CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING FEBRUARY 2023
FIRST PREBOARD EXAMINATION BATCH 93
SITUATION 1 – data about three unrelated entities
Arabian Company reported the following on December 31, 2023:
Cash (including bond sinking fund of P500,000) 5,000,000
Accounts receivable 7,500,000
Notes receivable (net of discounted note of P500,000) 2,000,000
Inventory 4,000,000
Total current assets 18,500,000
An analysis disclosed that accounts receivable comprised of the following:
Trade accounts receivable 5,000,000
Allowance for sales discount (250,000)
Allowance for doubtful accounts (250,000)
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
Accounts receivable 7,500,000
Mazda Company reported the following liability balances on December 31, 2023:
Accounts payable 2,800,000
Short-term borrowings 2,100,000
Bonds payable due 2025 4,200,000
Discount on bonds payable 700,000
Mortgage payable, current portion P700,000 4,900,000
Bank loan, due June 30, 2024 1,400,000
The P1,400,000 bank loan was refinanced with a 4-year loan on December 31, 2023. The financial statements
were issued on March 31, 2024.
Mercury Company incurred the following costs during 2023:
Property tax 250,000
Freight in 1,750,000
Doubtful accounts 1,600,000
Officer’s salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000
Interest on bank loan 500,000
Research and development cost 1,000,000
1. What amount should Arabian Company report as total current assets on December 31, 2023?
a. 17,250,000
b. 17,000,000
c. 15,250,000
d. 15,000,000
2. What total amount should Mazda Company report as current liabilities on December 31, 2023?
a. 10,500,000
b. 7,000,000
c. 11,900,000
d. 5,600,000
3. What amount of costs should Mercury Company report as administrative expense?
a. 2,600,000
b. 3,350,000
c. 4,200,000
d. 5,200,000
 Page 2
SITUATION 2 – data about four unrelated entities
Thorpe reported the following items of other comprehensive income for the year 2023:
Unrealized gain on bond investment - FVPL 800,000
Unrealized loss on equity investment - FVOCI 1,000,000
Unrealized gain on bond investment - FVOCI 1,200,000
Unrealized gain on forward contract designated as cash flow hedge 400,000
Translation loss on foreign operations 200,000
Net remeasurement gain on defined benefit plan 600,000
Loss on credit risk of a financial liability at FVPL under the fair value option 300,000
Revaluation surplus 2,500,000
On April 1, 2023, Carlos Company had a machine costing P10,000,000 and accumulated depreciation of
P7,500,000. On such date, Carlos classified the machine as held for sale. On April 1, 2023, the machine had an
estimated selling price of P1,000,000, estimated disposal cost of P100,000 and remaining useful life of 2 years.
On December 31, 2023, the estimated selling price of the machine increased to P1,500,000 with estimated disposal
cost of P200,000.
On January 1, 2023, Vernon Company had a division that met the criteria for discontinuance of a business
component. For the period January 1 through October 31, 2023, the component had revenue of P500,000 and
expenses of P800,000. The assets of the component were sold on October 31, 2023 at a loss of P100,000. The
income tax rate is 25%.
On January 1, 2023, Animus Company discovered that it had incorrectly expensed a P2,100,000 machine
purchased on January 1, 2020. The entity estimated the machine’s useful life to be 10 years and the residual value
at P100,000. The entity used the straight-line method of depreciation and is subject to a 25% income tax rate.
4. What net amount in OCI that may be reclassified to profit or loss should Thorpe report for the year 2023?
a. 1,400,000
b. 2,200,000
c. 1,100,000
d. 2,000,000
5. What amount should Carlos report as impairment loss on April 1, 2023?
a. 900,000
b. 1,600,000
c. 1,500,000
d. 0
6. What amount should Carlos report as gain on reversal of impairment on December 31, 2023?
a. 937,500
b. 737,500
c. 600,000
d. 400,000
7. What amount of loss from discontinued operation should Vernon report for 2023?
a. 400,000
b. 300,000
c. 200,000
d. 150,000
8. What amount should Animus report as prior period error in the December 31, 2023 financial statements?
a. 1,300,000
b. 975,000
c. 1,125,000
d. 1,500,000
 Page 3
SITUATION 3 – data about four unrelated entities
Pauline Company had the following transactions during the quarter ending March 31, 2023:

Inventory loss from market decline 1,400,000

Depreciation of equipment for the year 2023 200,000

Congo Company reported intersegment sales of P15,000,000. The minimum amount of sales to be considered a
major customer was determined to be P3,000,000.

On December 31, 2023, Armenia Company reported the following items:

Cash on hand 1,000,000

Petty cash fund 50,000
Security bank current account 2,000,000
BDO current account (overdraft) (200,000)
BPI time deposit – 90 days for land acquisition 2,000,000
Sinking fund for bonds payable due December 31, 2024 2,500,000
Asia Bank time deposit – 60 days 900,000

The cash on hand included a customer postdated check of P150,000 and postal money order of P50,000. The petty
cash fund included unreplenished petty cash vouchers of P10,000 and an employee check for P5,000 dated
January 31, 2024.

Zealous Company is accounting for its petty cash fund using the imprest system. On November 1, 2023, Zealous
established a petty cash fund of P50,000. On December 31, 2023, the fund consisted of the following items:

Currency and coins 2,000

Petty cash voucher for employee’s IOU 10,000
Currency in envelope marked “collections for Valentine’s Day party” 5,000
Petty cash vouchers for expenses 33,000

The petty cash fund was replenished on December 31, 2023.

9. What total amount of expenses should Pauline report for the quarter ending March 31, 2023?
a. 1,600,000
b. 1,450,000
c. 400,000
d. 0

10. Congo should consider each of its operating segments as reportable if the segment revenue is at least
a. 4,500,000
b. 3,000,000
c. 1,500,000
d. 22,500,000

11. What amount should Armenia report as cash and cash equivalent on December 31, 2023?
a. 8,285,000
b. 5,385,000
c. 6,285,000
d. 6,235,000

12. Zealous’ entry to replenish the petty cash fund will include
a. Credit Petty Cash Fund, P48,000
b. Credit Cash Short / Over, P5,000
c. Credit Cash in Bank, P43,000
d. Debit Cash Short / Over, P5,000
 Page 4
SITUATION 4 – data about four unrelated entities
Aroma Company records sales return during the year as a credit to accounts receivable. However, at year-end,
the entity estimates the probable sales return and records the same by means of an allowance account. Also, the
entity uses the gross method of recording cash discounts. The following transactions occurred during the year:
Sale of merchandise on account, 2/10, n/30 4,000,000
Collection within the discount period 1,470,000
Collection beyond the discount period 1,000,000
Sales return granted 100,000
Sales return estimated at the end of the year 20,000
Doubtful accounts (10% of gross accounts receivable at year-end) ?
Marvel Company reported the following information before adjustments on December 31, 2023:
Accounts receivable 3,000,000
Allowance for doubtful accounts 200,000
Sales 10,000,000
Sales returns and allowances 500,000
Accounts written off 150,000
Collection of accounts previously written off 30,000
75% of all sales are on credit and an average of 4% of credit sales may prove uncollectible.
Emma Company is a dealer in equipment. On January 1, 2023, the entity sold equipment in exchange for a
noninterest bearing note requiring five annual payments of P800,000. The first payment was made on December
31, 2023. The market rate for similar notes was 8%. The PV of 1 at 8% for 5 periods is 0.68 and The PV of an
ordinary annuity of 1 at 8% for 5 periods is 3.99.
On January 1, 2023, City Bank loaned P4,000,000 to one of its customers. The loan is due on December 31, 2027,
has an interest rate of 9% and interest is payable annually every December 31. On December 31, 2023, the entity
had recognized a 12-month expected credit loss of P172,800. On December 31, 2024, the entity assessed that
there was a significant increase in credit risk of the loan but no objective evidence of impairment. On such date,
the entity concluded that there is a 35% probability of default over the remaining term of the loan and it is expected
that only 70% of the loan will be collected. Interest for the years 2023 and 2024 were collected. The present value
of 1 at 9% for 3 periods is 0.77.
13. What is the net realizable value of accounts receivable to be reported by Aroma?
a. 1,240,000
b. 1,260,000
c. 1,267,000
d. 1,287,000
14. What amount of allowance for doubtful accounts should Marvel report on December 31, 2023?
a. 300,000
b. 365,000
c. 285,000
d. 380,000
15. What is the carrying amount of the note receivable to be recognized by Emma on December 31, 2023?
a. 3,200,000
b. 2,647,360
c. 2,937,600
d. 3,447,360
16. What amount of allowance for impairment loss should City Bank report on December 31, 2024?
a. 1,844,000
b. 645,400
c. 472,600
d. 322,000
 Page 5
SITUATION 5 – data about four unrelated entities

On December 1, 2023, Grateful Company assigned P1,500,000 of accounts receivable to a bank on a

nonnotification basis in consideration for a loan. The bank advanced P1,300,000 less a service charge of P50,000.
The entity signed a promissory note bearing interest at 12%. On December 31, 2023, the entity collected assigned
accounts of P1,000,000 less sales discount of P30,000. Also on December 31, 2023, the entity remitted the
collection to the bank in payment first of interest and the balance to the principal amount of the note.

Daisy Company factored with recourse P5,000,000 of accounts receivable with a bank. The finance charge is 5%
and 10% was retained to cover sales discounts, sales returns and sales allowances. The transaction met the
condition to be considered as sale but subject to recourse for nonpayment. The factor estimated the fair value of
the recourse obligation at P125,000.

Morale Company provided the following transactions:

January 1 Sold merchandise for P5,000,000 accepting a note of P5,000,000 for six months with interest to
be paid at 12% at maturity
March 1 Discounted the note with recourse at a local bank at 15%. The discounting is accounted for as
conditional sale with recognition of a contingent liability
July 1 The customer paid the bank in full

Myriad Company provided the following data on December 31, 2023:

Finished goods in storeroom, at cost 2,000,000

Finished goods in transit, purchased FOB Shipping Point 250,000
Finished goods held by salesmen, at cost 100,000
Goods in process, at cost 1,000,000
Materials on hand 900,000
Materials in transit, purchased FOB Destination 50,000
Damaged materials returned to supplier 100,000
Factory supplies 400,000

17. What is the balance of the note payable to be reported by Grateful on December 31, 2023?
a. 330,000
b. 280,000
c. 343,000
d. 293,000

18. What total amount of loss on factoring should Daisy recognized initially?
a. 500,000
b. 250,000
c. 375,000
d. 625,000

19. What amount of loss on note receivable discounting should Morale report on March 1?
a. 65,000
b. 100,000
c. 265,000
d. 48,750

20. What is the cost of Myriad’s inventory on December 31, 2023?

a. 4,250,000
b. 4,350,000
c. 4,650,000
d. 2,350,000
 Page 6
SITUATION 6 – data about four unrelated entities
Lawan Company provided the following information relating to inventory for the month of February:
Date Transaction Units Unit Cost
February 1 Beginning 10,000 52
February 7 Purchase 30,000 50
February 12 Sale 20,000
February 17 Purchase 60,000 45
February 22 Purchase 20,000 43
February 28 Sale 70,000
The unit selling price is P90 and the entity uses the weighted average periodic system.
White Company provided the following inventory data at the end of first year of operations:
Cost Net Realizable Value
Skis 4,400,000 5,000,000
Boots 3,400,000 3,000,000
Ski equipment 1,400,000 1,600,000
Ski apparel 800,000 1,000,000
On December 31, 2023, Planter Company has an outstanding purchase commitment for 30,000 gallons at P200
per gallon of raw material to be used in the manufacturing process. The market price on December 31, 2023 is
P170. On January 31, 2024, when the 30,000 gallon shipment is received, the market price is P210.
On December 31, 2023, Frenzy Company provided the following data:
2023 2022
Beginning inventory 500,000 -
Purchase 4,000,000 2,800,000
Purchase return 250,000 50,000
Sales 4,500,000 3,000,000
At the beginning of 2023, the entity changed the policy on the selling price of the merchandise in order to produce
a gross profit rate of 5% higher than the gross profit rate in 2022.
21. What is Lawan’s inventory cost on February 28?
a. 1,371,000
b. 1,400,000
c. 1,310,000
d. 1,395,000
22. What amount of loss on inventory writedown should White report for the current year?
a. 600,000
b. 400,000
c. 200,000
d. 0
23. What amount of gain on purchase commitment should Planter record on January 31, 2024?
a. 1,200,000
b. 900,000
c. 300,000
d. 0
24. What is Frenzy’s estimated cost of inventory on December 31, 2023?
a. 1,100,000
b. 875,000
c. 650,000
d. 1,050,000
 Page 7
SITUATION 7 – data about four unrelated entities
Groom Company used the average cost retail method. The entity provided the following information:
Cost Retail
Beginning inventory 1,650,000 2,200,000
Net purchase 3,725,000 4,950,000
Departmental transfer - credit 200,000 300,000
Net markup 150,000
Normal inventory shortage 100,000
Employee discounts 200,000
Sales (including sales of P400,000 of items which were marked down from P500,000) 4,000,000
On January 1, 2023, Farming Company has 10 “2-year-old” dairy cattle at P4,000,000 and 8 “2.5-year-old”
carabaos at P2,000,000. On June 30, 2023, the entity purchased 4 “1-year-old” dairy cattle at P1,500,000 and 6
“0.5-year-old” carabaos at P1,000,000. On December 31, 2023, the fair value less cost of disposal of each animal
is as follows:
2-year-old dairy cattle 520,000
2.5-year-old carabao 312,500
1-year-old dairy cattle 425,000
0.5-year-old carabao 200,000
3-year-old dairy cattle 580,000
3.5-year-old carabao 362,500
1.5-year-old dairy cattle 500,000
1-year-old carabao 250,000
There were no sales, newborns nor deaths of animals during 2023.
Sun Company held 40,000 shares purchased for P75 per share. The entity received 40,000 share rights to purchase
one new share at P80 per share and two rights. The fair value of each right is P10. The entity exercised all of the
rights to acquire the new shares. The rights are accounted for separately at fair value.
Skyline Company acquired equity investments costing P3,000,000 during 2023. The entity irrevocably elected to
measure the investment at FVOCI. The fair values on December 31, 2023 and 2024 are P2,900,000 and
P2,300,000 respectively.
25. What amount should Groom report as cost of inventory?
a. 1,924,000
b. 2,600,000
c. 1,950,000
d. 2,250,000
26. What amount of gain attributable to physical change should Farming report for the year 2023?
a. 3,700,000
b. 2,100,000
c. 1,700,000
d. 1,600,000
27. What is the cost of the new investment recognized by Sun?
a. 2,000,000
b. 1,600,000
c. 3,200,000
d. 3,600,000
28. What amount of unrealized loss in other comprehensive income should Skyline report in the 2024 statement
of comprehensive income?
a. 100,000
b. 600,000
c. 700,000
d. 0
 Page 8
SITUATION 8 – data about four unrelated entities

At the beginning of the current year, Cyber Company acquired 40% of the outstanding ordinary shares of an
investee by paying P2,560,000 when the carrying amount of the net assets of the investee equaled P5,000,000.
The difference was attributed to equipment which had a carrying amount of P1,200,000 and fair value of
P2,000,000, and to building with a carrying amount of P1,000,000 and a fair value of P1,600,000. The remaining
useful lives of the equipment and building were 4 years and 12 years respectively. During the current year, the
investee reported net income of P1,600,000 and paid dividends of P1,000,000.

On January 1, 2023, Gelyka Company purchased 12% bonds with a face amount of P5,000,000 for P5,380,000.
The bonds provide an effective yield of 10%. The bonds are dated January 1, 2023, mature on January 1, 2028
and pay interest annually every December 31 of each year. The bonds are quoted at 120 and at 115 on December
31, 2023 and December 31, 2024 respectively. The entity has elected the fair value option for this investment.

On January 1, 2023, Competent Company entered into a two-year P4,000,000 variable interest rate loan at the
prevailing interest rate of 12%. In 2024, the interest rate is equal to the prevailing interest rate at the beginning of
the year. The principal loan is payable on December 31, 2024 and the interest rate is payable on December 31 of
each year. On January 1, 2023, the entity entered into a “receive variable, pay fixed” interest rate swap agreement
with a speculator bank. The interest rate swap agreement is designated as a cash flow hedge. The prevailing
interest rate on January 1, 2024 is 11%. The PV of 1 at 11% for one period is 0.901 and the PV of 1 at 12% for
one period is 0.893.

On January 1, 2023, Elysee Company took out a P5,000,000 insurance policy on the life of the president, the
entity being the beneficiary. The accounting period is the calendar year. The annual premium on the policy is
P160,000. Data regarding dividends and cash surrender value are as follows:

2024 2025 2026

Dividends received on December 31 - 10,000 12,000
Cash surrender value on December 31 - 84,000 94,000

29. What is the carrying amount of the investment in associate to be reported by Cyber at year-end?

a. 2,550,000
b. 2,700,000
c. 2,800,000
d. 3,050,000

30. What amount of unrealized gain or loss from change in fair value should be recognized by Gelyka in 2024?

a. 620,000 gain
b. 250,000 loss
c. 370,000 gain
d. 181,800 loss

31. What is the derivative asset or liability that Competent should report on December 31, 2023?

a. 35,720 asset
b. 35,720 liability
c. 36,040 asset
d. 36,040 liability

32. What amount of life insurance expense should Elysee report for the year ended December 31, 2026?

a. 160,000
b. 150,000
c. 138,000
d. 54,000
 Page 9
SITUATION 9 – data about four unrelated entities

Tower Company acquired the following machines during 2023:

• Machine A in exchange for 50,000 ordinary shares with a P100 par value and market price of P120 per
share.
• Machine B at an invoice price of P3,000,000 subject to a 5% cash discount which was not taken. Freight
and insurance during shipment were P50,000 and installation cost amounted to P200,000
• Machine C in exchange for a noninterest bearing note requiring eight payments of P200,000. The note
was dated January 1, 2023 and the first payment was made on December 31, 2023. The prevailing market
interest rate is 11%. The PV of an ordinary annuity of 1 at 11% for 8 periods is 5.146 and the PV of an
annuity of 1 in advance at 11% for 8 periods is 5.712.

Jilmar Company exchanged a car from inventory for a computer to be used as a long-term asset. The car has a
carrying amount P1,200,000 and a list selling price of P1,900,000. The computer has a fair value of P1,720,000.
The entity paid a cash difference of P200,000 to acquire the computer.

On January 1, 2023, Landmark Company was granted by a local government authority 5,000 hectares of land
located near the slums outside the city limits. The condition attached to this grant was that the entity shall clean
up this land and lay roads by employing laborers from the village where the land is located. The government has
fixed the minimum wage payable to the workers. The entire operation will take 4 years and is estimated at
P10,000,000. The entity will spend P1,500,000, P2,000,000, P3,000,000 and P3,500,000 for 2023, 2024, 2025
and 2026 respectively. The fair value of the land is P20,000,000.

Seda Company had the following borrowings during 2023. The borrowings were made for general purposes but
some of the proceeds were used to finance the construction of a new building: 12% bank loan P3,000,000 and 8%
long-term loan P5,000,000. Construction began on January 1, 2023 and was completed on December 31, 2023.
Expenditures on the building were P2,000,000, P2,000,000 and P1,000,000 on January 1, June 30 and December
31 respectively.

33. What is the total cost of the machines to be recognized by Tower?

a. 10,129,200
b. 10,279,200
c. 10,700,000
d. 10,242,400

34. What amount of gain from exchange should Jilmar recognize?

a. 520,000
b. 320,000
c. 700,000
d. 500,000

35. What amount of grant income should Landmark recognize in 2024?

a. 20,000,000
b. 3,000,000
c. 5,000,000
d. 4,000,000

36. What is the cost of the new building to be recognized by Seda?

a. 5,000,000
b. 5,285,000
c. 3,285,000
d. 5,760,000
 Page 10
SITUATION 10 – data about three unrelated entities
Uptown Company incurred the following expenditures related to the construction of a new home office:
Purchase price of land and an old apartment building 2,000,000
Fair value of the land 1,800,000
Legal fees, including fee for title search 10,000
Payment of land mortgage and related interest due at the time of sale 50,000
Payment of delinquent property taxes assumed 20,000
Cost of razing the apartment building 30,000
Grading and drainage on the land site 15,000
Architect fee on new building 200,000
Payment to building contractor 8,000,000
Interest cost on specific borrowing during construction 300,000
Payment of medical bills of employees accidentally injured while inspecting the construction 10,000
Cost of paving driveway and parking lot 40,000
Cost of trees, shrubs and other landscaping 55,000
Cost of installing lights in parking lot 5,000
Insurance premium on building during construction 25,000
Cost of open house party to celebrate opening of building 60,000
Mundo Company purchased equipment which was installed and put into service on January 1, 2023 at a total cost
of P12,800,000 with estimated residual value of P800,000. The equipment is being depreciated over 8 years by
the double declining balance method.
Prospect Company was engaged in the rock and gravel business. The following transactions relate to the
acquisition and development of an expensive gravel pit:
2023 Cost of acquisition and development 960,000
Estimated output 2,400,000 tons
Production 1,000,000 tons

2024 Additional development cost 490,000

Production 600,000 tons

2025 Additional development cost 500,000

New estimate of remaining output 2,500,000 tons
Production 700,000 tons
37. What amount should Uptown report as cost of land?
a. 2,120,000
b. 1,920,000
c. 1,895,000
d. 1,845,000
38. What amount should Uptown report as cost of the new building?
a. 8,555,000
b. 8,525,000
c. 8,540,000
d. 8,530,000
39. What amount of depreciation should be recorded by Mundo for the year 2024?
a. 2,250,000
b. 2,400,000
c. 3,000,000
d. 3,200,000
40. What amount of depletion should Prospect recognize for 2025?
a. 308,000
b. 400,000
c. 450,000
d. 854,000
 Page 11

SITUATION 11 – Data about four unrelated entities

Brandy Company purchased four convenience store buildings on January 1, 2017 for a total cost of P25,000,000.
The buildings have been depreciated using the straight-line method with a 20-year useful life and 10% residual
value. On January 1, 2023, the entity converted the buildings into a hotel and restaurant. The entity estimated that
the buildings have a remaining life of 10 years, that their residual value will be zero, that net cash inflows from
the buildings will total P3,000,000 per year and that the fair value less cost of disposal of the four buildings totaled
P15,000,000. The appropriate discount rate is 12% and the present value of an ordinary annuity of 1 at 12% for
10 periods is 5.65.

Jolo Company has determined that the furniture division is a cash generating unit. The entity calculated the value
in use of the division to be P7,000,000. The entity has also determined that the fair value less cost of disposal of
the building is P5,500,000. The carrying amounts of the assets are as follows: Building, P8,000,000; Equipment,
P4,000,000; Inventory, P2,000,000; Goodwill, P2,000,000.

Grape Company provided the following data related to an equipment on January 1, 2023, the date of revaluation:

Cost Replacement Cost

Equipment 6,500,000 9,200,000
Residual value 500,000 200,000

The equipment has a total useful life of 12 years and is already 2 years old on January 1, 2023. On December 31,
2024, the equipment was sold for P8,000,000. Ignore the effect of taxes.

On January 1, 2020, Raven Company acquired a building costing P25,000,000 with a useful life of 25 years. On
January 1, 2023, the entity decided to revalue the building. It was ascertained that the replacement cost of the
building was 80% above the original cost and there was no change in the useful life. The income tax rate is 25%.

41. What amount of impairment loss should Brandy report on January 1, 2023?

a. 6,750,000
b. 3,250,000
c. 1,300,000
d. 0

42. What amount of impairment loss should Jolo allocate to equipment?

a. 2,500,000
b. 3,000,000
c. 2,000,000
d. 1,500,000

43. What amount of revaluation surplus should Grape report on December 31, 2024, before the sale?

a. 2,200,000
b. 1,980,000
c. 2,160,000
d. 1,760,000

44. What amount of revaluation surplus should Raven report on January 1, 2023?

a. 13,200,000
b. 17,600,000
c. 20,000,000
d. 15,000,000
 Page 12

SITUATION 12 – Data about four unrelated entities

Safehouse Company purchased a patent on January 1, 2018 for P3,000,000. The original life of the patent was
estimated to be 15 years. However, in December 2022, the controller received information proving conclusively
that the product protected by the patent would be obsolete within four years. The entity decided to write off the
unamortized portion of the patent cost over five years beginning 2023.

Ball Company incurred the following research and development costs during the 2023:

Equipment purchased for current and future projects 200,000

Equipment purchased for current project only 400,000
Research and development salaries of current project 800,000
Legal fees to obtain the patent 100,000
Material and labor costs for prototype product 1,200,000

The equipment has a five-year useful life and is depreciated using the straight-line method.

Choco Company offers customers a pottery cereal bowl if they send three boxtops from its product and P10. The
entity estimated that 60% of the boxtops will be redeemed. During the current year, the entity sold 675,000 boxes
and customers received 110,000 bowls by redeeming boxtops. The cost of each bowl is P25.

Chato Company is involved with two contingencies. The fiscal year ends on December 31, 2023 and the 2023
financial statements are issued on March 31, 2024:

• Chato is the plaintiff in a P3,000,000 lawsuit filed against Western Company for damages due to lost profit
from rejected contracts and for unpaid accounts receivable. The case is in final appeal and legal counsel
advised that it is probable that Chato will prevail and be awarded P2,500,000.
• In July 2023, the city government filed suit against Chato seeking civil penalties and injunctive relief for
violation of environmental law regulating hazardous waste. On February 15, 2024, Chato reached a settlement
with state authorities. Based on discussions with legal counsel, Chato believed it is probable that P2,000,000
will be required to cover the cost of violation.

45. What amount should Safehouse report as amortization of patent for 2023?
a. 600,000
b. 500,000
c. 400,000
d. 200,000
46. What total amount should Ball recognize as research and development expense for the year 2023?
a. 2,440,000
b. 2,000,000
c. 2,700,000
d. 2,120,000

47. What amount should Choco report as liability for outstanding premiums at year-end?
a. 250,000
b. 375,000
c. 625,000
d. 875,000
48. What is the net impact of the following contingencies in Chato’s 2023 income statement?
a. Net profit of P1,000,000
b. Net profit of P500,000
c. Loss of P2,000,000
d. Income of P2,500,000
 Page 13

SITUATION 13 – Data about two unrelated entities

Alyanna Company operates a customer loyalty program. The entity grants loyalty points for goods purchased.
The loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiry
date. During 2023, the entity issued 100,000 award credits and expects that 80% of these award credits shall be
redeemed. The total stand-alone selling price of the award credits granted is reliably measured at P2,000,000. In
2023, the entity sold goods to customers for a total consideration of P8,000,000 based on stand-alone selling price.
Award credits redeemed in 2023 and 2024 are 30,000 and 15,000 respectively. Total award credits expected to
be redeemed in 2023 and 2024 are 80% and 90% respectively.
On October 1, 2023, Zola Company issued 5,000 12% bonds payable with face amount of P1,000 per bond at
110. The bonds which mature on January 1, 2027, pay interest semiannually on January 1 and July 1. The entity
paid bond issue cost of P200,000.

49. What amount of revenue from the points should Alyanna report for the year 2023?
a. 1,600,000
b. 1,500,000
c. 600,000
d. 480,000
50. What amount of cash should Zola received as a result of the issue of bonds payable?
a. 5,450,000
b. 5,650,000
c. 5,300,000
d. 5,550,000
SITUATION 14 – THEORY
51. Which of the following terms best describes information that influences the economic decisions of users?
a. Reliable
b. Prospective
c. Relevant
d. Understandable
52. It is the removal of all or part of a recognized asset or liability from the statement of financial position.
a. Writeoff
b. Derecognition
c. Extinguishment
d. Retirement
53. Which is an optional step in the accounting cycle?
a. Adjusting entries
b. Closing entries
c. Financial statements
d. Reversing entries
54. When classifying assets as current and noncurrent
a. Current assets must reflect realizable cash value
b. Prepayments are included in other assets
c. Current assets are determined by the seasonal nature
d. Assets are classified as current if reasonably expected to be realized in cash or consumed during the normal
operating cycle.
55. Which of the following is not a related party?
a. A shareholder owing 30% of the outstanding ordinary shares of an entity
b. An entity providing banking facilities
c. An associate
d. Key management personnel
 Page 14

56. Which statement is true in relation to events after the reporting period?

a. Notes to financial statements should give details of material adjusting events included in those financial
statements
b. Notes to financial statements should give details of material nonadjusting events which could influence
the decisions of primary users
c. A decline in fair value of trading investments would normally be classified as adjusting event
d. The settlement of a long-running court case would normally be classified as nonadjusting event

57. When an entity decided to sell a component, the gain on disposal should be

a. Presented in other income

b. Presented as an adjustment of retained earnings
c. Netted against the loss from operations of the component as part of discontinued operations
d. Included in other comprehensive income

58. An entity that changed from cash basis to accrual basis of accounting during the current year should report

a. Prior period adjustment resulting from the correction of an error

b. Prior period adjustment resulting from the change in accounting policy
c. Component of income from continuing operations
d. Component of income from discontinued operations

59. For interim financial reporting, an expropriation gain occurring in the second quarter shall be

a. Recognized ratably over the last three quarters

b. Recognized ratably over all four quarters with the first quarter being restated
c. Recognized in the second quarter
d. Disclosed in the second quarter

60. The approach used in segment reporting is known as

a. Segment approach
b. Revenue approach
c. Management approach
d. Enterprise approach

61. In reimbursing the imprest petty cash fund, which of the following statements is true?

a. Cash is debited
b. Petty cash is debited
c. Petty cash is credited
d. Expense accounts are debited

62. Which is not permitted in accounting for uncollectible accounts?

a. Percentage of accounts receivable

b. Percentage of sales
c. Direct writeoff method
d. Aging of accounts receivable

63. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold
computed using FIFO method exceeds cost of goods sold using average cost method?

a. Prices decreased
b. Prices remained unchanged
c. Prices increased
d. Price trend cannot be determined
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64. Depending on the business model for managing financial assets, an entity shall classify financial assets
subsequent to initial recognition at

a. Fair value through profit or loss

b. Amortized cost
c. Fair value through other comprehensive income
d. All of these are used in measuring financial assets

65. If the entity uses the fair value model for investment property, which statement is true?

a. Value the property at cost less accumulated depreciation and impairment

b. Report the increase in fair value in other comprehensive income for the period
c. Depreciate the property using normal depreciation methods
d. Do not depreciate the investment property

66. Cost of demolishing an old building to make room for construction of a new building should be

a. Expensed as incurred
b. Added to the cost of the new building
c. Added to the cost of the land
d. Amortized over the estimated time period between the demolition of the old building and completion of
the new building

67. Which cost associated with trademark should not be capitalized?

a. Attorney fee
b. Consulting fee
c. Research and development fee
d. Design cost

68. Providing a monetary rebate program

a. Is accounted for similarly to a premium offer

b. Creates an expense for the seller in the period of sale
c. Creates a liability for the seller at the time of sale
d. Is normally not recognized

69. An entity did not record an accrual for a present obligation but disclosed the nature of the obligation and the
range of the loss. How likely is the loss?

a. Remote
b. Reasonably possible
c. Probable
d. Certain

70. A discount on bonds payable is charged to interest expense

a. Equally over the life of the bonds

b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures

END