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Financial Accounting and Reporting

National Federation of Junior Institute of Accountants Region 1 and Cordillera In partnership with:

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REGIONAL MOCK BOARD EXAMINATIONS FINANCIAL ACCOUNTING AND REPORTING 1. Which of the following statements is true? I. Trade Receivables are current asset if collectible within one year from balance sheet date, or within one accounting cycle, whichever is shorter. II. If installment sale is part of the normal operation of the business, receivables from it is classified as current even if collectible beyond one year, as long this is not longer than normal accounting cycle of the business. III. Long term, non-interest bearing Note Receivable shall be reported at its face value. IV. Long term, interest bearing Notes Receivable shall be reported at its face value less unamortized discount. V. In Pledging of Accounts Receivable, the amount of Receivable pledged is deducted from the gross amount of the Accounts Receivable to arrive at an amount reportable in the Balance Sheet. VI. In Assignment of Accounts Receivable, the specific accounts assigned to the assignee bank are removed from the assets of the borrower, and such is disclosed in the financial statements. VII. Under the Receivable method of recording Credit Card, the credit card company requires the seller to surrender the credit card receipts before it could receive payments from the credit card company. VIII. Under the Cash method of recording Credit Card, the bank increases the current account of the seller upon deposit of credit card receipts directly into its checking account.

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a.

I, II, III VII

b. II, IV, VII, VIII

c. I, III, V, VI, VII

d. I, II, III, IV, V, VI,

2. Which of the following is correct treatment of bearer plants and bearer animals expected to bear for more than 1 year? Bearer Animals Bearer Plants a. Property, plant and equipment Biological Assets b. Biological Assets Biological Assets c. Biological Assets Property, plant and equipment d. Property, plant and equipment Property, plant and equipment 3. UNICUSPID Company began construction of its administration building at an estimated cost of ₱10,000,000 on January 1, 2016. The construction is expected to be completed by December 31, 2019. To finance the construction, UNICUSPID Company borrowed ₱10,000,000, 10%, 4-year note dated January 1, 2016, both principal and interest are payable on December 31, 2019. In the first phase of the construction, there were idle funds which the company invested for a period of 6 months. Income from this investment was ₱50,000. Assume the use of simple interest, the journal entry in 2016 will include? a. Debit: Building under construction – ₱10,000,000. b. Debit: Building under construction – ₱1,000,000. c. Credit: Interest expense – ₱50,000. d. Credit: Investment income – ₱50,000

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NFJPIA-R1CAR 2

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Financial Accounting and Reporting

4. The following statements relate to cash. Which is false? a. Depositing all receipts intact at the bank and making all cash disbursements by check are important cash controls under an imprest system. b. Neither the book balance nor the bank balance of cash usually represents the cash balance shown on the statement of financial position. c. A bank reconciliation is the statement sent monthly by a bank to a depositor that list all deposits, checks paid and other credits and charges to the depositor’s account for the month. d. All of the above. 5. Most methods of pricing inventories are in accordance with generally accepted accounting principles and generally are permissible for income tax purposes. One method that does not fall into this category is a. Moving average. c. Weighted average. b. FIFO. d. Variable costing. 6. If the company failed to record an in transit goods purchased under F.O.B. shipping point, the effect will be a(n) a. Overstatement in net income b. No effect on income c. Overstatement of liabilities d. Understatement of administrative expenses 7. At the beginning of 2015, Stephie Company decided to change from the FIFO method of inventory valuation to the weighted average method. Balances of Inventory under each method were: FIFO Weighted Average December 31, 2013 ₱ 1,000,000 ₱ 900,000 December 31, 2014 1,200,000 1,350,000 December 31, 2015 1,320,000 1,200,000 Which of the following is correct when preparing a comparative financial statement for the current period 2015? a. The amount of inventory reported as comparative in 2013 is ₱1,350,000. b. The amount of inventory reported as comparative in 2013 is ₱1,200,000. c. The amount of inventory reported as comparative in 2014 is ₱900,000. d. The amount of inventory reported as comparative in 2014 is ₱1,350,000.

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8. What is the effect on the ‘cash and cash equivalents’ if the company established a petty cash fund amounting to P20,000 to be maintained at all times by the petty cash custodian? a. Increase by P20,000. b. Decrease by P20,000. c. No effect. d. Negligible effect. 9. When there is both physical growth in the asset as well as part unit price change then: a. Only change as a result of physical growth is to be disclosed b. Only change as a result of unit price change is to be reduced c. Both the components should be disclosed separately d. Both the components are not required to be disclosed 10. Paragraph 63 of IAS 38 Intangibles, prohibits the recognition of the following internally generated identifiable intangibles: I II III IV Brands No No No Yes Mastheads No Yes Yes Yes Publishing titles No No Yes Yes Customer lists No Yes No Yes a. IV; b. II; c. III; d. I. 11. You were employed as an accountant in a company. One day your company changed its business model on managing financial instrument. What will you do? a. Immediately make journal entries to reclassify financial assets. b. Make journal entries only if the boss is looking. c. Procrastinate. Go back to your facebook account. Make journal entries next fiscal year.

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NFJPIA-R1CAR 2

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Financial Accounting and Reporting

d.

Read the revised risk management manual, identify the effect of the change in business model on the current classifications of financial assets, identify which items should be reclassified and to which classifications they will be reclassified, and then make the journal entries before you go home.

12. The directors of The Ranger Company decided at a board meeting on February 28, 2013 that a major machine tool should be sold. Trade magazines reported recent transactions in non-current assets of a similar age at P500,000, but the board decided that the asking price should be P750,000. The board also decided that as a programme of repairs to the tool needed to be carried out, an agent should not be contracted with for the sale of the item until the repairs were completed, which was on May 31, 2013. On July 31, 2013 the board agreed to reduce the asking price to P500,000. A deal was agreed with a buyer on August 31, 2013 and completion of the sale took place on November 30, 2013. In accordance with PFRS5 Non-current assets held for sale and discontinued operations, the asset should be classified as held for sale on a. February 28, 2013 b. May 31, 2013 c. July 31, 2013 d. August 31, 2013 13. Which of the following statements is correct in relation to PAS 38 Intangible Assets? I. The nature of intangible assets is such that, in many cases, there are no additions to such an asset or replacements of part of it. II. Most subsequent expenditures are likely to maintain the expected future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria in PAS 38. III. It is often difficult to attribute subsequent expenditures directly to a particular intangible asset rather than to the business as a whole. IV. Only rarely will subsequent expenditures (expenditures incurred after the initial recognition of an acquired intangible asset or after completion of an internally generated intangible asset) be recognized in the carrying amount of an intangible asset. V. Internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance shall be recognized as intangible assets. VI. Subsequent expenditures on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally acquired or internally generated) are always recognized in profit or loss as incurred. This is because such expenditures cannot be distinguished from expenditures to develop the business as a whole VII. If an intangible asset has been enhanced, for example, when a payment has been made to extend the period of an existing license, then the cost should be capitalized.

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a. b.

Only one statement is incorrect. Two of the statements are incorrect.

c. All of the statements are correct. d. Four statements are correct.

14. On January 1, 2017, Bank Company granted a five-year term loan of ₱3,000,000 to Utangero Company. If there were no possibility of credit losses, the coupon rate that Bank Company would charge the borrower is 5% per annum. However, because of the borrower’s credit rating, Bank Company estimates that there is a possibility the borrower might default on the payments and the expected credit losses are estimated at ₱40,000 per year over the five-year term. Accordingly, Bank Company charges the borrower 6% coupon rate to reflect the yield on the instrument to include a return to cover those credit losses expected when the loan is first recognized. (Round off present value factors to four decimal places) What is the lifetime expected credit loss. a. ₱168,496 b. ₱169,846 c. ₱200,000 d. ₱100,000 15. DMC, Inc. completed the construction of a shopping mall at the end of 2016 for a total cost of ₱100 million. The mall has an estimated economic life of 25 years. The mall was constructed for the purpose of earning rentals by letting out space in the shopping mall to tenants. The company opted to use the fair value model to measure the shopping mall. An independent valuation expert was used by the company to fair value the shopping mall on an annual basis. According to the fair valuation expert the fair values of the shopping mall at the end of 2017 and 2018 were ₱120 million and ₱115 million, respectively. How much is the carrying amount of the shopping mall on December 31, 2018 if DMC used the cost model? a. ₱100,000,000 b. ₱96,000,000 c. ₱115,000,000 d. ₱92,000,000

nd

NFJPIA-R1CAR 2

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Financial Accounting and Reporting

16. Alyson Company purchased a building on June 1, 2015 at a total cost of ₱4,000,000. Residual value was estimated at ₱800,000. The building is being depreciated over 10 years by the double declining balance method. On July 1, 2015, Alyson Company leased this building to Mark for a period of 6 years at an annual rental payment of ₱450,000. Alyson Company incurred a direct cost of ₱60,000 in finalizing the lease agreement. For the year 2015 how much depreciation expense should Alyson record on this equipment? a. ₱476,667 b. ₱471,667 c. ₱466,667 d. ₱373,333 17. Data for the December manufacturing cost of Alyson Company, a VAT registered company is as follows: Variable cost: • 3 labor hours (at ₱3 per hour) and • 1 kilogram of raw material X (at ₱2.24 per kg including VAT) Fixed cost: Budgeted fixed manufacturing cost Normal expected production (units)

₱100,000 100,000

Assume the actual production is 80,000 units, how much should the finished goods recorded? a. ₱1,224,000 b. ₱1,200,000 c. ₱1,183,333 d. ₱1,180,000 18. In 2014, Lepanto Mining Company purchased property with natural resources for ₱28,000,000. The property had a residual value of ₱5,000,000. However, the company is required to restore the property to its original condition for ₱2,000,000. In 2014, Lepanto spent ₱1,000,000 in development costs and ₱3,000,000 in buildings on the property. Lepanto does not anticipate that the buildings will have utility after the natural resources are removed. In 2015, an amount of ₱1,000,000 was spent for additional development on the mine. The tonnage mined and estimated remaining tons for years 2014 to 2016 are as follows: 2014 2015 2016

Tons extracted 0 3,000,000 3,500,000

Tons remaining 10,000,000 7,000,000 2,000,000

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The company should recognize depletion for 2016 at a. ₱10,150,000 b. ₱14,245,000 c.

₱12,040,000

d.

₱ 9,450,000

19. In January 2016, ENBEEN TOORY began retailing product X. ENBEEN TOORY purchases and sales of product X during 2016 are: Date Units Unit cost Cost Sale units Revenue January 1 5,000 ₱10.00 ₱50,000 February 1 2,000 ₱11.00 ₱22,000 February 28 2,000 ₱ 24,000 March 1 3,000 ₱11.00 ₱33,000 April 1 2,500 ₱12.00 ₱30,000 April 30 5,000 ₱ 70,000 June 30 4,000 ₱ 52,000 July 1 6,000 ₱12.50 ₱75,000 August 1 2,500 ₱13.50 ₱33,750 August 31 3,000 ₱ 39,000 October 31 1,000 ₱ 16,000 November 1 3,000 ₱14.00 ₱42,000 December 31 5,000 ₱100,000 Determine the cost of inventory for each of the sales made during 2016 using weighted average periodic Ending inventory Cost of goods sold a. ₱42,000 ₱243,750 b. ₱47,625 ₱238,125 c. ₱52,026 ₱233,724 d. ₱47,625 ₱253,375

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NFJPIA-R1CAR 2

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Financial Accounting and Reporting

20. On April 1, 2015, VOLKSMAN Co. purchased 25,000 common shares of RHAD Co. at ₱180 per share which reflected book value as of that date. At the time of the purchase, RHAD had 100,000 common shares outstanding. The shares are intended as a long term investment. The first quarter statement ending March 31, 2015 of RHAD recorded earnings of ₱480,000. For the year ended December 31, 2015, RHAD reported net income of ₱2,400,000. RHAD paid VOLKSMAN dividends of ₱60,000 on June 1, 2015 and again ₱60,000 on December 31, 2015. The shares of RHAD are selling at ₱190 per share on December 31, 2015. On April 1, 2016, VOLKSMAN sold 10,000 common shares of RHAD for ₱200 per share. For the year ended December 31, 2016 the reported net income of RHAD was ₱2,800,000 and dividends of ₱60,000 was paid to VOLKSMAN on August 1, 2016. The shares of RHAD are selling at ₱205 per share on December 31, 2016. How much is the net amount that should be recognized in 2016 profit or loss regarding the investment in RHAD Co.? a. ₱185,000 b. ₱221,000 c. ₱161,000 d. ₱173,000 21. On January 1, 2015, Blade Company purchased 25,000 shares of the 100,000 outstanding shares of Razor Company for a total of ₱2,000,000. At the time of purchase, the book value of Razor Company’s equity was ₱6,000,000. Razor Company assets having a market value greater than book value at the time of the acquisition were as follows: Inventory Equipment Land Goodwill

Book value ₱ 800,000 4,000,000 200,000 0

Market value ₱ 1,000,000 4,500,000 700,000 800,000

Remaining life Less than 1 year 5 years Indefinite Indefinite

Razor Company’s net incomes in 2015 and 2016 were ₱1,400,000 and ₱1,600,000 respectively. Dividends per share paid by Razor Company amounted to ₱4 in 2015 and ₱5 in 2016. The inventory was sold in 2015 while the land was sold at the end of 2016 at a gain on sale of ₱50,000. What amount should Blade report as investment in associate for the year ended December 31, 2016? a. ₱2,312,500 b. ₱2,300,000 c. ₱2,137,500 d. ₱2,120,000

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22. Timothy acquires a 35% interest in Peter over which it is able to exercise significant influence. Timothy paid ₱950,000 for its interest in Peter. At that date the book value of Peter's net assets was ₱1,800,000, and their fair value ₱2,200,000, the difference of ₱400,000 relates entirely to an item of property, plant and equipment with a remaining useful life of 10 years. During 2015, Peter made a profit of ₱160,000 and paid a dividend of ₱240,000 on December 31, 2015. Peter also owned an investment in securities classified as financial asset at fair value through other comprehensive income that increased in value by ₱40,000 during the year. Ignore any tax implication. What amount of goodwill should be recognized by Timothy in its financial statement relating to the acquisition of 35% interest in Peter? a. Nil b. ₱180,000 c. ₱460,000 d. ₱140,000 23. On January 1, 2017, Pike Company purchased 80% of the outstanding voting shares of Sword Company for ₱800,000. On that date, Sword had ₱300,000 of capital stock and ₱600,000 of retained earnings. All assets and liabilities of Sword had book values approximately equal to their fair market values. Goodwill, if any, is not amortized. Pike uses the complete equity method to account for its investment in Sword. On April 1, 2017, Pike sold equipment with a book value of ₱40,000 to Sword for ₱60,000. The equipment is expected to have a useful life of five years from the date of the sale and no salvage value. Sword will use straight-line depreciation. For year 2017, Sword reported net income of ₱200,000 and paid dividends of ₱40,000. Determine the income from investment under the equity method. a. ₱143,000 b. ₱144,000 c. ₱163,000

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NFJPIA-R1CAR 2

d. ₱111,000

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Financial Accounting and Reporting

24. Bernadette Company received dividends from its ordinary share investments during the year 2016 as follows:  A stock dividend of 10,000 shares from R Company when the market price of R’s share was ₱10.  A cash dividend of ₱1,500,000 from S Company in which Bernadette owns a 15% interest.  5,000 shares of T Company in lieu of cash dividend of ₱20 per share. The market price of T Company’s share was ₱150. Bernadette holds originally 50,000 shares of T Company. Bernadette owns 5% interest in T Company. What amount of dividend revenue should Bernadette report in its 2016 income statement? a. ₱2,500,000 c. ₱2,250,000 b. ₱1,500,000 d. ₱2,350,000 25. On January 1, 2015, Solenn Company acquired as a long-term investment for ₱1,400,000, a 40% interest in Lovie Company when the fair value of Lovie’s net assets was ₱3,500,000. Lovie Company reported the following net losses: 2015 2016 2017 2018

₱1,000,000 1,400,000 1,600,000 800,000

On January 1, 2017, Solenn Company made cash advances of ₱400,000 to Lovie Company. On December 31, 2018, it is not expected that Solenn Company will provide further financial support for Lovie Company. What amount should Solenn Company report in 2018 as loss from investment? a. ₱320,000 c. ₱200,000 b. ₱800,000 d. ₱120,000 26. The statement of financial position of a company presents the following financial assets at December 31, 2016:  Bank cheque account = ₱58,400.  Bank savings account (collectible immediately) = ₱23,440.  Cash = ₱10,000.  Common stocks of Entity Z, one of the most traded assets in Country A’s stock exchange, purchased by the airline to speculate = ₱2,715.  Oil price derivative entered into by the entity to hedge the commodity price risk of the anticipated future purchase of oil for use in the entity’s operating business = ₱6,720.  A gold price derivative entered into by the entity to speculate = ₱9,880.  Treasury bonds issued by the government of Country A = ₱8,500. The entity acquired the bonds from the government one week before the entity’s reporting date.  The bonds mature 2 months after the date of acquisition (ie they are two-month bonds from date of issue).  Treasury bonds issued by the government of Country A = ₱6,300. The entity acquired those bonds from the government in the previous annual reporting period. The bonds mature 15 months after the date of acquisition (ie they are 15-month bonds). In the absence of evidence to the contrary, the entity’s total cash and cash equivalent at December 31, 2016 is: a. ₱98,560 c. ₱109,775 b. ₱100,340 d. ₱107,060

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27. On January 1, 2015, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2016. Expenditures on the project were as follows: January 1, 2015 September 1, 2015 December 31, 2015 March 31, 2016 September 30, 2016

200,000 300,000 300,000 300,000 200,000

Kendall borrowed ₱750,000 on a construction loan at 12% interest on January 1, 2015. This loan was outstanding throughout the construction period. The company had ₱4,500,000 in 9% bonds payable outstanding in 2015 and 2016.

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NFJPIA-R1CAR 2

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Financial Accounting and Reporting

Average accumulated expenditures for 2015 was a. 300,000 c. 500,000 b. 350,000 d. 400,000 28. At the start of its business, Snell Corp. decided to use the composite method of depreciation and prepared the following schedule of machinery owned. Total cost Machine A Machine B Machine C

275,000 100,000 20,000

Estimated Salvage value 25,000 10,000 -

Estimated Life in years 20 15 5

Snell computes depreciation on the straight-line method. Based on the information presented, the composite life of these assets (in years) should be a. 13.30 c. 18.00 b. 16.00 d. 19.80 29. Which of the following statements is true? I. The share based compensation to employees may be equity settled, but could not be cash settled. II. The value of employees’ compensation in a stock option scheme in the absence of the fair value of the stock options is the intrinsic value of the stock options on the date of grant. III. The intrinsic value of the stock option is the excess of option price over the par value of the stock. IV. The intrinsic value of the option could be used as measurement of the compensation income if the fair value of the stock option cannot be estimated reliably. V. The compensation expense is recognized in the date of grant, when the stock option is considered as not vested. VI. The stock option granted to the employee will benefit the employee in times when the fair value of the stocks is lower than the option price.

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a. 30. In a. b. c. d.

I, II, IV, VI

b. II, III, IV

c. II, IV

d. II, III, IV

computing diluted EPS, dividends on convertible preferred stock should be Deducted from net income, whether declared or not Deducted from net income, only when declared Added back to net income, whether declared or not Ignored

31. Which of the following properly describes the per share (BVPS) and basic earnings per share Book Value Per Share a. Ending outstanding shares b. Weighted average outstanding shares c. Ending outstanding shares d. Weighted average outstanding shares

denominator used in the calculation of book value (BEPS)? Basic Earnings Per Share Weighted average outstanding shares Ending outstanding shares Ending outstanding shares Weighted average outstanding shares

32. When the corporation issues dividends to shareholders, it is important to determine whether the dividends are considered “small” or “large”. Large stock dividends is a. At least 10% of the outstanding shares. b. More than 10% of the outstanding shares. c. At least 20% of the outstanding shares. d. More than 20% of the outstanding shares. 33. The accounting of a change in an accounting policy is a. Retrospective restatement. b. Retrospective statement. c. Retrospective application. d. Retrospective comparison.

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NFJPIA-R1CAR 2

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34. Which of the following factors are relevant while computing the actuarial value: a. Projected future salary c. Benefits promised under the plan b. Type of business entity d. Service rendered to date 35. Which of the following statement is correct in relation to PAS 12? 1. The tax base of an asset or liability (such as the amount attributed to it for tax purposes) might be different from its carrying value for accounting purposes, and the amount of that difference is called a temporary difference under PAS 12. 2. The Oman location purchased a portable generator for ₱105,000. For Tax purposes, depreciation of ₱25,000 has been already deducted in the current and prior periods and the remaining cost of ₱80,000 will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated by using the machine is taxable and any loss on disposal will be deductible for tax purposes. Therefore, the tax base is ₱80,000. a.

I only

b. II only

c. Both I and II

d. Neither I nor II

36. The accounting concept that is principally used to classify leases into operating and finance is a. Substance over form. c. Prudence. b. Neutrality. d. Completeness. 37. A post-employment benefit plan where the enterprise sets up a separate fund for the benefits of the employees, but retains the right and obligation to pay its retiring employees is a / an a. Contributory plan c. Funded plan b. Con-contributory pacboi plan d. Unfunded plan 38. There is a substantial modification of terms of an old liability if the gain or loss on extinguishment is a. More than 10% of the carrying amount of the old liability. b. At least 10% of the carrying amount of the old liability. c. More than 10% of the carrying amount of the new liability. d. At least 10% of the carrying amount of the new liability. 39. If the sale and leaseback transaction results in an operating lease where the sales price and rental are established at fair value, any gain from the sale and leaseback should a. Not be recognized b. Be recognized as gain immediately c. Be deferred and amortized over the term of the lease d. Be deferred and amortized over the life of the asset or term of the lease whichever is shorter

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40. In which of the following entities would the PFRS for SMEs apply? I. Company A with total assets of P300M but with total liabilities of P1M only II. Company B with total assets of P350M and total liabilities of P250M III. Bank C with total assets of P350M and total liabilities of P250M IV. Company D with total assets of P3M and total liabilities of P3M a. I and II b. I, II, IV c. II only d. all of the above 41. Under PFRS for SME, inventories must be measured at: a. cost. b. the lower of cost and net realizable value. c. the lower of cost and estimated selling price less costs to complete and sell. d. the lower of cost and fair value less costs to complete and sell. 42. The Lawson Company has 100,000 shares of common stock outstanding with a par value of ₱10 per share. The stock was originally issued for ₱14 per share. Currently, the stock has a fair value of ₱17 per share. The company issues 22,000 new shares of this common stock to its stockholders as a stock dividend. Retained earnings should be reduced because of this dividend by which of the following amounts? a. ₱220,000 (22,000 shares at ₱10 per share) b. ₱308,000 (22,000 shares at ₱14 per share) c. ₱374,000 (22,000 shares at ₱17 per share) d. The company can reduce retained earnings by either ₱220,000 or ₱374,000

nd

NFJPIA-R1CAR 2

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Financial Accounting and Reporting

43. A department store received cash and issued a gift certificate that is redeemable in merchandise. When the gift certificate was issued a. Deferred revenue account should be decreased. b. Revenue account should be decreased. c. Deferred revenue account should be increased. d. Revenue account should be increased. 44. Are the following statements in relation to the term 'dilution' true or false, according to PAS33 Earnings per share? (1) A reduction in earnings per share is an example of dilution. (2) A reduction in loss per share is an example of dilution. Statement (1) Statement (2) a. False False b. False True c. True False d. True True 45. Psalms Company’s trial balance reflected the following account balances on December 31, 2018: Net Sales Share of profit of associate Cost of goods sold Interest income Loss on sale of equipment Revaluation surplus during the year Finance cost Distribution costs Administrative expenses Translation gain on foreign operation Income tax expense Unrealized gain on FVTOCI securities Income from discontinued operations

₱4,000,000 125,000 2,500,000 30,000 50,000 300,000 35,000 60,000 120,000 50,000 408,000 200,000 100,000

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What is the comprehensive income for the year 2018? a. ₱1,632,000 b. ₱1,532,000 c. ₱1,082,000

d. ₱550,000

46. Chronicles Company’s trial balance reflected the following account balances on December 31, 2018: Cash, net of bank overdraft of ₱300,000 and unreleased check of ₱100,000 and including customer's post-dated check of ₱50,000 and sinking fund amounting to ₱280,000 Accounts payable, net of debit balance in suppliers accounts amounting to ₱25,000 Bonds payable Premium on bonds payable Deferred tax liability Property dividends payable Income tax payable Note payable, due January 31, 2019 Note payable, due February 14, 2020 Contingent liability Share dividends payable Cash dividends payable Financial liabilities at fair value through profit or loss Reserve for contingencies Estimated expenses of meeting warranties Estimated damages as a result of unsatisfactory performance on a contract Mortgage payable Loans payable (payable in five semi-annual installment)

₱1,000,000 1,900,000 3,400,000 200,000 400,000 400,000 300,000 500,000 350,000 150,000 320,000 80,000 130,000 430,000 335,000 268,000 1,000,000 500,000

How much is the total noncurrent liabilities for the year ended December 31, 2018? a. ₱5,750,000 b. ₱5,650,000 c. ₱5,570,000 d. ₱5,560,000

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NFJPIA-R1CAR 2

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Financial Accounting and Reporting

47. Information on Lyra Co.’s defined benefit plan is shown below. Fair value of plan assets, Jan. 1, 2017 Present value of defined benefit obligation, Jan. 1, 2017 Current service cost Past service cost, Jan. 1, 2017 (average vesting period is 5 years) Benefits paid Return on plan assets Contribution to the plan Increase in obligation during the year due to changes in actuarial assumptions Expected rate of return Discount rate used to discount the defined benefit obligation

₱2,800,000 2,200,000 960,000 600,000 420,000 600,000 1,820,000 240,000 12% 10%

On January 1, 2017, Lyra Co. amended its retirement plan. The amendment resulted to an increase in the balance of the present value of defined benefit obligation from ₱1,600,000 to ₱2,200,000. The present values of economic benefits available in the form of refunds from the plan are ₱400,000 and ₱800,000 on January 1 and December 31, respectively. How much is the component of the defined benefit cost recognized in profit or loss? a. ₱1,560,000 b. ₱1,520,000 c. ₱1,600,000 d. ₱920,000 48. During your audit of the PPE of Marvelous Company, they provided the following information relating to the revaluation of an equipment on January 1, 2018. Equipment Residual value Useful life Age of the equipment Accumulated depreciation

Cost ₱6,500,000 500,000 12 2 ?

Replacement cost ₱9,200,000 200,000 ?

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On January 1, 2018, Marvelous Company estimates the remaining useful life of the equipment of 8 years. The equipment was sold on December 31, 2016 for ₱8,000,000. Using PFRS for SMEs, what is the revaluation surplus on January 1, 2018? a. ₱2,700,000 b. ₱2,200,000 c. ₱2,500,000 d. Some other answer 49. On January 1, Year One, the Smith Company issues 1,000 stock options to its president. The president must work for four years and then has three additional years in which to buy the stock at a price of ₱30 per share. The price of the stock on that day is ₱28 per share but it goes up in price by ₱3 per year thereafter. The conveyance qualifies as a compensatory stock option plan. According to a computer pricing model (Black-Scholes), one of these options is worth ₱5 on January 1, Year One but ₱8 on December 31, Year One, and ₱10 on December 31, Year Two. How much expense should this company recognize in Year Two? a. Nil b. ₱1,250 c. ₱2,000 d. ₱3,000 50. On January 1, 2015, TimSpurs Co. issued 4-year bond with a face value of ₱2,000,000 and stated interest of 8%, payable annually every December 31. The company received ₱1,898,205 and incurred ₱25,000 of transaction cost. The quoted price of the bonds is as follows: December 31, 2015 December 31, 2016 December 31, 2017

102 98 99

The bonds were retired on January 1, 2018 at 105 and incurred a transaction cost of ₱20,000. Assuming the bonds is classified as financial liability at amortized cost, how much is the interest expense during 2015? a. ₱160,000 b. ₱190,053 c. ₱187,321 d. ₱27,321 51. Star Company has recently launched a new model of consumer car. Its cars are sold with a threeyear warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the cars sold are with some defects, of which 4% are minor defects, 3% are normal

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Financial Accounting and Reporting

defects and 3% are major defects. For the year ended December 31, 2015, the company sold 10,000 units of the new model. The following information relates to the estimate of costs of defects associated with the new model: Cost of repair/unit Probability Minor Defects Normal defects Major defects High 30% ₱1,500 ₱4,000 ₱7,000 Medium 60% 1,200 3,000 5,000 Low 10% 1,000 1,500 2,000 What amount of provision should the company recognized for the year ended December 31, 2015? a. None b. ₱1,445,000 c. ₱1,590,000 d. ₱3,043,000 52. On January 1, 2015, Sarangani Company showed the following: Long-term note Accrued interest payable

₱6,000,000 600,000

At the end of 2014, Sarangani had started to experience extreme financial pressure and is in default in meeting interest payment on its long-term note. This had continued until 2015. However, the company had still accrued interest for 2015. The interest rate is 10% payable every December 31. In an agreement with the creditor, Sarangani Corporation obtained the following changes in the terms of the note.  The accrued interest is forgiven.  The principal obligation is reduced to ₱5,000,000 and will be due on December 31, 2020.  The new interest rate is 8% What is the gain on debt restructuring to be recognized by Sarangani? a. ₱2,579,180 b. ₱2,200,000 c. ₱1,600,000

d.

Nil

53. Included in Dwight Company’s liability balances on December 31, 2016 are: 10% note payable, maturing 03/3 1/2017 ₱ 10,000,000 12% note payable, maturing 06/30/2017 6,000,000 7% guaranteed debentures, due 2020 2,000,000

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Additional information:  On January 31, 2017, the entire ₱10,000,000 note was refinanced through issuance of a longterm obligation payable lump sum.  For the ₱6,000,000 note, under the loan agreement, the entity has the discretion to refinance the obligation for at least 12 months after December 31, 2016.  The annual sinking fund requirement on the guaranteed debentures is ₱500,000 per year.  The 2016 financial statements were issued on March 31, 2017. Assuming all accruing interest for 2016 were paid, the amount to be reported as current liabilities on December 31, 2016 is a. ₱19,300,000 b. ₱10,500,000 c. ₱16,500,000 d. ₱6,500,000 54. The following data were compiled prior to preparing the statement of financial position of the Oklahoma Corporation as of December 31, 2016: Authorized ordinary share, ₱100 par value Cash dividends payable Donated capital Gain on sale of treasury shares Net unrealized loss on financial asset at FVTOCI Premium on share capital Premium on bonds payable Reserve for bond sinking fund Reserve for depreciation Revaluation increment on property Accumulated profits, unappropriated Subscribed share capital Share subscriptions receivables Share warrants outstanding

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₱4,000,000 160,000 800,000 80,000 96,000 320,000 240,000 400,000 600,000 800,000 720,000 480,000 120,000 200,000

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Financial Accounting and Reporting

Treasury shares, at cost Unissued ordinary share

144,000 800,000

The amount of legal capital a. 4,000,000 b. 3,680,000

c. 3,560,000

d. 3,200,000

55. Marlou Ford Company had 100,000 ordinary shares issued and outstanding at January 1. During the year; Marlou Ford also had the ordinary share transactions listed below. April 1 Issued 30,000 previously unissued shares May 1 Split the share 2-for-1 June 30 Purchased 10,000 shares for the treasury July 30 Distributed a 20 percent bonus issue December 31 Split the stock 3-for-1 The weighted number of shares for EPS purposes a. 900,000 b. 872,000

c. 867,000

d. 864,000

56. On July 1, 2013, Mariel Inc. leased a delivery truck from Chubs Corp. under a 3 year operating lease. Total rent for the term of the lease will be ₱360,000 payable as follows: 12 months at ₱5,000 = ₱60,000 12 months at ₱7,500 = ₱90,000 12 months at ₱17,500 = ₱210,000 All payments were made when due. In Chubs’s June 30, 2015 statement of financial position, what amount should be reported as accrued rent income? a. ₱60,000 b. ₱90,000 c. ₱150,000 d. Nil 57. On January 1, 2015, Renz, Inc. purchased equipment for ₱4,000,000. The equipment shall be leased out under operating lease. The estimated useful life is 10 years and the estimated residual value is ₱480,000. On July 1, 2015, the equipment was leased to Wenz Co. under a 5-year operating lease. Annual rent is ₱800,000. The first annual rent was made on that date. Initial direct cost incurred on negotiating the lease amounted to ₱80,000. Insurance costs incurred by Renz in 2015, not reimbursable from lessee, amounted to ₱4,000.

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How much is the carrying amount of the leased asset at December 31, 2015? a. ₱3,648,000 b. ₱3,712,000 c. ₱2,418,000 d. ₱3,720,000 58. On December 31, 2015, Kathryn Co. sold equipment to Czarina, Inc., and simultaneously leased it back. Pertinent information is as follows: Cost of equipment Accumulated depreciation Remaining useful life of equipment Lease term Sales price (usually equal to present value of rentals) Annual rent payable at end of year (starting Dec. 31, 2016) Implicit interest rate How much is the gain (loss) on sale? a. ₱227,948 recognized immediately b. ₱227,948 deferred

₱2,000,000 ₱ 960,000 5 years 4 years ₱1,267,948 ₱ 400,000 10%

c. (₱227,948) recognized immediately d. Nil

59. Black Co., organized on January 2, 2017, had pretax financial statement income of ₱500,000 and taxable income of ₱800,000 for the year ended December 31, 2017. The only temporary differences are accrued product warranty costs, which Black expects to pay as follows: 2018 ₱ 100,000 2020 ₱ 50,000 2019 ₱ 50,000 2021 ₱ 100,000 The enacted income tax rates are 32% for 2017, 30% for 2018 through 2020, and 35% for 2021. Black believes that future years' operations will produce profits. In its December 31, 2017 statement of financial position, what amount should Black report as deferred tax asset? a. ₱50,000 b. ₱75,000 c. ₱90,000 d. ₱95,000

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60. If petty cashier pays P200 for a transportation out of an imprest petty cash, the journal entry should include a. Credit to cash for P200 b. Debit to transportation and credit to petty cash for P200 c. Credit to petty cash for P200 d. No journal entry is made 61. The Cuanza Company purchased a major new piece of machinery for P10 million on 1 January 2008. It will depreciate this machinery on a straight line basis over its useful life of 10 years, assuming a zero residual value. Also on 1 January 2008 the company received a government grant of CU1 million to help finance this machinery. According to PAS20 Government grants and government assistance, which, if either, of the following methods would be an acceptable treatment of this machinery and the related government grant in the company's statement of financial position at 31 December 2008? Method 1 Method 2 Non-current asset Non-current asset Cost 9,000,000 Cost 10,000,000 Depreciation 900,000 Depreciation 1,000,000 Carrying amount 8,100,000 Carrying amount 9,000,000 Deferred income 900,000 a. b.

Method 1 only Neither method

c. Method 2 only d. Method 1 or Method 2

62. On January 1, 2015, Amazing Company bought a land and building from Spiderman Company for ₱3,500,000. The Amazing Company will use the building as its head office. The portion of the total purchase price attributable to the land was ₱1,700,000, while the balance to the building. The company depreciates the building using straight line method over an estimated useful life of 25 years. Amazing Company uses the cost model in measuring its fixed assets subsequent to initial measurement. The company recorded impairment loss of ₱204,000. On December 1, 2017, the company has acquired another land and building in the Central Business District to be used as their new head office as this would be a good location. The management decided to lease out the old building under operating lease. By the end of 2017, the old building was already vacated by Amazing Company and another company has already occupied the old building. The fair value of the land and building at the end of 2017 was ₱3,400,000.

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The journal entry to record the transfer will include a a. Debit – Investment property, ₱3,284,000 b. Debit – Loss on transfer, ₱204,000 c. Credit – Building, ₱1,584,000 d. Credit – Land, ₱1,496,000 63. On January 1, 2015, Amazing Company bought a land and building from Spiderman Company for ₱3,500,000. The Amazing Company will use the building as its head office. The portion of the total purchase price attributable to the land was ₱1,700,000, while the balance to the building. The company depreciates the building using straight line method over an estimated useful life of 25 years. Amazing Company uses the cost model in measuring its fixed assets subsequent to initial measurement. The company recorded impairment loss of ₱204,000. On December 1, 2017, the company has acquired another land and building in the Central Business District to be used as their new head office as this would be a good location. The management decided to lease out the old building under operating lease. By the end of 2017, the old building was already vacated by Amazing Company and another company has already occupied the old building. The fair value of the land and building at the end of 2017 was ₱3,400,000. The journal entry to record the transfer will include a a. Debit – Investment property, ₱3,284,000 b. Debit – Loss on transfer, ₱204,000 c. Credit – Building, ₱1,584,000 d. Credit – Land, ₱1,496,000

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64. The statement of financial position of the Dixie Corporation on December 31, 2015 includes the following receivables balances: Notes Receivable Less: Notes discounted Accounts Receivable Less: Allowance for doubtful accounts

₱365,000 155,000 ₱856,000 41,500

₱210,000 814,500

Selected transactions during 2016 included the following:  Notes received in settlement of accounts totaled ₱825,000.  Notes receivable discounted as of December 31, 2015, were paid at maturity with the exception of one ₱30,000 note on which the company had to pay the bank ₱30,900, which included interest and protest fees. It is expected that recovery will be made on this note early 2017.  Customers’ notes of ₱600,000 were discounted with recourse during the year, proceeds from their transfer being ₱585,000. Of this total, ₱480,000 matured during the year without notice of protest.  Notes receivable collected during the year totaled ₱270,000 and interest collected was ₱24,500. Notes Receivable (including notes receivable discounted) as of December 31, 2016. a. ₱320,000 b. ₱365,000 c. ₱165,000 d. ₱285,000 65. The following data are available for the Cash in bank of Cayetano Company for February of the current year: 1) Checks issued by the company this February, ₱150,000. 2) Outstanding checks, January 31, ₱52,000. 3) Customer’s check representing receipts in January amounting to ₱12,000 was erroneously recorded by the company as ₱21,000. 4) Check of the company in January amounting to ₱20,000 was erroneously recorded by the company as ₱2,000. 5) Checks paid by the bank in February, ₱130,000. 6) Erroneous bank credit in January 31, ₱10,000. 7) Erroneous bank charge in February 28, ₱12,000. 8) Bank service charge, January 31, ₱2,000. 9) Bank service charge, February, ₱3,000.

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How much is the outstanding checks in February 28? a. ₱72,000 b. ₱22,000 c. ₱52,000 66. Which of the following statement is incorrect? Full PFRS a. Always amortize goodwill and indefinite-life intangibles. b. Borrowing costs on qualifying assets must be capitalized. Other borrowing costs are expensed. c. Research costs are expensed. Development costs must be capitalized and amortized if criteria are met. d. Residual value, useful life and depreciation method are reviewed annually as part of impairment tests.

d. ₱62,000

PFRS for SMEs An intangible with an indefinite life shall not be amortized All borrowing costs are expensed when incurred. Research and development costs are expensed when incurred. Residual value, useful life and depreciation method are reviewed only if there is an indication of related asset impairment.

67. Good Company filed a ₱900,000 law suit against Bad Company during Year One. At the end of Year One, both companies think that Good will probably win ₱200,000 but that a win of ₱370,000 is reasonably possible. In Year Two, the suit is settled with Bad paying ₱170,000 in cash to Good. What does each company recognize on its income statement for Year Two? a. Good recognizes a gain of ₱170,000 and Bad recognizes a recovery (gain) of ₱30,000. b. Good recognizes a loss of ₱30,000 and Bad recognizes a recovery (gain) of ₱30,000. c. Good recognizes a gain of ₱170,000 and Bad recognizes a loss of ₱170,000. d. Good recognizes a loss of ₱30,000 and Bad recognizes a loss of ₱170,000.

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68. David Company decided to offer a bonus to its branch manager at 20% of net income earned by the branch during the current year. The income for the branch was ₱3,090,000 before tax and before bonus for the current year. The income tax rate is 30%. How much is the bonus if the bonus is based on the net income after bonus and tax? a. ₱360,500 c. ₱379,474 b. ₱515,000 d. ₱618,000 69. On January 1, 2016, Deps Co. issues convertible bonds with a maturity of five years. The issue is for a total of 1,000 convertible bonds. Each bond has a par value of ₱1,000, a stated interest rate of 5% per year, and is convertible into 5 ordinary shares of Deps. The convertible bonds were issued to Beps at par. The per-share price of Deps share is ₱15. Quotation for similar bonds issued by Deps without the conversion privilege suggest that they can be sold for ₱900,000. The issuance of convertible bonds increased Deps’s equity by a. ₱100,000 c. ₱76,923 b. ₱75,000 d. Nil 70. Portions of the financial statements for Don Romantico Company are provided below. DON ROMANTICO COMPANY Statement of Comprehensive Income For the Year Ended December 31, 2018 (in 000s) Sales ₱ 800 Cost of goods sold (300) Gross Margin ₱ 500 Salaries Expense ₱120 Insurance Expense 40 Depreciation Expense 123 Interest Expense 50 (333) Gains and Losses: Gain on sale of building 11 Loss on sale of machinery (12) Income before tax ₱ 166 Income tax expense (78) Net Income ₱ 88

OPEN USING ADOBE READER AND PC. DON ROMANTICO COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2018 and 2017 (in 000s) Year 2018 2017 Change Cash ₱134 ₱100 ₱ 34 Accounts Receivable 324 216 108 Inventory 321 425 (104) Prepaid Insurance 66 88 (22) Accounts Payable 210 117 93 Salaries Payable 102 93 9 Deferred Income Tax Liability 60 52 8 Bond Discount 190 200 (10)

Using PFRS for SMEs, the net cash inflow (outflow) from operating activities using direct method is a. ₱352,000 b. ₱330,000 c. ₱412,000 d. ₱350,000  -- END -- 

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