ANFJPIA R11

CUP 2 – FINANCIAL ACCOUNTING AND REPORTING

EASY
1. Which statement is incorrect?
a. The Bangko Sentral ng Pilipinas is represented in the AASC.
b. The Insurance Commission is represented in the Philippine Interpretations Committee.
c. The chairman of the FRSC should have been or presently a senior practitioner in public accountancy.
d. PICPA is the accredited professional organization of CPAs by the PRC.

2. Which statement is incorrect regarding the International Accounting Standards Board?

a. Its mission is to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets
around the world.
b. It sets technical agenda and approves IFRSs.
c. It reports to the IFRS Foundation trustees.
d. The central theme of its current agenda is ‘Global Phenomenon’.

3. A regular way purchase or sale of financial assets shall be recognized and derecognized, as applicable,
a. Using trade date accounting
b. Using settlement date accounting
c. As a derivative
d. Either a or b

4. A derivative financial asset may be classified as financial asset at

a. Amortized cost
b. Fair value through other comprehensive income
c. Either a or b
d. Neither a nor b

5. If there is any excess of the investor’s share of the net fair value of the associate’s identifiable assets and contingent
liabilities over the cost of the investment, that is, negative goodwill, how should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be disclosed separately as part of the investor’s equity.
d. It should be included as income in the determination of the investor’s share of the associate’s profit or loss for the
period.

6. Investment Property includes

a. Property acquired exclusively with a view to subsequent disposal in the near future.
b. Property occupied by an employee paying market rent.
c. Property occupied by an employee paying below market rent.
d. Property held for currently undetermined future use.

7. The following may be included in the cost of inventories, except

a. Administrative overheads.
b. Storage costs.
c. Wasted materials, labor and other production costs.
d. Selling costs.

8. The use of the gross profit method assumes

a The amount of gross profit is the same as in prior years.
.

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b Sales and cost of goods sold have not changed from previous years.
.
c Inventory values have not increased from previous years.
.
d The relationship between gross profit and sales remains stable over time.
.

9. To increase consistency and comparability in fair value measurements and related disclosures, PFRS 13 establishes a
fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value.
Which of the following provides the most reliable evidence of fair value?
a. Quoted prices in active markets for identical assets that the entity can access at the measurement date.
b. Quoted prices for similar assets in active markets.
c. Quoted prices for identical or similar assets in markets that are not active.
d. Inputs other than quoted prices that are observable for the asset.

10. In accordance with PFRS 15, how should volume rebates and/or discounts on goods or services applied retrospectively
be accounted for?
a. As variable consideration.
b. As customer options to acquire additional goods or services at a discount.
c. Either a or b.
d. Neither a nor b.

AVERAGE

1. PRTC Co. uses the revaluation model for its head office building, which was acquired on January 1, 2017. At the end
of 2017, the fair value of the building was lower than its carrying value by P500,000. At the end of 2018, fair value
had increased such that its fair value was only P100,000 less than its carrying value. Which of the following is true
regarding the use of the revaluation model by PRTC for its building?
a. Revaluation would be required to be done annually by PRTC.
b. The decrease in fair value in 2017 would be recorded in other comprehensive income.
c. The increase in fair value in 2018 would be recorded in other comprehensive income.
d. Depreciation would be taken annually prior to any revaluation by PRTC.

2. Which of the following classification of assets is not applicable to SMEs?

a. Biological assets
b. Investment property
c. Goodwill
d. Noncurrent asset held for sale

3. Buyer Co. regularly buys shirts from Vendor Company and is allowed trade discounts of 20% and 10% from the list
price. Buyer purchased shirts from Vendor on May 27 and received an invoice with a list price of P100,000 and
payment terms 2/10, n/30. If Buyer uses the net method of recording purchases, the journal entry to record the
payment on June 8 will include
a. A debit to Accounts payable of P72,000.
b. A debit to Purchase Discounts Lost of P1,440.
c. A credit to Purchase Discounts of P1,440.
d. A credit to Cash of P70,560.

4. Yumul Company provided the following data:

Cost Retail
Beginning inventory P 160,000 P 400,000
Purchases 2,800,000 3,200,000
Freight in 40,000
Markup 300,000

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Markup cancellation 30,000

Markdown 160,000
Markdown cancellation 40,000
Sales 3,000,000
Physical inventory at year end 500,000
Estimated normal shrinkage is 4% of sales
Assuming the company uses the average retail inventory method, the estimated inventory shortage is
a. P104,000 c. P200,000
b. P130,000 d. P 4,000

5. On January 1, 2017, Job Corporation enters into a forward contract to purchase on January 1, 2019, a specified
number of barrels of oil at a fixed price. Job Corporation is speculating that the price of oil will increase and plans to
net settle the contract if the price increases. Job Corporation does not pay anything to enter into the forward contract
on January 1, 2017. Job Corporation does not designate the forward contract as a hedging instrument. At the end of
2017, the fair value of the forward contract has increased to P400,000. At the end of 2018, the fair value of the
forward contract has declined to P350,000. How much should be recognized in 2018 profit or loss related to this
forward contract?
a. P400,000 c. P50,000
b. P350,000 d. P 0

6. On January 2, 2018, Jones Company purchased a call option for P30,000 on Merchant ordinary shares. The call option
gives Jones the option to buy 100,000 shares of Merchant at a strike price of P50 per share. The market price of a
Merchant share is P50 on January 2, 2018. On March 31, 2018, the market price for Merchant share is P53 per share,
and the time value of the option is P20,000. What was the effect on profit of entering into the derivative transaction
for the period January 2 to March 31, 2018?
a. P300,000 c. P270,000
b. P290,000 d. (P10,000)

7. Excel Corp. plans to dispose of a group of net assets that form a disposal group. The net assets at December 31,
2018, are
Carrying amount
Goodwill P 6,000,000
Property, plant, and equipment 18,000,000
Inventory 10,000,000
Financial assets at fair value 7,000,000
Financial liabilities ( 4,000,000)
P37,000,000
Under applicable PFRSs, property, plant, and equipment would be stated at P16 million and inventory at P9 million.
The fair value less cost to sell of the disposal group is P25 million. Assuming that the disposal group qualifies as held
for sale, what is the amount to be presented in the statement of financial position as assets classified as held for sale?
a. P37,000,000 c. P29,000,000
b. P34,000,000 d. P25,000,000

8. The following pertains to Wild Company’s biological assets:

Fair value based on quoted price in an
active market for similar asset P5,100
Fair value based on quoted price in an
active market for identical asset 5,000
Fair value based on unobservable inputs
for the asset 4,900
Selling price in a binding contract to sell 5,200
Estimated commissions to brokers and 500
dealers
Estimated transport and other costs
necessary to get asset to the market 300
The entity’s biological assets should be valued at
a. P4,600 c. P4,300

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b. P4,500 d. P4,200

9. Entity A acquired an asset that had a cost of P130,000. The asset is being depreciated over a 5-year period using the
sum-of-the-years’ digit method. It has a salvage value estimated at P10,000. The loss/gain if the asset is sold for
P38,000 at the end of the third year is
a. P4,000 gain c. P68,000 loss
b. P20,000 loss d. P92,000 loss

10. On 1 January 2017 an SME acquired, free of charge, a non-transferable nine-year taxi license by way of government
grant when the fair value of the taxi license was P90,000. In accordance with the terms of the license the entity must
operate at least 10 taxis in a deprived neighborhood of the capital city during that nine-year period. Failure to do so
will result in the taxi license being revoked immediately.
The entity shall recognize income from government grant in 2017 profit or loss of
a. P90,000 c. P9,000
b. P10,000 d. Nil

DIFFICULT

1. The Verba Company accounts for non-current assets using the revaluation model. On 30 June 2018, Verba classified
two items of non-current assets as held for sale in accordance with PFRS5. The following information relates to these
assets:
Asset 1 Asset 2
Carrying amount before classification as held for sale P400,000 P300,000
Revaluation surplus before classification as held for sale 60,000 30,000
Fair value, 30 June 2018 450,000 260,000
Estimated costs to sell 20,000 12,000

The balance of revaluation surplus as of 30 June 2018 after classification of the assets as held for sale is
a. P110,000 c. P70,000
b. P 90,000 d. P50,000

2. On January 1, 2018, CDO Corporation created a special building fund by depositing a single sum of P100,000 with an
independent trustee. The purpose of the fund is to provide resources to build an addition to the older office building
during the latter part of 2022. The company anticipates a total construction cost of P500,000 and completion by
January 1, 2023. The company plans to make equal annual deposit from December 31, 2018 through 2022, to
accumulate the P500,000. The independent trustee will increase the fund each December 31 at an interest rate of
10%. The accounting periods of the company and the fund end on December 31.
How much is the fund balance as of December 31, 2018? (Round off future value factors to five decimal places)
a. P165,519 c. P110,000
b. P155,519 d. P100,000

3. Pak Company owns 50% of Ganern Company’s cumulative preference shares and 30% of its ordinary shares.
Ganern’s shares outstanding at December 31, 2018 include P10,000,000 of 10% cumulative preference shares and
P40,000,000 of ordinary shares.
Ganern reported profit of P8,000,000 for the year ended December 31, 2018. Ganern declared and paid P1,500,000
preference share dividends during 2018. Ganern paid no preference share dividends during 2017.
How much is the total amount to be recognized by Pak Company in its 2018 profit or loss related to these
investments?
a. P2,450,000 c. P2,700,000
b. P2,600,000 d. P2,850,000

4. On June 29, 2018, an entity commits itself to purchase a financial asset to be classified as FVTPL for P100,000, its fair
value on commitment (trade) date. This financial asset has a fair value of P101,000 and P101,500 on June 30, 2018

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(the entity’s financial year-end), and July 2, 2018 (settlement date), respectively. In the marketplace concerned, the
time frame for delivery of the asset or payment of liability is transaction date plus 3 days (“T+3”).
Which statement is correct?
a. The transaction is not a regular way purchase.
b. If the entity applies the trade date accounting method, the entity will recognize a gain of P1,500 on July 2, 2018.
c. If the entity applies the settlement date accounting method, the entity will recognize the financial asset at
P100,000 on July 2, 2018.
d. If the entity applies the settlement date accounting method, the entity will recognize a gain of P500 on July 2,
2018.

5. On January 2, 2018, Gamu Company purchased as a long term investment 10,000 ordinary shares of Ilagan
Corporation for P70 per share, which represents a 1% interest. On July 1, Ilagan Corporation declared its annual
dividend on its ordinary shares of P5 per share payable on August 1 to shareholder’s of record at July 25, 2018. On
July 20, 2018 Gamu needed additional cash for operations and sold all 10,000 shares Ilagan for P100 per share.

For the year ended December 31, 2018, Gamu should report on its income statement a gain on disposal of
a. P300,000 c. P175,000
b. P210,000 d. P250,000

6. On January 1, 2018, Alaska Corporation purchased P1,000,000 10% bonds for P1,051,510 (including broker’s
commission of P20,000). Interest is payable annually every December 31. The bonds mature on December 31,
2020. The prevailing market rate for the bonds is 9% at December 31, 2018.

Which statement is correct if the bonds are classified as FA@FVTOCI?

a. The amount to be recognized in 2018 profit or loss is P100,000.
b. The amount to be recognized in 2018 other comprehensive income is P33,900.
c. The amount to be reported on the entity’s December 31, 2018 statement of financial position is P1,035,630.
d. None of the above.

7. Entity A factors P500,000 of accounts receivable. Entity A transfers the receivable records to the factor, which will
receive the collections. Factor assesses a finance charge of 3 percent of the amount of accounts receivable and
retains an amount equal to 5 percent of the accounts receivable (for probable adjustments).

If Entity A issues a guarantee to factor to compensate the factor for any credit losses on receivables transferred,
which statement is correct?
a. Entity A reports both a receivable and a liability of P500,000 in its statement of financial position.
b. Entity A records a loss of P15,000.
c. The factor’s net income will be the difference between the financing income of P15,000 and the amount of any
uncollectible receivables.
d. None of the above.

8. Sample Company has the following receivables classified into individually significant and all other receivables.
Individually significant receivables
P Co. P 40,000
R Inc. 100,000
T Co. 60,000
C Ltd. 50,000 P250,000
All other receivables 500,000
Total P750,000
Sample determines that P’s receivable is impaired by P15,000, and C’s receivable is totally impaired. Both R’s and T’s
receivables are not considered impaired. Sample also determines that a composite rate of 2% is appropriate to
measure impairment on all other receivables.
Sample has an impairment related to its receivables of

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a. P75,000 c. P78,700
b. P78,200 d. P80,000

9. The accountant for Indra Ltd (Indra) has determined the following information for the year ended 30 June 2017.
Profit or loss P300,000
Share of total comprehensive income
(after tax) of associates 20,000
Share of profit (after tax) of associates 15,000
Exchange difference gain (net of tax of
P3,000) on translation of foreign
operation up to the date sold (1
March 2017) 7,000
Exchange difference gain (net of tax of
P9,000) on disposal of foreign
operation recognized in profit for
the year 21,000
Increase in asset revaluation surplus
(net of tax) 45,000
What is the total amount of other comprehensive income for Indra for the year ended 30 June 2017?
a. P36,000 c. P57,000
b. P51,000 d. P72,000

10. At the beginning of year 1, an entity grants 100 share options to each of its 200 employees. Each grant is
conditional upon the employee remaining in service over the next three years. The entity estimates that the fair
value of each option is P21. On the basis of a weighted average probability, the entity estimates that 60 employees
will leave during the three-year period and therefore forfeit their rights to the share options.
Suppose that 15 employees leave during year 1. Also suppose that by the end of year 1, the entity’s share price has
dropped, and the entity reprices its share options, and that the repriced share options vest at the end of year 3. The
entity estimates that a further 35 employees will leave during years 2 and 3. During year 2, a further 10 employees
leave, and the entity estimates that a further 10 employees will leave during year 3. During year 3, a total of 8
employees leave.
The entity estimates that, at the date of repricing, the fair value of each of the original share options granted (ie
before taking into account the repricing) is P10 and that the fair value of each repriced share option is P13.
The amount to be recognized as expense in year 2 is
a. P159,000 c. P150,750
b. P105,000 d. P135,750

TIE BREAKER
1. The following figures relate to inventory held at 31 December 2017:
Per Unit
Cost P10
General selling price 12
Selling price in a binding contract to sell 14
Quoted price in an active market for similar asset 11
Estimated costs to sell 3

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There were 10,000 units (including 2,000 held to satisfy a binding contract to sell).
At what amount should the entity report the inventory on its statement of financial position?
a. P100,000 c. P90,000
b. P 92,000 d. P84,000

2. The following pertains to Wild Company’s biological assets:

Fair value based on quoted price in an active market for similar asset P5,100
Fair value based on quoted price in an active market for identical asset 5,000
Fair value based on unobservable inputs for the asset 4,900
Selling price in a binding contract to sell 5,200
Estimated commissions to brokers and dealers 500
Estimated transport and other costs necessary to get as1set to the market 300
The entity’s biological assets should be valued at
a. P4,600 c. P4,300
b. P4,500 d. P4,200

3. Riley acquired a non-current asset on 1 January 2012 at a cost of P100,000 which had a useful economic life of ten
years and a nil residual value. The asset had been correctly depreciated up to 31 December 2016. At that date the
asset was damaged and an impairment review was performed. On 31 December 2016, the fair value of the asset less
costs of disposal was P30,000 and the expected future cash flows were P8,500 per annum for the next five years. The
appropriate discount rate is 10% and a five year annuity of P1 per annum at 10% would have a present value of P3.79

What amount would be charged to profit or loss for the impairment of this asset for the year ended 31 December
2016?
a. P17,785 c. P30,000
b. P20,000 d. P32,215

4. The Junior Company leased a freehold building for 20 years with effect from 1 January 2016. The useful life of the
building is 40 years. As part of the negotiations for the lease the lessor granted Junior a rent-free period. Annual
rentals of P1.6 million are payable in advance on 1 January, commencing in 2018.

What expense should Junior recognize in profit or loss in the year ended 31 December 2016?
a. P1.6 million c. P1.52 million
b. Nil d. P1.44 million

5. An entity has spent P600,000 in developing a new product. These costs meet the definition of an intangible asset
under PAS 38 and have been recognized in the statement of financial position. These costs have been recognized as
an expense for tax purposes. At the year-end the intangible asset is deemed to be impaired by P50,000. The tax
base of the intangible asset at year-end is
a. P600,000 c. P50,000
b. P550,000 d. P 0

6. Cuyapo Company purchased a machine on January 2, 2014, for P500,000. The machine has an estimated useful life
of eight years and a salvage value of P50,000. Depreciation was computed by the 200% declining-balance method.
What should be the depreciation charge for the year ended 31 December 2017?
a. P70,313 c. P47,461
b. P52,734 d. P41,870

7. The transactions of Tsape Company for the current year included the following:
Cash borrowed from bank for purchase of land
P6,000,000
Purchase of land for cash 6,000,000

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Sale of securities for cash 1,000,000

Dividend declared (of which P2,000,000 was paid during the year) 3,000,000
Issuance of ordinary shares for cash 7,000,000
Payment of bank loan including interest of P500,000 3,500,000
Increase in customers’ deposits 500,000

The current year statement of cash flows should report net cash provided by financing activities at
a. P8,000,000 c. P8,500,000
b. P7,500,000 d. P7,000,000

8. An investor has the following accounts with an associate:

Investment in ordinary shares P5,000,000
Investment in preference shares 2,000,000
Accounts receivable 200,000
Loans receivable - unsecured 1,000,000
Loans receivable - secured 500,000

The investor’s ‘interest in associate’ is

a. P5,000,000 c. P8,000,000
b. P7,000,000 d. P8,500,000

9. Draft income statement of Raffles Inc. showed profit of P100,000 before considering the following:
(1) Closing inventory includes goods costing P20,000 which are expected to realize P19,000.
(2) A customer has taken legal action for damages of P50,000 against Raffles. The lawyer of Raffles has advised the
customer that he has a 25% chance of success.
(3) After the end of the reporting period, a vehicle was damaged in an accident. The carrying amount of the vehicle
was P6,000. It was not insured.
(4) Raffles has sued one of its competitors for P60,000. The chances Raffles winning the case are 75%. The outcome
will be known in three months.
What is the correct profit after considering the foregoing adjustments?
a. P159,000 c. P99,000
b. P103,000 d. P49,000

10. On January 1, 2016, Citimart Inc. was granted land in a village, located near the slums outside the city limits, by a
local government authority. The condition attached to this grant was that the company should clean up this land and
lay roads by employing laborers from the village in which the land is located. The government has fixed the minimum
wage payable to the workers. The entire operation will take three years and is initially estimated to cost P160 million.
The fair value of this land on the date of grant was P240 million and is expected to increase by at least 20% annually
because of the improvements to be done by the company.

In relation to the attached condition, the company incurred costs of P80 million in 2016 and P70 million in 2017. On
December 31, 2017, the company estimated that it will incur additional cost of P30 million in 2018.

How much should be recognized as income from government grant for the year ended December 31, 2017?
a. P120,000,000 c. P80,000,000
b. P150,000,000 d. P70,000,000

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