,000
B. 4,800,000 D. 5,400,000
i. Answer is (D).
Accrual sales 5,000,000 
Accounts receivable - January 1   800,000
Advances from customer - December 31 400,000
Total 6,200,000
Less: Accounts receivable - December 31   500,000
Advances from customers - January 1   300,000 800,000
Cash received from customers 5,400,000
Cash basis Accrual basis
Sales Cash sales plus collection of trade Cash sales plus sales on
receivables. account.
Purchases Cash purchases plus payments to Cash purchases plus purchases

trade creditors. on account.
Income other Amounts received are considered Amounts earned are considered
than sales as income regardless of when as income regardless of when
earned. received.
Expenses, in Amounts paid are treated as Amounts incurred are treated as

general expenses regardless of when expenses regardless of when
incurred. paid.
Depreciation Depreciation is provided normally. Depreciation is provided

normally.
Bad debts No bad debts are recorded because Doubtful accounts are treated as
trade receivables are not bad debts.
recognized.
Rent receipt
i. Under the accrual basis, Hamtikan Company reported rental income for the current year at P600,000. The entity
reported the following additional information regarding rental income:
Unearned rental income, January 1 50,000
Unearned rental income, December 31 75,000
Accrued rental income, January 1 30,000
Accrued rental income, December 31 40,000
What total amount of cash was received from rental in the current year?
A. 585,000 C. 625,000
B. 615,000 D. 655,000 FA © 2014
Insurance premium paid

ii. Harlett Company reported that all insurance premiums paid are debited to prepaid insurance. The entity made
monthly estimated charges to insurance expense with credit to prepaid insurance
Prepaid insurance - January 1, 2013 210,000
Charges to insurance expense during 2013 875,000
Prepaid insurance - December 31, 2013 245,000
What is the insurance premium paid during 2013?
A. 665,000 C 875,000
B. 840,000 D. 910,000 P1 © 2014
Operating expenses
iii. During the current year, Seawall Company reported total operating expenses of P3,200,000, consisting of
P1,000,000 depreciation, P700,000 insurance and PI,500,000 salaries. The prepaid insurance P150,000 on
January 1 and P200,000 on December 31. The accrued salaries payable totaled P220,000 on January 1 and
P200,000 on December 31. What total amount was paid for operating expenses?
A 2,130,000 C. 2,270,000
B. 2,230,000 D. 3,270,000 FA © 2014
i. Answer is (B).
Rental income - accrual basis 600,000
Unearned rental income - January 1 (50,000)
Unearned rental income - December 31 75,000
Accrued rental income - January 1 30,000
Accrued rental income - December 31 ( 40,000)
Rental received - cash basis 615,000
ii. Answer is (D). Insurance premium paid (875,000 + 245,000 - 210,000) = 910,000
iii. Answer is (C).

Operating expenses per book 3,200,000
Depreciation (1,000,000)
Prepaid insurance - December 31 200,000
Prepaid insurance - January 1 (150,000)
Accrued salaries payable - December 31 (100,000)
Accrued salaries payable - January 1 120,000
Cash paid for operating expenses 2,270,000
Change in life
i. Rodrigo Company had purchased an equipment on January 1, 2011 for P2,400,000. The entity used the straight-
line depreciation based on a ten-year useful life with no residual value. During 2014, the entity decided that the
equipment would be used only three more years. What entry should be made on January 1,2014 to reflect this
accounting change?
A. No entry
B. Debit depreciation and credit accumulated depreciation P560,000.
C. Debit retained earnings and credit accumulated depreciation P480,000. FA © 2014
D. Debit other comprehensive income and credit accumulated depreciation P480,000.
ii. During 2014, Kerr Company determined that machinery previously depreciated over a seven-year life had a total
estimated useful life of only five years. An accounting change was made in 2014 to reflect the change in estimate.
If the change had been made in 2013, accumulated depreciation would have been P800,000 on December 31,
2013, instead of P600,000. As a result of the change, the 2014 depreciation expense was P50,000 greater. The
tax rate was 30%. What amount should be reported in the income statement for the year ended December 31,
2014 as the cumulative effect on prior years for changing the estimated useful life of the machinery?
A. 0 C. 150,000
B. 130,000 D. 200,000 FA © 2014
iii. On January 1, 2011, Charisma Company bought a machine for P1,500,000. The machine had useful life of six
years with no residual value. On January 1, 2014, the entity determined that the machine had useful life of eight
years from the date it was acquired with no residual value. The straight line method of depreciation is used. What
amount of depreciation should be recorded for 2014?
A. 125,000 C. 187,500
B. 150,000 D. 250,000 FA © 2014
iv. Blue Company purchased a machine on January 1, 2011 for P6,000,000. At the date of acquisition, the machine
had a life of six years with no residual value. The machine is being depreciated on a straight line basis. On
January 1,2014, the entity determined that the machine had a useful life of eight years from the date of acquisition
with no residual value. What is the depreciation of the machine for 2014?
A. 375,000 C. 600,000
B. 500,000 D. 750,000 P1 © 2014
v. On January 1, 2013, London Company purchased a large quantity of personal computers. The cost of these
computers was P6,000,000. On the date of purchase, the management estimated that the computers would last
approximately four years and would have a residual value at that time of P600,000. The entity used the double
declining balance method. During January 2014, the management realized that technological advancements had
made the computers virtually obsolete and that they would have to be replaced. The management changed the
remaining useful life of the computers to two years. What is the depreciation expense for 2014?
A. 1,200,000 C. 2,400,000
B. 1,500,000 D. 3,000,000 FA © 2014
vi. Acute Company was incorporated on January 1, 2011. In preparing the financial statements for the year ended
December 31,2013, the entity used the following original cost and useful life for the property, plant and equipment:
Original cost Useful life
Building 15,000,000 15 years
Machinery 10,500,000 10 years
Furniture 3,500,000 7 years
On January 1,2014, the entity determined that the remaining useful life is 10 years for the building, 7 years for
the machinery and 5 years for the furniture. The entity used the straight line method of depreciation with no
residual value. What is the total depreciation for 2014?
A. 2,550,000 C. 3,500,000
B. 2,650,000 D. 3,700,000 FA © 2014
vii. On January 1,2008, Paragon Company paid P6,000,000 to acquire a new barge. In the belief that it was entitled
to a refund of purchase taxes on the acquisition of the barge, the entity claimed and was refunded P600,000 by
the local government. However, in late 2014 the entity repaid the refund when it became apparent that it had
made an error in making the claim from the local government as it had not been entitled to the refund of purchase
taxes on acquisition of the barge. The useful life of the barge is 15 years from the date of acquisition. The residual
value of the barge is NIL.
In 2014, the period over which the barge is expected to be economically usable increased from 15 to 26 years.
However, the entity expected to dispose of the barge after using it for 20 years from the date of acquisition. On
December 31,2014, the entity assessed the residual value of the barge at P800,000. What is the carrying amount
of the barge on December 31,2014?
A. 3,400,000 C. 3,460,000
B. 3,420,000 D. 3,600,000 FA © 2014
Change in life & residual value

viii. On January 1, 2011, Flair Company purchased a machine for P2,640,000 and depreciated it by the straight line
using an estimated life of 8 years with no residual value. On January 1, 2014, the entity determined that the
machine had a useful life of 6 years from the date of acquisition with a residual value of P240,000. What is the
accumulated depreciation on December 31, 2014?
A. 1,460,000 C. 1,600,000
B. 1,540,000 D. 1,760,000 FA © 2014
ix. On January 1, 2011, Flax Company purchased a machine for P5,280,000 and depreciated it by the straight line
method using an estimated useful life of eight years with no residual value. On January 1, 2014, the entity
determined that the machine had a useful life of six years from the date of acquisition and the residual value was
P480,000. An accounting change was made in 2014 to reflect these additional data. What is the accumulated
depreciation for the machine on December 31,2014?
A. 2,920,000 C. 3,200,000
B. 3,080,000 D. 3,520,000 P1 © 2014
x. On January 1, 2010, Roma Company purchased equipment for P4,000,000. The equipment has a useful life of
10 years and a residual value of P400,000. On January 1, 2014, the entity determined that the useful life of the
equipment was 12 years from the date of acquisition and the residual value was P460,000. What is the
depreciation of the equipment for 2014?
A. 175,000 C. 300,000
B. 262,500 D. 360,000 FA © 2014
xi. On January 1,2012, Milan Company purchased an equipment for P6,000,000. The equipment had been
depreciated using the straight line with residual value of P600,000 and useful life of 20 years. On January 1,2014,
the entity determined that the remaining useful life is 10 years and the residual value is P800,000. What is the
depreciation for 2014?
A. 270,000 C. 546,000
B. 466,000 D. 582,500 FA © 2014
xii. Dawn Company purchased a machine on January 1, 2011 for P3,000,000. At the date of acquisition, the machine
had a life of six years with no residual value. The machine is being depreciated on a straight line basis. On
January 1, 2014, the entity determined that the machine had a useful life of five years from the date of acquisition
with residual value of P100,000. What is the depreciation for 2014?
A. 500,000 C. 700,000
B. 600,000 D. 750,000 FA © 2014
Change from accelerated depreciation to straight-line method

xiii. On January 1, 2014, Canyon Company decided to decrease the estimated useful life of an existing patent from
10 years to 8 years. The patent was purchased on January 1,2009 for P3,000,000. The estimated residual value
is zero. The entity decided on January 1,2014 to change the depreciation method from an accelerated method to
the straight line method. On January 1, 2014, the cost of a depreciable asset is P8,000,000 and the accumulated
depreciation is P3,400,000. The remaining useful life of the depreciable asset on January 1,2014 is 10 years and
the residual value is P200,000. What is the total charge against income for 2014 as a result of the accounting
changes?
A. 627,500 C. 940,000
B. 647,500 D. 960,000 FA © 2014
Change from double-declining method to straight-line method

Change from double-declining method to straight-line method
xiv. On January 1, 2012, Zee Company purchased for P2,400,000 a machine with a useful life often years and no
residual value. The machine was depreciated by the double declining balance method and the carrying amount
of the machine was Pl,536,000 on December 31, 2013. The entity changed to the straight line method on January
1, 2014. What is the depreciation for 2014?
A. 153,600 C. 240,000
B. 192,000 D. 307,200 AICPA 0587
xv. Turtle Company purchased equipment on January 1, 2012 for P5,000,000. The equipment had an estimated 5-
year service life. The policy for 5-year assets is to use the 200% double declining balance method for the first
two years and then switch to the straight-line depreciation method. What amount should be reported as
accumulated depreciation on December 31,2014?
A. 3,000,000 C. 3,920,000
B. 3,800,000 D. 4,200,000 FA © 2014
xvi. On January 1,2012, Brazilia Company purchased for P4,800,000 a machine with a useful life often years and a
residual value of P200,000. The machine was depreciated by the double declining balance and the carrying
amount of the machine was P3,072,000 on December 31, 2013. The entity changed to the straight line method
on January 1, 2014. The residual value did not change. What is the depreciation expense on this machine for the
year ended December 31, 2014?
A. 287,200 C. 384,000
B. 359,000 D. 460,000 FA © 2014
Change from SYD to straight-line method

xvii. On January 1, 2013, Kevin Company purchased a machine for P2,750,000. The machine was depreciated using
the sum of years' digits method based on a useful life of 10 years with no residual value. On January 1,2014, the
entity changed to the straight line method of depreciation. The entity can justify the change. What is the
depreciation of the machine for 2014?
A. 180,000 C. 250,000
B. 220,000 D. 275,000 FA © 2014
Change from straight-line to SYD

xviii. Xavier Company purchased a machinery on January 1, 2011 for P7,200,000. The machinery had useful life of 10
years with no residual value and was depreciated using the straight line method. In 2014, a decision was made
to change the depreciation method from straight line to sum of years' digits method. The useful life and residual
value remained unchanged. What is the depreciation for 2014?
A. 720,000 C. 1,260,000
B. 916,360 D. 1,440,000 FA © 2014
i. Answer is (A). No entry is necessary on January 1,2014 because a change in the useful life of an asset is a
change in accounting estimate.
ii. Answer is (A). Change in estimated useful life is not a prior period error subject to prior year adjustment.
iii. Answer is (B). (750,000 / 5) = 150,000

Machine - January 1, 2011 1,500,000
Accumulated depreciation (1,500,000 / 6 x 3) 750,000
Carrying amount - January 1, 2014 750,000
iv. Answer is (C).

Cost 6,000,000
Accumulated depreciation (6,000,000 / 6 x 3) 3,000,000
Carrying amount - January 1, 2014 3,000,000
Depreciation (3,000,000 / 5 years) 600,000
Revised life 8 years
Years expired 3 .
Remaining revised life 5 years
This is a change in accounting estimate. The procedure is to allocate the remaining depreciable amount over
the remaining revised life.
v. Answer is (C).
Fixed rate (100% / 4 x 2) 50%
Cost 6,000,000
Depreciation for 2013 (50% x 6,000,000) 3,000,000
Carrying amount – 1/1/2014 3,000,000
Residual value (600,000)
Maximum depreciation in 2014 2,400,000
Fixed rate in 2014 (100% / 2 x 2) 100%
This means that the computers should be fully depreciation in 2014/ Since there is no residual value of P600,000,
the maximum depreciation for 2014 is equal to the carrying amount of P3,000,000 minus the residual value of
P600,000 or P2,400,000.
vi. Answer is (B).

Building Machinery Furniture
Cost-January 1,2011 15,000,000 10,500,000 3,500,000
Accumulated depreciation:
(15,000,000/ 15 x 3) 3,000,000
(10,500,000/ 10 x 3) 3,150,000
( 3,500,000/ 7 x 3) 1,500,000
Carrying amount - January 1, 2014 12,000,000 7,350,000 2,000,000
Depreciation for 2014
Building (12,000,000/10) 1,200,000
Machinery ( 7,350,000 / 7) 1,050,000
Furniture (2,000,000 / 5) 400,000
2,650,000
vii. Answer is (A).
Correct cost - January 1, 2008 6,000,000
Accumulated depreciation - January 1, 2014 (6,000,000 /15 x 6 years) (2,400,000)
Carrying amount - January 1,2014 3,600,000
Depreciation for 2014 (3,600,000 - 800,000 /14 years) ( 200,000)
Carrying amount - December 31, 2014 3,400,000
Remaining useful life (20 minus 6 years expired) 14
viii. Answer is (A).

Cost 2,640,000
Accumulated depreciation (2,640,000 / 8 x 3) 990,000
Carrying amount – 1/1/2014 1,650,000
Accum. depreciation – 1/1/2014 990,000
Depreciation for 2014 (1,650,000 – 240,000) / 3) 470,000
Balance – 12/31/2014 1,460,000
ix. Answer is (A).

Acquisition cost - January 1,2011 5,280,000
Accumulated depreciation for 2011, 2012 and 2013 (5,280,000/8x3) 1,980,000
Accumulated depreciation - January 1,2014 1,980,000
Depreciation for 2014 (3,300,000-480,000/3) 940,000
Accumulated depreciation - December 31, 2014 2,920,000
Revised life 6 years
Years expired 3 .
Remaining revised life 3 years
x. Answer is (B). (2,560,000 - 460,000) / 8 = 262,500

Cost - January 1,2010 4,000,000
Accumulated depreciation - January 1, 2014(4,000,000 - 400,000 / 10 x 4) 1,440,000
xi. Answer is (B). (5,460,000 - 800,000) / 10 = 466,000

Cost - January 1, 2012 6,000,000
Accumulated depreciation-January 1, 2014(6,000,000-600,000 / 20 x 2) 540,000
xii. Answer is (C).

Depreciation 2014 (1,500,000 – 100,000) / 2 700,000
xiii. Answer is (C).

Patent - January 1, 2009 3,000,000
Accumulated amortization (3,000,000 /10 x 5) 1,500,000
Carrying amount-January 1,2014 1,500,000
Amortization of patent for 2014 (1,500,000 / 3) 500,000
Depreciation for 2014 (4,600,000-200,000/10) 440,000
Total charge against income for 2014 940,000
xiv. Answer is (B).

Straight-line depreciation for 2014 (1,536,0000 / 8) 192,000
xv. Answer is (B).
Straight-line rate (100% / 5 years) 20%
Fixed rate (20% x 2) 40%
2012 depreciation (5,000,000 x 40%) 2,000,000
2013 depreciation (3,000,000 x 40%) 1,200,000
Accum. depreciation, 12/31/2013 3,200,000
Depreciation for 2014 – straight-line(5,000,000 – 3,200,000)/ 3 600,000
Accum. depreciation, 12/31/2014 3,800,000
xvi. Answer is (B).

Depreciation for 2014 (3,072,000 - 200,000 / 8) 359,000
Under PAS 16, paragraph 61, a change in depreciation method is accounted for as a change in accounting
estimate.
xvii. Answer is (C).

SYD (1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9+10) 55
Cost - January 1,2013 2,750,000
Accumulated depreciation – Jan. 1, 2014 (10 / 55 x 2,750,000) ( 500,000)
Straight line depreciation for 2014 (2,250,000 / 9 years remaining) 250,000
xviii. Answer is (C).

Cost - January 1, 2011 7,200,000
Accumulated depreciation-January 1, 2014 (7,200,000/10x3) 2,160,000
SYD for the remaining life of 7 years (1+2 + 3+4 + 5 + 6 + 7) 28
Depreciation for 2014 (5,040,000 x 7/28) 1,260,000
5. (Single entry) Changes in the accounts of Noel Co. for 20x6 are as follows:
Increase / (Decrease)
Cash P500,000
Accounts receivable (4,600,000)
Allowance for bad debts (460,000)
Merchandise inventory 4,800,000
Investment in associate 3,000,000
Property, plant and equipment 2,400,000
Notes payable 2,600,000
Bonds payable (2,800,000)
Discount on bonds payable (600,000)
Ordinary share capital 3,900,000
Share premium 200,000
Treasury shares 320,000
 On December 31, 20x6, Noel Co. declared cash dividends amounting to P500,000 and share dividends
amounting to P800,000. Also during the year, the company appropriated retained earnings for the
retirement of bonds amounting to P100,000.
 During the year, Noel obtained a bank loan of P2,000,000 and paid off loan amortization of P1,600,000 and
interest of P100,000. Interest of P180,000 is accrued on December 31, 20x6. There was no interest payable
at the end of 20x5. In 20x6, Noel Company acquired treasury shares from its existing shareholders.
Compute for the net loss during the year.

A. P1,200,000 B. P1,300,000 C. P1,100,000 D. P1,000,000
P1,100,000
Statement of Financial Position/Net Assets

500,000
460,000 4,600,000
4,800,000
3,000,000
2,400,000 800,000
2,800,000 2,600,000
600,000
3,900,000
200,000
320,000 2,600,000
500,000
400,000
180,000
1,100,000
15,880,000 15,880,000
Yates Company's records provide the following information concerning certain account balances and changes in these
account balances during the current year. Transaction information is missing from each item below.
Instructions
Prepare the entry to record the missing information for each account. (Consider each inde-pendently.)
1. Accounts Receivable: Jan. 1, balance P41,000, Dec. 31, balance P55,000, uncollectible accounts written off during
the year, P6,000; accounts receivable collected during the year, P134,000. Prepare the entry to record sales.
2. Allowance for Doubtful Accounts: Jan. 1, balance P4,000, Dec. 31, balance P7,500, uncollectible accounts written
off during the year, P25,000. Prepare the entry to record bad debt expense.
3. Accounts Payable: Jan. 1, balance P25,000, Dec. 31, balance P44,000, purchases on account for the year,
P110,000. Prepare the entry to record payments on account.
4. Interest Receivable: Jan. 1 accrued, P3,000, Dec. 31 accrued, P2,100, earned for the year, P30,000. Prepare the
entry to record cash interest received.
*Solution 3-182
1. Ending balance P 55,000 Ending balance P 55,000
Beginning balance 41,000 Plus: Rec. collected 134,000
Difference 14,000 Write-offs 6,000
Uncollectible accounts 6,000 OR 195,000
Receivables collected 134,000 Less: Beginning balance 41,000
Sales for period P154,000 Sales for period P154,000
Accounts Receivable ............................................................................................. 154,000
Sales ........................................................................................................ 154,000

Beginning balance 4,000 Write-off 25,000
Difference 3,500 OR 32,500
Write-off 25,000 Beginning balance 4,000
Adjusting entry P28,500 Adjusting entry P28,500
Bad Debt Expense ................................................................................................. 28,500

Allowance for Doubtful Accounts ............................................................. 28,500
3. Ending balance P 44,000 Beginning balance P 25,000

Beginning balance 25,000 Plus purchases 110,000
Purchases 110,000 Less ending balance 44,000
Payments P 91,000 Payments P 91,000
Accounts Payable ................................................................................................... 91,000

Cash ........................................................................................................ 91,000
4. Revenue Earned P30,000 Beginning balance P 3,000

Less: Dec. 31 accrual (2,100) Plus revenue earned 30,000
Plus: Jan. 1 accrual 3,000 OR 33,000
Cash received P30,900 Less ending balance 2,100
Cash received P30,900
Cash ..................................................................................................................... 30,900

Interest Receivable ................................................................................... 30,900
(This entry assumes that the P30,000 interest earned
was first recorded as a receivable.)
i. Camadillo Company reported the following changes in all the account balances for the current year, except for
retained earnings:
Increase
(Decrease)
Cash 790,000
Accounts receivable, net 240,000
Inventory 1,270,000
Investments (470,000)
Accounts payable (380,000)
Bonds payable 820,000
Share capital 1,250,000
There were no entries in the retained earnings account except for net income and a dividend declaration of P
190,000 which was paid in the current year. What is the net income for the current year?
A. 10,000 C. 1,190,000
B. 200,000 D. 1,200,000 FA © 2014
i. Answer is (B).
Effect on equity
Increase in cash 790,000
Increase in accounts receivable 240,000
Increase in inventory 1,270,000
Decrease in investments (470,000)
Decrease in accounts payable 380,000
Increase in bonds payable ( 820,000)
Net increase in equity   1,390,000
Add: Dividend declared 190,000
Total 1,580,000
Less: Increase in share capital   1,250,000
Increase in share premium 130,000 1,380,000
Net income 200,000
3. What is the formula in the computation of sales under accrual basis?
Cash sales xx
Sales on account:
Trade accounts and notes receivable, end xx
Collection of trade accounts and notes receivable xx
Sales returns, allowances and discounts xx
Accounts and notes receivable written off x
Trade notes receivable discounted
(notes receivable directly credited) xx
Total xx
Less: Trade accounts and notes receivable, beginning xx xx
Total sales - accrual basis xx
Normally, the data concerning the cash sales and "the collections from customers are given. So the main problem
in the formula is the computation of sales on account. The substance of the formula is the reconstruction of the
accounts and notes receivable because the total accounts and notes receivable would represent the total sales
on account. Thus, the approach is to add back all items that decreased trade receivables to the ending balance
of accounts receivable and notes receivable.
The items that decreased trade receivables normally include:

Collections from customers
Sales returns, allowances and discounts
Accounts and notes receivable written off
Notes receivable discounted - when the notes receivable account is credited upon discounting.
The beginning balances of accounts receivable and notes receivable are deducted because these items pertain
to the preceding year and constitute sales of the prior year and that they might have been collected during the
current year or some may be the subject of returns, allowances and discounts.
4. What is the formula in the computation of purchases under accrual basis?
Cash purchases xx
Purchases on account:
Trade accounts and notes payable, end xx
Payment of trade accounts and notes payable xx
Purchase returns, allowances and discounts xx
Total xx
Less: Trade accounts and notes payable, beginning xx xx
Total purchases - accrual basis xx
Normally, the data pertaining to cash purchases and payments of trade payables are given.
So the main problem is the computation of purchases on account. The substance of the formula is the
reconstruction of the accounts and notes payable because the total accounts and notes payable would represent
the total purchases on account. Thus, the approach is to add back all items that decreased trade payables to
the ending balance of accounts payable and notes payable. The items that decreased trade payables normally
include:
Payments of accounts payable and notes payable

Purchase returns, allowances and discounts
The beginning balances of accounts and notes payable are deducted because these items pertain to the
preceding year and constitute purchases of the preceding year and they might have been paid during the current
year or some may be the subject of returns, allowances and discounts.
5. What is the formula in the computation of "income other sales" under accrual basis?
Income received - cash basis xx

Add: Deferred income - beginning xx
Accrued income - ending xx
Total xx
Less: Deferred income - ending xx
Accrued income - beginning xx xx
Income for the current year - accrual basis xx
Deferred income or unearned income or precollected income is income already received but not yet earned.
Thus, deferred income is a liability account. Examples are unearned rental income and unearned interest income.
The deferred income - beginning is added because this is received in the preceding year and earned in the current
year. The deferred income-ending is deducted because this is received in advance in the current year and to be
earned only next year.
Accrued income is income already earned but not yet received. It is a receivable and therefore an asset.
Examples are accrued interest receivable, accrued rental receivable or accrued royalties receivable. Accrued
income - beginning is deducted because this is already recognized as income in the preceding year although it
is received only in the current year. Accrued income - ending is added because this is already earned in the
current year although not yet received. It is to be received next year.
6. What is the formula in the computation of "expenses" under accrual basis?
Expenses paid-cash basis xx

Add: Prepaid expenses - beginning xx
Accrued expenses - ending xx
Total xx
Less: Prepaid expenses-ending xx
Accrued expenses - beginning xx xx
Expenses - accrual basis xx
Prepaid expenses are expenses paid in advance but not yet incurred. Prepaid expenses are assets. Examples
are prepaid insurance, prepaid taxes, prepaid rent, prepaid interest and prepaid salaries. Prepaid expense -
beginning is added because this is paid in the preceding year and only expensed in the current year. Prepaid
expense-ending is deducted because this is paid in the current year and to be expensed next year.
Accrued expenses are expenses already incurred but not yet paid. Accrued expenses are liabilities. Examples
are accrued salaries payable, accrued interest payable and accrued rental payable. Accrued expense - beginning
is deducted because this is incurred in the preceding year and only paid in the current year. Accrued expense -
ending is added because this is incurred in the current year and to be paid next year.
7. Briefly explain double entry system of accounting.
Double entry system is the method usually followed in recording transactions. Under this system, there is
complete set of accounting records which consist of journal, special journal, ledger, subsidiary ledger and other
important records. The double entry system records all transactions in terms of equal debits and credits and thus
maintains the equality of the basic accounting equation, "asset equals liability plus equity".
8. Explain single entry system of accounting.
A system of record keeping in which transactions are not analyzed and recorded in the double entry framework
is called a single entry system. Where the records are incomplete, they are said to be maintained on a single
entry basis.
Under the single entry system, the records maintained are represented only by the so-called "bare essentials"
and normally these include a record of cash, accounts receivable, accounts payable, property, plant and
equipment, and taxes paid.
The major record under the single entry system is the cashbook. The cashbook is maintained showing all receipts
and disbursements. And because in a single entry no specific accounts for the receipts and disbursements are
debited or credited, only a description thereof is made. With respect to accounts receivable and accounts
payable, only a list of customers and creditors is made with their corresponding balances.
9. What is the "single entry formula" in determining net income or loss?
The procedure in determining net income or loss is simply to compare the capital or retained earnings at the
beginning of the year and capital or retained earnings at the end of the same year, after taking into consideration
withdrawals or dividends and additional investments. The difference is either net income or net loss.
Any increase in capital or retained earnings is net income and any decrease in capital or retained earnings is net
loss. The single entry formula of determining net income or loss is also known as "net assets approach" or
"capital maintenance approach".
Formula for proprietorship or partnership:

Capital, end of the year xx
Add: Withdrawals xx
Total xx
Less: Capital, beginning of year xx
Additional investment xx xx
Net income (loss) xx
Formula for corporation:

Retained earnings, end xx
Add: Dividends declared or paid xx
Other items that decrease retained earnings but
not included in profit or loss xx
Total xx
Less: Retained earnings, beginning xx
Other items that increase retained earnings but
not included profit or loss xx
If the balance of retained earnings is not available, the net income or loss may be determined as follows:
Shareholders' equity - end xx
Add: Dividends declared or paid xx
Other items that decrease equity but not included in profit or loss xx
Total xx
Less: Shareholders' equity - beginning xx
Other items that increase equity but not included in profit or loss xx xx
Problem No. 5—Accrual accounting.
Yates Company's records provide the following information concerning certain account balances and changes in these
account balances during the current year. Transaction information is missing from each item below.
Instructions
Prepare the entry to record the missing information for each account. (Consider each inde-pendently.)
1. Accounts Receivable: Jan. 1, balance P41,000, Dec. 31, balance P55,000, uncollectible accounts written off during
the year, P6,000; accounts receivable collected during the year, P134,000. Prepare the entry to record sales.
2. Allowance for Doubtful Accounts: Jan. 1, balance P4,000, Dec. 31, balance P7,500, uncollectible accounts written
off during the year, P25,000. Prepare the entry to record bad debt expense.
3. Accounts Payable: Jan. 1, balance P25,000, Dec. 31, balance P44,000, purchases on account for the year,
P110,000. Prepare the entry to record payments on account.
4. Interest Receivable: Jan. 1 accrued, P3,000, Dec. 31 accrued, P2,100, earned for the year, P30,000. Prepare the
entry to record cash interest received.
*Solution 3-182
Beginning balance 41,000 Plus: Rec. collected 134,000
Difference 14,000 Write-offs 6,000
Uncollectible accounts 6,000 OR 195,000
Receivables collected 134,000 Less: Beginning balance 41,000
Sales for period P154,000 Sales for period P154,000
Accounts Receivable ............................................................................................. 154,000
Sales ........................................................................................................ 154,000

Beginning balance 4,000 Write-off 25,000
Write-off 25,000 Beginning balance 4,000
Adjusting entry P28,500 Adjusting entry P28,500
Bad Debt Expense ................................................................................................. 28,500

Allowance for Doubtful Accounts ............................................................. 28,500
3. Ending balance P 44,000 Beginning balance P 25,000

Beginning balance 25,000 Plus purchases 110,000
Purchases 110,000 Less ending balance 44,000
Payments P 91,000 Payments P 91,000
Accounts Payable ................................................................................................... 91,000

Cash ........................................................................................................ 91,000
4. Revenue Earned P30,000 Beginning balance P 3,000

Less: Dec. 31 accrual (2,100) Plus revenue earned 30,000
Plus: Jan. 1 accrual 3,000 OR 33,000
Cash received P30,900 Less ending balance 2,100
Cash received P30,900
Cash ..................................................................................................................... 30,900

Interest Receivable ................................................................................... 30,900
(This entry assumes that the P30,000 interest earned
was first recorded as a receivable.)
Problem No. 6—Accrual basis.
Grier & Associates maintains its records on the cash basis. You have been engaged to convert its cash basis income
statement to the accrual basis. The cash basis income statement, along with additional information, follows:
Grier & Associates

Income Statement (Cash Basis)
For the Year Ended December 31, 2011
Cash receipts from customers P450,000

Cash payments:
Wages P150,000
Taxes 65,000
Insurance 40,000
Interest 25,000 280,000
Net income P170,000
Balances at 12/31
2011 2010
Accounts receivable P50,000 P30,000
Wages payable 10,000 20,000
Taxes payable 14,000 19,000
Prepaid insurance 8,000 4,000
Accumulated depreciation 90,000 75,000
Interest payable 3,000 9,000
No plant assets were sold during 2011.
*Solution
Grier & Associates

Income Statement (Accrual Basis)
For the Year Ended December 31, 2011
Revenue (PP450,000 + PP50,000 – PP30,000) P470,000

Expenses
Wages (PP150,000 + PP10,000 – PP20,000) P140,000
Taxes (PP65,000 + PP14,000 – PP19,000) 60,000
Insurance (PP40,000 + PP4,000 – PP8,000) 36,000
Depreciation (PP90,000 – PP75,000) 15,000
Interest (PP25,000 + PP3,000 – PP9,000) 19,000
Total expenses 270,000
Net Income P200,000
Accrued expenses
i. Aubrey Company has a 12-month accounting period ending December 31. On April 1, 2013, it introduced a new
contractual bonus scheme covering the year to March 31 each year. It is reasonably anticipated that the bonuses
for the year to March 31, 2014 will amount to P900,000. What amount of liability for bonuses should be recorded
on December 31, 2013?
A. 0 C. 675,000
B. 225,000 D. 900,000 P1 © 2013
ii. Ronald Company has an incentive compensation plan under which a branch manager received 10% of the branch
income after deduction of the bonus but before deduction of income tax. Branch income for the current year
before the bonus and income tax was P1,650,000. The tax rate was 30%. What is the bonus for the current year?
A. 126,000 C. 165,000
B. 150,000 D. 180,000 FA 2 © 2014
iii. Tobruk Company has an agreement to pay its sales manager a bonus of 5% of the income after bonus and after
tax. The income for the year before bonus and tax is P5,250,000. The income tax rate is 30% of income after
bonus. What is the bonus for the year?
A. 177,536 C. 250,000
B. 186,548 D. 262,500 P1 © 2013
iv. The bonus agreement of Christian Company provides that the general manager shall receive an annual bonus
of 10% of the net income after bonus and tax. The income tax rate is 30%. The general manager received
P280,000 for the current year as bonus. What is the income before bonus and tax?
A. 2,800,000 C. 4,000,000
B. 3,720,000 D. 4,280,000 FA 2 © 2014
v. After three profitable years, Gretchen Company decided to offer a bonus to the branch manager of 25% of income
over PI,000,000 earned by the branch during the current year. The income for the branch was P 1,600,000 before
tax and before bonus for the current year. The bonus is computed on income in excess of Pi,000,000 after
deducting the bonus but before deducting tax. What is the bonus for the current year?
A. 120,000 C. 250,000
B. 150,000 D. 320,000 FA 2 © 2014
vi. Leslie Company pays all salaried employees on a Monday for the five-day workweek ended the previous Friday.
The last payroll recorded for the year ended December 31, 2013 was for the week ended December 25,2013.
The payroll for the week ended January 1,2014, included regular weekly salaries of P80,000 and vacation pay of
P25,000 for vacation time earned in 2013 not taken by December 31,2013. The entity has accrued a liability of
P20,000 for vacation pay on December 31,2012. On December 31,2013, what amount should be reported as
accrued salary and vacation pay?
A. 64,000 C. 69,000
B. 68,000 D. 89,000 P1 © 2013
i. Answer is (C).
Bonus payable from April 1 to December 31, 2013 (900,000 x 9/12) 675,000
ii. Answer is (B).

B = .10 (1,650,000 – B)
B = 165,000 - .10B
B + .10B = 165,000
1.10B = 165,000
B = 165,000 /1.10
B = 150,000
iii. Answer is (A).

B= .05 (5,250,000-B-T)
T= .30 (5,250,000 -B)
B= .05 [5,250,000 - B - .30 (5,250,000 - B)]
B= .05 (5,250,000-B-l,575,000+ .30B)
B= 262,500-.05B-78,750 + .015B
B + .05B-.015B = 262,500-78,750
1.035B = 183,750
B= 183,750/1.035
B= 177,536
iv. Answer is (D)

Income after bonus and tax (280,000 / 10%) 2,800,000
Income before tax (2,800,000 / 70%) 4,000,000
Income before bonus and tax (4,000,000 + 280,000) 4,280,000
Proof:
Income before bonus and tax 4,280,000
Less: Bonus 280,000
Less: tax (30% x 4,000,000) 1,200,000
Income after bonus and tax 2,800,000
v. Answer is (A).
Income after bonus before tax (600,000 / 125%) 480,000
Bonus (25% x 480,000) 120,000
vi. Answer is (D).

January 1,2014 is a Friday based on the weekly payroll. Therefore, for 2013 consider only 4 days from Monday,
December 28 to Thursday, December 31.
Accrued salary - December 31, 2013 (80,000 x 4/5) 64,000
Vacation pay earned in 2013 25,000
Total 89,000
Kollar Company provided the following data for the current year:
Purchase of real estate for cash (cash was borrowed from bank) 5,500,000
Sale of investment securities for cash 5,000,000
Dividend paid 6,000,000
Issuance of ordinary shares for cash 2,500,000
Purchase of patent for cash 1,250,000
Payment of bank loan 1,500,000
Increase in customers' deposit 200,000
Issuance of bonds payable for cash 3,000,000
i. What is the net cash used in investing activities?

A. 500,000 C. 3,750,000
B. 1,750,000 D. 6,750,000
ii. What is the net cash provided by financing activities?

A. 3,500,000 C. 5,000,000
B. 4,500,000 D. 5,500,000
i. Answer is (B).
Purchase of real estate (5,500,000)
Sale of investment securities 5,000,000
Purchase of patent for cash (1,250,000)
Net cash used in investing activities (1,750,000)
The increase in customers' deposit is an addition to net income in determining the net cash flows from operating
activities.
ii. Answer is (B).

Cash borrowed from bank 5,500,000
Dividend paid (6,000,000)
Issuance of ordinary shares for cash 2,500,000
Payment of bank loan (1,500,000)
Issuance of bonds payable 3,000,000
Net cash provided - financing 3,500,000
Capiz Company provided the following for the current year:
Increase in long-term debt 5,000,000
Purchase of treasury shares 1,000,000
Depreciation and amortization 1,500,000
Gain on sale of equipment 500,000
Proceeds from issuance of share capital 4,000,000
Purchase of equipment for cash 7,000,000
Proceeds from sale of equipment 2,000,000
Payment of cash dividend 2,500,000
Increase (decrease) in working capital accounts:
Accounts receivable 2,000,000
Inventory (3,500,000)
Trade accounts and notes payable 4,000,000
Income tax payable (4,500,000)
Cash balance, January 1 6,000,000
i. What is the net cash provided by operating activities?

A. 7,500,000 C. 10,000,000
B. 8,500,000 D. 11,000,000
ii. What is the net cash used in investing activities?

A. 2,000,000 C. 7,000,000
B. 5,000,000 D. 9,000,000
iii. What is the net cash provided by financing activities?

A. 2,500,000 C. 8,000,000
B. 5,500,000 D. 9,000,000
i. Answer is (C).
Increase in accounts receivable ( 2,000,000)
Decrease in inventory 3,500,000
Increase in accounts and notes payable 4,000,000
Decrease in income tax payable ( 4,500,000)
Depreciation and amortization 1,500,000
Gain on sale of equipment ( 500,000)
Net cash provided - operating 10,000,000
ii. Answer is (B).

Purchase of equipment for cash ( 7,000,000)
Proceeds from sale of equipment 2,000,000
Net cash used - investing ( 5,000,000)
iii. Answer is (B).

Increase in long-term debt 5,000,000
Purchase of treasury shares ( 1,000,000)
Proceeds from issuance of share capital 4,000,000
Payment of cash dividend ( 2,500,000)
Cash balance - January 1 6,000,000

Net cash used - investing ( 5,000,000)
Cash balance - December 31 16,500,000
1. ABC Co. is preparing its interim financial statements for the period ended March 31, 20X1. The following relate
to the transactions during the first quarter:
A. Total sales for the interim period was P1,000,000.
B. Cost of sales P450,000.
C. ABC is liable for 10% commission on its sales to its sales representatives and agents. No commission has
yet been paid as of March 31, 20X1.
D. The allowance for doubtful has a balance of P5,000 as of January 1, 20X1. The required balance as of March
31, 20X1 is P15,000. There were no write-offs or recoveries during the period.
E. A building with historical cost of P1,200,000 is being depreciated over 5 years using straight line method.
F. ABC prepaid a one-year insurance on its assets for P40,000 on January 1, 20X1.
G. Property taxes for 20X1 amounting to P26,000 was paid in January.
H. Advertising costs of P50,000 were incurred in February on promotional activities held on Valentine’s Day.
I. Year-end staff bonuses are expected to be around P92,000. Employees become entitled to the bonuses as
they provide services to ABC during the year.
J. ABC’s president is entitled to a 10% bonus on profit before bonus and taxes.
K. Loss on sale of a used equipment on March 2, 20X1 was P30,000.
L. ABC incurred P12,000 on unanticipated repairs on its factory equipment on March 16, 20X1.
M. Due to the unexpected breakdown of the factory equipment on March 16, 20X1, ABC has planned a major
periodic overhaul of its other equipment to be held annually starting on December 31, 20X1. The cost of
the major planned periodic overhaul is estimated at P48,000.
N. ABC leases one of its retail stores. Monthly rentals are P5,000, however, the lease contracts provide for a
contingent rent equal to 2% of the excess of sales over P900,000.
O. ABC’s budget for 20X1 included charitable contributions of P24,000 and employee training costs of P13,000.
None of those costs were incurred as of March 31, 20X1.
P. Other operating expenses incurred during the first quarter total P120,000.
Q. It was discovered that depreciation in the previous year was overstated by P9,000
R. The income tax for the year is 30%.
Required: Compute for the profit or loss for the first quarter ended March 31, 20X1.
A. P70,245 B. P60,745 C. P80,345 D. P90,235
a Sales 1,000,000
b Cost of sales (450,000)
Gross profit 550,000
c Commission (10% x 1M) (100,000)
d Bad debt expense (15-5) (10,000)
e Dep. (1.2 / 5 x 3/12) (60,000)
f Insurance (40K x 3/12) (10,000)
g Property tax ( 26 x 3/12) (6,500)
h Advertising (50,000)
i Staff (92 x 3/12) (23,000)
k loss on sale (30,000)
l Repairs (12,000)
n rent (5K x 3) (1M-900k)x 2% (17,000)
p other operating expenses (120,000)
Profit before bonus 111,500
j Bonus (11,150)
Net income before tax 100,350

R tax 30% (30,105)
Net profit 70,245
M and o shall be recognized only when actually incurred. Q prior period

Case 1: (Casualty loss, insurance expense) Farehight Company had the following transactions during the quarter
ended March 31,20x4.
Loss from typhoon P700,000
Payment of fire insurance premium for calendar year 20x4 100,000
What amount should be included in the income statement for the quarter ended March 31, 20x4?
Casualty loss 700,000

Insurance expense (100,000 / 4) 25,000
Under PAS 34, paragraph 28, the general rule in preparing interim financial statements is that costs and
expenses that clearly benefit more than one interim period are allocated to the interim periods affected. Thus,
the insurance premium of PI00,000 is allocated over four quarterly interim periods. Gains and losses are not
allocated over the interim periods. Thus, the casualty loss is reported in the quarter when incurred
Case 2: (Loss from disposal of a business segment, property taxes) On June 30,20x4, Sugar Company
incurred a P1,000,000 net loss from disposal of a business segment. Also, on June 30,20x4, the entity paid P400,000
for property taxes assessed for the calendar year 20x4. What total amount should be included in the determination
of the net income or loss for the six-month interim period ended June 30,20x4?
Net loss from disposal of segment 1,000,000

Property taxes (400,000 x 6/12) 200,000
Total amount 1,200,000
The effects of a disposal of segment of business are reported separately in the interim periods in which they
occur. The property taxes clearly benefit the entire year. Therefore, the property taxes are allocated over the
interim periods reported.
Case 3: (Advertising & bonus) Mount Apo Company operates in the travel industry and incurs costs unevenly
throughout the year. Advertising costs of P2,000,000 were incurred on March 1, 20x4, and staff bonuses are paid at
year-end based on sales. Staff bonuses are expected to be around P20,000,000 for the year. Of that sum, P3,000,000
would relate to the period ending March 31,20x4. What amount should be included in the quarterly financial report
ending March 31, 20x4?
Advertising and bonuses are reported in the interim period when incurred. (2,000,000 and 3,000,000)
Case 4: (Real property tax, repairs) On March 15, 20x4, Bantay Company paid property taxes of P180,000 on
the factory building for calendar year 20x4. On April 1, 20x4, the entity made P300,000 in unanticipated ordinary
repairs to plant equipment. What total amount of these expenses should be included in the quarterly income
statement ending June 30, 20x4?
Property taxes (180,000 / 4) 45,000

Repairs 300,000
The expense for second quarter 345,000
Problem 4: (Provisions-Changes in estimates)
Case 1: (Inventory loss) Vilma Company experienced a P500,000 decline in the market value of inventory at the
end of the first quarter. The entity had expected this decline to reverse in the second quarter, and in fact, the second
quarter recovery exceeded the previous decline by P100,000. What amount of gain or loss should be reported in the
interim statements for the first and second quarters?
First quarter 500,000 loss

Second quarter 500,000 gain
Inventory loss from market decline is reported in the interim period in which the decline occurs. Recovery of such
loss on the same inventory in later interim period is recognized as gain in the later interim period. However,
any gain on reversal of inventory write-down is limited only to the amount of loss previously recognized.
Case 2: (Provision for warranty) Cebu Company prepares quarterly interim financial reports. The entity sells
electrical goods and normally 5% of customers claim on their warranty. The provision in the first quarter was
calculated at 5% of sales to date which amounted to P10,000,000. However, in the second quarter, a design fault
was found and warranty claims were expected to be 10% for the whole year. Sales for the second quarter amounted
to P15,000,000. What amount of provision should be charged in the second quarter's interim income statement?
Total warranty expense - first and second quarter(10% x 25,000,000) 2,500,000

Warranty expense recognized in first quarter (5% x 10,000,000) 500,000
Warranty expense - second quarter 2,000,00
Problem 5: (Operating activities -Indirect method vs. Direct method) The Bean Company reported the following condensed
profit or loss for 20x9:
Sales P1,000,000
Cost of Goods Sold 580,000
Gross Profit P 420,000
Operating Expenses
Depreciation Expense P 80,000
Salaries Expense 120,000 220,000
Profit Before Income Taxes P220,000
Income tax Expense 66,000
Profit P154,000
During 20x9, the following changes occurred in the company’s current liabilities:
Increase (Decrease)
Cash P 37,000
Accounts Receivable (50,000)
Inventories 89,000
Accounts Payable (trade) (46,000)
Salaries Payable 24,000
Income Tax Payable 12,000
Required: Prepare the operating activities section of the Bean Company’s Statement of Cash Flows for the year 20x9 using (a) indirect
method and (b) direct method.
(a) Indirect method

Cash flows from operating activities:
Net income before income tax P220,000
Adjustments for:
Depreciation expense 80,000
Operating income before working capital changes P300,000
Decrease in accounts receivable 50,000
Increase in inventories (89,000)
Decrease in accounts payable (46,000)
Increase in salaries payable 24,000
Cash generated from operations P239,000
Income tax paid (66,000 – 12,000) (54,000)
Net cash from operating activities P185,000
(b) Direct method

Cash flows from operating activities:
Collections from customers P1,050,000
Payments to trade creditors (715,000)
Payments for salaries (96,000)
Cash generated from operations P 239,000
Income taxes paid 54,000
Net cash from operating activities P185,000
Statement of cash flows Page 1 of 3

Problem 6: (Investing Activities) Riverside Company provided the following information for the current year:
* Purchased a building for P1,200,000. Paid P400,000 and signed  a mortgage with the seller for the remaining P800,000.
* Executed a debt-equity swap and replaced a P600,000 loan by  giving the lender ordinary shares worth P600,000 on the
date the swap was executed.
* Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.
* Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan proceeds as follows: PI50,000 for
purchase of additional inventory, P3 00,000 to pay cash dividend, and PI00,000 to increase the cash balance.
Required: What amount should be reported as net cash used in investing activities in the statement of cash flows?
Cash paid for purchase of building (400,000)

Cash paid for purchase of land (350,000)
Net cash used - investing (750,000)
The debt-equity swap is disclosed as a financing activity. The borrowing of P550,000 is a cash inflow from financing. The purchase
of inventory of P300,000 is operating and the dividend payment of PI 00,000 is financing.
Problem 7: (Financing Activities) During the current year, ABC Company had the following activities related to financial operations:
Payment for the early retirement of long-term
bonds payable (carrying amount P7,400,000) P7,500,000
Distribution in the current year cash dividend declared
in prior year to preference shareholders 620,000
Carrying amount of convertible preference shares
converted into ordinary shares 1,200,000
Proceeds from sale of treasury shares (carrying amount at cost, P860,000) 950,000
In the statement of cash flows for the current year, what amount should be reported as net cash used in financing activities?
Payment of bonds payable (7,500,000)
Payment of cash dividend (620,000)
Proceeds from sale of treasury shares 950,000
Net cash used in financing activities (7,170,000)
The conversion of preference shares into ordinary shares is a noncash financing activity and therefore has no cash effect. As a simple
guide, cash effects of transactions involving nontrade liabilities and shareholders 'equity are financing activities.
Problem 8: (Statement of cash flows) Megamall Company gathered the following information about changes which took place
during the current year:
Cash (P150,000)
Inventory 1,500,000
Property, plant and equipment 500,000
Accumulated depreciation (180,000)
Intangible asset, net of amortization 275,000
Accrued expenses (50,000)
Accounts payable (320,000)
Note payable - short-term debt (700,000)
Bonds payable (250,000)
Ordinary share capital, P5 par (125,000)
Share premium (200,000)
Retained earnings (600,000)
Equipment which had originally cost P200,000 and had a carrying amount of zero was thrown away. Equipment with a cost of P150,000
and accumulated depreciation of P100,000 was sold for P50,000. Some new equipment was purchased during the year. An intangible
asset was acquired during the year for 25,000 ordinary shares. Each share was selling for P13 at that time. The entity retired
P2,500,000 of 10% bonds at par and issued P2,750,000 of 8% bonds at par. The income statement reported revenue of P7,000,000
and expenses of P5,000,000.
Required:
a. What is the net cash provided by operating activities?
b. What is the net cash used in investing activities?
c. What is the net cash used in financing activities?
Net income (7,000,000 - 5,000,000) 2,000,000

Depreciation 480,000
Increase in accounts receivable ( 300,000)
Increase in inventory (1,500,000)
Amortization (325,000 - 275,000) 50,000
Increase in accrued expenses 50,000
Increase in accounts payable 320,000
Net increase in accumulated depreciation 180,000

Accumulated depreciation of equipment thrown away 200,000
Accumulated depreciation of equipment sold 100,000
Total depreciation 480,000
Sale of equipment 50,000

Purchase of equipment (850,000)
Net cash used - investing (800,000)
Net increase in property, plant and equipment 500,000

Cost of equipment thrown away 200,000
Cost of equipment sold 150,000
Total acquisition 850,000
Patent acquired by issuing shares (25,000 shares x 13) 325,000
Less: Increase in intangible asset 275,000
Amortization 50,000
Retirement of bonds payable (2,500,000)

Issuance of bonds payable 2,750,000
Dividend paid (1,400,000)
Proceeds from note payable - short term debt 700,000
Net cash used - financing ( 450.000)
Less: Increase in retained earnings 600,000
Dividend paid 1,400,000

The income statement provides information that helps predict
A. The timing of future cash flows C. The uncertainty of future cash flows
B. The amount of future cash flows D. All of these
The income statement information would help in which of the following tasks?
A. Estimate future cash flows C. Evaluate liquidity
B. Estimate future financial flexibility D. Evaluate solvency
Information in the income statement helps users to

A. Evaluate the past performance of the entity.
B. Provide a basis for predicting future performance.
C. Assess the risk or uncertainty of achieving future cash flows.
D. All of these
Incomplete accounting records using only a cash book is a characteristic of

A. Accrual basis C. Double entry system
B. Cash basis D. Single entry system
Under the cash basis of accounting

A. The matching principle is ignored.
B. Revenue is recorded when earned.
C. Accounts receivable would appear in the statement of financial position.
D. Depreciation of assets having an economic life of more than one year is not recognized.
Under the cash basis of accounting, revenue is recorded

A. When earned C. When earned and realized
B. When realized D. When earned and realizable
The statement of financial position is useful for all of the following, except
A. To compute rate of return
B. To assess future cash flows
C. To evaluate capital structure
D. To analyze cash inflows and outflows for the period
The premium on a three-year insurance policy expiring on December 31, 2015 was paid in total on January 1, 2013. If
the original payment was recorded as a prepaid asset, how would total assets and shareholders' equity be
affected during 2013?
A. Both total assets and shareholders' equity would increase
B. Neither total assets nor shareholders' equity would change
C. Both total assets and shareholders' equity would decrease
D. Total assets would decrease and shareholders' equity would increase
An entity shall present all items of income and expense recognized in a period
I. In a single statement of comprehensive income.
II. In two statements, one statement displaying the components of profit or loss, and the second statement
beginning with profit or loss and displaying components of other comprehensive income
A. I only C. Either I or II
B. II only D. Both I and II
Which of the following options for displaying comprehensive income is preferred?

I. A continuation from net income at the bottom of the income statement.
II. A separate statement that begins with net income. III. In the statement of changes in equity.
A. I only C. II and III only
B. II only D. I and II only
Which of the following statements is true?

I. An entity presenting a single statement of comprehensive income shall present a statement of changes in
equity.
II. An entity presenting a separate income statement and a statement of comprehensive income shall present
a statement of changes in equity.
A. I only C. Both I and II
B. II only D. Neither I nor II
It is the total of income less expenses, excluding the components of other comprehensive income.
A. Accounting income C. Economic income
B. Comprehensive income D. Profit or loss
The income statement reveals

A. Assets and equity at a point in time. C. Net income at a point in time.
B. Assets and equity for a period of time. D. Net income for a period of time.
The income statement reveals

A. Net earnings at a point in time.
B. Net earnings for a period of time.
C. Resources and equity at a point in time.
D. Resources and equity for a period of time.
he income statement would help in which of the following tasks?

A. Evaluate the liquidity of an entity
B. Estimate future financial flexibility
C. Evaluate the solvency of an entity
D. Estimate the amount, timing and uncertainty of future cash flows
Comprehensive income excludes changes in equity resulting from which of the following?
A. Prior period error correction
B. Dividends paid to shareholders
C. Loss from discontinued operations
D. Unrealized loss on financial assets held for trading
An entity shall disclose for each reportable segment a measure of all of the following, except
A. Net assets
B. Profit or loss
C. Total assets if such amount is regularly provided to the chief operating decision maker
D. Total liabilities if such amount is regularly provided to the chief operating decision maker
An entity shall disclose for each reportable segment which of the following specified amounts that are included in the
measure of segment assets?
A. Deferred tax assets
B. Financial instruments
C. Postemployment benefit assets
D. The amount of investment in associates and joint ventures accounted for by the equity method.
The statement of financial position provides a basis for all of the following, except
A. Computing rate of return.
B. Evaluating capital structure.
C. Assessing liquidity and financial flexibility.
D. Determining increase in cash due to operations.
The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to
as
A. Exchangeability C. Liquidity
B. Financial flexibility D. Solvency
Classify the following cash flows according to activities: In case there are two possible related
activities, then identify the (BT) benchmark treatment vs (AT) alternative treatment
Cash Flow Transaction Operating InvestingFinancing
1. Interest payments to creditor

2. Dividend payments to owners
3. Interest received from debtors
4. Dividend receipts from investees
5. Income tax payments and refunds
Problem 3: Identify the treatment of the following items in the computation of operating cash flows using the
INDIRECT METHOD:
Indicate (+) if added to net income, (-) if deducted from net income or (0) if not considered to be considered at all:
1. Depreciation of building
2. Impairment of held to maturities securities
3. Increase in trade payables
4. Decrease in accounts receivable
5. Increases in inventories
6. Decrease in trade accrued expenses
7. Depletion of wasting assets
8. Amortization of bond discount (bonds payable)
9. Loss on sale of property
10. Gain of sale of long term investment
P
Problem 1: (Statement of cash flows) For each event listed below, select the appropriate category which
describes the effect of the event on a statement of cash flows:
a. Cash provided/used by operating activities.
b. Cash provided/used by investing activities.
c. Cash provided/used by financing activities.
d. Not a cash flow.
_____ 1. Payment on long-term debt

_____ 2. Issuance of bonds at a premium
_____ 3. Collection of accounts receivable
_____ 4. Cash dividends declared
_____ 5. Issuance of stock to acquire land
_____ 6. Sale of available-for-sale securities (long-term)
_____ 7. Payment to acquire trading securities
_____ 8. Issuance of share capital–ordinary for cash
_____ 9. Payment of income taxes payable
_____ 10. Purchase of equipment
_____ 11. Purchase of treasury stock (ordinary)
_____ 12. Sale of real estate held as a long-term investment
Current assets
i. On December 31, 2014, the current assets of Hazel Company revealed cash and cash equivalents of P700,000,
accounts receivable of P1,200,000 and inventories of P600,000: The examination of accounts receivable
disclosed the following:
Trade accounts 930,000
Allowance for doubtful accounts ( 20,000)
Claim against shipper for goods lost in transit 30,000
Selling price of unsold goods sent by Hazel on consignment
at 130% of cost and not included in ending inventory 260,000
Total accounts receivable 1,200,000
What total amount should be reported as current assets?
A. 2,240,000 C. 2,440,000
B. 2,412,000 D. 2,500,000 FA © 2014
ii. Gracia Company reported the following current assets at year-end:

Cash including sinking fund of P500,000 with trustee 1,500,000
Inventory, including P200,000 cost of goods in transit
purchased FOB point of destination 2,000,000
Advances to officers collectible currently 400,000
Dividend receivable 100,000
Total current assets 6,500,000
What total amount should be reported as current assets?
A. 5,300,000 C. 5,800,000
B. 5,400,000 D. 5,900,000 FA © 2014
iii. Darwin Company provided the following information on December 31,2014:

Inventory, including inventory expected in the ordinary course of
operations to be sold beyond 12 months amounting to P700,000 1,000,000
Prepaid insurance 100,000
Financial assets held for trading 200,000
Financial assets at fair value through other comprehensive income 800,000
Cash 300,000
Deferred tax asset 150,000
Bank overdraft 250,000
What amount should be reported as total current assets on December 31, 2014?
A. 2,100,000 C. 2,800,000
B. 2,550,000 D. 3,600,000 P1 © 2014
iv. Violago Company provided the following account balances on December 31, 2014:
Financial assets at fair value through profit or loss 500,000
Financial assets at amortized cost 1,300,000
Cash 1,100,000
Inventory 3,000,000
Equipment and furniture 2,500,000
Accumulated depreciation 1,500,000
Patent 400,000
Prepaid expenses 100,000
Equipment held for sale 1,800,000
On December 31, 2014, what total amount should be reported as current assets?
A. 6,300,000 C. 8,000,000
B. 7,600,000 D. 8,100,000 FA © 2014
v. Pamela Company provided the following adjusted account balances on December 31,2014:
Wages payable 250,000
Cash 200,000
Mortgage payable 1,500,000
Dividends payable 150,000
Prepaid rent 100,000
Inventory 800,000
Sinking fund 500,000
Short-term investments 300,000
Investment in associate 2,000,000
Taxes payable 220,000
Accounts payable 240,000
Accounts receivable 350,000
What total amount should be reported as current assets on December 31, 2014?
A. 1,750,000 C. 3,750,000
B. 2,250,000 D. 4,250,000 P1 © 2014
vi. Petite Company provided the following data on December 31,2014:

Cash 5,000,000
Financial assets at fair value (including long-term investment
of P500,000 in ordinary shares of Ayala Company) 2,000,000
Inventories (including goods received on
consignment of P200,000) 800,000
Prepaid expenses (including a deposit of P50,000 made
on inventories to be delivered in 18 months) 150,000
Property, plant, and equipment (excluding P300,000
of equipment still in use, but fully depreciated) 10,000,000
Goodwill 1,000,000
Total assets 18,950,000
Cash in general checking account 3,500,000

Cash in fund to be used to retire bonds in 2016 1,000,000
Cash held to pay value added taxes 500,000
Total cash 5,000,000
What total amount of current assets should be reported on December 31, 2014?
A. 6,200,000 C. 7,200,000
B. 6,250,000 D. 7,250,000 P1 © 2014
vii. Arabian Company reported the following current assets on December 31,2014:
Cash 4,300,000
Inventory 4,000,000
Deferred tax asset 1,200,000
17,000,000
An analysis of the accounts receivable disclosed that accounts receivable comprised the following:
Trade accounts receivable 5,000,000
Selling price of Arabian Company's unsold goods sent
to Tar Company on consignment at 150% of cost
and excluded from Arabian's ending inventory 3,000,000
7,500,000
On December 31, 2014, what amount should be reported as total current assets?
A. 14,800,000 C. 15,800,000
B. 15,300,000 D. 16,000,000 P1 © 2014
viii. Caticlan Company provided the following data on December 31,2014:

Cash, including sinking fund of P500,000 2,000,000
Notes receivable 1,200,000
Note receivable discounted 700,000
Accounts receivable - unassigned 3,000,000
Accounts receivable - assigned 800,000
Allowance for doubtful accounts 100,000
Equity of assignee in accounts receivable assigned 500,000
Inventory, including P600,000 cost of goods in transit
purchased FOB destination. The goods were
received on January 3, 2015 2,800,000
What total amount of current assets should be reported on December 31,2014?
A. 7,400,000 C. 7,900,000
B. 7,700,000 D. 8,000,000 P1 © 2014
ix. Caticlan Company provided the following data on December 31,2014:

Cash, including sinking fund of P500,000 for bond
payable due on June 30, 2015 2,000,000
Note receivable discounted 700,000
Equity of assignee in accounts receivable assigned 500,000
Inventory, including P600,000 cost of goods in transit purchased
FOB destination. The goods were received on Jan. 3, 2015 2,800,000
A. 7,400,000 C. 7,900,000
B. 7,700,000 D. 8,400,000 FA © 2014
x. On December 31, 2014, Ivan Company showed the following current assets:
Cash 500,000
Inventory 2,000,000
Cash on hand including customer's postdated check
of P20,000 and employee IOU of PI0,000 130,000
Cash in bank per bank statement (outstanding
checks on December 31, 2014, P70,000) 370,000
Total cash 500,000
Customers' debit balances, net of customers' deposit of P50,000 1,900,000
Allowance for doubtful accounts (150,000)
Sales price of goods invoiced to customers at 150% of cost on
December 29, 2014 but delivered on January 5, 2015 and
excluded from reported inventory 750,000
What total amount of current assets should be reported?
A. 4,630,000 C. 4,830,000
B. 4,780,000 D. 4,900,000 P1 © 2014
xi. East Company reported the following current assets at year end:
Cash 3,200,000
Inventory 2,800,000
Deferred charges 200,000
8,200,000
The accounts receivable consisted of the following:
Customers' accounts 1,420,000
Employees' account-current 240,000
Advances to subsidiary 260,000
Allowance for uncollectible accounts (120,000)
Claim against shipper for goods lost in transit 200,000
2,000,000
What amount should be reported as total current assets?
A. 7,740,000 C. 7,940,000
B. 7,780,000 D. 8,200,000 FA © 2014
xii. The general ledger trial balance of Daria Company included the following accounts on December 31, 2014:
Inventory, including inventory expected in the ordinary course
of operations to be sold beyond 12 months amounting to P700.000 1,000,000
Trade receivables 1,200,000
Financial assets at fair value through other comprehensive income 800,000
Cash 300,000
A. 2,100,000 C. 2,800,000
B. 2,550,000 D. 3,600,000 FA © 2014
xiii. Daet Company provided the following account balances and related information on December 31,2014:
Cash 3,700,000
Inventory 2,000,000
The cash included cash in bank of P1,000,000 net of bank overdraft P300,000, cash set aside for plant purchase
P2,000,000, petty cash P10,000, cash withheld from wages P190,000, and general cash P500,000.
The accounts receivable included past due account in the amount of P100,000. The account is deemed
uncollectible and should be written off. The inventory included goods held on consignment amounting to
P150,000 and goods of P200,000 purchased and received on December 31,2014. Neither of these items have
been recorded as a purchase. The prepaid insurance included cash surrender value of life insurance of P50,000.
A. 5,100,000 C. 5,300,000
B. 5,200,000 D. 5,400,000 P1 © 2014
xiv. Gold Company provided the following trial balance on December 31,2014:
Cash overdraft 100,000
Inventory 580,000
Land classified as held for sale 1,000,000
Property, plant and equipment, net 950,000
Accounts payable and accrued expenses 320,000
Ordinary share capital 250,000
Share premium 1,500,000
Retained earnings . 830,000
3,000,000 3,000,000
Checks amounting to P300,000 were written to vendors and recorded on December 29,2014, resulting in a cash
overdraft of P100,000. The checks were mailed on January 15,2015. Land classified as held for sale was sold
for cash on January 31,2015. The entity issued the financial statements on March 31, 2015. On December
31,2014, what total amount should be reported as current assets?
A. 1,250,000 C. 2,050,000
B. 1,950,000 D. 2,250,000 P1 © 2014
xv. Petite Company provided the following data on December 31, 2014:
Cash 5,000,000
Financial assets at fair value (including long-term
investment of P500,000 in ordinary shares of Ayala Company) 2,000,000
Inventories (including goods received on consignment of P200,000) 800,000
Prepaid expenses (including a deposit of P50,000 made on
inventories to be delivered in 18 months) 150,000
Property, plant, and equipment (excluding P300,000 of equipment
still in. use but fully depreciated) 10,000,000
Goodwill (based on estimate by the president) 1,000,000
Total assets 18,950,000
Analysis of the cash account showed the following:
Cash in general checking account 3,500,000
Sinking fund set aside to retire bonds in 2016 1,000,000
5,000,000
A. 6,200,000 C. 7,200,000
B. 6,250,000 D. 7,250,000 FA © 2014
xvi. On December 31, 2014, Ivan Company showed the following current assets:
Cash 500,000
Inventory 2,000,000
Cash on hand including customer's postdated
check ofP20,000 and employee IOU of P10,000 130,000
Cash in bank per bank statement (outstanding
checks on December 31, 2014, P70,000) 370,000
Total cash 500,000
Customers' debit balances, net of customers'
deposit of P50,000 1,900,000
Sales price of goods invoiced to customers at
150% of cost on December 29, 2014 but delivered on
January 5, 2015 and excluded
from reported inventory 750,000
Subscription receivable, collectible currently 1,000,000
A. 5,800,000 C. 5,900,000
B. 5,830,000 D. 6,230,000 FA © 2014
xvii. Daet Company provided the following account balances and related information on December 31, 2014:
Cash and cash equivalents 3,700,000
Inventory 2,000,000
7,300,000
The cash and cash equivalents included the following:
Cash in bank, net of bank overdraft of P300,000
maintained in a separate bank 1,000,000
Cash set aside by the Board of Directors for the purchase of a plant site 2,000,000
Petty cash 10,000
Cash withheld from wages for income tax of employees 190,000
General cash 500,000
3,700,000
* The accounts receivable included past due account in the amount of P100,000 on which a loss of 50% is
anticipated. The account should be written off.
* The merchandise inventory included goods held on consignment amounting to P150,000 and goods of
P200,000 purchased and received on December 31, 2014. Neither of these items had been recorded as a
purchase.
* The prepaid insurance included cash surrender value of life insurance of P50,000.
A. 5,100,000 C. 5,300,000
B. 5,200,000 D. 5,400,000 FA © 2014
Total assets
xviii. Rice Company was incorporated on January 1, 2014 with P5,000,000 from the issuance of share capital and
borrowed funds of PI,500,000. During the first year, net income was P2,500,000. On December 15, the entity
paid a P500,000 cash dividend. On December 31,2014, the liabilities had increased to P1,800,000. On December
31,2014, what amount should be reported as total assets?
A. 6,500,000 C. 8,800,000
B. 6,800,000 D. 9,300,000 P1 © 2014
xix. Mirr Company was incorporated on January 1,2014 with proceeds from the issuance of P7,500,000 in share
capital and borrowed funds of PI, 100,000. During the first year, revenue from sales and consulting amounted to
P8,200,000, and operating costs and expenses totaled P6,400,000. On December 15,2014, the entity declared
a P300,000 dividend, payable to shareholders on January 15,2015. The liabilities increased to P2,000,000 by
December 31, 2014. On December 31,2014, what amount should be reported as total assets?
A. 10,100,000 C. 11,300,000
B. 11,000,000 D. 12,100,000 P1 © 2014
xx. Peach Company reported total assets of P4,375,000 at year-end which included the following:
Treasury shares of Peach Company at cost 120,000
Unamortized patent 56,000
Cash surrender value of life insurance 68,500
Cumulative translation loss 42,000
What amount should be reported as total assets at year-end?
A. 4,208,500 C. 4,250,500
B. 4,213,000 D. 4,255,000 FA © 2014
Current liabilities
xxi. Brazil Company reported the following liability balances on December 31, 2014:
Accounts payable 5,000,000
Bonds payable, due December 30, 2015 10,000,000
Deferred tax liability 2,500,000
Note payable-bank 4,000,000
The bank note payable matures on June 30, 2015. On March 1, 2015, the bank note payable was refinanced on
a long-term basis. The financial statements were issued on March 31, 2015. What total amount should be
reported as current liabilities?
A. 9,000,000 C. 19,000,000
B. 15,000,000 D. 21,500,000 FA © 2014
xxii. Mill Company reported the following account balances on December 31, 2014:
Bonds payable, due 2015 2,500,000
Discount on bonds payable 300,000
Dividend payable 800,000
Note payable, due 2016 2,000,000
What total amount should be reported as current liabilities?
A. 4,500,000 C. 6,500,000
B. 5,100,000 D. 7,800,000 FA © 2014
xxiii. Brite Company had the following information on December 31,2014:

Unsecured note payable, 8%, due July 1, 2015 4,000,000
Accrued expenses 350,000
Contingent liability 450,000
Deferred tax liability 250,000
Senior bonds payable, 7%, due March 31,2015 5,000,000
What amount should be reported as total current liabilities?
A. 4,900,000 C. 10,150,000
B. 9,900,000 D. 10,350,000 P1 © 2014
xxiv. Gar Company reported the following liability account balances on December 31,2014:
Bonds payable 3,400,000
Premium on bonds payable 200,000
Income tax payable 900,000
Note payable, due January 31,2015 600,000
The deferred tax liability is based on temporary differences that will reverse in 2016. On December 31,2014,
what total amount should be reported as current liabilities?
A. 3,900,000 C. 4,300,000
B. 4,100,000 D. 7,100,000 FA © 2014
xxv. Burma Company disclosed the following information:

Accounts payable, after deducting debit balances
in suppliers' accounts amounting to P100,000 4,000,000
Accrued expenses 1,500,000
Credit balances of customers' accounts 500,000
Stock dividend payable 1,000,000
Claims for increase in wages and allowance by
employees of the entity, covered in a pending lawsuit 400,000
Estimated expenses in redeeming prize coupons 600,000
A. 6,600,000 C. 7,100,000
B. 6,700,000 D. 7,700,000 FA © 2014
xxvi. Gumamela Company provided the following data at year-end:

Trade accounts payable, including cost of goods
received on consignment of P150,000 1,350,000
Accrued taxes payable 125,000
Customers' deposit 100,000
Manila Company as guarantor 200,000
Accrued electric and power bills 60,000
Reserve for contingencies 150,000
What total amount should be reported as current liabilities?
A. 1,540,000 C. 1,740,000
B. 1,650,000 D. 1,840,000 FA © 2014
xxvii. Mazda Company reported the following liability balances on December 31,2014:
10% note payable issued on October 1,2013, maturing October 1, 2015 2,000,000
12% note payable issued on March 1, 2013, maturing on March 1, 2015 4,000,000
The 2014 financial statements were issued on March 31,2015. Under the loan agreement for the 10% note
payable, the entity has the discretion to refinance the obligation for at least twelve months after December 31,
2014. On March 1, 2015, the entire P4,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum. What amount of the notes payable should be classified as
current on December 31, 2014?
A. 0 C. 4,000,000
B. 2,000,000 D. 6,000,000 P1 © 2014
xxviii.Jam Company had P2,000,000 note payable due on March 1, 2015. The entity borrowed P1,500,000 on
December 31, 2014 which has a five-year term and used the proceeds to pay down the note payable and used
other cash to pay the balance at maturity. The financial statements were issued on March 31, 2015. What amount
of the note payable should be classified as current on December 31, 2014?
A. 0 C. 1,500,000
B. 500,000 D. 2,000,000 FA © 2014
xxix. On December 31,2014, Ace Company had P40,000,000 note payable due on February 28,2015. On December
31, 2014, the entity arranged a line of credit with City Bank which allows the entity to borrow up to P35,000,000
at one percent above the prime rate for three years. On February 15,2015, the entity borrowed P25,000,000 from
City Bank and used P5,000,000 additional cash to liquidate P30,000,000 note payable. The financial statements
were issued on March 31,2015. What amount of note payable should be reported as current liability on December
31,2014?
A. 0 C. 10,000,000
B. 5,000,000 D. 40,000,000 FA © 2014
xxx. Charice Company provided the following information on December 31,2014:

* Accounts payable amounted to P500,000 and accrued expenses totaled P300,000 on December 31,2014.
* On December 15,2014, die entity declared a cash dividend of P7 per share on 100,000 outstanding shares,
payable on January 15,2015.
* On July 1, 2014, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The bonds mature
on June 30, 2019, and pay interest annually every June 30.
* The pretax financial income was P8,500,000 and taxable income was P6,000,000. The difference is due to
P1,000,000 permanent difference and PI,500,000 of taxable temporary difference to reverse in 2015.
* The income tax rate is 30%. The entity made estimated income tax payments during the year of P1,000,000.
What amount should be reported as total current liabilities on December 31,2014?
A. 2,300,000 C. 2,700,000
B. 2,500,000 D. 3,500,000 P1 © 2014
xxxi. Manchester Company provided the following information on December 31,2014:

Employee income taxes withheld 900,000
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Accounts receivable with credit balance 750,000
Estimated expenses of meeting warranties 500,000
Estimated damages as a result of unsatisfactory performance on a contract1,500,000
Deferred serial bonds, issued at par and bearing interest at 12%,
payable in semiannual installments of P500,000 due April 1 and
October 1 of each year, the last bond to be paid on October 1, 2020.
Interest is also paid semiannually. 5,000,000
What amount should be reported on December 31,2014 as total current liabilities?
A. 7,350,000 C. 8,100,000
B. 7,950,000 D. 9,100,000 P1 © 2014
xxxii. Kumaykay Company provided the following information on December 31,2014:

Bank note payable - 10% 3,000,000
Interest payable 150,000
Mortgage note payable - 10% 2,000,000
* The P3,000,000, 10% note was issued March 1,2014, payable on demand. Interest is payable every six
months.
* The one-year P5,000,000,11% note was issued January 15,2014. On December 31,2014, the entity
negotiated a written agreement with the bank to replace the note with a 2-year, P5,000,000,10% note to be
issued January 15,2015.
* The 10% mortgage note was issued October 1,2011, with a term of 10 years. Terms of the note give the
holder the right to demand immediate payment if the entity fails to make a monthly interest payment within
10 days from the date the payment is due. On December 31,2014, the entity is three months behind in
making the required interest payment.
* The bonds payable are ten-year, 8% bonds, issued June 30,2005. Interest is payable semiannually on June
30 and December 31.
A. 11,650,000 C. 15,650,000
B. 13,650,000 D. 20,650,000 FA © 2014
xxxiii.Charice Company provided the following information on December 31, 2014:

* Accounts payable for goods and services purchased on open account amounted to P500,000 and accrued
expenses totaled P300.000 on December 31, 2014.
* On December 15, 2014, the entity declared a cash dividend of P7 per share, payable on January 15, 2015,
to shareholders of record on December 31, 2014. The entity had 100,000 shares issued and outstanding
throughout 2014.
* On July 1, 2014, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The bonds mature on
June 30, 2019, and pay interest annually every June 30. On December 31, 2014, the bonds were trading in
the open market at 86 to yield 12%. The entity used the effective interest method to amortize bond discount.
* The pretax financial income was P8,500,000 and taxable income was P6,000,000. The difference is due to
PI,000,000 permanent difference and Pi,500,000 of taxable temporary difference which is expected to
reverse in 2015. The entity is subject to income tax rate of 30% and made estimated income tax payments
during the year of P1,000,000.
What total amount should be reported as current liabilities on December 31, 2014?
A. 2,300,000 C. 2,700,000
B. 2,500,000 D. 3,500,000 FA © 2014
xxxiv. Manchester Company provided the following information on December 31, 2014:
Cash balance at First State Bank 2,500,000
Cash overdraft at Harbor Bank 1,300,000
Estimated expenses of meeting warranties on
merchandise previously sold 500,000
Estimated damages as a result of unsatisfactory
performance on a contract 1,500,000
Deferred serial bonds, issued at par and bearing interest at 12%,
payable in semiannual installments of P500,000 due April 1
and October 1 of each year, the last bond to be paid on
October 1, 2020. Interest is also paid semiannually. 5,000,000
Stock dividend payable 2,000,000
On December 31, 2014, what total amount should be reported as current liabilities?
A. 7,350,000 C. 8,100,000
B. 7,950,000 D. 9,100,000 FA © 2014
Working capital
xxxv. Alena Company provided the following information at year-end:
Land 20,000,000
Cash 5,000,000
Allowance for doubtful accounts 1,000,000
Prepaid insurance 2,500,000
Financial asset at fair value through other comprehensive income 7,000,000
Wages payable 2,000,000
Short-term note payable 3,000,000
Premium on bonds payable 3,000,000
What is the working capital?
A. 26,500,000 C. 35,500,000
B. 33,500,000 D. 46,500,000 P1 © 2014
xxxvi. Moon Company provided the following data on December 31,2014.

Cash in general checking account 500,000
Sinking fund to be used to retire bonds in 2017 1,200,000
Note receivable - due February 2016 2,200,000
Inventory 1,500,000
Vacant land held as investment 5,000,000
Equipment classified as held for sale 200,000
Note payable - due 2015 800,000
Note payable -due 2016 300,000
Bonds payable - due 2017 4,600,000
Salaries payable 400,000
Value added taxes payable 300,000
What is the working capital on December 31, 2014?
A. 1,700,000 C. 2,260,000
B. 2,000,000 D. 4,900,000 P1 © 2014
xxxvii. Aroma Company provided the following information on December 31, 2014:
Cash 300,000
Accounts receivable, net of allowance of P50,000 800,000
Inventory 1,650,000
Retained earnings 500,000
A P500,000 note payable to bank, due on June 30, 2015, was deducted from the balance on deposit in the same
bank. The entity recorded checks of P200,000 in payment of accounts payable on December 31,2014. These
checks were still on hand on January 20, 2015. An advance payment of P100,000 from a customer for goods to
be delivered in 2015 was deducted from accounts receivable. What is the working capital on December 31,2014?
A. 1,400,000 C. 2,000,000
B. 1,500,000 D. 3,800,000 P1 © 2014
Noncurrent liabilities
xxxviii. Jam Company had P2,000,000 note payable that is due on February 28, 2015. The entity borrowed
PI,600,000 on February 25, 2015 which has afive year term and used the proceeds to pay down the note and
used other cash to pay the balance. How much of the P2,000,000 note is classified as noncurrent in the December
31,2014 financial statements that were issued on March 31, 2015?
A. 0 C. 1,600,000
B. 400,000 D. 2,000,000 P1 © 2014
xxxix. Mazda Company reported the following liability balances on December 31, 2014:
10% note payable issued on October 1, 2013 maturing October 1,2015 2,000,000
12% note payable issued on March 1, 2013 maturing on March 1, 2015 4,000,000
The 2014 financial statements were issued on March 31, 2015. The entity has the discretion to refinance the 10%
note payable for at least twelve months after December 31, 2014. On December 31, 2014, the entire P4,000,000
balance of the 12% note payable was refinanced on a long-term basis. What amount of the notes payable should
be classified as noncurrent on December 31, 2014?
A. 0 C. 4,000,000
B. 2,000,000 D. 6,000,000 FA © 2014
xl. Cara Company provided the following information:

1/1/2014 12/31/2014
Current assets 240,000 ?
Property, plant, and equipment 1,600,000 1,700,000
Current liabilities ? 130,000
Noncurrent liabilities 580,000 ?
All assets and liabilities are reported at year-end. Working capital of P92,000 remained unchanged from 2013 to
2014. Net income in 2014 was P64,000. No dividends were declared during 2014 and there were no other
changes in shareholders' equity. What amount should be reported as noncurrent liabilities on December 31,
2014?
A. 340,000 C. 580,000
B. 432,000 D. 616,000 FA © 2014
Total shareholders’ equity

xli. Magnolia Company reported the following unadjusted current assets and shareholders' equity on December 31,
2014:
Cash 150,000
Investments in trading equity securities (including
P750,000 cost of Magnolia Company shares) 1,000,000
Trade accounts receivable 850,000
Inventories 370,000
Retained earnings 1,000,000
Total shareholders' equity 6,000,000
The investments and inventories are reported at costs which approximate market value. What amount should be
reported as total shareholders' equity on December 31, 2014?
A. 5,000,000 C. 6,000,000
B. 5,250,000 D. 6,750,000 FA © 2014
xlii. United Company provided the following current assets and shareholders' equity on December 31,2014:
Cash 600,000
Financial assets at fair value (including cost of
P300,000 of United Company's shares) 1,000,000
Inventory 1,500,000

What amount should be reported as total shareholders' equity?
A. 5,200,000 C. 7,500,000
B. 7,200,000 D. 7,800,000 P1 © 2014
xliii. Kalinga Company provided the following information at year-end:

Treasury shares, at cost 2,000,000
Actuarial loss on defined benefit plan 1,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Cumulative translation adjustment-credit 1,500,000
What amount should be reported as total shareholders' equity?
A. 25,500,000 C. 31,500,000
B. 28,500,000 D. 32,500,000 P1 © 2014
xliv. Silver Company provided the following information at year-end:

Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares at cost - ordinary 500,000
Dividends 700,000
What total shareholders' equity should be reported on December 31 ?
A. 5,800,000 C. 8,500,000
B. 8,000,000 D. 8,700,000 P1 © 2014
xlv. Mont Company reported net assets totaling P8,750,000 at year-end which included the following:
Treasury shares of Mont Company at cost 250,000
Idle machinery 100,000
Trademark 150,000
Allowance for inventory write-down 200,000
What amount should be reported as net assets at year-end?
A. 8,200,000 C. 8,400,000
B. 8,300,000 D. 8,500,000 P1 © 2014
xlvi. When preparing a draft of year-end statement of financial position, Mont Company reported net assets totaling
P8,750,000. Included in the asset section were the following:
Treasury shares of Mont Company at cost, which approximates
market value on December 31 250,000
Idle machinery 100,000
Cash surrender value of life insurance 150,000
Allowance for inventory write-down 50,000
What amount should be reported as net assets?
A. 8,350,000 C. 8,500,000
B. 8,450,000 D. 9,000,000 FA © 2014
Comprehensive
Current assets & current liabilities
Questions 1 & 2 are based on the following information. FA © 2014
Kabugao Company provided the following information on December 31,2014:
Cash in bank, net of bank overdraft of P500,000 5,000,000
Petty cash (unreplenished petty cash expenses, P10,000) 50,000
Accounts receivable, net of accounts with credit balances of P1,500,000 6,000,000
Inventory 3,000,000
Bond sinking fund 3,000,000
Accounts payable, net of suppliers' accounts with debit balances of P1,000,000 7,000,000
Bond payable due June 30, 2015 3,000,000
Total current liabilities 16,000,000
xlvii. What amount should be reported as total current assets on December 31,2014?
A. 19,040,000 C. 20,050,000
B. 20,040,000 D. 24,040,000
xlviii. What amount should be reported as total current liabilities on December 31,2014?
A. 15,000,000 C. 16,000,000
B. 15,500,000 D. 19,000,000
Questions 1 & 2 are based on the following information. FA © 2014

Camarines Company provided the following data on December 31, 2014:
Cash 2,000,000
Inventory 1,900,000
Accounts payable, net of debit balance of P50,000, 2,450,000
Money claim of the union pending final decision 500,000
Mortgage payable, due in four annual installments 2,000,000
The cash of P2,000,000 included cash in bank of Pl,650,000, a customer check of PI00,000 marked NSF, an employee
IOU of P50,000 and P200,000 deposited with the court for a case under litigation. The cash in bank of P1,650,000 is
the balance per bank statement. On December 31,2014, outstanding checks amounted to P250,000.
The accounts receivable included the following:
Customers' debit balances 1,600,000
Advances to subsidiary 400,000
Advances to suppliers 200,000
Receivable from officers 300,000
Selling price of merchandise invoiced at 120%
of cost, undelivered and excluded from inventory 600,000
xlix. What amount should be reported as total current assets?

A. 5,550,000 C. 6,100,000
B. 6,050,000 D. 6,350,000
l. What amount should be reported as total current liabilities?

A. 3,400,000 C. 3,700,000
B. 3,450,000 D. 3,950,000
Current assets & retained earnings

Questions 1 & 2 are based on the following information. P1 © 2014
Trey Company provided the following trial balance on December 31. 2014 which had been adjusted except for income
tax expense:
Cash 600,000
Accounts receivable, net of allowance of P100,000 1,650,000
Prepaid taxes 300,000
Share capital 500,000
Foreign currency translation adjustment 400,000
Revenue 3,600,000
Expenses 2,600,000 .
5,550,000 5,550,000
During 2014, estimated tax payments of P300,000 were charged to prepaid taxes. The entity has not yet recorded
income tax expense. There were no differences between financial and taxable income. The tax rate is 30%.
Included in accounts receivable is P500,000 due from a customer. Special terms granted to this customer require
payment in equal semiannual installments of P 125,000 every April 1 and October 1.
li. On December 31,2014, what amount should be reported as total current assets?
A. 2,000,000 C. 2,250,000
B. 2,200,000 D. 2,300,000
lii. On December 31,2014, what amount should be reported as total retained earnings?
A. 1,200,000 C. 1,630,000
B. 1,330,000 D. 1,680,000

The following trial balance of Trey Company on December 31, 2014 has been adjusted except for income tax expense.
Cash 5,000,000
Accounts receivable, net 8,000,000
Prepaid taxes 1,500,000
Inventory 6,000,000
Foreign currency translation adjustment 2,500,000
Revenue 15,000,000
Expenses 10,000,000 .
50,000,000 50,000,000
During 2014, estimated tax payments of PI,500,000 were charged to prepaid taxes. The entity has not yet
recorded income tax expense. The tax rate is 30%. The accounts receivable included P3,000,000 due from a
customer. Special terms granted to this customer require payment in equal semiannual installments of P500,000
every April 1 and October 1.
liii. On December 31, 2014, what total amount should be reported as current assets?
A. 17,000,000 C. 19,500,000
B. 18,500,000 D. 21,000,000
liv. On December 31, 2014, what amount should be reported as total retained earnings?
A. 5,750,000 C. 8,500,000
B. 6,000,000 D. 10,000,000
Current assets & shareholders’ equity

Gold Company provided the following trial balance on June 30,2014:
Cash overdraft 100,000
Inventory 580,000
Property, plant and equipment, net 950,000
Accounts payable and accrued expenses 320,000
Retained earnings . 830,000
3,000,000 3,000,000
Checks amounting to P300,000 were written to vendors and recorded on June 29, 2014 resulting in a cash overdraft
of P100,000. The checks were mailed on July 9, 2014. Land classified as held for sale was sold for cash on July 15,
2014. The entity issued the financial statements on July 31, 2014.
lv. What total amount should be reported as current assets?

A. 1,250,000 C. 2,050,000
B. 1,950,000 D. 2,250,000
lvi. What total amount should be reported as shareholders' equity?

A. 1,330,000 C. 2,580,000
B. 1,750,000 D. 2,900,000
Current assets, current liabilities, retained earnings
Shaw Company provided the following trial balance on December 31, 2014 which had been adjusted except for income
tax expense:
Cash 675,000
Accounts receivable (net) 2,695,000
Inventory 2,185,000
Property, plant and equipment (net) 10,245,000
Accounts payable and accrued liabilities 1,800,000
Income tax payable 1,500,000
Net sales and other revenue 15,000,000
Costs and expenses 10,000,000
Income tax expense 2,100,000 .
27,900,000 27,900,000
The accounts receivable included P1,000,000 due from a customer and payable in quarterly installments of P125,000.
The last payment is due December 30,2016. During the year, estimated tax payment of P600,000 was charged to
income tax expense. The income tax rate is 30%o on all types of income.
On December 31,2014, what amount should be reported as
lvii. Total current assets?

A. 5,055,000 C. 5,555,000
B. 5,530,000 D. 6,030,000
lviii. Total current liabilities?

A. 2,700,000 C. 3,450,000
B. 3,300,000 D. 4,050,000
lix. Retained earnings?

A. 6,250,000 C. 7,750,000
B. 6,850,000 D. 8,350,000

Shaw Company provided the following trial balance on December 31, 2014 which had been adjusted except for income
tax expense:
Cash 675,000
Inventory 2,185,000
Income tax payable 1,500,000
27,900,000 27,900,000
The accounts receivable included PI,000,000 due from a' customer and payable in quarterly installments of Pl25,000.
The last payment is due December 30, 2016. During the year, estimated tax payment of P600,000 was charged to
income tax expense. The income tax rate is 30%. On December 31, 2014, what amount should be reported as
lx. Total current assets?

A. 5,055,000 C. 5,555,000
B. 5,530,000 D. 6,030,000
lxi. Total current liabilities?

A. 2,700,000 C. 3,450,000
B. 3,300,000 D. 4,050,000
lxii. Retained earnings?

A. 6,250,000 C. 7,750,000
B. 6,850,000 D. 8,350,000

Mint Company provided the following account balances on December 31, 2014 which had been adjusted except for
income tax expense:
Cash 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on long-term contracts 1,600,000
Billings in excess of cost on long-term contracts 700,000
Prepaid taxes 450.000
Property, plant, and equipment, net 1,510,000
Note payable - noncurrent 1,620,000
Retained earnings unappropriated 900,000
Retained earnings restricted for note payable 160,000
Earnings from long-term contracts 6,680,000
All receivables on long-term contracts are considered to be collectible within 12 months. During the year, estimated tax
payments of P450,000 were charged to prepaid taxes. The entity has not recorded income tax expense. The tax rate
is 30%. On December 31, 2014, what amount should be reported as
lxiii. Total current assets?

A. 4,100,000 C. 5,700,000
B. 5,000,000 D. 6,150,000
lxiv. Total noncurrent liabilities?

A. 1,620,000 C. 2,320,000
B. 1,780,000 D. 2,480,000
lxv. Total retained earnings?

A. 1,950,000 C. 2,400,000
B. 2,110,000 D. 2,560,000
Current assets, noncurrent liabilities, retained earnings

Mint Company provided the following account balances on December 31,2014 which had been adjusted except for
income tax expense:
Cash 600,000
Cost in excess of billings on long-term contracts 1,600,000
Billings in excess of cost on long-term contracts 700,000
Prepaid taxes 450,000
Property, plant, and equipment, at carrying amount 1,510,000
Note payable - noncurrent 1,620,000
Retained earnings restricted for note payable 160,000
Earnings from long-term contracts 6,680,000
All receivables on long-term contracts are considered to be collectible within 12 months. During the year, estimated
tax payments of P450,000 were charged to prepaid taxes. The entity has not recorded income tax expense. The tax
rate is 30%. On December 31,2014, what amount should be reported as
lxvi. Total current assets?

A. 4,100,000 C. 5,700,000
B. 5,000,000 D. 6,150,000
lxvii. Total noncurrent liabilities?

A. 1,620,000 C. 2,320,000
B. 1,780,000 D. 2,480,000
lxviii. Total retained earnings?

A. 1,950,000 C. 2,400,000
B. 2,110,000 D. 2,560,000
Noncurrent liabilities, retained earnings & shareholders’ equity

Multinational Company provided the following balances on December 31,2014:
Accrued taxes 100,000
Dividends - ordinary share 1,000,000
Dividends - preference share 500,000
Mortgage payable (P500,000 due in six months) 4,000,000
Note payable, due January 31, 2016 2,000,000
Preference share capital 3,000,000
Premium on note payable 200,000
Income summary - credit balance 4,000,000
Unamortized issue cost on note payable 50,000
Unearned rent income 150,000
lxix. What is the amount of noncurrent liabilities on December 31, 2014?

A. 5,500,000 C. 5,700,000
B. 5,650,000 D. 6,200,000
lxx. What is the amount of retained earnings on December 31, 2014?

A. 1,000,000 C. 5,000,000
B. 2,500,000 D. 6,500,000
lxxi. What is the total shareholders' equity on December 31, 2014?

A. 8,500,000 C. 13,500,000
B. 9,500,000 D. 15,000,000
i. Answer is (C).
Cash and cash equivalent 700,000
Trade accounts & other receivables (1,200,000 – 260,000) 940,000
Inventories (600,000 + 200,000) 800,000
ii. Answer is (C).

Cash (1,500,000 – 500,000) 1,000,000
Trade and other receivables 3,000,000
Inventory (2,000,000 – 200,000) 1,800,000
iii. Answer is (C)

Inventory 1,000,000
Cash 300,000
In the absence of statement to the contrary, financial assets at fair value through other comprehensive income
shall be classified as noncurrent. PAS 1 and PAS 12 provide that deferred tax asset is a noncurrent asset. The
bank overdraft is classified as current liability.
iv. Answer is (D).

Financial assets at fair value through profit or loss 500,000
Cash 1,100,000
Inventory 3,000,000
Equipment held for sale 1,800,000
The financial assets at amortized cost shall be classified as noncurrent. Financial assets at amortized cost
include investment in bonds and other debt instruments.
v. Answer is (A)
Cash 200,000
Prepaid rent 100,000
Inventory 800,000
Short-term investments 300,000
The sinking fund and the investment in associate should be classified as noncurrent asset.
vi. Answer is (A)

Cash (3,500,000 + 500,000) 4,000,000
Financial assets (2,000,000 - 500,000) 1,500,000
Inventories (800,000 - 200,000) 600,000
Prepaid expenses ( 150,000 - 50,000) 100,000
vii. Answer is (A)

Cash 4,300,000
Inventory (4,000,000 + 2,000,000) 6,000,000
The selling price of the unsold goods out on consignment is excluded from accounts receivable but the cost of
the goods shall be included in inventory. The cost of goods out on consignment is P3,000,000 divided by 150%
or P2,000,000.
viii. Answer is (C)

Cash (2,000,000-500,000) 1,500,000
Note receivable discounted (700,000)
Inventory (2,800,000-600,000) 2,200,000
The equity of the assignee in assigned accounts shall not be offset against the assigned accounts receivable but
included in current liabilities.
The note receivable discounted should be deducted from the total notes receivable with disclosure of contingent
liability.
ix. Answer is (D).

Cash 2,000,000
Note receivable discounted (700,000)
Inventory (2,800,000 – 600,000) 2,200,000
x. Answer is (C)
Cash on hand (130,000 - 20,000 - 10,000) 100,000
Cash in bank (370,000 - 70,000) 300,000
Accounts receivable (1,900,000 + 50,000 + 20,000) 1,970,000
Advances to employee 10,000
Inventory (2,000,000 + 500,000 undelivered) 2,500,000
Cost of undelivered goods (750,000/ 150%) 500,000
xi. Answer is (A)

Cash 3,200,000
Allowance for uncollectible accounts (120,000)
Receivable from employees 240,000
Claim receivable 200,000
Inventory 2,800,000
The advances to subsidiary shall be classified as noncurrent. The deferred charges are considered noncurrent
because technically these expire in more than one year from the end of reporting period.
xii. Answer is (C)

Inventory 1,000,000
Cash 300,000
In the absence of statement to the contrary, financial assets at fair value through other comprehensive income
shall be classified as noncurrent. PAS 1 and PAS 12 provide that deferred tax asset is a noncurrent asset. The
bank overdraft is classified as current liability.
xiii. Answer is (D).

Cash (3,700,000 + 300,000 -2,000,000) 2,000,000
Accounts receivable (1,500,000 - 100,000) 1,400,000
Allowance for doubtful accounts (200,000-100,000) ( 100,000)
Inventory (2,000,000 - 150,000) 1,850,000
Prepaid insurance (300,000-50,000) 250,000
xiv. Answer is (D).

Cash (300,000-100,000 overdraft) 200,000
Inventory 580,000
The undelivered checks of P300,000 should be adjusted by debiting cash and crediting accounts payable.
xv. Answer is (A)

Cash (3,500,000 + 500,000) 4,000,000
Financial assets (2,000,000 - 500,000) 1,500,000
Inventories (800,000 - 200,000) 600,000
Prepaid expenses ( 150,000 - 50,000) 100,000
xvi. Answer is (B).

Current assets per book 6,500,000
Deferred tax asset (400,000)
Outstanding checks (70,000)
Customers’ deposit 50,000
Overstatement of accounts receivable (750,000)
Understatement of inventory (750,000 / 150%) 500,000
xvii. Answer is (D).

Cash (3,700,000 + 300,000 -2,000,000) 2,000,000
Accounts receivable (1,500,000 - 100,000) 1,400,000
Allowance for doubtful accounts (200,000-100,000) ( 100,000)
Inventory (2,000,000 - 150,000) 1,850,000
Prepaid insurance (300,000-50,000) 250,000
xviii. Answer is (C)

Liabilities 1,800,000
Retained earnings (P2,500,000 less dividend P500,000) 2,000,000
Total liabilities and shareholders' equity 8,800,000
xix. Answer is (B)

Liabilities 2,000,000
Retained earnings (8,200,000 - 6,400,000 - 300,000) 1,500,000
Total liabilities and shareholders' equity 11,000,000
xx. Answer is (B)

Adjusted total assets (4,375,000- 120,000-42,000) 4,213,000
xxi. Answer is (C).

Bonds payable, due December 30, 2015 10,000,000
Note payable-bank 4,000,000
xxii. Answer is (A)

Discount on bonds payable ( 300,000)
xxiii. Answer is (B)

Unsecured note payable 4,000,000
Senior bonds payable 5,000,000
xxiv. Answer is (A)

Note payable 600,000
Under PAS 1 and PAS 12, a deferred tax liability should be classified as noncurrent. In the absence of any
contrary statement, the bonds payable plus the premium on bonds payable should be classified as noncurrent.
The dividends payable and income tax payable are normally classified as current.
xxv. Answer is (B)

Accounts payable (4,000,000 + 100,000) 4,100,000
Credit balances in customers' accounts 500,000
Estimated liability for coupons 600,000
The stock dividend payable is not an accounting liability but presented as part of shareholders' equity as an
addition to share capital. The claims for increase in wages and allowance should be disclosed as contingent
liability.
xxvi. Answer is (A).

Trade accounts payable, including cost of goods (1,350,000 – 150,000) 1,200,000
Accrued taxes payable 125,000
Customers' deposit 100,000
Accrued electric and power bills 60,000
xxvii. Answer is (C)

The 10% note payable is classified as noncurrent. PAS 1, paragraph 73, provides that if an entity has the
discretion to refinance or roll over an obligation for at least twelve months after the reporting period under an
existing loan facility, the obligation shall be classified as noncurrent, even if it would otherwise be due within a
shorter period.
The 12% note payable is classified as current. PAS 1, paragraph 72, provides that an obligation that matures
within one year from the end of reporting period is classified as current even if it is refinanced on a long-term
basis after the reporting period and before issuance of the financial statements.
The 12%note payable is refinanced on March 1,2015 and therefore classified as current.
xxviii.Answer is (B).
Current portion of note payable (2,000,000 – 1,500,000) 500,000
xxix. Answer is (D). The refinancing occurred on February 15, 2015, which is after the end of the reporting period and
before issuance of the 2014 financial statement. Thus, the note payable is classified totally as current.
xxx. Answer is (B).

Dividends payable (100,000x7) 700,000
Accrued interest payable (5,000,000 x 8% x 6/12) 200,000
Current tax expense (6,000,000 x 30%) 1,800,000
Estimated tax payment (1,000,000)
The interest on the bonds payable is payable annually on June 30. Thus, there is an accrued interest payable
from July 1 to December 31, 2014 or six months.
xxxi. Answer is (C).

Cash overdraft 1,300,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accrued interest on bonds payable from October 1 to
December 31,2014 (5,000,000 x 12% x 3/12) 150,000
The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last bond will be
paid on October 1,2020, the first bond will be paid on April 1,2016. Accordingly, there is no currently maturing bond
in 2014.
xxxii. Answer is (C).

Mortgage note payable 2,000,000
Bonds payable-due June 30, 2015 4,000,000
xxxiii.Answer is (B).
Dividend payable (100,000 x 7) 700,000
Accrued interest payable (5,000,000 x 8% x 6/12) 200,000
Income tax payable (30% x 6,000,000 – 1,000,000) 800,000
xxxiv. Answer is (C).

Cash overdraft 1,300,000
Estimated warranty liability 500,000
Estimated damages payable 1,500,000
Accrued interest on bonds payable from October 1 to
December 31,2014 (5,000,000 x 12% x 3/12) 150,000
The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last bond will be
paid on October 1,2020, the first bond will be paid on April 1,2016. Accordingly, there is no currently maturing bond
in 2014.
xxxv. Answer is (A)

Current assets:
Cash 5,000,000
Allowance for doubtful accounts ( 1,000,000)
Prepaid insurance 2,500,000 39,500,000
Current liabilities:
Wages payable 2,000,000
Short-term note payable 3,000,000 13,000,000
Working capital 26,500,000
xxxvi. Answer is (B)

Current assets:
Cash in general checking account 500,000
Inventory 1,500,000
Equipment classified as held for sale 200,000 4,900,000
Note payable - due July 2015 800,000
Salaries payable 400,000
Value added taxes payable 300,000 2,900,000
xxxvii. Answer is (B).

Current assets:
Cash (300,000 + 500,000 + 200,000) 1,000,000
Accounts receivable (800,000 + 100,000) 900,000
Inventory 1,650,000
Prepaid expenses 250,000 3,800,000
Note payable-bank 500,000
Advances from customers 100.000 2,300,000
xxxviii. Answer is (A)
xxxix. Answer is (D).

10% note payable issued on October 1, 2013 maturing October 1,2015 2,000,000
12% note payable issued on March 1, 2013 maturing on March 1, 2015 4,000,000
Noncurrent notes payable 6,000,000
xl. Answer is (D).

Current assets - January 1, 2014 240,000
Property, plant and equipment-January 1, 2014 1,600,000
Total assets - January 1,2014 1,840,000
Current liabilities (240,000-92,000) ( 148,000).
Noncurrent liabilities ( 580,000)
Shareholders' equity-January 1, 2014 1,112,000
Net income in 2014 64,000
Shareholders' equity - December 31,2014 1,176,000
Current assets - December 31, 2014(130,000 + 92,000) 222,000
Property, plant and equipment - December 31,2014 1,700,000
Total assets - December 31,2014 1,922,000
Current liabilities-December 31,2014 ( 130,000)
Noncurrent Iiabilities-December31, 2014 (SQLEEZE) ( 616,000)
Shareholders' equity - December 31, 2014 1,176,000
xli. Answer is (B).

Treasury shares (750,000)
Adjusted shareholders’ equity 5,250,000
xlii. Answer is (B)

Treasury shares, at cost ( 300,000)
Cash 600,000
Financial at assets at fair value (1,000,000 - 3 00,000) 700,000
Inventory 1,500,000
xliii. Answer is (C)

Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Cumulative translation adjustment - credit 1,500,000
Actuarial loss on defined benefit plan ( 1,000,000)
Treasury shares, at cost ( 2,000,000)
The credit in the cumulative translation adjustment account is a translation gain.
If the cumulative translation adjustment account has debit balance, it is a translation loss.
xliv. Answer is (B)

Sales 10,000,000
Total expenses ( 7,800,000)
Dividends ( 700,000)
Retained earnings – December 31 2,500,000

Treasury shares at cost ( 500,000)
xlv. Answer is (D)

Reported net assets 8,750,000
Treasury shares ( 250,000)
Adjusted net assets 8,500,000
xlvi. Answer is (C).

Net assets per book 8,750,000
Treasury stock (250,000)
Adjusted net assets 8,500,000
xlvii. Answer is (D).

Cash in bank (5,000,000 + 500,000) 5,500,000
Petty cash (50,000 - 10,000) 40,000
Accounts receivable (6,000,000 + 1,500,000) 7,500,000
Inventory 3,000,000
Bond sinking fund 3,000,000
Debit balances in accounts payable 1,000,000
The bank overdraft is not netted against the cash in bank but should be classified as current liability. The
customers' credit balances are not netted against accounts receivable but should be classified as current
liability. The bond sinking fund is classified as current asset because the bond payable is already classified as
current liability. The classification of the fund should parallel the classification of the related liability.
xlviii. Answer is (D).

Credit balances in accounts receivable 1,500,000
Accounts payable (7,000,000 + 1,000,000) 8,000,000
Bond payable 3,000,000
The debit balances in suppliers' accounts are not netted against accounts payable but should be classified
as current asset.
xlix. Answer is (C).

Cash in bank (1,650,000 - 250,000) 1,400,000
Accounts receivable (1,600,000 + 100,000) 1,700,000
Advances to employee 50,000
Receivable from officers 300,000
Advances to suppliers 200,000
Inventory (1,900,000 + 500,000) 2,400,000
Debit balance in accounts payable 50,000
The customer check marked NSF should be reverted to accounts receivable.
The cash deposit with court is classified as noncurrent.
The cost of undelivered inventory should be included in inventory. The amount is computed as P600,000 divided
by 120% or P500,000.
l. Answer is (B).
Mortgage payable - current portion (2,000,000 / 4) 500,000
The debit balance in accounts payable is not netted against accounts payable but should be classified as current
asset.
The money claim of the union pending final decision should be disclosed as contingent liability.
li. Answer is (A).

Cash 600,000

Noncurrent portion (125,000 + 125,000) ( 250,000)
Current portion 1,400,000
The prepaid taxes of P300,000 actually represent the current tax expense for 2014 and therefore should
be charged to income tax expense.
lii. Answer is (B).

Revenue 3,600,000
Expenses (2,600,000)
Income tax (30% x 1,000,000) ( 300,000)
Net income 700,000
Retained earnings-January 1 630,000
Total retained earnings 1,330,000
The debit balance in the foreign currency translation adjustment is a component of other comprehensive income
and a deduction from total shareholders' equity because it is a translation loss.
liii. Answer is (A).

Cash 5,000,000
Accounts receivable (8,000,000 – 2,000,000) 6,000,000
Inventory 6,000,000
liv. Answer is (C).
Income tax (1,500,000)
Retained earnings – January 1 5,000,000
Total 8,500,000
lv. Answer is (D).

Cash (300,000-100,000 overdraft) 200,000
Inventory 580,000
The undelivered checks of P300,000 should be adjusted by debiting cash and crediting accounts payable.
lvi. Answer is (C).

Total shareholders’ equity 2,580,000
lvii. Answer is (A).

Cash 675,000
Inventory 2,185,000
Noncurrent portion (125,000x4) ( 500,000)
Adjusted current portion 2,195,000
lviii. Answer is (A).

Income tax payable (1,500,000 - 600,000) 900,000
The estimated tax payment of P600,000 should be adjusted as follows:
lix. Answer is (B).

Costs and expenses (10,000,000)
Income tax (30% x 5,000,000) (1,500,000)
lx. Answer is (A).

Cash 675,000
Inventory 2,185,000
Noncurrent portion (125,000x4) ( 500,000)
Adjusted current portion 2,195,000
lxi. Answer is (A).

Income tax payable (1,500,000 - 600,000) 900,000
The estimated tax payment of P600,000 should be adjusted as follows:
lxii. Answer is (B).

Income tax (30% x 5,000,000) (1,500,000)
lxiii. Answer is (C).

Cash 600,000
Cost in excess of billings on long term contracts 1,600,000
The prepaid taxes of P450,000 represent the tax expense for 2014.
lxiv. Answer is (A).

Note payable-noncurrent 1,620,000
The billings in excess of cost on long term contracts account is a current liability.
lxv. Answer is (B).

Earnings from long term contracts 6,680,000
Income tax (30% x 1,500,000) ( 450,000)
Retained earnings restricted 160,000
lxvi. Answer is (C).

Cash 600,000
Cost in excess of billings on long term contracts 1,600,000
The prepaid taxes of P450,000 represent the tax expense for 2014.
lxvii. Answer is (A).
Note payable-noncurrent 1,620,000
The billings in excess of cost on long term contracts account is a current liability.
lxviii. Answer is (B).

Earnings from long term contracts 6,680,000
Income tax (30% x 1,500,000) ( 450,000)
Retained earnings restricted 160,000
lxix. Answer is (B).

Mortgage payable (4,000,000 - 500,000) 3,500,000
Note payable due January 31,2016 2,000,000
Unamortized issue cost ( 50,000)
Premium on note payable 200,000
Total noncurrent liabilities 5,650,000
Under PFRS 9, the unamortized issue cost is a deduction from the related financial liability.
lxx. Answer is (C).

Dividends - ordinary share (1,000,000)
Dividends - preference share (500,000)
The net income is derived from the credit balance of the income summary account.
Needless to say, if the income summary account has debit balance, it is a net loss.
lxxi. Answer is (C).


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MCQ - Theory

3. Postemployment employee benefits include all of the following, except

6. What is a postemployment benefit plan under Philippine law?

7. A multiemployer plan is defined as

Defined contribution plan

10. Which of the following statements characterizes defined contribution plans?

11. Which of the following is not a characteristic of a defined contribution plan?

13. A formula in a defined contribution plan

14. The report of a defined contribution plan shall contain

Defined benefit plan

i. What is the employee benefit expense for the current year?

ii. What is the remeasurement gain or loss?

iii. What is the total defined benefit cost?

ii. Answer is (C).

iii. Answer is (B).

iv. Answer is (D).

a. Bonus to sales manager = .08 x 3,000,000 = 240,000

b. Total Bonus = .36 {3,000,000 – B – T )

The projected benefit obligation at the end of each year is as follows:

(Employee Benefit Expense)

Service cost : (recognized in P/L)

Gain or (Loss) on settlement:

Current service cost 300,000

Components of defined benefit cost

Actual return on plan assets 700,000

Employee benefit expense 675,000

Prepaid/accrued benefit cost - January 1 (credit) (750,000)

PV of defined benefit obligation

Guaranteed Residual Value Unguaranteed Residual Value

Gross rentals 4,000,000 Gross rentals 4,000,000

PV of Gross rentals 3,032,640 PV of Gross rentals

PV of Gross rentals PV of Gross rentals

Cost of machinery Cost of machinery

10% x PV Payment – Interest

Lease receivable 200,000 200,000

Guaranteed Residual Value Unguaranteed Residual Value

Gross rentals 4,000,000 Gross rentals 4,000,000

PV of Gross rentals 3,032,640 PV of Gross rentals

PV of Gross rentals PV of Gross rentals

Cost of machinery Cost of machinery

Amortization Table (Whether guaranteed or unguaranteed)

10% x PV Payment – Interest

Lease receivable 200,000 200,000

i. What is the unearned interest income on January 1,2013?

ii. What amount should be reported as gross profit on sale in 2013?

iii. What is the interest income for 2013?

ii. Answer is (B).

iii. Answer is (C).

ii. Answer is (B).

During the current year, the following data are gathered:

i. What is the employee benefit expense?

ii. What is the net remeasurement gain?

ii. Answer is (B).

Remeasurement of Lease Liability

Change in the Change in the amounts Change in future lease

Required: Prepare the necessary journal entry.

Lease modifications Lessee

Lease modification may either be:

Accounted for as a separate Lease