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NAME: Date:
Professor: Section: Score:

INTERMEDIATE ACCOUNTING 1
SECOND GRADING EXAMINATION

1. Entity A needs guidance in accounting for its inventories. Entity A should refer to
which of the following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8

2. The debit side of a trial balance totals ₱800 more than the credit side. Which one of
the following errors would fully account for the difference?
a. ₱400 paid for plant maintenance has been correctly entered in the cash book
and credited to the plant asset account.
b. Discount received ₱400 has been debited to discount allowed account.
c. A receipt of ₱800 for commission receivable has been omitted from the records.
d. The petty cash balance of ₱800 has been omitted from the trial balance.

Explanations:

3. To reduce in accounting costs, a firm always expenses its routine operating

expenditures immediately and then makes an adjusting entry at the end of the year
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if needed. For example, it received ₱1,200 for one year's rent from a tenant on
August 1 and immediately recorded ₱1,200 of rent revenue. The rental period
begins August 1.The adjusting entry required at December 31 would include
a. cr. unearned rent ₱700 c. cr. rent revenue ₱700
b. dr. rent revenue ₱500 d. dr. unearned rent ₱500

4. Transactions are posted to the

a. book of original entry c. log book
b. book of final entry d. facebook

5. Why are certain costs capitalized when incurred and then depreciated over
subsequent reporting periods?
a. To reduce the income tax liability
b. To aid management in cash-flow analysis
c. To reflect the consumption of economic benefits from the asset
d. To adhere to the accounting constraint of conservatism

6. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability

7. Which of the following is considered when depreciating an asset?

a. The cost of the asset
b. The useful life of the asset
c. The change in the fair value of the asset
d. Both a and b.

8. The information below is from the books of the Seminole Corporation on June 30:

Balance per bank statement ₱11,164

Deposits in transit 1,340
Bank charges not recorded 16
Note collected by bank and not recorded on books 1,120
Outstanding checks 1,100
NSF checks - not recorded on books nor redeposited 160

Assuming no errors were made, how much is the cash balance per books on June 30
before any reconciliation adjustments?
a. 11,404
b. 10,980
c. 10,460
d. 11,440

Solution:
Per books 10,460 (squeeze) Per bank, June 30 11,164 (start)

Credit memo 1,120 Deposits in transit 1,340

Debit memo Outstanding checks (1,100)

(16 + 160) (176)

Adjusted balance 11,404 Adjusted balance 11,404

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9. Under the allowance method of recognizing bad debts on trade accounts

receivable, the effect of writing off an account to an entity's current ratio is
a. increase
b. decrease
c. increase if the entity's current ratio is higher than 1 prior to the write-off;
decrease if the entity's current ratio is lower than 1 prior to the write-off
d. no effect

10. On December 31, Central Savings & Loan discounted a 3-month, ₱70,000, non-
interest-bearing note dated October 31, at 12 percent. How much is the proceeds
from the discounting?
a. 63,900
b. 48,550
c. 30,380
d. 69,300

Solution:
MV = 70,000 + (70,000 x 0% x 3/12) = 70,000
D = 70,000 x 12% x 1/12 = 700
NP = 70,000 – 700 = 69,300

11. Grant Company accepted a ₱400,000 face value, 6-month, 10 percent note
dated May 15 from a customer. On that same date Grant discounted the note at
Eagle National Bank at a 12 percent discount rate. How much cash should Grant
receive from the bank on May 15?
a. ₱400,000
b. ₱396,000
c. ₱394,800
d. ₱387,200

Solution:
MV = 400,000 + (400,000 x 10% x 6/12) = 420,000
D = 420,000 x 12% x 6/12 = 25,200
NP = 420,000 – 25,200 = 394,800

12. Goods in transit that are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

13. Cross Co. accepted delivery of merchandise which it purchased on account. As

of December 31, Cross had recorded the transaction, but did not include the
merchandise in its inventory. The effect of this on its financial statements for
December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.

14. All of the following costs should be expensed in the period they are incurred
except for
a. manufacturing overhead costs for a product manufactured and sold in the same
accounting period.
b. costs which will not benefit any future period.
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c. depreciation of idle manufacturing capacity resulting from an unexpected plant

shutdown.
d. storage costs that are necessary in bringing the asset to its intended condition.

15. Which of the following cost flow formulas can be applied by an entity whose
inventories that are purchased last are sold first?
a. LIFO d. b or c
b. FIFO e. None of these
c. Weighted average cost

16. On June 1, 2004, Noll Corp. sold merchandise with a list price of ₱30,000 to
Linn on account. Noll allowed trade discounts of 30% and 20%. Credit terms were
2/15, n/40 and the sale was made f.o.b. shipping point. Noll prepaid ₱600 of
delivery costs for Linn as an accommodation. On June 12, 2004, Noll received from
Linn a remittance in full payment amounting to
a. ₱16,464. b. ₱17,052. c. ₱17,064. d. ₱16,794.

C ₱30,000 × .7 × .8 = ₱16,800
(₱16,800 × .98) + 600 = ₱17,064.

17. The following information was derived from the 2004 accounting records of
Kelly Co.:
Kelly's Goods
Kelly's Central Warehouse Held by Consignees
Beginning inventory ₱260,000 ₱ 28,000
Purchases 950,000 140,000
Freight-in 20,000
Transportation to consignees 10,000
Freight-out 60,000 16,000
Ending inventory 290,000 40,000
Kelly's 2004 cost of sales was
a. ₱940,000.
b. ₱1,000,000.
c. ₱1,068,000.
d. ₱1,078,000.

D ₱260,000 + ₱28,000 + ₱950,000 + ₱140,000 + ₱20,000 + ₱10,000 – ₱290,000 – ₱40,000 =

₱1,078,000.

18. Dial Corp.'s accounts payable at December 31, 2004 totaled ₱800,000 before
any necessary year-end adjustments relating to the following transactions:
 On December 27, 2004, Dial wrote and recorded checks to creditors totaling
₱350,000 causing an overdraft of ₱100,000 in Dial's bank account at December 31,
2004. The checks were mailed out on January 10, 2005.
 On December 28, 2004, Dial purchased and received goods for ₱200,000, terms
2/10, n/30. Dial records purchases and accounts payable at net amounts. The
invoice was recorded and paid January 3, 2005.
 Goods shipped f.o.b. destination on December 20, 2004 from a vendor to Dial were
received January 2, 2005. The invoice cost was ₱65,000.
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At December 31, 2004, what amount should Dial report as total accounts payable?
a. ₱1,411,000.
b. ₱1,346,000.
c. ₱1,050,000.
d. ₱1,000,000.

B ₱800,000 + ₱350,000 + ₱196,000 = ₱1,346,000.

19. The balance in Iwig Co.'s accounts payable account at December 31, 2004 was
₱400,000 before any necessary year-end adjustments relating to the following:
 Goods were in transit to Iwig from a vendor on December 31, 2004. The invoice
cost was ₱50,000. The goods were shipped f.o.b. shipping point on December 29,
2004 and were received on January 4, 2005.
 Goods shipped f.o.b. destination on December 21, 2004 from a vendor to Iwig were
received on January 6, 2005. The invoice cost was ₱25,000.
 On December 27, 2004, Iwig wrote and recorded checks to creditors totaling
₱30,000 that were mailed on January 10, 2005.
In Iwig's December 31, 2004 balance sheet, the accounts payable should be
a. ₱430,000
b. ₱450,000.
c. ₱475,000.
d. ₱480,000.

D ₱400,000 + ₱50,000 + ₱30,000 = ₱480,000.

20. Gear Co.'s accounts payable balance at December 31, 2004 was ₱1,100,000
before considering the following transactions:
 Goods were in transit from a vendor to Gear on December 31, 2004. The invoice
price was ₱80,000, and the goods were shipped f.o.b. shipping point on December
29, 2004. The goods were received on January 4, 2005.
 Goods shipped to Gear, f.o.b. shipping point on December 20, 2004, from a vendor
were lost in transit. The invoice price was ₱50,000. On January 5, 2005, Gear filed a
₱50,000 claim against the common carrier.

In its December 31, 2004 balance sheet, Gear should report accounts payable of
a. ₱1,230,000.
b. ₱1,180,000.
c. ₱1,150,000.
d. ₱1,100,000.

A ₱1,100,000 + ₱80,000 + ₱50,000 = ₱1,230,000.

21. Dark Co. recorded the following data pertaining to raw material X during
January 2004:
Date Units Unit cost
1/1/04 On hand 3,200 ₱2.00
1/11/04 Issue 1,600
1/22/04 Purchase 4,000 ₱2.35

The moving-average unit cost of X inventory at January 31, 2004 is

a. ₱2.18.
b. ₱2.22.
c. ₱2.25.
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d. ₱2.35.

C [(1,600 × ₱2.00) + (4,000 × ₱2.35)] ÷ 5,600 = ₱2.25.

22. Barlow Company's Accounts Payable balance at December 31, 2002, was
₱1,800,000 before considering the following transactions:
 Goods were in transit from a vendor to Barlow on December 31, 2002. The invoice
price was ₱100,000, and the goods were shipped FOB shipping point on December
29, 2002. The goods were received on January 4, 2003.
 Goods shipped to Barlow FOB shipping point on December 20, 2002, from a vendor
were lost in transit. The invoice price was ₱50,000. On January 5, 2003, Barlow
filed a ₱50,000 claim against the common carrier.

In its December 31, 2002 balance sheet, Barlow should report Accounts Payable of
a. 1,950,000 b. 1,900,000 c. 1,850,000 d. 1,800,000

A
Solution:
Unadjusted bal. 1,800,000
Goods purchased - FOB Shipping pt. 100,000
Goods lost - FOB Shipping pt. 50,000
Adjusted bal. 1,950,000

23. The balance in Master Company's accounts payable account at December 31,
2002, was ₱1,100,000 before considering the following information:
 Goods shipped FOB shipping point on December 20, 2002 from a vendor to Master
were lost in transit. The invoice cost of ₱20,000 was not recorded by Master. On
January 6, 2003, Master filed a ₱20,000 claim against the common carrier.
 On December 27, 2002, a vendor authorized Master to return, for full credit, goods
shipped and billed at ₱35,000 on December 2, 2002. The returned goods were
shipped by Master on December 27, 2002. A ₱35,000 credit memo was received
and recorded by Master on January 6, 2003.

What amount should Master report as accounts payable in its December 31, 2002,
balance sheet?
a. 1,120,000 b. 1,115,000 c. 1,085,000 d. 1,065,000

C
Solution:
Unadjusted bal. 1,100,000
Goods purchased - FOB shipping pt. 20,000
Purchase returns (35,000)
Adjusted bal. 1,085,000

24. The balance in Stockwell Company's accounts payable account on December 31,
2002, was ₱1,225,000 before the following information was considered:
 Goods shipped FOB destination on December 21, 2002, from a vendor to
Stockwell were lost in transit. The invoice cost of ₱45,000 was not recorded by
Stockwell. On December 28, 2002, Stockwell notified the vendor of the lost
shipment.
 Goods were in transit from a vendor to Stockwell on December 31, 2002. The
invoice cost was ₱60,000, and the goods were shipped FOB shipping point on
December 28, 2002. Stockwell received the goods on January 6, 2003.
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What amount should Stockwell report as accounts payable in its December 31, 2002,
balance sheet?
a. 1,330,000 b. 1,285,000 c. 1,270,000 d. 1,225,000

B
Solution:
Unadjusted bal. 1,225,000
Goods purchased - FOB dest. -
Goods purchased - FOB shipping pt. 60,000

Adjusted bal. 1,285,000

25. When using the periodic inventory system, which of the following generally
would not be separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period

26. Goods out on consignment are

a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account.
c. recorded in a Consignment In account which is an inventory account.
d. all of these

27. Miller Company needs an estimate of its ending inventory balance. The
following information is available:
Cost Retail
Sales revenue ............................. ₱180,000
Beginning inventory ....................... ₱ 35,000 62,000
Net purchases ............................. 100,000 135,000
Gross margin percentage ................... 30%

Given this information, when using the gross margin estimation method, ending
inventory is approximately
a. ₱1,000.
b. ₱9,000.
c. ₱19,000.
d. ₱11,650.

B 35,000 + 100,000 - (180,000 x 70%) = 9,000

28. The following information is available for the Becca Company for the three
months ended June 30 of this year:

Inventory, April 1 of this year ...................... ₱1,200,000

Purchases ............................................ 4,500,000
Freight-in ........................................... 300,000
Sales ................................................ 6,400,000
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The gross margin was 25 percent of sales. What is the estimated inventory balance at
June 30?
a. ₱880,000
b. ₱933,000
c. ₱1,200,000
d. ₱1,500,000

C (1,200,000 + 4,500,000 + 300,000) – (6,400,000 x 75%) = 1,200,000

29. Petersen Menswear, Inc. maintains a markup of 60 percent based on cost. The
company's selling and administrative expenses average 30 percent of sales. Annual
sales were ₱1,440,000. Petersen's cost of goods sold and operating profit for the
year are
Cost of Goods Sold Operating Profit
a. ₱864,000 ₱144,000
b. ₱864,000 ₱432,000
c. ₱900,000 ₱108,000
d. ₱900,000 ₱432,000

Solution:
% Amount
Sales 100% 1,440,000
(1,440,000 x 100/160) or
COGS (900,000) (1,440,000 x 62.5%*)
Expenses 30% (432,000) (1,440,000 x 30%)
Profit 108,000

*(60% ÷ 160%) = 37.5% GPR based on sales

(100% - 37.5%) = 62.5% cost ratio

30. On October 31, a flood at Payne Company's only warehouse caused severe
damage to its entire inventory. Based on recent history, Payne has a gross profit of
25 percent of net sales. The following information is available from Payne's records
for the ten months ended October 31:
Inventory, January 1 .................................. ₱ 520,000
Purchases ............................................. 4,120,000
Purchase returns ...................................... 60,000
Sales ................................................. 5,600,000
Sales discounts ....................................... 400,000

A physical inventory disclosed usable damaged goods which Payne estimates can be
sold for ₱70,000. Using the gross profit method, the estimated cost of goods sold for
the ten months ended October 31 should be
a. ₱680,000.
b. ₱3,830,000.
c. ₱3,900,000.
d. ₱4,200,000.

Solution: C (5,600,000 – 400,000) x 75%] = 3,900,000

31. Davis Company's accounting records indicated the following information:

Inventory, 1,000,0
1/1/02 ..................................... 00
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Purchases during 5,000,0

2002 ................................. 00
Sales during 6,400,0
2002 ..................................... 00

A physical inventory taken on December 31, 2002, revealed actual ending inventory at
cost was ₱1,150,000. Davis' gross profit on sales has regularly been about 25 percent
in recent years. The company believes some inventory may have been stolen during the
year. What is the estimated amount of missing inventory at December 31, 2002?
a. ₱50,000
b. ₱200,000
c. ₱350,000
d. ₱450,000

Solution: A (1,000,000 + 5,000,000) – (6,400,000 x 75%) = 1,200,000 – 1,150,000 = 50,000

32. On June 19, 2002, a fire destroyed the entire uninsured merchandise inventory
of the Allen Merchandising Company. The following data are available:

Inventory, January ₱
1 .................................. 80,000
Purchases, January 1 through June 560,00
19 .................. 0
Sales, January 1 through June 776,00
19 ...................... 0
Markup percentage on 25%
cost .............................

What is the approximate inventory loss as a result of the fire?

a. ₱19,200
b. ₱27,200
c. ₱34,000
d. ₱58,000

A (80,000 + 560,000) – (776,000 x 100%/125%) = 19,200

33. Product X sells for ₱12.00; selling expenses are ₱2.40; normal profit is ₱3.00. If
the cost of Commodity X is ₱7.80, the lower of cost and NRV is
a. ₱5.40.
b. ₱6.00.
c. ₱6.60.
d. ₱7.80.

D – the cost

34. The following information is available for Torino Corp. for its most recent year:

Net ₱3,600,0
sales ............................................. 00
Freight- 90,000
in ............................................
Purchase 50,000
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discounts ....................................
Ending 240,000
inventory ......................................

The gross margin is 40 percent of net sales. What is the cost of goods available for
sale?
a. ₱1,680,000
b. ₱1,920,000
c. ₱2,400,000
d. ₱2,440,000

C (3,600,000 x 60%) = 2,160,000 COGS + 240,000 EI = 2,400,000

35. Changes in fair value are recognized in profit or loss for which type of financial
assets?
a. Financial assets measured at amortized cost
b. FVOCI securities
c. Held to maturity debt securities
d. Financial assets designated at FVPL

36. Which securities are purchased with the intent of selling them in the near
future?
a. Financial assets measured at amortized cost
b. FVOCI securities
c. Held for trading securities
d. Held-for-sale securities

37. Which of the following is not a debt security?

a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.

38. An unrealized holding loss on a company's FVOCI securities should be reflected

in the current financial statements as
a. an extraordinary item shown as a direct reduction from retained earnings.
b. a current loss resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and deducted in the equity section of the balance
sheet.

39. An entity has financial assets held under a business model with the objective of
holding financial assets in order to collect contractual cash flows. Prior to maturity
date, the entity sells a significant portion of the financial assets. Which of the
following statements is correct?
a. The change in circumstance is a prior period error.
b. Under the “hold to collect” business model, the entity needs to hold financial
assets until their maturity dates. A significant sale of financial assets before
their maturity date evidences an inability to hold and collect cash flows.
Therefore, the remaining financial assets shall be reclassified to either FVPL or
FVOCI.
c. The remaining financial assets within the “hold to collect” business model need
not be reclassified. However, the change in circumstance may be relevant in
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assessing the business model for new financial assets that have been acquired
or originated.
d. The entity shall change its business model because of the change in
circumstance. The remaining financial assets shall be reclassified after the
entity changes the business model.

Use the following information for the next two questions:

On January 1, 20x1, Gina Co. acquired 10%, ₱4,000,000 bonds for ₱3,807,853. The
principal is due on January 1, 20x4 but interest is due annually. The yield rate on the
bonds is 12%.

40. How much is the interest income recognized in 20x1?

a. 456,942 b. 463,776 c. 471,429 d. 400,000

A (See amortization table below)

41. How much is the carrying amount of the investment on December 31, 20x1?
a. 3,807,853 b. 3,864,796 c. 3,928,571 d. 4,000,000

B (See amortization table below)

Solution:
Date Collections Interest income Amortization Present value

1/1/x1 3,807,853

12/31/x1 400,000 456,942 56,942 3,864,795

42. On December 29, 20x1, an entity commits itself to purchase a financial asset for
₱10,000, which is its fair value on commitment date (trade date). Transaction costs
are immaterial. On December 31, 20x1 and on January 4, 20x2 (settlement date)
the fair values of the asset are ₱12,000 and ₱15,000, respectively. If the entity uses
the trade date accounting and that the investment is classified as held for trading,
how much is the carrying amount of the investment in the December 31, 20x1
statement of financial position?
a. 10,000 b. 12,000 c. 15,000 d. 0

B – the fair value on Dec. 31, 20x1

43. Tuba Co. enters into a “receive variable, pay fixed” interest swap on January 1,
20x1 for a notional amount of ₱1,000,000. Under the terms of the contract, if the
current rate increases above 12% (i.e., the set rate), Tuba Co. shall receive the
excess interest. If the current rate falls below 12%, Tuba Co. shall pay the
deficiency. Swap payment shall be made on December 31, 20x2. The current rates
are as follows:
Jan. 1, 20x1……………………………12%
Jan. 1, 20x2……………………………15%

How much is the net cash settlement on January 1, 20x2?

a. 30,0000 payment
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b. 30,000 receipt
c. 26,087 payment
d. 26,087 receipt

B (Receive 15% - Pay 12%) = 3% net receipt x 1,000,000 = 30,000 receipt

44. During the year, Entity A acquired investment in the shares of stocks of Entity B
for ₱1,200,000. Entity A made an irrevocable choice to measure the investment at
FVOCI. At the end of the reporting period, the investment has a fair value of
₱1,100,000. The change in fair value is expected to persist over a very long period
of time, and thus permanent. Which of the following statements is correct?
a. Entity A recognizes a gain of ₱100,000.
b. Entity A recognizes a loss of ₱100,000 in profit or loss.
c. Entity A recognizes a loss of ₱100,000 in other comprehensive income.
d. Entity A ignores the change in fair value.

45. According to PAS 28, significant influence is the investor’s participation in the
financial and operating policy decisions of the investee but not control of these
decisions. Which of the following may an investor be unable to exercise significant
influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of
shareholders who operate the investee without regard to the views of the
d. investor
technological dependency

46. Consider the following statements.

I. In applying the Equity Method of accounting for investments in associates,
dividends received from the investee are considered a return of capital and
should be credited to stockholders’ equity of the investor.
II. A subsidiary is an affiliate that is not controlled by an enterprise directly, or
indirectly, through one or more intermediaries.

State whether the foregoing statements are correct.

a. Only I is correct
b. Only II is correct
c. I and II are correct
d. Neither I nor II is correct

47. Which of the following may provide evidence of significant influence even if the
percentage of ownership interest is less than 20%?
I. Representation on the board of directors or equivalent governing body of the
investee.
II. Participation in policy-making processes, including participation in decisions
about dividends or other distributions.
III. Material transactions between the investor and the investee
IV. Interchange of managerial personnel.
V. Provision of essential technical information.
a. I, II b. I, II, III c. I, II, IV d. any of these

48. Bach Co. acquired a 20% interest in C Major Co. on December 31, 20x3 for
₱630,000. During 20x4, C Major reported profit of ₱400,000 and paid cash
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dividends of ₱100,000. At December 31, 20x4, the balance in the investment

account should be
a. ₱630,000.
b. ₱690,000.
c. ₱670,000.
d. ₱720,000.
B ₱630,000 + (₱400,000 × .2) – (₱100,000 × .2) = ₱690,000.

49. The following statements relate to the fair value and equity methods of
accounting for a stock investment.
I. whenever an investment in equity securities does not qualify for equity method,
the investor is required to use PFRS 9 in accounting for dividend income
received from the investee.
II. the fair value method of accounting for a stock investment recognizes the legal
fact that the investor and investee are one economic unit.
III. an investor may still be able to exercise significant influence over an investee
even if the investment is less than 20% of the voting stock of the investee.
IV. no adjustment to the investment account is made when changing from the
equity to the fair value method, or vice versa.

State whether the foregoing statements are true.

a. all of the statements are true
b. only one statement is true
c. only two statements are true
d. three statements are true

C - Statements I and III.

50. On January 1, 2003, Point, Inc. purchased 10% of Iona Co.’s common stock.
Point purchased additional shares bringing its ownership up to 40% of Iona’s
common stock outstanding on August 1, 2003. During October 2003, Iona declared
and paid a cash dividend on all of its outstanding common stock. Using PFRSs, how
much income from the Iona investment should Point’s 2003 income statement
report?
a. 10% of Iona’s income for January 1 to July 31, 2003, plus 40% of Iona’s income
for August 1 to December 31, 2003.
b. 40% of Iona’s income for August 1 to December 31, 2003 only.
c. 40% of Iona’s 2003 income.
d. Amount equal to dividends received from Iona.

51. Giovan Caresa owns 10% of the common stock of Gorthon Co. throughout the
year. The Gorthon Co. has no preferred stock outstanding. Giovan’s stock gives him
the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the corporation for
the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing to
buy 10% of the newly issued shares

52. Stock dividends on common stock should be recorded at their fair value by the
investor when the related investment is accounted for under which of the
standards?
PFRS 9 PAS 28
 P a g e | 14

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

53. In its financial statements, Pare, Inc. uses the fair value accounting for its 15%
ownership of Sabe Co. At December 31, 2003, Pare has a receivable from Sabe.
How should the receivable be reported in Pare’s December 31, 2003 financial
statements?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in Sabe,
without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance offset
against Sabe’s payable to Pare.
d. The total receivable should be offset against Sabe’s payable to Pare, without
separate disclosure.

54. In its financial statements, Pulham Corp. uses the equity method of accounting
for its 30% ownership of Angles Corp. At December 31, 2003, Pulham has a
receivable from Angles. How should the receivable be reported in Pulham’s 2003
financial statements?
a. None of the receivable should be reported, but the entire receivable should be
offset against Angles’ payable to Pulham.
b. 70% of the receivable should be separately reported, with the balance offset
against 30% of Angles’ payable to Pulham.
c. The total receivable should be disclosed separately.
d. The total receivable should be included as part of the investment in Angles,
without separate disclosure.

55. When the equity method is used to account for investments in common stock,
which of the following affects the investor’s reported investment income?
Equipment amortization Cash dividends
related to purchase from investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No

56. Park Co. uses the equity method to account for its January 1, 2003 purchase of
Tun Inc.’s common stock. On January 1, 2003, the fair values of Tun’s FIFO
inventory and land exceeded their carrying amounts. How do these excesses of fair
values over carrying amounts affect Park’s reported equity in Tun’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
Explanation: Land is not depreciable. Thus, the excess fair value is not amortized.

57. Peel Co. received a cash dividend from a common stock investment. Should Peel
report an increase in the investment account if it has classified the stock as FVOCI
or uses the equity method of accounting?
FVOCI Equity
a. No No
 P a g e | 15

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

58. On January 1, 20x1, Entity A acquires 30% interest in Entity B for ₱600,000.
Entity B reports profit of ₱200,000 and declares dividends of ₱50,000 in 20x1. How
much is the carrying amount of the investment in associate on December 31, 20x1?
a. 600,000
b. 660,000
c. 645,000
d. 630,000

Solution:
Investment in associate
1/1/x1 600,000
Sh. in profit (200K x 30%) 60,000 15,000 Dividends (50K x 30%)
645,000 12/31/x1

59. According to PAS 28, the reporting dates of the investor and its associate should
not differ by more than
a. one month.
b. two months.
c. three months.
d. six months.

60. Which of the following statements are in accordance with PAS 28?
I. When the associate has cumulative preference shares, the investor computes its
share in the profit or loss of the investee after deducting the preferred
dividends, only when such dividends are declared.
II. When the associate has non-cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting the
preferred dividends, whether or not such dividends are declared.
a. true, true
b. true, false
c. false, true
d. false, false

61. Adjustments to the carrying amount of the investment in associate may be

necessary for changes in the investor’s proportionate interest in the investee
arising from changes in the investee’s equity that have not been recognized in the
investee’s profit or loss. Which of the following may not necessitate an adjustment
in the investment in associate account?
a. Changes in revaluation surplus of associate
b. Changes in valuation of the associate’s FVOCI securities
c. Changes in the actuarial gains and losses of the associate’s defined benefit
retirement plan.
d. Changes in the Allowance for doubtful accounts of the associate

62. When the accounting policies used by the investor and the associate do not
match
a. PAS 28 requires appropriate adjustments to the associate’s financial statements
to conform them to the investor’s accounting policies for reporting like
transactions and other events in similar circumstances.
 P a g e | 16

b. PAS 28 does not require appropriate adjustments to the associate’s financial

statements to conform them to the investor’s accounting policies for reporting
like transactions and other events in similar circumstances when it was not
practicable to use uniform accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the
associate be different.

63. When financial statements of an associate used in applying the equity method
are prepared as at the end of the reporting period that is different from that of the
investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist

64. When an entity elects to prepare separate financial statements, it shall account
for its investment in associates
a. at cost c. using the equity method
b. in accordance with PFRS 9 d. any of these

65. Young Co. acquired a 60% interest in Tomlin Corp. on December 31, 2003 for
₱630,000. Young accounts for the investment using the equity method. During
2004, Tomlin had net income of ₱400,000 and paid cash dividends of ₱100,000. At
December 31, 2004, the balance in the investment account should be
a. ₱630,000.
b. ₱870,000.
c. ₱810,000.
d. ₱930,000.

C ₱630,000 + (₱400,000 × .6) – (₱100,000 × .6) = ₱810,000.

Use the following information for the next three questions:

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2004 for
₱360,000. During 2004, Carne earned ₱150,000 and paid dividends of ₱90,000.
Kimm's 30% interest in Carne gives Kimm the ability to exercise significant influence
over Carne's operating and financial policies. During 2005, Carne earned ₱180,000
and paid dividends of ₱60,000 on April 1 and ₱60,000 on October 1. On July 1, 2005,
Kimm sold half of its stock in Carne for ₱237,000 cash.

66. What amount should Kimm include in its 2004 income statement as a result of
the investment?
a. ₱150,000.
b. ₱90,000.
c. ₱45,000.
d. ₱27,000.

C ₱150,000 × 30% = ₱45,000.

67. The carrying amount of this investment in Kimm's December 31, 2004 balance
sheet should be
a. ₱360,000.
b. ₱378,000.
c. ₱405,000.
 P a g e | 17

d. ₱333,000.

B ₱360,000 + ₱45,000 – (₱90,000 × 30%) = ₱378,000.

68. What should be the gain on sale of this investment in Kimm's 2005 income
statement?
a. ₱57,000.
b. ₱52,500.
c. ₱43,500.
d. ₱34,500.

C ₱378,000 – (₱60,000 × 30%) + (₱180,000 × 50% × 30%) = ₱387,000; ₱237,000 – (₱387,000 ÷ 2) = ₱43,500.

69. On January 1, 2004, Sloane Co. purchased 25% of Orr Corp.'s common stock; no
goodwill resulted from the purchase. Sloane appropriately carries this investment
at equity and the balance in Sloane’s investment account was ₱480,000 at
December 31, 2004. Orr reported net income of ₱300,000 for the year ended
December 31, 2004, and paid dividends totaling ₱120,000 during 2004. How much
did Sloane pay for its 25% interest in Orr?
a. ₱435,000.
b. ₱510,000.
c. ₱525,000.
d. ₱585,000.

A ₱480,000 – (₱300,000 × 25%) + (₱120,000 × 25%) = ₱435,000.

70. Which of the following values is unlikely to be used in fair value measurement?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. Level 4 inputs in accordance with PFRS 13.

71. A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less cost to sell of a biological asset should be included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.

72. When agricultural produce is harvested, the harvest should be accounted for by
using PAS 2 Inventories or another applicable standard. For the purposes of that
Standard, cost at the date of harvest is deemed to be
a. Its fair value less costs to sell at point of harvest.
b. The historical cost of the harvest.
c. The historical cost less accumulated impairment losses.
d. Market value.

73. Contract prices are not necessarily relevant in determining fair value and the
fair value of a biological asset or agricultural produce is not adjusted because of the
existence of a contract.
a. True.
b. False.
c. Maybe.
d. I don’t know.
 P a g e | 18

74. Land that is related to agricultural activity is valued

a. At fair value.
b. In accordance with PAS 16 Property, Plant, and Equipment or PAS 40
Investment Property.
c. At fair value in combination with the biological asset that is being grown on the
land.
d. At the resale value separate from the biological asset that has been grown on
the land.

75. An unconditional government grant related to a biological asset that has been
measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.

76. If a government grant is conditional on certain events, then the grant should be
recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant are
met.
d. A deferred credit when the grant is approved.

77. Where there is a production cycle of more than one year, PAS 41 encourages
separate disclosure of the
a. Physical change only.
b. Price change only.
c. Total change in value.
d. Physical change and price change.

78. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological assets
and agricultural produce and the change in fair value less cost to sell of
biological assets.
c. The total gain or loss from biological assets, agricultural produce, and from
changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains or
losses.

79. Entity A’s assets have a carrying amount of ₱100,000 before year-end
adjustments. The PFRSs require these assets to be measured at fair value at each
reporting date. Location is a characteristic of the assets. Information at year-end is
as follows:
Active Market #1 Active Market #2
Quoted price Quoted price
₱130,000 ₱135,000
Transport costs Transport costs
10,000 12,000
Costs to sell Costs to sell
2,000 3,000
 P a g e | 19

If neither Active Market #1 nor Active Market #2 is the principal market, how much is
the fair value?
a. 135,000 c. 120,000
b. 132,000 d. 123,000

Solution:
The “most advantageous market” is determined as follows:
Active Market Active Market
#1 #2

Quoted price 130,000 135,000

Transport costs (10,000) (12,000)

Costs to sell (2,000) (3,000)

Net sale
proceeds 118,000 120,000

The fair value is computed as follows:

135,000 price in active market #2 – 12,000 transport costs = 123,000

80. The equity method of accounting for investments is discussed under

a. PAS 28
b. PAS 29
c. PAS 21
d. PFRS 2

“We want each of you to show this same diligence to the very end, so that
what you hope for may be fully realized.” (Hebrews 6:11)

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