CUP 4

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Easy Round 1 point each Theory – 10 seconds

Problem – 15 seconds

1. Which of the following statement correctly describes a partnership by estoppel?

a. One which failed to comply with one or more of the legal requirements for its
establishment.
b. One which is formed for a particular undertaking, the completion of which will
automatically dissolve the partnership.
c. One which in reality is not a partnership but is considered as one only in relation to those
who, by their conduct or omission, are precluded to deny or disprove the partnership’s
existence.
d. One which has for its object determinate things, their use or fruits, or a specific undertaking
or the exercise of a profession or vocation.

ANSWER: c

2. The financial reports for a corporate bankruptcy liquidation are:

a. Balance sheet and statement of affairs
b. Statement of affairs and statement of realization and liquidation
c. Balance sheet and income statement
d. Statement of affairs and income statement

ANSWER: b

3. The Billings on Construction in Progress is a(n)

a. Contract revenue account.
b. Inventory account.
c. Contra-inventory account.
d. Construction expense account.

ANSWER: c

4. The ABC Co., on which A, B and C are partners, reported profit of ₱360,000 during the year. If
partners A, B and C have a profit sharing agreement of 2:3:4, respectively, how much is the share of
A in the profit?

ANSWER: ₱80,000

5. The GSP Corporation established its Cagayan Branch on January 1, 2017. Merchandise shipments
from home office during the month, billed at 120% of cost, is P125,000. Branch returned damaged
merchandise worth P15,260. On January 31, the branch reported a net loss of P2,270 and an
inventory of P84,000. What is the net income (loss) of the branch to be taken up in the books of the
GSP Corporation’s home office?
a. (P1,690)
b. P6,500
c. (P2,270)
d. P1,960

ANSWER: d
 6. Under PFRS 3 Business Combination, goodwill arising from business combination is
a. charged to retained earnings after the acquisition is completed.
b. amortized over 40 years or its useful life, whichever is shorter.
c. amortized over its useful life, or over a life of not more than 10 years based on the
management’s judgment when its useful life is not clearly determinable
d. not amortized.

ANSWER: d

7. A and B agreed to form a partnership. A shall contribute ₱60,000 cash while B shall contribute
₱120,000 cash. However due to the expertise that A will be bringing to the partnership, the
partners agreed that they should initially have an interest ratio of 5:4 in the partnership capital.
Under the bonus method, how much is the adjusted capital balance of B immediately after the
formation of the partnership?

ANSWER: ₱80,000

8. Allied Bank holds a P500,000 note secured by a building owned by Aling Susan Company, which has
filed for bankruptcy. If the property has a book value of P600,000 and a fair market value of
P450,000, what is the best way to describe the notes held by Allied Bank?
a. The bank has a secured claim of P500,000.
b. The bank has unsecured claim of P500,000.
c. The bank has a secured claim of P450,000 and an unsecured claim of P50,000.
d. The bank has a secured claim of P50,000 and an unsecured claim of P50,000.

ANSWER: c

9. Seasons Construction is constructing an office building under contract for Cannon Company. The
contract calls for progress billings and payments of P1,240,000 each quarter. The total contract
price is P14,880,000 and Season estimates total costs of P14,200,000. Seasons estimate that the
building will take 3 years to complete, and commences construction on January 2, 2016.

At December 31, 2016, Seasons estimates that it is 30% complete with the construction, based on
costs incurred. What is the total amount of Revenue from Long Term Contracts recognized for
2016, and what is the balance in the Accounts Receivable account assuming Cannon Company has
not yet made its last quarterly payment?
a. Revenue – P4,960,000; Accounts Receivable – P4,960,000
b. Revenue – P4,260,000; Accounts Receivable – P1,240,000
c. Revenue – P4,464,000; Accounts Receivable – P1,240,000
d. Revenue – P4,260,000; Accounts Receivable – P4,960,000

ANSWER: c

10. Franchise fees should be recognized

a. On the date the contract was signed.
b. On the date the franchise is opened for business.
c. On the date the franchise fee is paid to franchisor.
d. When performance obligations are satisfied.

ANSWER: d
EXTRA QUESTIONS:

11. On March 1, 2016, U and I formed a partnership with each contributing the following assets:
U I
Cash P 300,000 P 700,000
Machinery and equipment 250,000 750,000
Building - 2,250,000
Furniture and fixtures 100,000 -

The building is subject to a mortgage loan of P800,000, which is to be assumed by the partnership.
The partnership agreement provides that U and I share profits and losses in the ratio of 3:7. On
March 1, 2016, the balance of I’s capital account should be ________________________________.

ANSWER: P2,900,000

12. Seasons Construction is constructing an office building under contract for Cannon Company. The
contract calls for progress billings and payments of P1,240,000 each quarter. The total contract
price is P14,880,000 and Season estimates total costs of P14,200,000. Seasons estimate that the
building will take 3 years to complete, and commences construction on January 2, 2016.

At December 31, 2017, Seasons Construction estimates that it is 75% complete with the building;
however, the estimate of total costs to be incurred has risen to P14,400,000 due to unanticipated
price increases. At December 31, 2015, Seasons estimated it was 30% complete. What is the total
amount of Construction Expenses that Seasons will recognize for the year 2017?
a. P10,800,000
b. P6,540,000
c. P6,480,000
d. P6,390,000

ANSWER: b

Average Round 3 points each Theory – 15 seconds

Problem – 30 seconds

1. Which of the following statements regarding partnership liquidation is INCORRECT?

a. Sale of noncash assets lower than its carrying amount may result to deficiency of a partner’s
capital.
b. If a partner’s capital balance becomes a debit balance and said partner has a loan payable in
the books of the partnership, the partner may avail the right of offset
c. Any type of partner whose capital balance becomes deficient but is personally solvent
should make an additional investment to eliminate such deficiency
d. When a partner is personally insolvent and his/her capital balance becomes deficient, the
other partners will absorb the deficiency according to their remaining profit ratio.

ANSWER: c

2. Darcy, Becky and Maynard are partners with average capital balances during 2018 of P120,000,
P60,000 and P40,000, respectively. Partners will receive 10% interest on their average capital
balances. After deducting salaries of P30,000 to Darcy and P20,000 to Maynard, the residual profit
or loss is divided equally. In 2018, the partnership sustained a P33,000 loss before interest and
 salaries to partners. How much should the balance of Darcy’s account be after the distribution of
loss to the partners?

ANSWER: P127,000

3. Action Inc. sold a fitness equipment on installment basis on October 1,2013. The unit cost to the
company was P60,000 but the installment selling price was set at P85,000. Terms of payment
included the acceptance of a used equipment with a trade-in value of P30,000. Cash of P5,000 was
paid in addition to the traded-in equipment with the balance to be paid in ten monthly installments
due at the end of each month commencing the month of sale.

It would require P1,250 to recondition the used equipment so that it could be resold for P25,000. A
15% gross profit was usual from sale of used equipment. The realized gross profit from the 2013
collections amounted to
a. P4,000
b. P34,000
c. P10,000
d. P8,000

ANSWER: d

4. On March 1, 2016, the GABRIEL Company sold machine for P 155,000. The machine costs P100,000.
The customer is allowed a trade-in allowance of P 50,000 for an old machine. A down payment of P
45,000 was made and the balance is to be paid in 12 monthly installments of P 5,000 each payable
at the end of each month beginning March 31. The old machine is estimated to have a resale value
of P 70,000 after incurring a reconditioning cost of P 7,500. The seller expects a 20% profit from the
sale of used machine; commission is 5%. What is the gross profit rate?

ANSWER: 30.33%

5. AMNESTY PARDON Co. is currently preparing its combined financial statements. At December 31,
20x1, the home office shows a ₱624,000 balance in its “Investment in branch” account while the
branch showed a ₱280,800 balance in its “Home office” account. The following information has
been gathered:
a. The home office shipped merchandise worth ₱80,000 to the branch during December 20x1
which the latter has received and recorded only in January 20x2.
b. The home office collected ₱40,000 accounts receivable on behalf of the branch. The branch
did not yet receive the credit memo sent by the home office.
c. The branch returned damaged merchandise worth ₱120,000 to the home office. The home
office did not yet receive the debit memo sent by the branch.
d. A remittance of cash collections amounting to ₱160,000 was not yet recorded by the home
office.
e. The home office allocated overhead cost of ₱20,000 to the branch which the latter has
recorded twice.
f. Freight charge of ₱48,000 paid by the home office for shipments of merchandise to the
branch was recorded by the latter as ₱4,800.

How much is the adjusted balance of the “home office” account?

ANSWER: ₱344,000

6. Sicat CO. will issue share of P10-par ordinary share for the net asset of Max Co. Sicat’s ordinary
share has a current market value of P40 per share. Max’s balance sheet accounts follow:
 Current Assets P 320,000 Ordinary Share, par P4 P 80,000
Property and Equipment 880,000 Share Premium 320,000
Liabilities 400,000 Retained Earnings 400,000

Max’s current assets and property and equipment, respectively, are appraised at P400,000 and
P1,600,000; its liabilities are fairly valued. Accordingly, Sicat Co. will issue ordinary shares with a
total market value equal to that of Max’s net assets plus some goodwill. In order to recognize
goodwill of P200,000, how many shares should be issued by Sicat?

ANSWER: 45,000 shares

7. Entities A, B and C own 20 per cent, 25 per cent and 30 per cent of the ordinary shares that carry
voting rights at a general meeting of shareholders of Entity Y. Entities B and C have contractually
agreed to jointly control Entity Z. Entity Z is considered as a _____________________.

ANSWER: Jointly controlled entity

8. Which of the following is correct?

a. All joint arrangements which are not structured through a separate vehicle are classified as
joint ventures.
b. For a joint venture, the rights pertain to the rights and obligations associated with
individual assets and liabilities, whereas with a joint operation, the rights and obligations
pertain to the net assets.
c. In considering the legal form of the separate vehicle if the legal form establishes rights to
individual assets and obligations, the arrangement is a joint operation. If the legal form
establishes rights to the net assets of the arrangement, then the arrangement is a joint
venture.
d. Where the joint operators have designed the joint arrangement so that its activities
primarily aim to provide the parties with an output it will be classified as a joint venture.

ANSWER: c

9. Which of the following considerations would not be relevant in determining the entity’s functional
currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance or fund is generated.
c. The currency that is the most internationally acceptable for trading.
d. The currency in which receipts from operating activities are retained.

ANSWER: c

10. In relation to the accounting for the impairment of goodwill, the term “value-in-use” is the
a. Amortized cost of the said intangible asset.
b. Difference between its net assets’ book value and fair value.
c. Present value of future expected cash flows.
d. Sum of future expected cash flows.

ANSWER: c
EXTRA QUESTIONS:

11. Goodwill impairment losses, if significant, must be reported on a company’s income statement
a. After income from continuing operations.
b. As part of other comprehensive income.
c. As a separate line item in operating expenses.
d. As a component of selling and administrative expenses.

ANSWER: c

12. A, B, and C establish an arrangement whereby A has 50% of the voting rights in the arrangement, B
has 25% and C has 25%. The contractual arrangement between A, B and C specifies that at least
75% of the voting rights are required to make decisions about the relevant activities of the
arrangement. Which of the following statements is correct?
a. A and B have joint control of the arrangement
b. A and C have joint control of the arrangement
c. All of the parties have joint control of the arrangement
d. A and B have joint control if the contractual arrangement specifies that the combination of A
and B is required to agree unanimously to decisions about relevant activities of the
arrangement.

ANSWER: d

Difficult Round 5 points each Theory – 20 seconds

Problem – 60 seconds

1. Dendi, Puppey and Kuroky are partners who share profits and losses as follows: 35:25:40,
respectively. The Balance Sheet of the partnership as of December 31, 2014 contains the following
information: Cash, P40,000; Non-Cash Assets, P550,000; Liabilities, P90,000; Loan from Puppey,
P10,000. The capital account balances are as follows: Dendi, P163,500; Puppey, P117,500; Kuroky,
P209,000.

On January 1, 2015, the partners decided to liquidate. For that month, some assets were sold for a
loss of P10,000. Payments to partners from the initial sale of assets were P750, P11,250 and
P23,000 to Dendi, Puppey and Kuroky, respectively. Cash withheld for possible liquidation expense
amounted to P6,290. What was the carrying/book value of the noncash assets sold in January?

ANSWER: P101,290

2. On January 1, 2016, MARK entered into a franchise agreement with MARIAN, Inc. to sell M&M’s
products. The agreement provides of an initial franchise fee of P30,000,000, payable as follows:
P18,000,000 cash to be paid upon signing of the contract, and the balance in five equal annual
payments every December 31 starting 2016. MARK signs 12% interest bearing note for the balance.
The agreement further provides that the franchisor will assist the franchisee in locating the
business site, designing and supervising the construction of the building, and training of
management and employees. The agreement also provides that the franchisee must pay a
continuing franchise fees equal to 10% of its monthly gross sales.

On June 30, 2016, the franchisor completed the initial services required by the contract at a cost of
P8,000,000, of which 25% was indirect. The franchisee commenced business operations on July 5,
2014. The gross sales reported by the franchisee to the franchisor are: July sales P150,000; August
 sales P180,000; September sales P270,000; October sales P200,000; November sales P580,000; and
December sales P720,000.

What is the net income earned during the year 2016, assuming the collectability of the note is not
reasonably assured?

ANSWER: P15,970,000

3. According to IFRIC 12, Service Concession Arrangement, how should the infrastructure asset be
recognize by the operator in its accounting books?

ANSWER: Either as financial asset or intangible asset

4. The CASTILLANES Company acquired a foreign subsidiary on August 15, 2014. Goodwill arising on
the acquisition was Nt$175,000. Consolidated financial statements are prepared at the yearend of
December 31, 2014 requiring the translation of all foreign operations’ results into the presentation
currency of peso. The following rates of exchanges have been identified:
Rate at August 15, 2014 Nt$1.321 = P 1
Rate at December 31, 2014 Nt$1.298 = P 1
Average rate for the year ended Nt$1.302 = P 1
Average rate for the period from August 15 to December 31 Nt$1.292 = P 1

According to PAS 21, at what amount should the goodwill be measured in the consolidated
statement of financial position?

ANSWER: P134,823

5. VEGETA Company purchases 40% of BULMA Company on January 1 for P 500,000 that carry voting
rights at a general meeting of shareholders of BULMA Company. VEGETA Company and TRUNKS
Company immediately agreed to share control (wherein unanimous consent is needed to all the
parties involved) over BULMA Company. BULMA reports assets on that date of P 1,400,000 with
liabilities of P 500,000. One building with a seven-year life is undervalued on BULMA’s books by P
140,000. Also BULMA’s book value for its trademark (10-year life) is undervalued by P 210,000.
During the year, Basket reports net income of P 90,000, while paying dividends of P 30,000. What is
the Investment in BULMA Company balance (equity method) in VEGETA’s financial records as of
December 31?

ANSWER: P507,600

6. Two investors, A and B, subscribe to invest in company Z, a producing mine. Each party owns 50%
of the issued share capital of Z and appoint 2 members each to the board of directors. All mining
operations are managed by the ‘operator’, party A. The terms of the operating agreement state that
the operator can only be replaced by the unanimous consent of the investors. The operating
agreement also states that unanimous approval is required for:
• Cessation of mining
• Any disposal of the mine
• The acquisition of any capital equipment above P1 million.

The relevant activity of the arrangement is the rate at which mining activities are carried out, as the
amount of ore extracted in a given period will affect the amount of profit or loss generated by
company Z. How should A account for this investment?

ANSWER: As a subsidiary in accordance with PFRS 10

 7. Under the Government Accounting Manual issued by the Commission on Audit, which of the
following transactions will require journal entry in the accounting book of a national government
agency or unit?
a. Receipt of national budget allotment from Department of Budget and Management
b. Entering into a contract with a supplier for incurrence of obligation to acquire government
supplies or equipment
c. Receipt of notice of cash allocation from Department of Budget and Management
d. Receipt of appropriation from Department of Budget and Management based on the General
Appropriation Act

ANSWER: c

8. Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair value.
Owlet’s net identifiable assets approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of ₱40,000.

Since the acquisition date, Owlet has made accumulated profits of ₱800,000. There have been no changes
in Owlet’s share capital since acquisition date. The group determined that goodwill has been impaired by
₱32,000.

A summary of the individual statements of financial positions of the entities as at the end of reporting
period is shown below:
Owl Co. Owlet Co.
Total assets ₱ 4,000,000 ₱ 2,000,000

Total liabilities ₱ 800,000 ₱ 480,000

Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
Total liabilities and equity ₱ 4,000,000 ₱ 2,000,000

How much is the NCI in net assets?

ANSWER: ₱412,000

9. A and B formed a partnership. The following are their contributions:

A B
P
Cash 200,000 -
Accounts receivable 150,000 -
Inventory 100,000 -
Land P 500,000
Building 620,000
Total 450,000 1,120,000
Note payable 220,000
A, capital 230,000
B, capital 1,120,000
Total 450,000 1,120,000

Additional information:
 The accounts receivable has a recoverable amount of ₱120,000.
 The inventory has an estimated selling price of ₱110,000 and estimated costs to sell of ₱20,000.
 The land has a fair value of ₱500,000 an unpaid mortgage of ₱120,000. The partners agreed that B shall
settle the mortgage using his personal funds.
 The building is overdepreciated by ₱30,000.
 The building also has an unpaid mortgage amounting to ₱550,000. The partners agreed that the
partnership shall assume repayment of the mortgage.
 The note payable has a fair value of ₱210,000.
 A and B shall share in profits and losses 40% and 60%, respectively.

Assume that a partner’s capital shall be increased accordingly by contributing additional cash to bring the
partners’ capital balances proportionate to their profit or loss ratio. Which partner should provide
additional cash and how much is the additional cash contribution?

ANSWER: Partner A, ₱200,000

10. Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for ₱800,000. The following information
was determined at acquisition date:
Popo Co. Momo Co.
Carrying Carrying
amount amount Fair value
Equipment P4,000,000 P2,000,000 P1,600,000
Accumulated
depreciation (800,000) (400,000) ( 320,000)
Net 3,200,000 1,600,000 1,280,000
Remaining useful life, Jan. 1, 20x1 10 years 5 years 5 years

How much is the consolidated “equipment – net” in the December 31, 20x2 financial statements?

ANSWER: P3,328,000

EXTRA QUESTION:

11. On January 2, 2018, P Corporation purchased 80% of S Company’s common stock for P324,000.
P15,000 of the excess is attributable to goodwill and the balance to a depreciable asset with an
economic life of ten years. Non-controlling interest is measured at its fair value on the date of
acquisition. On the date of acquisition, stockholders’ equity of the two companies are as follows:
P Corporation S Company
Common stock P525,000 P120,000
Retained earnings 780,000 210,000

On December 31, 2018, S Company reported net income of P52,500 and paid dividends of P18,000
to P. P reported earnings from its separate operations of P142,500 and paid dividends of P69,000.
Goodwill has been impaired and should be reported at P3,000 on December 31, 2018.

What is the NCI in net income of S Company on December 31, 2018?

ANSWER: P6,900

Clincher Round Theory – 10 seconds

Problem – 30 seconds

1. On January 2, 2018, Cyndie Ice Cream signed an agreement authorizing Datu to operate as
franchisee for an initial franchise fee P500,000 received upon signing of the agreement. Datu
 commenced operations on August 1, 2018, at which date all of the initial services required of
Cyndie Ice Cream had been performed at a cost of P120,000. The franchise agreement further
provides that Datu must pay a 10% monthly continuing franchise fee. Sales reported from August 1
to December 31, 2018 amounts to P400,000. What is the net income related with franchise fee to
be reported by Cyndie Ice Cream in 2018?

ANSWER: P420,000

2. I, Love and You are partners in a merchandising business. I receives a bonus of 15% of net income
before deducting the bonus, salaries and interest. Annual salaries are P400,000 to I, P320,000 to
Love and P550,000 to You. Interest is 10% of the average capital balance. Any remainder is to be
divided by I, Love and You in a 3:2:1 ratio. The Income Summary account has a credit balance of
P1,530,000 after salaries, interest and bonus. Average capital are: I – P550,000; Love – P450,000
and You – P750,000. How much did I receive in the profit distribution?
a. P980,000
b. P1,490,000
c. P1,608,043
d. P1,745,000

ANSWER: d

3. Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may not be an unsecured creditor of the limited partnership
b. A general partner may not also be limited partner at the same time
c. A general partner may be a secured creditor of the limited partnership
d. A limited partnership can be formed with limited liability for all partners

ANSWER: c