CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
5. Distinguish external transactions and internal
transactions.
CHAPTER I
ANSWER:
External transaction or exchange transactions
are those economic events involving one entity and
another entity.
Internal transaction are economic events
involving the entity only.
QUESTIONS:
1. Define accounting.
ANSWER:
Accounting is a service activity. The
accounting function is to provide quantitative
information, primarily financial in nature, about
economic entities, that is intended to be useful in
making economic decision.
- Accounting Standards Council
Accounting is the art of recording, classifying
and summarizing in a significant manner and in terms
of money, transactions and events which are in part
at least of a financial character and interpreting the
results thereof.
- Committee on Accounting Terminology of the American
Institute of Certified Public Accountants
Accounting is the process of identifying,
measuring
and
communicating
economic
information to permit informed judgement and
decision by users of the information.
-The American Accounting Association (statement in basic
accounting theory)
2. What are the important points made in the
definition of accounting?
ANSWER:
One- Accounting is about quantitative
information.
Two- The information is likely to be financial in
nature.
Three- The information should be useful in
decision making.
3. Explain “identifying”
accounting.
as
a
component
of
ANSWER:
Identifying is an accounting process that is
the recognition or non-recognition of business
activities as “accountable” events.
-
NOTE: Not all business activities are accountable.
4. What are transactions?
ANSWER:
It is the subject matter of accounting that is
also called the economic activity or the
measurement of economic resources and economic
obligations. Also classified as external and internal
transactions.
6. When is a transaction accountable or quantifiable?
ANSWER:
An event is accountable or quantifiable
when it has an effect on assets, liabilities and equity.
7. Explain “measuring”
accounting.
as
a
component
of
ANSWER:
An accounting process that is the assigning
of peso amounts to the accountable economic
transactions and events.
8. What are the measurement bases used in
accounting?
ANSWER:
The measurement bases are historical cost
and current value.
Historical cost is the original acquisition cost
and the most common measure of financial
transactions.
Current value includes fair value, value in use,
fulfillment value and current cost.
9. Explain “communicating” as a component of
accounting.
ANSWER:
The process of preparing and distributing
accounting reports to potential users of accounting
information. Also the reason why accounting has
been called the “universal language of business”.
10. Explain recording, classifying and summarizing in
relation to the communicating component of
accounting.
ANSWER:
Recording or journalizing is the process of the
systematically maintaining a record of all economic
business transactions after they have been identified
and measured.
Classifying is the sorting or grouping of similar
and interrelated economic transaction into their
respective classes.
- Accomplished by posting to ledger.
Summarizing is the preparation of financial
statements which include the statement of financial
position,
income
statement,
statement
of
comprehensive income, statement of changes in
equity and statement of cash flows.
11
11. Explain why accounting has been called the
“universal language of business”.
18.
Explain
accountancy.
ANSWER:
Communication process is the reason why
accounting has been called the “universal language
of business” because it distributes accounting reports
to potential users of accounting information.
ANSWER:
Certified public accountants, firms and
partnerships of certified public accountants,
including partners and staff members thereof, are
required to register with the Board of Accountancy
and Professional Regulation Commission for the
practice of public accountancy. The Professional
Regulation
Commission
upon
favorable
recommendation of the Board of Accountancy shall
issue the Certificate of Registration to practice public
accountancy which shall be valid for 3 years and
renewable every 3 years upon payment required
fees.
12. Explain accounting as an information system.
ANSWER:
Accounting is an information system that
measures business activities, process information into
reports and communicates the reports to decision
makers.
13. What is the overall objective of accounting?
ANSWER:
The overall objective of accounting is to
provide quantitative financial information about a
business that is useful to statement users particularly
owners and creditors in making economic decisions.
the
accreditation
to
practice
19. What are the three main areas in the practice of
the accountancy profession?
ANSWER:
Public Accounting
Private Accounting
Government Accounting
14. Describe the accountancy profession.
20. Explain public accounting.
ANSWER:
R.A No. 9298 is the law regulating the
practice of accountancy in the Philippines. This is also
known as the Philippine Accountancy Act of 2004. It
has been developed as a profession attaining a
status equivalent to that of law and medicine. You
must also finish a degree in Bachelor of Science in
Accountancy and pass a very difficult government
examination given by the Board of Accountancy.
ANSWER:
It is composed of individual practitioners,
small accounting firms and large multinational
organizations that render independent and expert
financial services to the public.
21. What are the three kinds of services offered by
CPAs in the practice of public accounting.
ANSWER:
15. What is R.A 9298?
ANSWER:
R.A No. 9298 is the law regulating the
practice of accountancy in the Philippines. This is also
known as the Philippine Accountancy Act of 2004.
16. What do you understand by the Board of
Accountancy?
ANSWER:
It is the body authorized by law to
promulgate rules and regulations affecting the
practice of accountancy profession in the Philippines.
Auditing
Taxation
Management advisory services
22. Explain auditing.
ANSWER:
It is the primary service offered by most
public accounting practitioners. It is the examination
of financial statements by independent certified
public accountant for the purpose of expressing an
opinion as to the fairness with which the financial
statements are prepared.
23. Describe the taxation service offered by CPAs.
17. Explain the limitation of the practice of public
accountancy.
ANSWER:
A certificate of accreditation shall be issued
to certified public accountants in public practice
only upon showing in accordance with rules and
regulations
promulgated
by
the
Board
of
Accountancy and approved by the Professional
Regulation Commission that such registrant has
acquired a minimum of three years of meaningful
experience in any of the areas of public practice
including taxation.
Page 19
ANSWER:
It includes the preparation of annual income
tax returns and determination of tax consequences of
certain proposed business endeavors. To offer this
service effectively and efficiently, the public
accountant must be thoroughly familiar with the tax
laws and regulations and updated with changes in
taxation law and court cases concerned with
interpreting taxation law.
22
24. Explain management advisory services.
ANSWER:
It is become increasingly important in recent
years although audit and tax services are
undoubtedly the mainstay of public accountant. It
has no precise coverage but is used generally to refer
to services to clients on matters of accounting,
finance, business policies, organization procedures,
product costs, distribution and many other phases of
business conduct and operations.
25. What are some management advisory services
offered by CPAs.
31. What is the purpose of the required CPD credit
units?
ANSWER:
For the renewal of CPA license and
accreditation of CPA to practice the accountancy
profession.
32. What is
requirements?
the
exemption
from
the
CPD
ANSWER:
A CPA shall be permanently exempted from
CPD requirements upon reaching the age of 65
years.
ANSWER:
Advice on installation of computer
system
Quality control
Installation and modification of
accounting system
Budgeting
Forward planning and forecasting
Design
and
modification
of
retirement plans
Advice
on
mergers
and
consolidations
26. Explain private accounting.
ANSWER:
It includes maintaining of records, producing
the financial reports, preparing the budgets and
controlling and allocating the resources of the entity.
27. Explain government accounting.
ANSWER:
It encompasses the process of analyzing,
classifying, summarizing and communicating all
transactions involving the receipt and disposition of
the government funds and property and interpreting
the results thereof. The focus of government
accounting is the custody and administration of
public funds.
28. What do you understand by the continuing
professional development of CPAs.
ANSWER:
It refers to the inculcation and acquisition of
advanced knowledge, skill, proficiency and ethical
and moral values after initial registration of the
Certified Public Accountant for assimilation into
professional practice and lifelong learning.
29. What is the meaning of CPD credit units?
ANSWER:
CPD credit units (Continuing Professional
Development) refers to the CPD credit hours required
for the renewal of CPA license and accreditation of a
CPA to practice the accountancy profession every
three years.
30. How many CPD credit units are required?
ANSWER:
120 CPD credit units are required.
33. Distinguish accounting and auditing.
ANSWER:
Accounting embraces auditing. Accounting
is essentially constructive in nature, it ceases when
financial statements are already prepared. On the
other hand, auditing is analytical.
“The
work of an auditor begins when the work of the accountant
ends”.
34. Distinguish accounting and bookkeeping.
ANSWER:
Bookkeeping is procedural and largely
concerned with development and maintenance of
accounting records.
- It is the “how” of accounting
Accounting is conceptual.
- Concerned with the “why”, reason or
justification for any action adopted.
35. Distinguish accounting and accountancy.
ANSWER:
Accountancy refers to the profession of
accounting practice.
Accounting is used in reference only to a
particular field of accountancy such as public
accounting, private accounting and government
accounting.
Page 20
36. What is financial accounting?
ANSWER:
Area of accounting that emphasizes
reporting to creditors and investors. And is concerned
with the recording of business transactions and the
eventual preparation of financial statements
37. What is managerial accounting?
ANSWER:
Managerial accounting is the accumulation
and preparation of financial reports for internal users
only.
33
38. What is the meaning of generally accepted
accounting principles or GAAP?
ANSWER:
Represents the rules, procedures, practice
and standards followed in the preparation and
presentation of financial statements. These are also
like laws that must be followed in financial reporting.
39. What constitute GAAP in the Philippines?
ANSWER:
The Accounting standards promulgated by
the Financial Reporting Standards Council constitute
the “highest hierarchy” of generally accepted
accounting principles in the Philippines.
40. Explain the purpose of accounting standards.
ANSWER:
The purpose of accounting standard is to
identify proper accounting practices for the
preparation and presentation of financial statements.
41. What do you understand about the Financial
Reporting Standards Council?
ANSWER:
It is the standard-setting body created by the
Professional
Regulation
Commission
upon
recommendation of the Board of Accountancy to
assist the Board of Accountancy in carrying out its
powers and functions provided under R.A Act No.
9298. Its main function is to establish and improve
accounting standards that will be generally
accepted in the Philippines.
45. What are the twin objectives of IASC?
ANSWER:
-To formulate and publish in the public interest
accounting standards to be observed in the
presentation of financial statements and to promote
their worldwide acceptance and observance.
-To work generally for the improvement and
harmonization of regulations, accounting standards
and procedures relating to presentation of financial
statements.
46. What is IASB?
ANSWER:
The IASB standard-setting process includes in
the correct order research, discussion paper.
Exposure draft and accounting standard.
47. What do you understand by IFRIC?
ANSWER:
The counterpart of the PIC in the United
Kingdom which has already replaced SIC.
48. Explain why the Philippines has moved totally from
American accounting standards to international
accounting standards.
ANSWER:
Support of international accounting
standards by Philippine organizations,
such as the Philippines SEC, Board of
Accountancy and PICPA.
Increasing internalization of business
which has heightened interest in a
common language for financial
reporting.
Improvement
of
international
accounting standards or removal of
free
choices
of
accounting
treatments.
Increasing
recognition
of
international accounting standards
by
the
World
Bank,
Asian
Development Bank, and World Trade
Organization.
42. What is the composition of FRSC?
ANSWER:
It is composed of 15 members with a
Chairman who had been or is presently a senior
accounting practitioner and 14 representatives.
43. What do you understand about PIC and IFRIC?
ANSWER:
PIC is the one that prepare interpretations of
PFRS for approval by the FRSC and to provide timely
guidance on financial reporting issues not specifically
addressed in current PFRS.
IFRIC which has already replaced the
Standing Interpretation Committee or SIC, it is the
counterpart of the PIC.
49. What do you understand by the “International
Financial Reporting Standards”?
ANSWER:
It is essential to achieve goal of one uniform
and globally accepted financial reporting standards.
44. What do you understand about the International
Accounting Standards Committee?
50. What are collectively included in “Philippine
Financial Reporting Standards”?
ANSWER:
It is an independent private sector body, with
the objective of achieving uniformity in the
accounting principles which are used by business
and other organizations for financial reporting around
the world.
ANSWER:

Philippine
Financial
Reporting
Standards
which
correspond
to
International
Financial
Reporting
Standards.
The Philippine Financial Reporting
Standards are numbered the same as their
counterpart in International
Financial Reporting Standards.
44

Philippine
Accounting
Standards
which correspond to International
Accounting Standards.
The Philippine Accounting Standards are numbered
the same as their counterpart in International
Accounting Standards.

Philippine
Interpretations
which
correspond to Interpretations of the
IFRIC and the Standing Interpretations
Committee,
and
Interpretations
developed
by
the
Philippine
Interpretations Committee.
Page 21
PROBLEMS
6. D
7. A
8. A
9. A
10. D
Page 28
PROBLEM 1-5 MULTIPLE CHOICE (IAA)
1. A
2. C
3. D
4. D
5. D
Page 29
PROBLEM 1-6 MULTIPLE CHOICE (IAA)
1. D
2. B
3. D
4. A
5.A
PROBLEM 1-1 MULTIPLE CHOICE (ACP)
1. A
2. D
3. B
4. A
5. B
55
Page 30
Page 22
6. D
7. B
8. A
9. D
10. D
Page 23
PROBLEM 1-2 MULTIPLE CHOICE (ACP)
1. A
2. A
3. A
4. C
5. A
Page 24
PROBLEM 1-3 MULTIPLE CHOICE (ACP)
1. D
2. D
3. D
4. A
5. D
Page 25
6. A
7. B
8. D
9. A
10. A
Page 26
PROBLEM 1-4 MULTIPLE CHOICE (IFRS)
1. C
2. A
3. B
4. C
5. B
Page 27
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER II
6. What is the scope of the Revised Conceptual
Framework?
ANSWER:
Objective of financial reporting
Qualitative characteristics of useful
financial information
Financial statements and reporting
entity
Elements of financial statements
Recognition and derecognition
Measurement
Presentation and disclosure
Concepts of capital and capital
maintenance
QUESTIONS:
1. What is the meaning of Conceptual Framework?
ANSWER:
Conceptual Framework is a summary of the
terms and concepts that underlie the preparation
and presentation of financial statements for external
users.
2. What are the purposes of the Revised Conceptual
Framework?
ANSWER:
To assist the International Accounting
Standards Board to develop IFRS
Standards based on consistent
concepts.
To assist preparers of financial
statements to develop consistent
accounting policy when no Standard
applies to a particular transaction or
other event or where an issue is not
yet addressed by an IFRS.
To assist preparers of financial
statements to develop accounting
policy when a Standard allows a
choice of an accounting policy.
To assist all parties to understand and
interpret the IFRS Standards.
3. Explain the authoritative status of the Conceptual
Framework.
ANSWER:
In the absence of standard or an
interpretation that specifically applies to a
transaction, management shall consider the
applicability of the Conceptual Framework in
developing and applying an accounting policy that
results in information that is relevant and reliable.
4. Explain the “primary users” and their information
needs.
ANSWER:
These are the parties to whom general
purpose financial reports are primarily directed. They
cannot require reporting entities to provide
information directly to them and therefore must rely
on general purpose financial reports for how much of
the financial information needed.
5. Explain the “other users” and their information
needs.
ANSWER:
These are the users of financial information
other than the existing and potential investors,
lenders, and other creditors. They are so called
because they are parties that may find the general
purpose financial reports useful but the reports are
not directed to them primarily.
7. Explain financial reporting.
ANSWER:
It is the provision of financial information
about an entity to external users that is useful to them
in making economic decisions and for assessing the
effectiveness of the entity’s management.
8. What is the overall objective of financial reporting?
ANSWER:
The overall objective of financial reporting is
to provide financial information about the reporting
entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about
providing resources to the entity.
9. What are the specific objectives of financial
reporting?
ANSWER:
To provide information useful in
making decisions about providing
resources to the entity.
To provide information useful in
assessing the cash flow prospects of
the entity.
To provide information about the
entity resources, claims and changes
in resources and claims.
10. Explain financial position.
ANSWER:
Information about the entity’s economic
resources and the claims against the reporting entity.
In other words, financial position comprises the assets,
liabilities and equity of an entity at a particular
moment in time.
11. Explain liquidity and solvency.
ANSWER:
Liquidity is the availability of cash in the near
future to cover currently maturing obligations.
Solvency is the availability of cash over a
long term to meet financial commitments when they
fall due.
66
12. Explain financial performance
PROBLEM 2-2 MULTIPLE CHOICE (IFRS)
ANSWER:
The level of income earned by the entity
through efficient and effective use of its resources.
Also known as results of operations and is portrayed in
the
income
statement
and
statement
of
comprehensive income.
1. C
2. B
3. C
4. B
Page 44
PROBLEM 2-3 MULTIPLE CHOICE (IAA)
13. Explain accrual accounting.
ANSWER:
Income
is
recognized
when
earned
regardless of when received and expense is
recognized when incurred regardless of when paid.
1. D
2. A
3. D
4. B
5. B
Page 45
14. Explain management stewardship of the entity’s
economic resources.
ANSWER:
Information about how efficiently and
effectively
management
has
discharged
its
responsibilities to use the entity’s economic resources
helps users to assess management stewardship of
those resources.
PROBLEM 2-4 MULTIPLE CHOICE (ACP)
77
1. D
2. D
3. D
4. A
5. A
Page 46
15. What are the limitations of financial reporting?
ANSWER:
General purpose financial reports do
not and cannot provide all the
information that existing and potential
investors, lenders and other creditors
need.
These users need to consider pertinent
information from other sources, for
example,
general
economic
conditions,
political
events
and
industry outlook.
General purpose financial reports are
not designed to show the value of an
entity but
the reports
provide
information to help the primary users
estimate the value of the entity.
General purpose financial reports are
intended
to
provide
common
information to users and cannot
accommodate every request for
information.
To a large extent, general purpose
financial reports are based on
estimate and judgment rather than
exact depiction.
Page 42
6. D
7. A
8. A
9. A
10 A
Page 47
PROBLEM 2-5 MULTIPLE CHOICE (IAA)
1. A
2. B
3. A
4. C
5. A
Page 48
6. C
7. D
8. B
9. D
10. D
Page 49
PROBLEM 2-6 MULTIPLE CHOICE (AICPA Adapted)
1. C
2. C
3. C
PROBLEMS
Page 50
4. A
5. A
PROBLEM 2-1 MULTIPLE CHOICE (IFRS)
Page 51
1. D
2. D
3. D
4. D
Page 43
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
10. Explain the new definition of materiality.
CHAPTER III
QUESTIONS
1. What is the meaning of qualitative characteristics
of financial information ?
ANSWER:
These are the qualities or attributes that
make financial accounting information useful to the
users.
2. What are fundamental qualitative characteristics?
ANSWER:
It relates to the content or substance
financial information.
3. What are the
characteristics?
two
fundamental
of
qualitative
ANSWER:
Information is material if ommitting, misstating
or obscuring it could reasonably be expected be
expected to influence the economic decisions that
primary users of general purpose financial statements
make on the basis of those statements which provide
financial information about a specific reporting entity.
11. What are the factors that may be considered in
determining materiality?
ANSWER:
The size of the item in relation to the total of
the group to which the item belongs is tatekn into
account.
The nature of the item may be inherently
material because by its very nature it affects
economic decision.
12.
Explain
the
fundamental
characteristics of faithful representation.
qualitative
ANSWER:
The fundamental qualitative characterisrics
are relevance and faithful representation.
ANSWER:
It means that the actual effects of the
transactions shall be properly accounted for and
reported in the financial statements.
4. Explain the most efficient and effective process of
applying the fundamental qualitative characteristics.
13. What are the
representation?
ANSWER:
The mos efficient and effective process of
applying the fundamental qualittative characteristics
would usually be:
First, identify an economic phenomenon that
has the potential to be useful.
Second, identify the type of information about
the phenomenon that would be most
relevant and can be faithfully represented.
Third, determine whether the information is
available.
5. Explain relevance.
ANSWER:
Relevance is the capacity of the information
to influence a decision.
ANSWER:
Predictive value
Confirmatory value
ANSWER:
It can be used as an input to processes
employed bu users to predict future outcome.
8. Explain confirmatory value.
feedback
of
faithful
ANSWER:
Completeness
Neutrality
Free from error
14. Explain completeness of financial information.
ANSWER:
It is the result of the adequate disclosure
standard or the principle of full disclosure. It includes
all information necessary for a user to understand the
phenomenon being depicted, including all necessary
descriptions and explanations.
15. What is the standard of adequate disclosure?
16. Explain the notes to financial statements in
relation to completeness of financial information.
7. Explain predictive value.
provides
ingredients
ANSWER:
All significant and relevant information
leading to the preparation of financial statements
shall be clearly reported.
6. What are the two ingredients of relevance?
ANSWER:
If it
evaluations.
three
about
previous
9. When is an item material?
ANSWER:
An item is material if knowledge of it could
reasonably affect or influence the economic decision
of the primary users of the fianncial statements.
ANSWER:
It
provides
narrative
description
or
disaggregation of the items presented in the financial
statements and information about items that do not
qualify for recognition.
17. Explain neutrality of financial information.
ANSWER:
It is not slanted, weighted, emphasized,deemphasized or otherwise manipulated to increase
the probability that financial information will be
received favorably or unfavorably by users.it is
synonymous with all-encompassing principle of
fairness.
Page 70
88
18. What is prudence?
26. Explain comparability within a single entity.
ANSWER:
Exercise of care and caution when dealing
with uncertainities in the measurement process such
that assets or income are not overstated and
liabilitites or expenses are not understated. Neutrality
is supported by the exercise of prudence.
ANSWER:
The quality of information that allows
comparisons within a single entity through time or
from one accounting period to the next.
27. Explain comparability between and across
entities.
19. Explain conservatism.
ANSWER:
The quality of information that allows
comparisons between two or more entities engaged
in the same industry.
ANSWER:
It means that when alternatives exist, the
alternative which has the least effect on equity
should be chosen. Conservatism means “in case of
doubt, record any loss and dod not record any gain.”
20. Explain free from error financial information.
ANSWER:
There are no errors or omissions in the
description of the phenomenon or transaction.
21. Explain the effect of measurement uncertainty to
usefulness of financial information.
ANSWER:
As long as the estimate is clearly and
accurately described and explained, even a high
level of measurement uncertainty does not affect the
usefulness of the financial information.
22. Explain the concept of substance over form.
ANSWER:
It is not considered a separate component of
faithful representation because it would be
redundant.
23. What are enhancing qualitative characteristics?
ANSWER:
It is intended to increase the usefulness of the
financial information that is relevant and faithfully
represented.
24. Enumerate
characteristics.
the
four
enhancing
qualitative
ANSWER:
Comparability
Understandability
Verfiability
Timeliness
25. Explain comparability.
ANSWER:
It is the ability to bring together for the
purpose of noting points points of likeness and
difference.
The enhancing qualitative characteristic that enables
users to identify and understand similarities and
dissimilarities among items.
28. What is consistency?
ANSWER:
Refers to the use of the same method for the
same item, either from period to period within an
entity or in a single period across entities.
29. Distinguish consistency from comparability.
ANSWER:
Consistency is the uniform application
accounting method from period to period within an
entity while comparability is the uniform application
of accounting method between and across entities in
the same industry.
30. Explain understandability.
ANSWER:
It requires that financial information must be
comprehensible or intelligible if it is to be most useful.
31. Explain verifiability.
ANSWER:
Means that different knowledgeable and
independent observers could reach consensus,
although not necessarily complete agreement, that a
particular depiction is a faithful representation. It
provides results that would be substantially
duplicated
by
measurers
using
the
same
measurement method.
32. Distinguish
verification.
direct
verification
and
indirect
ANSWER:
Direct verification means verifying an amount
or other representation through direct observation,
for example, by counting cash.
Indirect verification means checking the
inputs to a model, formula or other technique and
recalculating
the
inputs
using
the
same
methodology.
33. Explain timeliness.
ANSWER:
Financial information must be available or
communicated early enough when a decision is to
be made. It enhances the truism that without
knowledge of the past, the basis for prediction will
usually be lacking and without interest in the future,
knowledge of the past is sterile.
99
34. Explain
information.
cost
constraint
on
useful
financial
ANSWER:
A consideration of the cost incurred in
generating financial information against the benefit
to be obtained from having the information.
PROBLEM 3-4 MULTIPLE CHOICE (IAA)
1. A
2. B
3. B
4. B
5. B
Page 78
35. What is the rule on cost constraint?
ANSWER:
It is important that such cost is justified by the
benefit derived from the financial information.
Page 71
6. B
7. C
8. C
9. C
10. B
Page 79
PROBLEM 3-5 MULTIPLE CHOICE (IAA)
10
10
1. D
2. D
3. A
4. A
5. D
PROBLEMS:
PROBLEM 3-1 MULTIPLE CHOICE (IAA)
1. A
2. D
3. A
4. B
5. A
Page 80
PROBLEM 3-6 MULTIPLE CHOICE (AICPA Adapted)
Page 72
6. B
7. C
8. D
9. C
10. B
1. B
2. B
3. C
4. B
5. A
Page 81
Page 73
PROBLEM 3-2 MULTIPLE CHOICE (IAA)
1. D
2. C
3. D
4. C
5. A
6. B
7. D
8. C
9. A
10. B
Page 82
PROBLEM 3-7 IDENTIFICATION (ACP)
Page 74
6. B
7. C
8. D
9. C
10. A
Indicate the accounting concept that is defined or
described.
1. Information that has no bearing on an economic
decision to be made is useless.
ANSWER:
RELEVANCE
Page 75
PROBLEM 3-3 MULTIPLE CHOICE (IAA)
1. D
2. C
3. D
4. A
5. D
Page 76
6. C
7. A
8. B
9. D
10. B
Page 77
2. It is the ability to bring together for the purpose of
noting points of likeness and difference.
ANSWER:
COMPARABILITY
3. It requires that users have some knowledge of the
complex economic activities of entities, the
accounting process and the technical terminology in
the statements.
ANSWER:
UNDERSTANDABILITY
4. Preparers of statements should not try to increase
the usefulness of the information to a few users to the
detriment of others who may have opposing interests.
ANSWER:
NEUTRALITY
5. In case of conflict between economic substance
and legal form of a transaction, the economic
substance shall prevail.
ANSWER:
SUBSTANCE OVER FORM
6. Small expenditures for tools are expensed
immediately.
ANSWER:
MATERIALITY
7. When in doubt, recognize all losses and recognize
gain.
ANSWER:
CONSERVATISM
8. The information should be presented in a manner
that facilitates understanding and avoids erroneous
implication.
ANSWER:
COMPLETENESS
9. It is the capacity of the information to influence a
decision.
ANSWER:
RELEVANCE
10. The description and numbers or figures must
match what really existed or happened.
ANSWER:
FAITHFUL REPRESENTATION
11. The financial statements shall be accompanied
by notes to financial statements.
ANSWER:
COMPLETENESS
12. There are no errors or omissions in the description
of the phenomenon.
ANSWER:
FREE FROM ERRORS
13. It is the goal achieved by consistency.
ANSWER:
COMPARABILITY
14. This enhancing qualitative characteristics implies
consensus.
ANSWER:
VERIFIABILITY
15. The older the information, the less useful.
ANSWER:
TIMELINESS
Page 83
PROBLEM 3-8 TRUE OR FALSE (IAA)
TRUE 1. A conceptual framework is a coherent
system of interrelated objectives and fundamentals
that lead to consistent standards.
FALSE 2. Fundamental qualitative characteristics of
financial accounting information are either relevant
or prudent.
FALSE 3. An enhancing qualitative characteristic is
confirmatory value.
FALSE 4. A fundamental qualitative characteristic is
understandability.
FALSE 5. To be a faithful representation, an
information must be predictive and confirmatory.
TRUE 6. An enhancing quality of financial
accounting information is comparability.
FALSE 7. Applying different accounting treatment to
similar event from period to period is violation of
verifiability.
TRUE 8. The idea of consistency does not mean that
entities cannot switch from one accounting method
to another.
FALSE 9. Financial statement users are assumed to
have no reasonable knowledge of business and
financial accounting matters.
FALSE 10. Entities consider only quantitative factors in
determining whether an item is material.
FALSE 11. Neutrality and predictive value are
characteristics of relevant information.
FALSE 12. The tendency to recognize favorable
events early is an example of conservatism.
FALSE 13. The Conceptual Framework focuses
primarily on the needs of internal users of financial
information.
TRUE 14. The overall objective of financial reporting
is to provide information for making economic
decisions.
FALSE 15. Once an accounting method is adopted,
it should never be changed.
Page 84
11
11
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER IV
QUESTIONS:
1. What is
statements?
the
6. Explain going concern assumption.
ANSWER:
It means that in the absence of evidence to
the contrary, the accounting entity is viewed as
continuing in operation indefinitely.
7. Explain time period assumption.
general
objective
of
financial
ANSWER:
Provide
infromation
about
economic
resources of the reporting entity claims against the
entity and changes in the economic resources
claims.
2. Explain a reporting period.
ANSWER:
Period when financial statements are
prepared for general purpose financial reporting.
3. Explain a reporting entity.
ANSWER:
An entity that is required or chooses to
prepare financial statements. It can be a single entity
or a portion of an entity, or can comprise more than
one entity. Reporting entity is not necessarily a legal
entity.
4.
Define
consolidated
financial
statements,
unconsolidated financial statements and combined
financial statements.
ANSWER:
Consolidated financial statements provide
information about the assets, liabilities, equity,
income and expenses of both the parent and
its subsidiaries as a single reporting entity. Also
useful for existing and potential investors,
lenders and other creditors of the parent in
their assessment of future net cash inflows to
the parent.
Unconsolidated financial statements are
designed to provide information about the
parent’s assets, liabilities income and
expenses and not about those of the
subsidiaries. Can be useful to the existing and
potential investors lenders and other creditors
of the parent because a claim against the
parent typically does not give the holder of
that claim against subsidiaries.
Combined financial statements provide
financial information about the assets,
liabilities, equity income and expenses not
linked with parent and subsidiary relationship.
ANSWER:
It requires that the definite life of an entity is
subdivided into accounting periods which are usually
of equal length for the purpose of preparing financial
reports on financial position, performance and cash
flows.
8. Distinguish calendar year and natural business
year.
ANSWER:
Calendar year is a twelve – month period that
ends on December 31.
Natural business year is a twelve – month
period that ends on any month when the
business is at the lowest or experiencing slack
season.
9. Explain monetary unit assumption.
ANSWER:
An accounting principle that concern about
the valuation of transactions or event that entity
records in its financial statement. It has two aspects,
namely quantifiability and stability of the peso.
10. Explain quantifiability and stability of the peso in
relation to monetary assumption unit.
ANSWER:
Quantifiability aspect means that the assets,
liabilities, equity, income and expenses should
be stated in terms of a unit of measure
which is the peso in the Philippines.
Stability of the peso assumption means that
the purchasing power of peso is stable or
constant and that
its
instability
is
insignificant and therefore may be ignored.
Page 93
PROBLEMS:
PROBLEM 4-1 MULTIPLE CHOICE (CONCEPTUAL
FRAMEWORK)
1. A
2. C
3. D
4. A
5. D
5. Explain underlying assumptions in the preparation
of financial statements.
Page 94
PROBLEM 4-2 MULTIPLE CHOICE (IAA)
ANSWER:
These are the basic notions or fundamental
premises on which the accounting process is based.
Accounting assumptions are also known as
postulates. It serves as the foundations or bedrock of
accounting in order to avoid misunderstanding but
rather enhance the understanding and usefulness of
the financial statements.
1. B
2. D
3. D
4. D
5. B
Page 95
12
12
6. B
7. C
8. C
9. B
10. D
PROBLEM 4-5 IDENTIFICATION (IAA)
Identify the assumption that is most clearly violated
by the accounting practice.
Page 96
PROBLEM 4-3 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. A
3. D
4. A
5. B
Page 97
PROBLEM 4-4 (IAA)
For each situation, identify the underlying assumption
involved.
1. The operations of a saving bank are being
evaluated by the Bangko Sentral ng Pilipinas.
During the investigation, the BSP has determined that
numerous loans made by top management were
unwise and have seriously endangered the future of
the saving bank.
1. An entity decided to publish financial statements
only in the years when it had good news to report.
ANSWER:
GOING CONCERN
2. An entity reported inventory, property, plant and
equipment and intangible assets at current value at
year-end.
ANSWER:
MONETARY UNIT ASSUMPTION
3. An electronics entity owned by a proprietor
reported the cost of the proprietor’s swimming pool
as an asset of the entity.
ANSWER:
ACCOUNTING ENTITY
4. An entity prepared financial statements adjusted
for changes in purchasing power.
ANSWER:
GOING CONCERN
2. The parent entity in Manila has a subsidiary in
Japan. The financial statements of the subsidiary are
translated to pesos for consolidation with the financial
statements of the parent entity at year-end.
ANSWER:
MONETARY UNIT ASSUMPTION
3. A machinery was imported from USA at a certain
cost five years ago. Because of inflation, the
machinery has now a current replacement cost
which is very much higher than the historical cost.
Management would like to report the machinery at
current replacement cost.
ANSWER:
MONETARY UNIT ASSUMPTION
5. A mining entity kept no accounting records after
starting business. The entity is waiting until the mine is
exhausted to determine the success or failure of
business.
ANSWER:
GOING CONCERN
PROBLEM 4-6 IDENTIFICATION (IAA)
Identify the assumption defined or described.
1. An entity reported financial statements in nominal
pesos that have mixed rather uniform amount of
purchasing power.
ANSWER:
MONETARY UNIT ASSUMPTION
4. An entity has experienced a drastic reduction in
revenue by reason of a long dry spell in the area
where the entity grows its tobacco.
The management decided to wait until next year
and
present financial statements for a two-year period
rather than prepare now the traditional twelve-month
financial statements.
ANSWER:
TIME PERIOD
ANSWER:
MONETARY UNIT
2. A multinational entity published a complete set of
financial statements at least once a year, regardless
of whether the financial results were good or bad.
ANSWER:
TIME PERIOD
3. The pesos of today can buy as much goods and
services as the pesos five years ago.
5. A subsidiary was exhibiting poor financial
performance for the current year.
In an effort to increase the subsidiary’s reported
income, the parent entity purchased goods from the
subsidiary at twice the normal mark up.
ANSWER:
ACCOUNTING ENTITY
Page 98
ANSWER:
MONETARY PERIOD (HISTORICAL COST)
4. An accounting entity is viewed as continuing in
operation in the absence of evidence to the
contrary.
ANSWER:
GOING CONCERN
13
13
5. An accounting practitioner mixed personal
accounting records with the records of the
accounting practice.
economic resource even if the probability that it will
produce economic benefit is low.
7. Explain control of an economic resource.
ANSWER:
ACCOUNTING ENTITY
Page 99
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER V
ANSWER:
An entity controls an asset if it has the present
ability to direct the use of the asset and obtain the
economic benefits that flow from it. It also includes
the ability to prevent others from using such asset and
therefore preventing others from obtaining the
economic benefits from the asset. It may arise if an
entity enforces legal rights.
8. Define a liability.
QUESTIONS:
1. Define the elements of financial statements.
ANSWER:
The elements of financial statements refer to
the quantitative information reported in the financial
statement of financial position and income
statement. Elements of financial statements are
considered as the “building blocks” from which the
financial statements are constructed.
2. What are the elements directly related to the
measurement of financial position?
ANSWER:
The elements that are directly related to the
measurement of financial position are:
Asset
Liability
Equity
3. What are the elements directly related to the
measurement of financial performace?
ANSWER:
The elements that are directly related to the
measurement of financial performace are:
Income
Expense
4. Define an asset.
ANSWER:
Asset is defined as a present economic
resource controlled by the entity as a result of past
events. It is a right that has the potential to produce
economic benefits.
5. What are the essential characteristics of an asset?
ANSWER:
The asset is a present economic resource.
The economic resource is a right that has the
potential to produce economic benefits.
The economic resource is controlled by the entity as
a result of past events.
6. Explain a right to produce economic benefit.
ANSWER:
For potential to exist, it does not need to be
certain or even likely that the right will produce
economic benefits. It is only necessary that the right
already exists. A right can meet the definition of an
ANSWER:
It is defined as the present obligation of an
entity to transfer an economic resource as a result of
past events. The new definition clarifies that a liability
is the obligation to transfer an economic resource
and not the ultimate outflow of economic benefits.
9. What are the essential characterictics of a liability?
ANSWER:
The essential characteristics of a liability are:
The entity has an obligation.
The entity liable must be identified. It is not necessary
that the payee or the entity to whom the obligation is
owed be identified.
The obligation is to transfer an economic resource.
The obligation is a present obligation that exist as a
result of past event.
This means that a liability is not recognized until it is
incurred.
10. Explain an obligation.
ANSWER:
It is a duty or responsibility that an entity has
no practical ability to avoid. Obligations can either
be legal or constructive. It may be legally
enforceable as a consequence of a binding contract
or statutory requirement.
11. Explain transfer of economic resources.
ANSWER:
It may include:
Obligation to pay cash.
Obligation to deliver goods or noncash
resources.
Obligation to provide services at some future
time.
Obligation to exchange economic resources
with another party on unfavorable terms.
Obligation to transfer an economic resource if
specified uncertain future event occurs.
12. Define income.
ANSWER:
It is defined as increases in assets or
decreases in liabilities that result in increases in equity
other than those relating to contributions from equity
holders. It encompasses both revenue and gains.
14
14
13. Distinguish income from revenue.
PROBLEM 5-3 MULTIPLE CHOICE (AICPA Adapted)
ANSWER:
Income is increases in assets or decreases in
liabilities that result in increases in equity other than
those relating to contributions from equity holders.
Revenue arises in the course of the ordinary
regular activities and is referred to by variety of
different names including sales, fees, interest,
dividends, royalties, and rent.
1. B
2. C
3. C
4. D
5. B
14. Define an expense.
ANSWER:
Expense is defined as decreases in assets or
increases in liabilities that result in decreases in equity,
other than those relating to distributions to equity
holders.
Page 112
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER VI
QUESTIONS:
1. Explain recognition of the elements of financial
statements.
15. Distinguish expenses from loss.
ANSWER:
Expenses arise in the course of ordinary
regular activities include cost of goods sold, wages
and depreciation.
Losses do not arise in the course of the
ordinary regular activities and include losses resulting
from disasters.
Page 107
ANSWER:
It is a process of capturing for inclusion in the
financial statement an item that meets the definition
of an asset, liability, equity, income or expense.
2. Explain the recognition criteria for the elements of
financial statements.
ANSWER:
It does not focus anymore on how people
probable economic benefits will flow to or from the
entity and that the cost can be measured reliably.
PROBLEMS:
PROBLEM 5-1 MULTIPLE CHOICE (ACP)
1. A
2. B
3. A
4. A
5. B
3. What is derecognition?
Page 108
ANSWER:
It is defined as the removal of all or part of a
recognized asset or liability from the statement of
financial position.
4. Explain the point of sale income recognition.
6. B
7. C
8. D
9. B
10. A
Page 109
PROBLEM 5-2 MULTIPLE CHOICE (Conceptual
Framework)
1. D
2. D
3. D
4. D
5. B
Page 110
6. A
7. B
8. D
9. C
10. C
Page 111
ANSWER:
The basic principle of income recognition is
that income shall be recognized when earned.
With respect to sale of goods in the ordinary course of
business, the point of sale is unquestionably the point
of income recognition. The reason is that it is at the
point of sale that the entity has transferred to the
buyer the significant risks and rewards of ownership of
the goods. Stated differently, legal title to the goods
passes to the buyer at the point of sale. Moreover, it is
at the point of sale that the entity has transferred
control of the goods to the customer.
5. What are the three applications of the matching
principle?
ANSWER:
The matching principle has three applications,
namely:
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
15
15
6. Explain cause and effect association principle.
ANSWER:
This is actually the "strict matching concept.
This process, commonly referred to as the matching
of cost with revenue, involves the simultaneous or
combined recognition of revenue and expenses that
result directly and jointly from the same transactions
or events.
7. Explain
principle.
systematic
and
rational
allocation
ANSWER:
The reason for this principle is that the cost
incurred will benefit future periods and that there is
an absence of a direct or clear association of the
expense with specific revenue.
When economic benefits are expected to arise over
several accounting periods and the association with
income can only be broadly or indirectly determined,
expenses are recognized on the basis of systematic
and allocation procedures.
transaction between market participants at
the measurement date.
Fair value is an exit price or exit value.
Fair value can be observed directly using
market price of the asset or liability in an
active market.
In cases where fair value cannot be directly
measured, an entity can use present value of cash
flows.
Fair value is not adjusted for transaction cost.
The reason is that such cost is a characteristic
of the transaction
and not of the asset or
liability.
12. Explain value in use.
ANSWER:
Value in use is the present value of the cash
flows that an entity expects to derive from the use of
an asset and from the ultimate disposal. Value in use
does not include transaction cost on acquiring the
asset but includes transaction cost on the disposal of
the asset. Value in use is an exit price or exit value.
8. Explain immediate recognition principle.
13. Explain fulfilment value.
ANSWER:
Under this principle, the cost incurred is
expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating
certain costs with future revenue.
An expense is recognized immediately:
a. When an expenditure produces no
future economic benefit.
b. When cost incurred does not qualify
or ceases to qualify for recognition as an asset.
ANSWER:
Fulfillment value is the present value of cash
that an entity expects to transfer in paying or settling
a liability.
Fulfillment value does not include transaction cost on
incurring a liability but includes transaction cost on
fulfillment of a liability. Fulfillment value is an exit price
or exit value.
9. What are the two categories of measurement?
ANSWER:
Current cost of an asset is the cost of an
equivalent asset at the measurement date
comprising the consideration paid and transaction
cost.
Current cost of a liability is the consideration that
would be received less any transaction cost at
measurement date.
Similar to historical cost, current cost is also based on
the entry price or entry value but reflects market
conditions on measurement date.
ANSWER:
The Revised Conceptual Framework mentions
two categories:
a. Historical cost
b. Current value
10. Explain historical cost.
ANSWER:
The historical cost or original acquisition cost
of an asset is the cost incurred in acquiring or
creating the asset comprising the consideration paid
plus transaction cost. The historical cost of a liability is
the consideration received to incur the liability minus
transaction cost. Simply stated, historical cost is the
entry price or entry value to acquire an asset or to
incur a liability. An application of the historical cost
measurement is to measure financial asset and
financial liability at amortized cost. The amortized
cost reflects the estimate of future cash flows
discounted at a rate determined at initial recognition.
11. Explain fair value.
ANSWER:
Fair value of an asset is the price that would
be received to sell an asset in an orderly
transaction between market participants at
measurement date.
Fair value of liability is the price that would
paid to transfer a liability in an orderly
14. Explain current cost.
15. Explain the guideline in selecting an appropriate
measurement basis.
ANSWER:
In selecting a measurement basis for an asset
or a liability and for the related income and expense,
it 1s necessary to consider the nature of the
information that the measurement basis will produce.
In most cases, no single factor will determine which
measurement basis should be selected.
The relative importance of each factor will depend
on and circumstances.
The information produced by the measurement basis
must be useful to the users of financial statements.
To achieve this, the information must be both relevant
and faithfully represented.
Historical cost is the measurement basis most
company adopted in preparing financial statements.
Page 121
16
16
PROBLEM 6-1 MULTIPLE CHOICE (Conceptual
Framework)
PROBLEM 6-7 IDENTIFICATION (IAA)
Identify the principle or concept that is most clearly
violated by the accounting practice described. Do
not use any answer more than once.
1. A
2. B
3. C
4. B
5. D
Page 122
PROBLEM 6-2 MULTIPLE CHOICE (IAA)
1. A
2. D
3. A
4. C
5. C
1. An entity charges the cost of new office
equipment to expense in the year of purchase
although the equipment is expected to help produce
revenue for many years.
ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION
2. An entity records sales after inventory has been
produced but before it is sold.
ANSWER:
INCOME RECOGNITION
Page 123
PROBLEM 6-3 MULTIPLE CHOICE (AICPA Adapted)
1. B
2. D
3. B
4. A
5. B
3. An entity having 150 accounts payable lists each
account among the liabilities in the statement of
financial position.
ANSWER:
CAUSE AND EFFECT
Page 124
PROBLEM 6-4 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. C
3. A
4. D
5. A
4. An entity does not report the major details about
the shareholders’ equity.
ANSWER:
GOING CONCERN/MATERIALITY
5. An entity follows a policy of recording an item as
an asset when the entity is in doubt whether the item
is an asset or an expense of the current period.
Page 125
6. C
7. B
8. B
9. B
10. B
ANSWER:
PRUDENCE
6. The accountant of the entity keeps a detailed
depreciation record on every asset no matter how
small its value.
Page 126
PROBLEM 6-5 MULTIPLE CHOICE (IAA)
ANSWER:
MATERIALITY
7. A construction firm signed a three-year contract to
build a skyway connecting Alabang and Tagaygay
City. The firm immediately records the full contract
price as revenue.
1. B
2. A
3. D
4. D
5. B
Page 127
6. D
7. C
8. C
9. D
10. C
ANSWER:
INCOME RECOGNITION
8. Competition has taken away much of the business
of an airline. The airline is unwilling to report its plans to
sell half of its fleet of aircraft.
Page 128
PROBLEM 6-6 MULTIPLE CHOICE (Conceptual
Framework)
ANSWER:
STANDARD ADEQUATE DISCLOSURE
9. A department store changes accounting method
every year in order to report a higher net income
possible under accounting standards.
1. D
2. D
3. D
4. D
5. B
ANSWER:
CONSISTENCY
Page 129
17
17
10. The damaged inventory of a department store is
being written down. The manager bases the write
down on subjective opinion in order to minimize
income tax.
8. The entity should always report the important
details about share capital, for example, the number
of shares authorized, shares issued, shares in treasury,
subscribed shares and par value.
ANSWER:
INCOME RECOGNITION
ANSWER:
FAITHFUL REPRESENTATION
Page 130
9. An allowance for doubtful accounts is established.
PROBLEM 6-8 IDENTIFICATION (IAA)
Indicate the principle, concept or constraint that best
supports each of the following statements. Do not use
an answer more than once.
1. An entity records a new machine at the cash
equivalent price paid.
ANSWER:
CAUSE AND EFFECT ASSOCIATION
10. The lower of cost and net realizable value is used
to measure inventory.
ANSWER:
CONSERVATISM
ANSWER:
Page 131
PROBLEM 6-11 DISCUSSION (IAA)
2. A large entity decides that whenever an asset has
a cost of less than P10,000, the cost will be charged
to expense even though the asset may benefit
several accounting periods.
ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION
3. The entity allocates the cost of a patent to the
accounting periods in which it helps to produce the
revenue.
ANSWER:
MATCHING PRINCIPLE
4. The entity estimates and records interest expense
on a 5-year noninterest-bearing not payable.
ANSWER:
FAIR VALUE
5. Subscriptions received in advance by a magazine
publishing entity are treated as deferred revenue until
the magazines are published.
ANSWER:
EXPENSE RECOGNITION
6. Users have trouble making interperiod comparisons
when an entity changes accounting principles from
one year to the next.
ANSWER:
CONSISTENCY
7. Many users of financial statements prefer
accounting
principles
such
as
accelerated
depreciation that tend to state income on the “low
side”.
ANSWER:
CONSERVATISM
Indicate the accounting concept that is the most
applicable.
1. Timely financial information with predictive and
confirmatory value is presented.
ANSWER:
RELEVANCE
2. Error-free financial information is presented.
ANSWER:
FREE FROM ERROR
3. The same accounting policies are applied from
period to period.
ANSWER:
CONSISTENCY
4. Notes to financial statements are prepared in order
to have a fair presentation.
ANSWER:
NOTES TO FINANCIAL STATEMENTS
5. The annual depreciation is recognized.
ANSWER:
6. An allowable exception to the point of sale is the
recording and reporting of inflows at the end of
production.
ANSWER:
POINT OF SALE INCOME RECOGNITION
7. All repair tools are expensed when purchased even
if the useful life is more than one year.
ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION
8. A patent is capitalized and amortized over the
period benefited.
ANSWER:
HISTORICAL COST
18
18
9. Rent paid in advance is recorded as prepaid rent
expense.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
ANSWER:
FULFILLMENT VALUE
10. Events after the end of reporting are either
adjusted or disclosed.
QUESTIONS:
ANSWER:
STANDARD ADEQUATE DISCLOSURE
Page 134
PROBLEM 6-12 DISCUSSION (IAA)
An entity provided the following situations:
1. The entity’s accountant increased the carrying
amount of a patent from the original cost of
P1,000,000 to the recently appraised value of
P3,000,000.
ANSWER:
DISAGREE, THIS IS A CASE OF FRAUD AND
UNFAITHFULLY REPRESENTED REPORT.
2. The entity paid for the personal travel of the chief
executive officer and charged travel expense.
ANSWER:
DISAGREE, THE ENTITY
EXPENSES SHOULD BE SEPARATED.
AND
CHAPTER VII
PERSONAL
3. At the end of the current reporting period, the
entity received an order from a customer. The
merchandise will be shipped in early next year.
Because the sale was made to a long-time customer
and the invoice was paid in the current year, the
controller recorded the sale in the current year.
ANSWER:
4. In the middle of the current year, the entity paid a
certain amount to an insurance company for oneyear comprehensive insurance coverage.
The entity recorded the entire expenditure as an
expense in current year.
ANSWER:
5. The entity included a note in the financial
statements that described a pending lawsuit against
the entity.
ANSWER:
REQUIRED:
State whether you agree or disagree with the
financial reporting practice. Briefly explain your
answer.
Page 135
1. Explain presentation and disclosure as an effective
communication tool.
ANSWER:
The presentation and disclosure can be an
effective communication tool about the information
in financial
statements.
A reporting entity communicates information about
its assets, liabilities, equity, income and expenses by
presenting and disclosing information in the financial
statements.
Effective communication of information in financial
statements makes the information more relevant and
contributes to a faithful representation of an entity's
assets liabilities, income and expenses.
Effective communication of information in financial
statements also enhances the understandability and
comparability of information in the financial
statements.
Effective communication in financial statements is
supported by not duplicating information in different
parts of the financial statements,
Duplication is usually unnecessary and can make
financial statements less understandable.
2. Explain classification of assets, liabilities and equity.
ANSWER:
Classification is the sorting of assets, liabilities,
equity, income and expenses on the basis of shared
or similar characteristics.
Classifying dissimilar assets, liabilities, equity, income
and expenses can obscure relevant information,
reduce understandability and comparability and
may not provide a faithful representation of financial
information.
It may be necessary to classify components of equity
separately if such components are subject to legal,
regulatory and other requirements.
Thus, ordinary share capital, preference share capital,
share premium and retained earnings should be
disclosed separately.
3. Explain classification of income and expenses.
ANSWER:
Income and expenses are classified as
components of profit loss and components of other
comprehensive income.
The Revised Conceptual Framework has introduced
the term Statement of financial performance to refer
to the statement of profit or loss together with the
statement presenting other comprehensive income.
The statement of profit or loss is the primary source of
information about an entity's financial performance
tor the reporting period.
Al income and expenses should be appropriately
classified and included in the statement of profit or
loss.
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However, there are certain items of income and
expenses that are presented outside of profit or loss
but included in other comprehensive income.
The components of other comprehensive income are
subsequently recycled or reclassified to profit or loss
or retained earnings.
This concept requires that productive assets be
measured at current cost, rather than historical cost.
Productive assets include inventories and property,
plant and equipment.
The current costs for these productive assets must be
maintained in order that physical capital is also
maintained.
4. What is aggregation?
ANSWER:
Aggregation is the adding together of assets,
liabilities, equity, income and expenses that have
similar or shared characteristics and are included in
the same classification.
Aggregation makes information more useful by
summarizing a large volume of detail. However,
aggregation may conceal some of the details.
5. Explain capital maintenance.
ANSWER:
The capital maintenance approach means
that net income occurs only after the capital used
from the beginning of the period is maintained.
In other words, net income is the amount an entity
can distribute to its owners and be as "well-off" at the
end of the year as at the beginning.
10. Explain the net income under the physical capital
concept.
ANSWER:
Under this concept, net income occurs "when
the physical productive capital of the entity at the
end of the year exceeds the physical productive
capital at the beginning of the period, also after
excluding distributions to and contributions from
owners during the period.
Page 142
PROBLEM 7-1
Framework)
MULTIPLE
CHOICE
1. D
2. A
3. C
4. A
5. D
6. Distinguish return on capital and return of capital.
ANSWER:
The capital maintenance approach means
that net income occurs only after the capital used
from the beginning of the period is maintained. In
other words, net income is the amount an entity can
distribute to its owners and be as "well-off" at the end
of the year as at the beginning.
7. Explain financial capital.
ANSWER:
Financial capital is the monetary amount of
the net assets contributed by shareholders and the
amount of the increase in net assets resulting from
earnings retained by the entity.
Financial capital is the traditional concept based on
historical cost and adopted by most entities.
8. Explain the net income under the financial capital
concept.
ANSWER:
Under the financial capital concept, net
income occurs when the nominal amount of the net
assets at the end of the year exceeds the nominal
amount of the net assets at the beginning of the
period, after excluding distributions to and
contributions by owners during the period."
9. Explain physical capital.
ANSWER:
Physical capital is the quantitative measure of
the physical productive capacity to produce goods
and services.
The physical productive capacity may be based on,
for example, units of output per day or physical
capacity of productive assets to produce goods and
services.
(Conceptual
Page 143
PROBLEM 7-2
Framework)
MULTIPLE
CHOICE
(Conceptual
1. A
2. B
3. A
4. D
5. C
Page 144
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CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER VIII
QUESTIONS:
1. What are financial statements?
ANSWER:
Financial statements are the means by which
the information accumulated and processed in
financial accounting is periodically communicated to
the users.
The financial statements are the end product or main
output of the financial accounting process.
Financial statements are a structured financial
representation of the financial position and financial
performance of an entity.
2. What are the components of financial statements?
ANSWER:
A complete set of financial statements
comprises the following components:
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant
accounting,
accounting
policies
and
other
explanatory notes
3. Explain the objective of financial statements.
ANSWER:
The objective of financial statements is to
provide information about the financial p0sition,
financial performance and cash flows of an entity
that is useful to a wide range of users in making
economic decisions.
4. What is the frequency of reporting of financial
statements?
ANSWER:
Financial statements shall be presented at
least annually.
When an entity's end of reporting period changes,
and financial statements are presented for a period
longer or shorter than one year, an entity shall
disclose:
a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial
statements are not entirely comparable.
5. Define a statement of financial position.
ANSWER:
A statement of financial position is a formal
statement showing the three elements comprising
financial position, namely assets, liabilities and equity.
Investors, creditors and other statement users analyze
the statement of financial position to evaluate such
factors as liquidity, solvency and the need of the
entity for additional financing.
6. What are the essential characteristics of an asset?
ANSWER:
Assets are classified only into two, namely
current assets and noncurrent assets.
When an entity supplies go0ods or services within a
clearly identifiable operating cycle, the separate
classification of current and noncurrent assets is a
useful information by distinguishing between net
assets that are continuously circulating as working
capital from the not assets used in long-term
operations.
The operating cycle of an entity is the time between
the acquisition of assets for proce8sing and their
realization in cash or cash equivalents. When the
entity's normal operating cycle is not clearly
identifiable, the duration is assumed to be twelve
months.
7. What are the classification of assets?
ANSWER:
PAS 1, paragraph 66, provides that an entity
shall classify an asset as current when:
a. The asset is cash or cash equivalent
unless the asset is unrestricted to settle a liability for
more than twelve months after the reporting period.
b. The entity holds the asset primarily
for the purpose of trading.
c. The entity expects to realize the
asset within twelve months after the reporting period.
d. The entity expects to realize the
asset or intends to sell or consume it within the entity's
normal operating cycle.
8. Define current assets.
ANSWER:
any asset which can reasonably be expected
to be sold, consumed, or exhausted through the
normal operations of a business within the current
fiscal year or operating cycle or financial year.
9. What are the line items for current assets?
ANSWER:
Current assets are usually listed in the order of
liquidity PAS 1, paragraph 54, provides that as a
minimum, the line items under current assets are:
a Cash and cash equivalents
b. Financial assets at fair value such as trading
securities and other investments in quoted equity
instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
10. Define noncurrent assets.
ANSWER:
The caption "noncurrent assets" is a residual
definition. PAS 1, paragraph 66, simply states that "an
entity shall classify all other assets not classified as
current as
noncurrent". In other words, what is not included in
the definition of current assets is deemed excluded.
All others are classified as noncurrent assets.
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11. Identify the non-current assets.
ANSWER:
Accordingly, noncurrent assets include the
following:
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets
12. What are the essential characteristics of a liability?
ANSWER:
A liability has three essential characteristics:
(a) it embodies a present duty or responsibility to one
or more other entities that entails settlement by
probable future transfer or use of assets at a specified
or determinable date, on occurrence of a specified
event, or on demand,
(b) the duty or responsibility obligates a particular
entity, leaving it little or no discretion to avoid the
future sacrifice, and
(c) the transaction or other event obligating the
entity has already happened
13. What are the classification of liabilities?
ANSWER:
PAS 1, paragraph 69, provides that an entity
shall classify a liability as current when:
a. The entity expects to settle the
liability within the entity's normal operating cycle.
b. The entity holds the liability primarily
for the purpose of trading.
c. The liability is due to be settled
within twelve months after the reporting period.
d. The entity does not have an
unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.
14. Define current liabilities.
ANSWER:
current liabilities are often understood as all
liabilities of the business that are to be settled in cash
within the fiscal year or the operating cycle of a
given firm, whichever period is longer.
15. What are the line items for current liabilities?
ANSWER:
PAS 1, paragraph 54, provides that as a
minimum, the face of the statement of financial
position shall include the following line items for
current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
16. Explain the treatment of currently maturing longterm debt.
ANSWER:
A liability which is due to be settled within
twelve months after the reporting period is classified
as current, even if:
a. The original term was for a period
longer than twelve months.
b. An agreement to refinance or to
reschedule payment on a long-term basis is
completed after the reporting period and before the
financial statements are authorized for issue.
However, if the refinancing on a long-term basis is
completed on or before the end of the reporting
period, the refinancing is an adjusting event and
therefore the obligation is classified as noncurrent.
17. Explain the effect of breach of covenants on the
classification of liability.
ANSWER:
PAS 1, paragraph 74, provides that the liability
is classified as current even if the lender has agreed,
after the reporting period and before the statements
are authorized for issue, not to demand payment as
a consequence of the breach.
This liability is classified as current because at
reporting date the borrower does not have an
unconditional right to defer payment for at least
twelve months after the reporting period.
However, Paragraph 75 provides that the liability is
classified as noncurrent if the lender has agreed on or
before the end of reporting period to provide a
grace period ending at least twelve months after the
end of reporting period.
18. What are the elements comprising the equity of a
corporation?
ANSWER:
1. Paid in capital or contributed capital
2. retained earnings
3. treasury stock
19. What is the meaning of “notes to financial
statements”?
ANSWER:
Notes to financial statements provide
narrative description or disaggregation of items
presented in the financial statements and information
about items that do not qualify for recognition.
Notes contain information in addition to that
presented in the statement of financial position,
income statement; statement of comprehensive
income, statement of changes in equity and
statement of cash flows.
In other words, notes to financial statements are used
to report information that does not fit into the body of
the financial statements in order to enhance the
understandability of the financial statements.
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22
20. Explain the two forms of statement of financial?
ANSWER:
In practice, there are two customary forms in
presenting the statement of financial position,
namely:
a. Report form
This form sets forth the three major sections in a
downward sequence of assets, liabilities and equity.
b. Account form
As the title suggests, the presentation follows that of
an account, meaning, the assets are shown on the
left side and the liabilities and equity on the right side
of the statement of financial position.
Page 161
PROBLEM 8-5 MULTIPLE CHOICE (PAS 1)
1. B
2. D
3. A
4. A
5. D
6. D
7. D
8. C
9. D
10. C
Page 174
PROBLEM 8-9 MULTIPLE CHOICE (AICPA Adapted)
1. A
2. D
3. D
4. D
5. D
Page 175
PROBLEM 8-10 MULTIPLE CHOICE (IAA)
Page 166
23
23
1. C
2. D
3. A
4. D
5. B
Page 176
PROBLEM 8-6 MULTIPLE CHOICE (PAS 1)
1. C
2. A
3. A
4. D
PROBLEM 8-11 MULTIPLE CHOICE (IAA)
Page 167
5. A
6. A
7. A
8. A
1. C
2. C
3. D
4. D
5. D
Page 177
Page 168
9. C
10. C
6. C
7. D
8. B
9. C
10. B
Page 178
Page 169
PROBLEM 8-12 MULTIPLE CHOICE (IAA)
PROBLEM 8-7 MULTIPLE CHOICE (IFRS)
1. B
2. D
3. D
4. D
5. B
1. D
2. C
3. C
4. A
Page 170
Page 179
5. C
6. A
7. C
8. D
Page 171
9. A
10. A
Page 172
PROBLEM 8-8 MULTIPLE CHOICE (AICPA Adapted)
1. A
2. D
3. D
4. A
5. A
Page 173
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER IX
QUESTIONS:
1. Define an income statement.
ANSWER:
An income statement is à formal statement
showing the financial performance of an entity for a
given period of time.
The financial performance of an entity is primarily
measured in terms of the level of income earned by
the entity through the effective and sufficient
utilization of its resources.
The financial performance is also known as the results
of operations of the entity.
The transaction approach is the traditional
preparation of the income statement in conformity
with accounting standards.
2. Explain the usefulness of an income statement.
ANSWER:
The income statement for a period presents
the income, expenses, gains, losses and net income
or loss recognized during the period,
Information about financial performance is useful in
predicting future performance and ability to
generate future cash flows.
3. Define comprehensive income.
ANSWER:
Comprehensive income is the change in
equity during a period resulting from transactions and
other events, other than changes resulting from
transactions with owners in their capacity as owners.
Accordingly, comprehensive income includes:
a. Components of profit or loss
b.
Components
of
other
comprehensive income
4. Distinguish components of profit or loss and
components of other comprehensive income.
ANSWER:
The term profit or loss is the total of income less
expenses, excluding the components of other
comprehensive income. In other words, this is the
"bottom line" in the traditional income statement. An
entity may use "net income" or "net loss" to describe
profit or loss.
5. Identify components of other comprehensive
income.
ANSWER:
Oher comprehensive income comprises items
of income and expenses including reclassification
adjustments that are not recognized in profit or loss as
required or permitted by Philippine Financial
Reporting Standards.
The components of "other comprehensive income"
include the following:
1. Unrealized gain or loss on equity investment
measured at fair value through other comprehensive
income
2. Unrealized gain or loss on debt investment
measured at fair value through other comprehensive
income.
3. Gain or loss from translation of the financial
statements of a foreign operation
4. Revaluation surplus during the year.
5. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
6. "Re measurements" of defined benefit plan,
including actuarial gain or loss
7. Change in fair value attributable to credit
risk of a financial liability designated at fair value
through profit
or loss.
6. Explain the presentation of other comprehensive
income.
ANSWER:
PAS 1, paragraph 82A, provides that the
statement of comprehensive income shall present
line items for amounts of other comprehensive
income during the period classified by nature.
The line items for amounts of OCI shall be grouped as
follows:
a. OCI that will be reclassified
subsequently to profit or loss when specific conditions
are met.
b. OCI that will not be reclassified
subsequently to profit or loss but to retained earnings.
7. What are the components of other comprehensive
income that are subsequently reclassified to profit or
loss?
ANSWER:
OCI that will be reclassified to profit or loss
a. Unrealized gain or loss on debt
investment measured at fair value through other
comprehensive
income.
b. Gain or loss from translating
financial statements of a foreign operation.
c. Unrealized gain or loss on derivative
contracts designated as cash flow hedge.
8. What are the components of other comprehensive
income that are not subsequently reclassified to profit
or loss?
ANSWER:
OCI that will be reclassified to retained
earnings
a. Unrealized gain or loss on equity investment
measured at fair value through other comprehensive
income.
b. Revaluation surplus during the year, the
realization of the revaluation surplus is through
retained earnings.
c. Re measurements of defined benefit plan,
including actuarial gain or loss.
d. Change in fair value attributable to credit
risk of a financial liability designated at fair value
through profit or loss.
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9. Explain the reclassification of the components of
other comprehensive income that are not reclassified
to profit or loss.
ANSWER:
10. Explain the two
comprehensive income.
options
of
presenting
14. What is the formula of computing the cost of
goods sold of a manufacturing entity?
ANSWER:
Cost of goods sold of manufacturing concern
Beginning raw materials
xx
Net purchases
xx
ANSWER:
An entity has two options of presenting
comprehensive income, namely:
1. Two statements:
a. An income statement showing the
components of profit or loss.
b. A statement of comprehensive
income beginning with profit or loss as shown in the
income statement plus or minus the components of
other comprehensive income.
2. Single statement of comprehensive income
This is the combined statement
showing the components of profit or loss and
components of other comprehensive income in a
single statement.
Raw materials available for use
Ending raw materials
xx
(xx)
Raw materials used
Direct labor
Factory overhead
xx
xx
xx
11. Identify the common sources of income.
Goods available for sale
Ending finished goods
ANSWER:
a. Sales of merchandise to customers
b. Rendering of services
c. Use of entity resources
d. Disposal of resources other than products
12. Identify the components of expenses.
ANSWER:
Components of expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expenses
13. What are the formula in computing cost of goods
sold of a merchandising concern?
ANSWER:
Cost of goods sold of merchandising concern
Beginning inventory
xx
Net purchases
xx
Goods available for sale
Ending inventory
Cost of goods sold
xx
(xx)
xx
Gross purchases
Freight in
xx
xx
Total
Purchase returns,
allowances and discounts
xx
Net purchases
(xx)
xx
Total manufacturing cost
Beginning goods in process
xx
xx
Total cost of goods in process
Ending goods in process
xx
(xx)
Cost of goods manufactured
Beginning finished goods
xx
xx
Cost of goods sold
xx
(xx)
xx
15. Define distribution cost.
ANSWER:
Distribution costs constitute costs which are
directly related to selling, advertising and delivery of
goods to customers.
Page 198
16. Define administrative expense.
ANSWER:
Administrative expenses constitute cost of
administering the business.
Administrative expenses ordinarily include all
operating expenses not related to selling and cost of
goods sold.
17. Define other expenses.
ANSWER:
Other expenses are those expenses which are
not directly related to the selling and administrative
function.
18. As a minimum, what are the line items that are
reported on the face of the income statement and
statement of
comprehensive income?
ANSWER:
PAS 1, paragraph 82, provides that as a
minimum, the income statement and statement of
comprehensive income shall include the following
line items:
a. Revenue
b. Gain and loss from the de recognition of financial
asset measured at amortized cost as required by FRS
9.
25
25
c. Finance cost
d. Share in income or loss of associate and joint
venture accounted for using the equity method
e. Gain or loss on the reclassification of financial asset
from amortized cost to fair value profit or loss
f. Gain or loss on the reclassification of financial asset
from fair value other comprehensive income to fair
value profit or loss.
g. Income tax expense
h. A single amount comprising discontinued
operations
i. Profit or loss for the period
j. Total other comprehensive income
k. Comprehensive income for the period being the
total of profit or loss and other comprehensive
income.
19. Explain the two forms of income statements.
ANSWER:
Functional presentation
This form classifies expenses according
to their function as part of cost of goods sold,
distribution costs, administrative expenses and other
expenses.
Natural presentation
The natural presentation is referred to
as the nature of expense method. Under this form,
expenses are aggregated according to their nature
and not allocated among the various functions within
the entity.
20. Which form of income statement is required?
ANSWER:
PAS 1 does not prescribe any format.
Paragraph 105 simply states that because each
method of presentation has merit for different types
of entities, management is required to select the
presentation that is reliable and more relevant.
23. What are the common items that directly affect
retained earnings?
ANSWER:
The important data affecting the retained
earnings that should be clearly disclosed in the
statement of retained earnings are:
a. Profit or loss for the period
b. Prior period errors
c. Dividends declared and paid to
shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings
24. Define a statement of changes in equity.
ANSWER:
The statement of changes in equity is a basic
statement that shows the movements in the elements
or components of the shareholders' equity.
The statement of retained earnings is no longer a
required basic statement but it is a part of the
statement of changes in equity.
25. Define a statement of cash flow.
ANSWER:
A statement of cash flows is a component of
financial statements summarizing the operating,
investing and financing activities of an entity.
In simple language, the statement of cash flows
provides information about the cash receipts and
cash payments of an entity during a period.
An entity shall prepare a statement of cash flows and
present it as an integral part of the financial
statements for each period for which financial
statements are presented.
The primary purpose of a statement of cash flows is to
provide relevant information about cash receipts and
cash payments of an entity during a period.
21. What is a single statement of comprehensive
income?
ANSWER:
Another option in presenting the components
of profit or loss and components of other
comprehensive income 1s to prepare a single
statement of comprehensive income,
Again, this single statement is the combined income
statement and statement of comprehensive income,
Using the preceding data, the single statement of
comprehensive income following the "functional
presentation" may appear as follows:
22. Define a statement of retained earnings.
Page 199
Problem 9-15 MULTIPLE CHOICE (PAS 1)
1. B
2. C
3. B
4. B
5. D
Page 211
6. A
7. D
8. A
9. D
10. D
Page 212
ANSWER:
The statement of retained earnings shows the
changes affecting directly the retained earnings of
an entity and relates the income statement to the
statement of financial position.
Problem 9-16 MULTIPLE CHOICE (IFRS)
1. C
2. C
3. D
4. B
5. A
Page 213
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26
Problem 9-17 MULTIPLE CHOICE (IAA)
1. D
2. C
3. D
4. C
5. B
2. Explain the primary purpose of a statement of cash
flows.
Page 214
6. C
7. A
8. A
9. D
10. B
ANSWER:
The primary purpose of a statement of cash flows is
to provide relevant information about cash receipts
and cash payments of an entity during a period.
3. Define cash.
Page 215
ANSWER:
Cash includes more than just the physical traditional
bills and coins. Cash can include any other
currencies, as well as undeposited cheques and
amounts in a current account.
Problem 9-18 MULTIPLE CHOICE (IAA)
4. Define cash equivalents.
1. C
2. B
3. A
4. D
5. A
Page 216
ANSWER:
Cash equivalents are short-term highly liquid
investments that are readily convertible to known
amount of cash and which are subject to an
insignificant risk of change in value.
Problem 9-19 MULTIPLE CHOICE (AICPA Adapted)
5. What are the three classifications of cash flows?
1. B
2. B
3. A
4. D
5. D
ANSWER:
The statement of cash flows shall report cash
flows during the period classified as operating,
investing and financing activities.
Page 217
6. Explain operating activities, investing activities and
financing activities.
Problem 9-20 MULTIPLE CHOICE (IAA)
ANSWER:
Operating activities are the cash flows derived
primarily from the principal revenue producing
activities of the entity.
1. D
2. D
3. C
4. A
5. C
Page 218
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER X
QUESTIONS:
1. Define a statement of cash flows.
ANSWER:
A statement of cash flows is a component of
financial statements summarizing the operating,
investing and financing activities of an entity.
In simple language, the statement of cash flows
provides information about the cash receipts and
cash payments of an entity during a period.
An entity shall prepare a statement of cash flows and
present it as an integral part of the financial
statements for each period for which financial
statements are presented.
Investing activities are the cash flows derived from
the acquisition and disposal of long-term assets and
other investments not included in cash equivalent.
Financing activities are the cash flows derived from
the equity capital and borrowings of the entity.
7. Explain the treatment of noncash investing and
financing transactions.
ANSWER:
PAS 7, paragraph 43, provides that investing
and financing transactions that do not require use of
Cash or cash equivalent shall be excluded from the
statement of cash flows.
Noncash investing and financing transactions shall)
be disclosed also where in the financial statements
either in the notes to financial statement or in a
separate schedules or in a way that provide all
relevant information about these transactions.
8. Explain the treatment of interest paid and interest
received in a statement of cash flows.
ANSWER:
PAS 7, paragraph 33, provides that interest
paid and interest received shall be classified as
operating cash flows because such items enter into
the determination of net income or loss
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27
Alternatively, interest paid may be classified as
financing cash flow because it is a cost of obtaining
financial resources.
Alternatively, interest received may be classified as
investing cash flow because it is a return on
investment.
For a financial institution, interest paid and interest
received are usually classified as operating cash
flows.
9. Explain the treatment of dividend received and
dividend paid in a statement of cash flows.
ANSWER:
PAS 7, paragraph 33, provides that dividend
received shall be classified as operating cash flow
because it enters into the determination of net
income.
Alternatively, dividend received may be classified as
investing cash flow because it is a return on
investment.
PAS 7, paragraph 34, provides that dividend paid
shall be classified as financing cash flow because it is
a cost of obtaining financial resources.
Alternatively, dividend paid may be classified as
operating cash flow in order to assist users to
determine the ability of the entity to pay dividends
out of operating cash flows.
10. Explain the treatment of income taxes in a
statement of cash flows.
ANSWER:
PAS 7, paragraph 35, provides that cash flows
arising from income taxes shall be separately
disclosed as cash flows from operating activities
unless they can be specifically identified with
investing and financing activities.
Tax cash flows are often difficult to match to the
originating underlying transaction, so most of the time
all tar cash flows are classified as arising from
operating activities.
Page 227
Problem 10-12 MULTIPLE CHOICE (IFRS)
1. D
2. C
3. A
4. B
5. C
Page 237
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XI
QUESTIONS:
1. Define accounting policies.
ANSWER:
Accounting policies are the specific principles,
bases, conventions, rules and practices
applied by an entity in preparing and
presenting financial statements. These policies
are essential for a proper understanding of the
information contained in the financial
statements.
2. Define a change in accounting policy.
ANSWER:
Accounting policies must be applied
consistently for similar transactions and events.
And a change in this policy shall be made
only when: a. Required by an accounting
standard.
The change will result to more relevant
and faithfully represented information
about the financial position, financial
performance and cash flows of the
entity.
3. Give examples of change in accounting policy.
Problem 10-10 MULTIPLE CHOICE (PAS 7)
ANSWER:
1. C
2. B
3. A
4. C
5. C
Page 234
6. D
7. D
8. B
9. D
10. B
Page 235
Problem 10-11 MULTIPLE CHOICE (IFRS)
1. A
2. C
3. A
4. A
5. D
Page 236
Change in the method of inventory pricing
from the FIFO to weighted average method.
Change in the method of accounting for long
term construction contract from cost recovery
method to percentage of completion
method.
The initial adoption of policy to carry assets at
revalued amount is a change in accounting
policy to be dealt with as revaluation.
Change from cost model to fair value model
in measuring investment property.
Change to a new policy resulting from the
requirement of a new PFRS
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4. When is a change in accounting policy allowed?
9. Define prior period errors.
ANSWER: A change in accounting policy shall be
made only when:
ANSWER:
Prior period errors are omissions and
misstatements in the financial statements for
one or more periods arising from a failure to
use or misuse of reliable information. Errors
may occur as a result of mathematical
mistakes, mistakes in applying accounting
policies, misinterpretation of facts, fraud or
oversight.
Required by an accounting standard.
The change will result in more relevant
and faithfully represented information
about the financial position, financial
performance and cash flows of the
entity.
5. How is a change in accounting policy reported?
10. Explain the treatment of prior period errors.
ANSWER:
ANSWER:
A change in accounting policy required by a
standard or an interpretation shall be applied
in accordance with the transitional provisions
therein. If the standard or interpretation
contains no transitional provisions or if an
accounting policy is changed voluntarily, the
change shall be applied retrospectively or
retroactively.
6. Explain the adoption of an accounting policy in
the absence of an accounting standard.
ANSWER:
In the absence of accounting standard that
specifically applies to a transaction or event,
management shall use judgment in selecting
an applying an accounting policy that results
in information that is relevant to the economic
decision making needs of users and faithfully
represented.
7. Define a change in accounting estimate.
ANSWER:
A change in accounting estimate is a normal
or recurring correction or adjustment of an
asset or liability which is the result of the use of
an estimate. An estimate may need revision if
changes occur regarding the circumstances
on which the estimate was based or as a
result of new information, more experience or
subsequent development.
8. How is a
reported?
change
in
accounting
Prior period errors shall be corrected
retrospectively by adjusting the opening
balances of retained earnings and affected
assets and liabilities. An estimate may need
revision if changes occur regarding the
circumstances on which the estimate was
based or as a result of new information, more
experience or subsequent development.
Page 245
PROBLEM 11-11 MULTIPLE CHOICE (IFRS)
1.B
2.A
3.D
Page 251
4.B
5.C
6.A
7.D
Page 252
8.D
9.D
10.C
Page 253
PROBLEM 11-12 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. C
3. C
4. C
5. D
Page 254
estimate
ANSWER:
The effect of a change in accounting
estimate shall be recognized currently
and prospectively by including it in
income or loss of:
(a) the period of change if the change
affects that period only, and
(b) the period changes and future periods if
the change affects both. A change in accounting
estimate shall not be accounted for by restating
amounts reported in financial statements prior
periods.
PROBLEM 11-13 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. A
3. D
4. C
5. A
Page 255
1. A
2. B
3. D
Page 256
4. D
5. A
Page 257
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CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XII
QUESTIONS:
Problem 12-1 (IFRS)
The audit of Anne Company for the year ended
December 31, 2020 was completed on March 1, 2021.
The financial statements were signed by the
managing director on March 15, 2021 and approved
by the shareholders on March 31, 2021.
1. Define events after the reporting period.
ANSWER:
The following events have occurred:
PAS 10, paragraph 3, defines events
after reporting period as those events, whether
favorable and unfavorable, that occur between the
end of reporting period and the date on which the
financial statements are authorized for issue. These
events are also known as subsequent events.
2. What are the type of events after reporting period?
ANSWER:
1. On the January 15, 2021, a customer owing
P900,000 to Anne filed for bankruptcy.
The financial statements include an allowance for
doubtful accounts pertaining to the customer only of
P100,000.
2. The entity’s issued share capital comprised 100,000
ordinary shares with P100 par value.
The entity issued additional 25,000 shares on March 1,
2021 at par value.
a. Adjusting events
b. Nonadjusting events
3. Explain adjusting events after reporting period.
ANSWER:
Adjusting events after the reporting
period are those that provide evidence of conditions
that exist at the end of reporting period.
4. Explain nonadjusting events after reporting period.
ANSWER:
3. Equipment with carrying amount of P525,000 was
destroyed by fire on December 15, 2020.
The entity has booked a receivable of P400,000 from
the insurance entity.
After the insurance entity completed the investigation
on February 1, 2021, it was discovered that the fire
took place due to negligence of the machine
operator.
As a result, the insurer’s liability was zero on the claim.
Nonadjusting events after reporting
period are those that are indicative of conditions that
arise after the end of reporting period.
5. When are financial
authorized for issue?
PROBLEMS
statements
considered
ANSWER:
Financial statements are authorized for issue
when the board of directors reviews the financial
statements and authorizes them issue. In some cases,
an entity is required to submit the financial statements
to the shareholders for approval after the financial
statements have been issued. In such cases, the
financial statements are authorized for issue on the
date of issue by the board of directors and not on the
date when shareholders approve the financial
statements.
Page 262
REQUIRED:
PREPARE ADJUSTING ENTRIES ON DECEMBER 31, 2020
FOR THE EVENTS AFTER REPORTING PERIOD.
PROBLEM 12-1
ANNE COMPANY
1. Doubtful accounts
800,000
Allowance for doubtful accounts
800,000
2. The issuance of additional shares on march 1, 2021
is a nonadjusting event
3. Loss on claim
400,000
Claim receivable
400,000
Page 263
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Problem 12-2 (IFRS)
PROBLEM 12-5 MULTIPLE CHOICE (IAS 10)
Norway Company reported that the year-end is
December 31, 2020 and the financial statements are
authorized for issue on March 15, 2021.
1. C
2. A
3. A
4. A
1. On December 31, 2020, Norway Company had a
receivable of P400,000 from a customer that is due 60
days after the end of reporting period. On January 15,
2021, a receiver was appointed for the said customer.
The receiver informed Norway that the P400,000
would be paid in full by June 30, 2021.
2. Norway Company measured share investments
held for trading at fair value through profit or loss. On
December 31, 2020, these investments were recorded
at the market value of P5,000,000. During the period
up to February 15, 2021, there was a steady decline in
the market value of all the shares in the portfolio, and
on February 15, 2021, the market value had fallen to
P2,000,000.
3. Norway Company had reported a contingent
liability on December 31, 2020 related to a court case
in which Norway Company was the defendant. The
case was not heard until the first week of February,
2021. On March 1, 2021, the judge handed down a
decision against Norway Company. The judge
determined that Norway Company was liable to pay
damages and costs totaling P3,000,000.
4. On December 31, 2020, Norway Company had an
account receivable from a large customer in the
amount of P3,500,000. On January 31, 2021, Norway
Company was advised by the liquidator of the said
customer that the customer was insolvent and would
be unable to repay the full amount owed to Norway
Company. The liquidator advised Norway Company
in writing that only 10% of the account receivable will
be paid on April 30, 2021.
Page 266
PROBLEM 12-6 MULTIPLE CHOICE (IAA)
1. D
2. D
3. C
4. D
5. D
Page 267
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31
PROBLEM 12-7 MULTIPLE CHOICE (IFRS)
1. B
2. A
3. D
Page 268
4. C
5. A
Page 269
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XIII
QUESTIONS:
1. Define related party.
ANSWER:
REQUIRED:
PREPARE ADJUSTING ENTRIES ON DECEMBER 31, 2020
TO REFLECT THE EVENTS AFTER REPORTING PERIOD.
PROBLEM 12-2
Related party - Parties are considered
to be related if one party has:
a. the ability to control the other party
NORWAY COMPANY
1. The receivable of P400,000 is a nonadjusting event
because the amount is still fully collectible
b. the ability to exercise significant influence
over the other party, and
c. joint control over the reporting entity.
2. Give examples of related parties.
2. The change in fair value of the investments on
February 15, 2021 is a nonadjusting event because
trading investments are measured at fair value at
every year-end.
ANSWER:
3. Loss on litigation
2. Associates -meaning the entities over
which one party exercises significant influence.
3,000,000
Estimated liability
3,000,000
4. Doubtful accounts
90%)
3,150,000
Allowance for doubtful accounts (3,500,000 x
3,150,000
Page 264
1. Affiliates - meaning
subsidiary and fellow subsidiaries.
the
parent, the
3. Venturer in a joint venture. It includes the
subsidiary or subsidiaries of the joint venture.
4. Key management personnel - those
persons having authority and responsibility for
planning, directing, and controlling the activities of
the entity, directly or indirectly, including any
executive director or nonexecutive director.
3. Explain related party disclosure.
ANSWER:
PAS 24, paragraph 12, requires disclosure of
related party relationships where control exists
irrespective of whether there have been transactions
between related parties. In other words, relationships
between parents and subsidiaries shall be disclosed
regardless of whether there have been transactions
between the related parties.
4. What are the minimum disclosure for related party
transactions?
ANSWER:
a. The amount of the transaction.
b. The amount of outstanding balance, terms
and conditions, whether secured or
unsecured, and nature of consideration to
be provided in settlement.
c. The allowance for doubtful accounts
related to the outstanding balance.
d. The doubtful accounts expense recognized
during the period in respect of amount due
from related parties.
Loans to officers:
Dean
Morey
1,250,000
500,000
Key officers' salaries:
Dean
Morey
Total
750,000
500,000
3,000,000
page 277
PROBLEM 13-3 MULTIPLE CHOICE (PAS 24)
1. D
2. B
3. C
4. D
5. D
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Page 278
PROBLEM 13-4 MULTIPLE CHOICE (IFRS)
1. D
2. D
3. B
4. D
5. A
Page 279
5. Give examples of unrelated parties.
ANSWER:
1. Two entities simply because they have a
director or key management personnel in
common.
2. Providers of finance, trade unions, public
utilities and government agencies in the
course of their normal dealings with an
entity by virtue only of those dealings.
3. A single customer, supplier, franchisor or
general agent with whom an entity transacts a
significant volume of business merely by virtue of the
resulting economic dependence.
4. Two venturers simply because they share
joint control over a joint venture.
Page 276
Dean Company acquired 100% of Morey Company in
the prior year. During the current year, the individual
entities included in their financial statements the
following:
Key officers’ salaries
Officers’ expenses
Loans to Officers
Intercompany sales
Morey
500,000
100,000
500,000
1,500,000
What total amount should be reported as related
party disclosures in the notes to Dean Company’s
consolidated financial statements for the current
year?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000
Page 280
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XIV
QUESTIONS:
1. Define inventories.
ANSWER:
PROBLEM 13-1 (AICPA Adapted)
Dean
750,000
200,000
1,250,000
6. C
7. C
8. B
9. B
10. D
Inventories are assets held for sale in the
ordinary course of business, in the process of
production for such sale or in the form of materials or
supplies to be consumed in the production process or
in the rendering of services.
2. What are the components of cost of inventories?
ANSWER:
The cost of inventories shall comprise; (a) cost
of purchase, (b) cost of conversion, and (c) other
cost incurred in bringing the inventories to their
present location and condition.
3. Explain cost of purchase, cost of conversion and
other cost included in cost of inventories.
ANSWER:
The cost of purchase of inventories comprises
the purchase price, import duties and irrecoverable
taxes, freight, handling and other costs directly
attributable to the acquisition of finished goods,
materials, and services. Trade discounts, rebates and
other similar items are deducted in determining the
cost of purchase. Cost of conversion of inventories
includes cost directly related to the units of
production such as direct labor. It also includes
systematic allocation of fixed and variable
production overhead that is incurred in converting
materials into finished goods.
Other cost included in the cost of inventories
only to the extent that it is incurred bringing the
inventories to their present location and condition.
4. Identify certain costs that are excluded from the
cost of inventories.
ANSWER:
The following costs are excluded from the cost of
inventories and recognized as expenses in the period
when incurred:
Abnormal amounts of wasted
materials,
labor
and
other
productions costs.
Storage costs, unless necessary in
the production process prior to a
further production stage.
Administrative overheads
Distribution or selling costs.
5. Explain the cost of inventories of a service provider.
ANSWER:
Cost of inventories of a service provider
consists primarily of the labor and other costs of
personnel directly engaged in providing the service,
including supervisory personnel and attributable
overhead.
6. Explain the cost formulas in determining cost of
inventories.
ANSWER:
PAS 2, paragraph 25, expressly provides that the cost
of inventories shall be determined by using either;
a
b
First in, first out (FIFO) method - assumes that
“the goods first purchased are first sold” and
consequently the goods remaining in the
inventory at the end of the period are those
most recently purchased or produced. In
other words, the FIFO is in accordance with
the ordinary merchandising procedure that
the goods are sold in the order they are
purchased. The rules are “first come, first sold.”
Weighted average - the cost of the beginning
inventory plus the total cost of purchases
during the period is divided by the total units
purchased plus those in the beginning
inventory to get a weighted average unit
cost. Such weighted average unit cost is then
multiplied by the units on hand to derive the
inventory value. In other words, the average
unit cost is computed by dividing the total
cost of goods available for sale by the total
number of units available for sale.
7. Explain the specific identification of determining
cost of inventories.
ANSWER:
Specific identification means that specific
costs are attributed to identified items of inventory.
The cost of inventory is determined by simply
multiplying the units on hand by the actual unit cost.
PAS 2, paragraph 23, provides that this method is
appropriate for inventories that are segregated for a
specific project and inventories that are not ordinarily
interchangeable.
8. What is the standard in measuring inventory in the
statement of financial position?
ANSWER:
PAS 2, paragraph 9, provides that inventories
shall be measured at the lower of cost and net
realizable value. The cost of inventory is determined
using either FIFO cost or average cost. The
measurement of inventory at the lower of cost and
net realizable value is known as LCNRV.
9. Explain net realizable value.
ANSWER:
Net realizable value or NRV is the estimated
selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost
of disposal.
10. Explain the accounting for inventory write-down.
ANSWER:
Accounting for inventory write-down
states that if the cost is lower than net realizable value,
there is no accounting problem because the inventory is
stated at cost and the increase in value is not recognized.
And if the net realizable value is lower than cost, the
inventory is measured at net realizable value. In this case,
the problem is the proper treatment of the write-down of
the inventory to the net realizable value. The write-down
of inventory to net realizable value is accounted for using
the allowance method
Page 29
PROBLEM 14-20 MULTIPLE CHOICE (PAS 2)
1. D
2. C
3. D
4. D
5. A
Page 302
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33
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
PROBLEM 14-21 MULTIPLE CHOICE (IFRS)
1. D
2. A
3. D
4. B
5. C
CHAPTER XV
Page 303
QUESTIONS:
Page 304
1. Define property, plant and equipment.
Answer:
Property, plant and equipment are tangible
assets that are held for use in production or supply of
goods or services, for rental to others, or for
administrative purposes, and are expected to be
used during more than one period.
6. C
7. A
8. B
9. A
10. A
PROBLEM 14-22 MULTIPLE CHOICE (IAA)
1.B
2.A
3.D
4.D
5.A
Page 305
PROBLEM 14-23 MULTIPLE CHOICE (IAA)
1. C
2. A
3. D
4. B
5. C
Page 306
PROBLEM 14-24 MULTIPLE CHOICE (IAA)
1. D
2. C
3. D
4. B
5. B
Page 307
PROBLEM 14-25 MULTIPLE CHOICE (PAS 2)
1.C
2.D
3.D
4.A
5.C
Page 308
PROBLEM 14-26 MULTIPLE CHOICE (IFRS)
1.D
2.D
3.B
4.A
5.A
Page 309
6.A
7.C
8.A
9.C
10.B
Page 310
2. What are the major characteristics in defining
property, plant and equipment?
Answer:
Accordingly, the major characteristics in the
definition of property, plant and equipment are: a.
The property, plant and equipment are tangible
assets, meaning with physical substance. The
property, plant and equipment are used in business,
meaning used in production or supply of goods or
services, for rental purposes and for administrative
purposes.
The property, plant and equipment are expected to
be used over a period of more than one year.
3. Give examples of property, plant and equipment.
Answer:
Land,
land
improvements,
building,
machinery, ship, aircraft, motor vehicle, furniture and
fixtures, office equipment and tools are examples of
property, plant and equipment.
4. Explain the recognition of property, plant and
equipment.
Answer:
An item of property, plant and equipment
shall be recognized as asset when;
it is probable that future economic benefits
associated with the asset will flow to the entity
the cost of the asset can be measured reliably.
5. Explain the measurement of property, plant and
equipment at recognition and after recognition.
Answer:
An item of property, plant and equipment
that qualifies for recognition as an asset shall be
measured at cost. Cost is the amount of cash or cash
equivalent paid and the fair value of the other
consideration given to acquire an asset at the time of
acquisition or construction.
6. What are the elements of cost of property, plant
and equipment?
Answer:
The cost of an item of property, plant and equipment
comprises:
Purchase price, including import duties and
nonrefundable
purchase
taxes,
after
deducting trade discounts and rebates.
Cost directly attributable to bringing the asset
to the location and condition necessary for it
to be capable of operating in the manner
intended by management.
Initial estimate of the cost of dismantling and
removing the item and restoring the site on
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34
which it is located for which an entity has a
present obligation.
7. Explain directly attributable costs.
Answer:
Cost of employee benefit arising directly from
the construction or acquisition of the item of property,
plant and equipment.
Cost of site preparation
Initial delivery and handling cost
Installation and assembly cost
Professional fee
Costs of testing whether the asset is
functioning properly.
8. Give examples of costs which are expensed rather
than capitalized as property, plant and equipment.
Answer:
Examples of cost that are expensed rather
than recognized as element of cost of property, plant
and equipment are:
Cost of opening a new facility
Cost of introducing a new product or service,
including cost of advertising and promotion
Cost of conducting business in a new location
or with a new class of customer, including cost
of staff training
Administration and other general overhead
cost
Initial operating loss
9. What is the cost of the asset acquired on a cash
basis?
Answer:
The cost of an item of property, plant and
equipment is the cash price equivalent at the
recognition date. The cost of asset acquired on a
cash basis simply includes the cash paid plus directly
attributable costs such as freight, installation cost and
other cost necessary in bringing the asset to the
location and condition for the intended use.
10. What is the cost of an asset acquired on account
subject to a cash discount?
Answer:
When an asset is acquired on account
subject to a cash discount, the cost of the asset is
equal to the invoice price minus the discount,
regardless of whether the discount is taken or not.
Cash discounts are generally considered as reduction
of cost and not as income.
11. If an asset is acquired on the installment basis, the
asset is recorded at what amount?
Answer:
When payment for item of property, plant and
equipment is deferred beyond normal credit terms,
the cost is the cash price equivalent. In other words, if
an asset is offered at a cash price and at an
installment price, the asset shall be recorded at the
cash price. The excess of the installment price over
the cash price is treated as an interest to be
amortized over the credit period.
12. Discuss the accounting procedure when an asset
is acquired through the issuance of share capital.
Answer:
Philippine GAAP provides that if shares are
issued for consideration other than actual cash, the
proceeds shall be measured by the fair value of the
consideration is received. Accordingly, where a
property is acquired through the issuance of share
capital, the property shall be measured at an
amount equal to the following in the order of priority:
Fair value of the property received
Fair value of the share capital
Fair value or stated value of the share capital
13. Discuss the accounting procedure when an asset
is acquired by issuing bonds payable.
Answer:
PFRS 9, paragraph 5.1.1, provides the asset
acquired by issuing bonds payables measured in the
following order:
Fair value of bonds payable
Fair value of asset received
Face amount of bonds payable
14. Discuss the accounting procedure for recording
an exchange.
Answer:
PAS 16, paragraph 24, provides that the cost
of an item of property, plant and equipment
acquired in exchange for a non-monetary asset or a
combination of monetary and non-monetary asset is
measured at fair value plus any cash payment.
However, the exchange is recognized at carrying
amount if the exchange transaction lacks
commercial substance.
15. What would the cost of self-constructed property,
plant and equipment include?
Answer:
The cost of self-constructed property, plant
and equipment includes:
direct cost of materials
direct cost of labor
indirect cost and incremental overhead
specifically identifiable or traceable to the
construction.
Page 322
16. Explain derecognition of property, plant and
equipment.
Answer:
Derecognition means that the cost of
property, plant and equipment together with the
related accumulated depreciation shall be removed
from the statement of financial position.
PAS 16, paragraph 67, provides that the carrying
amount of an item of property, plant, and equipment
shall be derecognized on disposal or when no future
economic benefits are expected from the use or
disposal.
17. Explain the treatment of fully depreciated
property.
Answer:
A property is said to be fully depreciated
when the carrying amount is equal to the residual
value. In such a case, the asset account and the
related accumulated depreciation account are
closed and the residual value is set up in a separate
account. However, it is not uncommon for an entity
to continue to use an asset after it has been fully
depreciated. The cost of fully depreciated asset
remaining in service and the related accumulated
depreciation ordinarily shall not be removed from the
accounts. Entities are encouraged but not required
to disclose fully depreciated property.
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35
18. Define depreciation.
Answer:
Depreciation is defined as the systematic
allocation of the depreciable amount of an asset
over the useful life. Depreciation is not so much a
matter of valuation. It is a matter of cost allocation in
recognition of the exhaustion of the useful life of an
item of property, plant and equipment. The objective
of depreciation is to have each period benefiting
from the use of the asset bear an equitable share of
the asset cost.
19. Explain the depreciation period.
Answer:
The depreciable amount of an asset shall be
allocated on a systematic basis over the useful life.
Depreciation of an asset begins when it is available
for use, meaning, when the asset is in the location
and condition necessary for the intended use by
management. Depreciation ceases when the asset is
derecognized.
20. What is the depreciable amount?
Answer:
Depreciable amount is the cost of an asset or
other amount substituted for cost, less the residual
value. Each part of an item of property, plant and
equipment with a cost that is significant in relation to
the total cost of the item shall be depreciated
separately.
21. What is residual value?
Answer:
Residual value is the estimated net amount
currently obtainable if the asset is at the end of useful
life. The residual value of an asset shall be reviewed
at least at each financial year-end and if
expectation differs from the previous estimate, the
change shall be accounted for as a change in an
accounting estimate.
22. What is the useful life of an asset?
Answer:
The useful life of an asset is either the period
over which an asset is expected to be available for
use by the entity, or the number of production or
similar units expected to be obtained from the asset
by the entity.
23. When is the straight line method adopted?
Answer:
Under the straight line method, the annual
depreciation charge is calculated by allocating the
depreciable amount equally over the number of
years of useful life. It is adopted when the principal
cause of depreciation is passage of time.
24. When is the production method adopted?
Answer:
The production or output method assumes
that depreciation is more a function of use rather that
passage of time. It is adopted if the principal cause of
depreciation is usage.
years of the useful life of the asset. Thus, these
methods result in decreasing depreciation charge
over the useful life. This method includes sum of years’
digits method and double declining balance.
Page 323
Problem 15-8 (IAA)
Siargao Company recently acquired two items of
equipment.
 Acquired a press at an invoice price of
P3,000,000 subject to a 5% cash discounts
which was taken.
Cost of freight and insurance during shipment
were P50,000 and installation cost amounted
to P200,000.

Acquired a welding machine at an invoice
price of P2,000,000 subject to a 10% cash
discount which was not taken. Additional
welding supplies were acquired at a cost of
P100,000.
What is the total increase in the equipment account
as a result of the transactions?
a
b
c
d
4,900,000
5,000,000
5,100,000
5,200,000
Page 328
Problem 15-10 multiple choice (PAS 16)
1. D
2. B
3. C
4. D
5. D
Page 329
Problem 15-11 multiple choice (IAA)
1. B
2. A
3. A
4. C
5. B
Page 330
Problem 15-12 multiple choice (AICPA Adapted)
1. D
2. C
3. A
4. B
Page 331
Problem 15-13 multiple choice (PAS 16)
1. A
2. C
3. D
Page 332
25. When
adopted?
Answer:
is
the
diminishing
balance
method
The
diminishing
balance
or
accelerated methods provide higher depreciation in
the earlier years and lower depreciation in the later
4. A
5. D
Page 333
36
36
Problem 15-14 multiple choice (IAA)
1. C
2. D
3. D
4. A
5. D
Page 334
Problem 15-15 multiple choice (PAS 16)
1. D
2. D
3. B
4. A
5. C
Page 335
6. A
7. B
8. B
9. D
10. D
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37
Page 336
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XVI
1. Define a government grant.
It is an assistance to government in the form of
transfer of resources to an entity in return for part or
future compliance with certain conditions relating to
operating activities of the entity.
2. Explain the recognition and measurement of
government grant.
Government grant shall be recognized when
there is reasonable assurance that:
a. the entity will comply with the
conditions attaching to the grant.
b. the grant will be received.
Government grant shall not be recognized on a cash
basis as this is not consistent with generally accepted
accounting practice.
3. Explain accounting for grant in recognition of
expenses.
Government grants are recognized in profit or
loss on a systematic basis over the periods in which
the entity recognizes expenses for the related costs
for which the grants are intended to compensate,
which in the case of grants related to assets requires
setting up the grant as deferred income or deducting
it from the carrying amount of the asset.
4. Explain accounting for grant related to depreciable
asset.
Grant related to depreciable asset shall be
recognized as income over the periods and in
proportion to the depreciation of the related asset.
5. Explain accounting for grant related to
nondepreciable asset requiring fulfillment of certain
conditions.
Grant related to nondepreciable asset
requiring fulfillment of certain conditions shall be
recognized as income over the periods which bear
the cost of meeting the conditions.
6. Explain accounting for grant received as
compensation for expenses or losses already
incurred.
A
government
grant
that
becomes
receivable as compensation for expenses or losses
already incurred or for the purpose of giving
immediate financial support to the entity with no
further related costs shall be recognized as income of
the period in which it becomes receivable.
7. Explain the presentation of government grant
related to asset.
It shall be presented in the statement of
financial position in either of two ways:
a. By setting the grant as deferred
income.
b. BY deducting the grant in arriving at
the carrying amount of the asset
8. Explain the presentation of government grant
related to income.
Shall be presented as follows:
a. the grant is presented in the income
statement, either separately or under the general
heading “other income”.
b. Alternatively, the grant is deducted
from the related expense.
9. Define government assistance.
It is the action by government designed to
provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria.
10. What are the necessary disclosures related to
government grant?
a. The accounting policy adopted for
government grant including the method of
presentation adopted in the financial statements.
b. The nature and extent of government grant
recognized in the financial statements and an
indication of other forms of government assistance
from which the entity has directly benefited.
c.
Unfulfilled
conditions
and
other
contingencies attaching to government assistance
that has been recognized.
Page 346
PROBLEM 16-1
PROBLEM NO. 1:
1st year
2nd year
3rd year
4th year
2,000,000
4,000,000
6,000,000
8,000,000
20,000,000
Journal Entries- first year
Cash
30,000,000
Deferred grant income
30,000,000
Deferred grant income
Grant income
Environmental expenses
2,000,000
Cash
First year (2/20 x 30,000,000)
Second year (4/20 x 30,000,000)
Third year (6/20 x 30,000,000)
Fourth year (8/20 x 30,000,000)
2,000,000
3,000,000
6,000,000
9,000,000
12,000,000
30,000,000
PROBLEM NO. 2:
Journal entries for first year
1. Cash
40,000,000
Deferred grant income
2. Building
Cash
40,000,000
50,000,000
50,000,000
3. Depreciation
2,500,000
Accumulated Depreciation
(50,000,000/20)
4. Deferred grant income
2,000,000
2,500,000
38
38
Grant income
(40,000,000/20)
2,000,000
Grant income
(1,000,000/5 years)
200,000
PROBLEM NO. 3:
DEDUCTION FROM ASSET APPROACH
Journal Entries in the First year:
Machine
Cash
7,000,000
7,000,000
50,000,000
Cash
1,000,000
1,000,000
80,000,000
Depreciation
Accumulated Depreciation
1. Land
50,000,000
Deferred grant income
2. Factory/Building
Cash
80,000,000
3. Depreciation
3,200,000
Accumulated Depreciation
(80,000,000/25 years)
3,200,000
4. Deferred Grant Income
2,000,000
Grant income
(50,000,000/25 years)
2,000,000
Machine
1,100,000
1,100,000
Acquisition cost
Government grant
Net cost
Residual Value
Depreciable amount
Annual Depreciation (5,500,000/5 years)
PROBLEM NO. 4:
7,000,000
(1,000,000)
6,000,000
(500,000)
5,500,000
1,100,000
PROBLEM 16-10 MULTIPLE CHOICE (PAS 20)
Cash
10,000,000
Grant income
10,000,000
PROBLEM 16-2
1. A
2. C
3.A
4.A
5.D
Page 352
1st
year
2nd year
3rd year
2,000,000
2,000,000
6,000,000
10,000,000
6.D
7.A
8.B
9.A
10.B
Page 353
Journal Entries for the first year:
1. Land
12,000,000
Deferred Grant Income
2. Operation
Cash
PROBLEM 16-11 MULTIPLE CHOICE (IFRS)
12,000,000
10,000,000
1st year (2/10 x 12 000 000)
2nd year (2/10 x 12 000 000)
3rd year (6/10 x 12 000 000)
10,000,000
2 400 000
2 400 000
7 200 000
12 000 000
1.C
2.B
3.C
4.C
5.A
Page 354
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XVII
PROBLEM 16-4
DEFERRED INCOME APPROACH
1. Machine
Cash
7,000,000
7,000,000
2. Cash
1,000,000
1,000,000
Deferred Grant income
3. Depreciation
Accumulated Depreciation
Cost of Machine
Residual value
Depreciable amount
7,000,000
(500,000)
6,500,000
Annual Depreciation (6,500,000/5 years)
Deferred grant income
1,300,000
200,000
1. Define borrowing costs.
It is defined as interest and other costs that an
entity incurs in connections with borrowing of funds.
2. What is a qualifying asset for purposes of
capitalization of borrowing cost?
An asset that necessarily takes a substantial
period of time to get ready for the intended use or
sale.
Examples includes the ff:
a. manufacturing plant
b. Power generation facility
c. intangible asset
d. Investment property.
39
39
3. Explain the accounting for borrowing cost.
It can be capitalized when the asset is a
qualifying asset and it is probable that the borrowing
cost will result to future economic benefit and the
cost can be measured reliably.
All the borrowing cost shall be expensed as
incurred.
4. Explain the capitalization of borrowing cost of asset
financed by specific borrowing.
If the funds are borrowed specifically for the
purpose of acquiring a qualifying asset, the amount
of capitalizable borrowing cost is actual borrowing
cost incurred during the period less any investment
income from the temporary investment of those
borrowings.
HAMLET COMPANY
Construction Cost
Interest (6,000,000 x 10% x 11/12)
Interest Income
6,000,000
550,000
(80,000)
6,470,000
CAGAYAN COMPANY
Interest Incurred (24,000,000 x 10% x 10/12)
Interest Income
MOSES COMPANY
Specific Borrowing (4,000,000 X 10%)
General Borrowing (750,000 X 12%)
2,000,000
(200,000)
1,800,000
400,000
90,000
490,000
(4,750,000-4,000,000 = 750,000- general borrowing)
5. Explain the capitalization of borrowing cost for
asset financed by general borrowing.
If the funds are borrowed generally and used
for acquiring a qualifying asset, the amount of
capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period
multiplied by a capitalization rate or average interest
rate.
6. Explain the capitalization of borrowing cost for
asset financed by both specific and general
borrowing.
7. Explain commencement of capitalization of
borrowing cost.
The capitalization starts
when
all
three
conditions
are
met:
expenditures
are
incurred, borrowing costs are incurred, and the
activities necessary to prepare the asset for its
intended use or sale are in progress. Expenditures on
the asset are incurred when the prepayments are
made (payments of the instalments).
8. Explain suspension of capitalization of borrowing
cost.
an entity may incur borrowing costs during
extended periods in which it suspends the activities
necessary to prepare the asset for its intended use or
sale, and that such costs are costs of holding partially
completed
assets
and
do
not
qualify
for capitalization.
9. Explain cessation of capitalization of borrowing
cost.
Capitalization of borrowing cost ceases when
all the activities necessary to prepare the qualifying
assets are complete. If an asset has been completed
in parts and a completed part is capable of being
used while the construction for the other part
continues then the capitalization for that completed
part will cease.
10. What are the necessary disclosures related to
borrowing cost?
The standard requires the entity to disclose the
following:
Borrowing
cost
capitalized
during
the accounting period; The weighted average
borrowing cost rate or percentage used to determine
the borrowing costs eligible for capitalization
Page 363
40
40
JOSHUA COMPANY
Average Expenditure
Specific Borrowing
General Borrowing
3,000,000
(2,200,000)
800,000
Specific Borrowing (2,200,000 x 10%)
Interest Income
General Borrowing (800,000 x 9%)
220,000
(45,000)
72,000
247,000
ELYSEE COMPANY
Average expenditures (30,000,000 / 2)
Applicable Specific Borrowing
General Borrowing
12% 20-year bonds issued
8% 5-year notes payable
Average Capitalization
40,000,000) 11%
15,000,000
(10,000,000)
5,000,000
30,000,000
10,000,000
40,000,000
(if
Interest on Specific Borrowing
(10,000,000x10%)
Interest Income
Interest on General Borrowing
(5,000,000 x 11%
asked)
3,600,000
800,000
4,400,000
(4,400,000
/
1,000,000
(100,000)
550,000
1,450,000
PROBLEM 17-8 MULTIPLE CHOICE (PAS 23)
1. D
2. C
3. D
Page 368
4. C
5. A
6. A
7. D
Page 369
8. D
9. A
10. C
Page 370
PROBLEM 17-9 MULTIPLE CHOICE (IFRS)
If the excess is attributable to undervaluation
of depreciable asset, it is amortized over the
remaining life of the depreciable asset.
1.C
2.B
3.C
4.A
5.B
Page 371
6.D
7.A
8.A
9.B
10.D
Page 372
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XVIII
1. Define associate.
Associate is simply defined as an entity over
which the investor has significant influence.
2. Define significant influence.
The power to participate in the financial and
operating policy decisions of the associate
but not control or joint control over those
policies.
3. What is the practical guidance in determining
significant influence?
When an investor exercises significant influence over
the investee, one or more of the following indicators is
usually present:
Representation on the board of directors or
equivalent governing body of the investee
Participation in policy-making processes,
including participation in decisions about
dividends or other distributions
Material transactions between the investor
and the investee
Interchange of managerial personnel
Provision of essential technical information
4. Explain the equity method of accounting for share
investment.
The equity method is applied when a
company's ownership interest in another
company is valued at 20–50% of the stock in
the investee.
The equity method requires the investing
company to record the investee's profits or
losses in proportion to the percentage of
ownership.
5. What is the meaning of “excess of cost over
carrying amount” with respect to acquisition of share
investment?
If the assets of the investee are fairly valued,
the excess of cost. over carrying amount of
the underlying net assets to goodwill.
6. Explain an impairment loss with respect to an
investment in associate.
If the carrying amount of an investment in an
associate or joint venture exceeds its
recoverable amount, an impairment loss is
recognized. The loss is allocated to the
investment as a whole and not to the
underlying assets of the investee that make up
the carrying amount of the investment.
7. Explain the accounting procedure if an associate
has cumulative and noncumulative preference
shares.
In case of cumulative preferred stock, any
unpaid dividends on preferred stock are
carried forward to the future years and must
be paid before any dividend is paid to
common stockholders.
Any unpaid dividend on preferred stock for a
year is known as ‘dividends in arrears’. The
disclosure of dividends in arrears is of great
importance for the investors and other users of
financial statements.
Unlike cumulative preferred stock, unpaid
dividends on noncumulative preferred stock
are not carried forward to the subsequent
years. If preferred stock is noncumulative and
directors do not declare a dividend because
of insufficient profit in a particular year, there is
no question of dividends in arrears.
8. Explain the discontinuance of the equity method.
An investor should discontinue the use of the equity
method from the date that:
it ceases to have significant influence but
retains either in part or in whole its investment
or
the use of the equity method is no longer
appropriate as the associate operates under
severe long-term restrictions.
The carrying value should be regarded as cost
thereafter.
9. Explain the measurement of the investment in
associate when significant influence is lost.
If an investor loses significant influence over
an associate, it derecognizes that associate
and recognizes in profit or loss the difference
between the sum of the proceeds received
and any retained interest, and the carrying
amount of the investment in the associate at
the date significant influence is lost.
10. What are the circumstances when the equity
method is not applicable?
Another group of shareholders has majority
ownership, and operate it without regard to
the investor's views. The investor is unable to
obtain sufficient information to apply the
equity method. The investor is unable to
obtain representation on the investee's board
of directors.
Page 382
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41
PROBLEM 18-9 MULTIPLE CHOICE (PAS 28)
1. A
2. C
3. D
4. B
Page 387
5. B
6. D
7. D
8. A
Page 388
9. B
10. C
Page 389
PROBLEM 18-10 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. D
3. C
4. A
Decline in asset value: more so than normal
wear and tear
Changes in the entity’s environment;
technological, market, economic or legal
conditions.
Increase in market interest rate, this will affect
the asset’s value in use.
Carrying amount of net assets: If this is greater
than the market capital of a company, there
may be impairment
4. What is the recoverable amount of an asset?
Recoverable amount is the greater of an
asset's fair value less costs to sell, or its value in
use.
Thus, the concept essentially focuses on the
greatest value that can be obtained from an
asset, either by selling or using it.
5. Explain fair value less cost of disposal.
Fair value less costs to sell (FVLCS) is the
amount obtainable from the sale of the asset
in an arm's length transaction between
knowledgeable and willing parties, less the
costs of disposal. This term is consistent with
the measurement basis in IFRS 5 Non-current
Assets Held for Sale and Discontinued
Operations.
Page 390
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XIX
Questions:
1. Define impairment asset.
An impaired asset is an asset that has a
market value less than the value listed on the
company's balance sheet. When an asset is
deemed to be impaired, it will need to be
written down on the company's balance
sheet to its current market value.
2. What are the internal sources of information that
would indicate possible impairment?
The internal information that should be considered
which may indicate impairment include:
Evidence of obsolescence or physical
damage
Changes to the asset’s use, including
Asset becoming idle
Plan to discontinue or restructure the
operation to which the asset belongs
Plan to dispose of the asset before previously
expected date
Reassessing the useful life as finite rather than
infinite
Poor performance
3. What are the external sources of information that
would indicate possible impairment?
The external information that should be considered
which may indicate impairment include:
6. Explain value in use.
Value-in-use is the net present value of the
cash flows generated by an asset as it is
currently being used by the owner. This
amount may be less than the net present
value of cash flows from the highest and best
use to which an asset can be put.
7. Explain the reversal of an impairment loss.
Reversal of an impairment loss on CGU is
allocated to individual assets on a pro-rata
basis, but the increased carrying amount
cannot be higher than the carrying amount
that would have been determined (net of
depreciation) without impairment loss in
previous years.
8. What is the meaning of cash generating unit?
A cash-generating unit is the smallest
identifiable group of assets that generates
cash inflows that are largely independent of
the cash inflows from other assets or groups of
assets
9. Explain the allocation of impairment loss across the
assets of a cash generating unit.
An impairment loss is recognized for a cashgenerating unit where the recoverable
amount of the unit is less than the carrying
amount of the unit. The impairment loss is
allocated to reduce the carrying amount of
the assets of the unit on a pro rata basis,
based on the carrying amount of each asset
in the unit.
42
42
10. Explain impairment of a cash generating unit with
goodwill.
A cash-generating unit to which goodwill has been
allocated shall be tested for impairment at least
annually by comparing the carrying amount of the
unit, including the goodwill, with the recoverable
amount of the unit:
If the recoverable amount of the unit exceeds
the carrying amount of the unit, the unit and
the goodwill allocated to that unit is not
impaired
If the carrying amount of the unit exceeds the
recoverable amount of the unit, the entity
must recognize an impairment loss.
Page 405
Problem 19-9 multiple choice (IFRS)
1. B
2. C
3. A
4. A
5. B
Page 411
6. B
7. D
8. D
9. A
10. B
4. Explain “future economic benefit” that may be
derived from an intangible asset.
The future economic benefit embodied in an
asset is the potential to contribute, directly or
indirectly, to the flow of cash and cash
equivalents to the entity or with respect of
not-for-profit entities, whether in the public or
private sector, the future economic benefits
are also used to provide goods and services in
accordance with the entities' objectives.
5. What are the two conditions that must be presented
for the recognition of an intangible asset?
An intangible asset shall be recognized if, and only if:
(a) it is probable that the expected future economic
benefits that are attributable to the asset will flow to
the entity; and
(b) the cost of the asset can be measured reliably.
6. Explain the initial measurement of intangible asset.
Intangible assets are measured initially at cost.
After initial recognition, an entity usually
measures an intangible asset at cost less
accumulated amortization. It may choose to
measure the asset at fair value in rare cases
when fair value can be determined by
reference to an active market.
7. Explain the measurement of cost of an intangible
asset acquired separately.
Page 412
The cost of a separately acquired intangible asset
comprises:
(a) its purchase price, including import duties
and non-refundable purchase taxes, after
deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing
the asset for its intended use.
Problem 19-10 Multiple choice (IFRS)
1. A
2. D
3. D
4. D
5. D
Page 413
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XX
1. Define intangible asset
An intangible asset is an asset that lacks
physical substance. Examples are patents,
copyright, franchises, goodwill, trademarks,
and trade names, as well as software. This is in
contrast to physical assets and financial
assets.
8. What is the cost of an internally generated
intangible asset?
the cost of an internally generated intangible
asset comprises all directly attributable costs
necessary to create, produce and prepare
the asset to be capable of operating in the
manner intended by management.
9. What is the treatment of internally generated brand,
masthead, publishing title, customer list and other
item similar in substance?
Internally generated brands, mastheads,
publishing titles, customer lists and items similar
in substance shall not be recognized as
intangible assets.
2. Explain “identifiability” of an intangible asset
Identifiability is the characteristic that
conceptually distinguishes other intangible
assets from goodwill.
Expenditure on internally generated brands,
mastheads, publishing titles, customer lists and
items similar in substance cannot be
distinguished from the cost of developing the
business as a whole. Therefore, such items are
not recognized as intangible assets.
3. Explain “control” of an intangible asset
The definition of intangible asset requires that
the intangible asset must be controlled by the
entity, and an entity controls an intangible
asset if it has ability to obtain economic
benefits related to the asset and can restrict
others from such benefits.
10. Define the terms “research” and development”
Research and development (R&D) includes
activities that companies undertake to
innovate and introduce new products and
services. It is often the first stage in the
development process. The goal is typically to
43
43
take new products and services to market
and add to the company's bottom line.
11. Identify the research activities.
Refers to activities that result in the creation of
new knowledge and/or the use of existing
knowledge in a new and creative way so as
to generate new concepts, methodologies
and understandings. This could include
synthesis and analysis of previous research to
the extent that it leads to new and creative
outcomes.
PROBLEM 20-8 MULTIPLE CHOICE (PAS 38)
1. C
2. B
3. D
4. A
Page 436
5. A
6. D
7. A
8. D
Page 437
12. Identify the development activities.
Development activities are strategies to gain
knowledge, skills, or abilities. These are specific
actions, relationships, tasks, or programs for
employees.
9. B
10. B
Page 438
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44
PROBLEM 20-9 MULTIPLE CHOICE (IFRS)
13. Explain the accounting for research cost.
The
accounting
for
research
and
development involves those activities that
create or improve products or processes. The
core accounting rule in this area is that
expenditures be charged to expense as
incurred. ... Testing products and processes.
Modifying formulas, products, or processes.
14. Explain the accounting for development cost.
The
accounting
for
research
and
development involves those activities that
create or improve products or processes. The
core accounting rule in this area is that
expenditures be charged to expense as
incurred
15. What are the criteria for the recognition of
development cost as an intangible asset?
There is an option to defer the development
expenditure and carry it forward as an intangible
asset if the following criteria are met:
there is a clearly defined project
expenditure is separately identifiable
the project is commercially viable
the project is technically feasible
project income is expected to outweigh cost
resources are available to complete the
project
Page 429
PROBLEM 20-7 MULTIPLE CHOICES (PAS 36)
1. D
2. D
3. A
4. C
5. B
Page 439
6. D
7. B
8. B
9. D
10. D
Page 440
PROBLEM 20-10 MULTIPLE CHOICE (IAA)
1. D
2. C
3. C
4. D
Page 441
5. A
6. D
7. D
8. A
Page 442
9. A
10. C
Page 443
PROBLEM 20-11 MULTIPLE CHOICE (IFRS)
1. D
2. B
3. D
4. D
5. A
1. D
2. C
3. D
4. D
Page 433
5. D
6. D
7. D
8. D
Page 434
9. D
10. D
Page 435
Page 444
PROBLEM 20-12 MULTIPLE CHOICE (AICPA ADAPTED)
1. A
2. B
3. B
4. A
Page 445
5. D
6. A
7. B
8. C
Page 446
9. B
10. A
Page 447
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXI
TOPIC QUESTIONS
1. Define an investment property.
Answer:
It defines as a property (land or building or both) held
by the owner or rented by the lessee under finance
lease, to earn rentals or for capital appreciation.
These are lands and building, because they are nonmovable property.
2. Define an owner-occupied property.
Answer:
These are land held by an owner for use in the
production or supply of goods or services or
administrative purposes; or sale in the ordinary course
of business.
3. Give examples of investment property.
Answer:
Examples of investment property are the following:
Land held for long-term appreciation in value,
rather than for short term sale in the ordinary
course of business;
Land whose future use is undeterminable. If
future use is not yet determined, land is
assumed to be held for capital appreciation;
A building owned or held under a finance
lease and leased out under an operating
lease
4. What is the treatment of property that is partly
investment and partly owner-occupied?
Answer:
If a property is being under dual-use i.e. property
contains a part of the property which is held for rental
earnings or capital appreciation and another part
which is held for use in the production, supply of
goods/services, or for use in administration. Such
property will be accounted for as:
If both portions are separable i.e. (could be
sold or leased out separately under finance
lease), then entity should account for each
portion on individual basis under relevant IAS
If both portions are not separable i.e. (could
not be sold or leased out separately under
finance lease), the property will be treated as
Investment Property only, if an immaterial
part of such property is held for use in the
production, supply of goods/services or for
use in administration.
Investment property should not include Ancillary
Services (Meals, Cleaning, Security, Utilities, and
Maintenance services). If in case of a certain
property, an entity provides ancillary services to the
occupants of a property, the entity shall apply the
following:
The property will be Investment Property, if
quantum of the services is immaterial or
insignificant. For example, security or
maintenance services.
The property will not be Investment Property, if
quantum of the services is material or
significant. For example, owner-managed
hotel. Therefore, such properties will be
covered in IAS 16
5. What is the treatment of property leased to an
affiliate?
Answer:
The property which is leased to, the Parent
Co. by a Subsidiary Co. or vice versa, will not
be treated as Investment Property in
the consolidated financial statements, instead
it will be treated as Owner-occupied
Property under IAS 16, because the property is
under owner-occupied use from the Group
perspective.
However, the property will remain Investment
Property
in
the individual
financial
statements of the entity who owns it.
6. When is an investment property recognized?
A property will be recognized as Investment Property
if it meets the following criteria:
The definition of Investment Property
If future economic benefits are probable to
flow to the entity
Its cost is reliably measurable.
7. Explain the initial measurement of investment
property?
Answer:
The
Investment
Property
is initially measured
at Cost including Transaction Costs. The cost of
Investment Property includes:
Purchase Price and
Any directly related cost such as (professional
or legal charges, property transfer taxes & any
other transaction costs)
8. What is the measurement of investment property
subsequent to initial recognition?
Answer:
Any expenditure upon Investment Property, during
the life of Investment Property will be recognize in the
carrying amount of investment property, if such
expense results in increase in economic benefits of
the investment property that would obtain otherwise.
Any other expense to maintain the Investment
Property will be treated as expense in the statement
of profit or loss.
The entity has two options to account for the
Investment Property at reporting date;
Cost Model
Fair Value Model
9. Explain the cost model and fair value model of
measuring investment property.
Answer:
The entity has two options to account for the
Investment Property at reporting date;
Cost Model
Fair Value Model
45
45
Whichever model is chosen; it should be applied
for all the Investment Properties held by the entity.
Cost Model:
The entity which chooses Cost model to account for
its Investment Property after initial recognition, will
measure the investment Property as per Cost Model
rules prescribed in IAS 16 i.e. Cost less Accumulated
Depreciation Less Accumulated impairment loss.
Fair Value Model:
The entity which chooses Fair Value model to
account for its Investment Property after initial
recognition, will measure the investment Property
at Fair Value.
Under fair vale model, the investment
property will be measured at fair value on
reporting date.
Any change (increase or decrease) in the fair
value of investment property at reporting
date, will be reported to the statement of
profit or loss.
Investment property under fair value model is
not depreciated.
Problem 21-8 Multiple Choice (IFRS)
1. C
2. A
3. D
4. A
Page 466
5. C
6. D
7. D
8. A
Page 467
9. A
10. D
Page468
Problem 21-9 Multiple Choice (PAS 40)
1. B
2. A
3. D
4. A
5. A
46
46
Page 469
10. Explain the fair value of investment.
Answer:
The fair value of the investment property is
determined as per the requirements of IFRS 13;
however, the entity should also consider the following
points;
The fair value should be determined as per
the current
condition of the investment
property, in the current market conditions.
If in exceptional circumstances, the fair value
of a certain investment property is not
determinable
and
alternative
reliable
measurements (discounted cash flows) are
also not available, then entity should measure
such investment property under cost model till
the date of disposal and residual value of
such property will assumed to be zero.
If the fair value of an investment property
being constructed is not available, and entity
estimates that the fair value of such property
will be determinable upon its completion,
then in such circumstances entity should
account for the investment property being
constructed under cost model until
Its fair value becomes available or
Construction work is finished
Page 429
Problem 21-7 Multiple choice (PAS 40)
1. C
2. D
3. D
4. B
5. A
Page 463
6. C
7. B
8. A
Page 464
9.A
10. A
Page 465
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXII
TOPIC QUESTIONS
1. Define biological assets, agricultural produce and
harvest.
Answer:
Biological assets are living animals and living plants.
Agricultural produce is the harvested product of the
entity’s biological assets.
Harvest is the detachment of produce from a
biological asset or the cessation of a biological
asset’s life processes.
Examples of biological assets, agricultural produce,
and products that are the result of processing after
harvest;
(1) sheep to wool to yarn or carpets;
(2) dairy cattle to milk to cheese;
(3) bushes to leaf to tea or cured tobacco;
(4) fruit trees to picked fruit to processed fruit.
2. What is an agricultural activity?
Answer:
Agricultural activity is the management by an entity
of the biological transformation and harvest of
biological assets for sale, or for conversion into
agricultural produce, or into additional biological
assets.
3. Explain biological transformation.
Answer:
Biological transformation comprises the processes of
growth, degeneration, production, and procreation
that cause qualitative or quantitative changes in a
biological asset.
4. Explain the recognition of biological asset and
agricultural produce.
Answer:
An entity should recognize a biological asset or
agriculture produce when, and only when:
the entity controls the asset as a result of past
events;
it is probable that future economic benefits
will flow to the entity; and
the fair value or cost of the asset can be
measured reliably.
5. Explain the initial measurement of biological asset.
Answer:
Biological assets should be measured on initial
recognition and at subsequent reporting dates at fair
value less costs to sell, unless fair value cannot be
reliably measured.
10. Explain the treatment of animal-related
recreational activities.
Answer:
Animals related to recreational activities shall be
accounted for in accordance with PAS16, PPE,
because any recreational activities are not an
agricultural activity.
Page 484
Problem 22-10 Multiple Choice (PAS 41)
1. B
2. A
3. D
4. C
5. D
47
47
6. Explain the measurement of agricultural produce
as it grows and once harvested.
Answer:
Agricultural produce should be measured at fair
value less costs to sell at the point of harvest. Because
harvested produce is a marketable commodity, there
is no 'measurement reliability' exception for produce.
A gain on initial recognition of agricultural produce at
fair value should be included in profit or loss for the
period in which it arises. All costs related to biological
assets that are measured at fair value are recognized
as expenses when incurred, other than costs to
purchase biological assets.
6. D
7. D
8. B
9. B
10. D
7. Define bearer plant.
Answer:
Bearer plant is a living plant that:
- Is used in the production or supply of agricultural
produce
- Is expected to bear produce for more than one
period, and
- Has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.
6. A
7. B
8. C
9. C
10. B
8. Explain the treatment of bearer plant.
Answer:
If an entity grows plants both to bear produce and for
sale as living plants or agricultural produce, apart
from incidental scrap sales, it must continue to
account for those plants at fair value less costs to sell
in their entirety (for example, trees that are cultivated
for their lumber as well as their fruit).
Before bearer plants are placed into production (i.e.
before they reach maturity and bear fruit) they
should be measured at accumulated cost.
9. Explain the treatment of bearer animals.
Answer:
The bearer plants as property, plant and equipment
(PPE) per IAS16 allows the preparer to value the
bearer plants at cost, less subsequent depreciation or
impairment or at a revalued amount.
No additional disclosure requirements were added
specifically for bearer plants. In general, the bearer
plants do not generate cash flows independently of
the land, and may therefore be seen together with
the land as a cash-generating unit. The impairment
test would then also take place at the level of the
cash-generating unit (thus bearer plants and land it is
situated on).
Page 493
Page 494
Problem 22-11 Multiple Choice (IFRS)
1. D
2. D
3. B
4. C
5. C
Page 495
Page 496
Problem 22-12 Multiple Choice (IFRS)
1. B
2. C
3. A
4. B
5. A
Page 497
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXIII
1. Explain the meaning of a provision.
Answer:
Provision is an existing liability of uncertain
timing or amount.
2. What are the three conditions necessary for the
recognition of a provision as a liability?
Answer:
The three conditions necessary for the recognition of
a provision as a liability are the following:
a. The entity has a present obligation, legal or
constructive, as a result of a past event.
b. It is probable that an outflow of resources
embodying economic benefits would be required to
settle the obligation.
c. The amount of the obligation can be measured
reliably.
3. Define a legal obligation and constructive
obligation.
Answer:
A legal obligation is an obligation arising from
a contract legislation or other perspective of law.
While, a constructive obligation exists when the entity
from an established pattern of practice or stated
policy has created a valid expectation that it will
accept certain responsibilities.
4. What is the measurement of a provision?
Answer:
A provision is measured at the amount that
the entity would rationally pay to settle the obligation
at the end of the reporting period or to transfer it to a
third party at that time.
5. Discuss briefly each of the following in connection
with measurement of a provision.
Answer:
a.
Risks and uncertainties
Risk describes variability of outcome.
However, uncertainty does not justify the creation of
excessive provision or a deliberate overstatement of
liabilities.
b.
Present value of obligation
When the effect of the time value of money is
material, the amount of provision shall be the present
value of the expenditure expected to be settle the
obligation.
c.
Future events
Future events that affect the amount required
to settle an obligation shall be reflected in the
amount of a provision where there is a sufficient
evidence that they will occur.
d.
Expected disposal of assets
Gains from expected disposal of assets shall
not be taken into account in measuring a provision.
In other words, any cash inflows from disposal are
treated separately from the measurement of the
provision.
Reimbursements
The reimbursement shall be treated as a
separate asset and not netted against the estimated
liability for the provision.
If an entity has an onerous contract, the
present obligation under the contract shall be
recognized and measured as a provision.
6.
Define a contingent liability.
Answer:
A contingent liability is a liability that may
occur depending on the outcome of an uncertain
future event. A contingent liability is recorded if the
contingency is likely and the amount of the liability
can be reasonably estimated. The liability may be
disclosed in a footnote on the financial statements
unless both conditions are not met.
7. Distinguish a contingent liability from a provision.
Answer:
An entity recognizes a provision if it is
probable that an outflow of cash or other economic
resources will be required to settle the provision. If an
outflow is not probable, the item is treated as a
contingent liability.
8. Explain the treatment of a contingent liability.
Answer:
A contingent liability shall not be recognized
in the financial statements but shall be disclosed only.
But, if a contingent liability is remote, no disclosure is
necessary.
9. Define a contingent asset.
Answer:
Contingent asset is a possible asset that arises
from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence
of one or more uncertain future events not wholly
within the control of the entity.
10. Explain the treatment of a contingent asset.
Answer:
Contingent asset should not be recognized but should be disclosed where an inflow of economic
benefits is probable. When the realization of income is
virtually certain, then the related asset is not
contingent asset and its recognition is appropriate.
Page 509
e.
f.
Changes in provisions
The provision shall be reveresed if it is no
longer probable that an outflow of economic
benefits would be required to settle the obligation.
g.
Use of provision
If an expenditure is charged against a
provision that was originally recognized for another
purpose, that would camouflage the impact of two
different events.
Future operating losses
A provision for operating losses is not
recognized because a past event creating a present
obligation has not occured.
Problem 23-10 Multiple Choice (PAS 37)
1. B
2. D
3. D
4. C
Page 516
5. A
6. A
7. C
8. A
Page 517
9.C
10. D
h.
i.
Onerous contract
Page 518
Problem 23-11 Multiple Choice (PAS 37)
1. D
2. D
3. C
Page 519
48
48
4. A
5. C
Page 520
Problem 23-12 Multiple Choice (IAA)
1. D
2. D
3. D
4. A
5. C
Page 521
6. D
7. D
8. B
9. B
10. B
Page 522
Problem 23-13 Multiple Choice (IAA)
1. C
2. A
3. D
4. D
5. D
Page 523
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXIV
1. Define a financial instrument.
Answer:
A financial instrument is any contract that
gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.
2. Define a financial asset.
Answer:
A financial asset is a liquid asset that gets its
value from a contractual right or ownership claim.
3. Give example of financial asset.
Answer:
Cash, stocks, bonds, mutual funds, and bank
deposits are all are examples of financial assets.
4. Define a financial liability.
Answer:
A financial liability is any liability that is a
ontractual obligation to deliver cash or other
financial asset to another entity and also to
exchange financial instruments with another entity
under conditions that are potentially unfavorable.
5. Give examples of financial liability.
Answer:
Some examples of financial liability are: Trade
accounts payable, Notes payable, Loans payable
and Bonds payable.
6. Define an equity instrument.
Answer:
An equity instrument is any contract that
evidences a residual interest in the assets of an entity
after deducting all of the liabilities.
7. What is the guideline in determining whether a
financial instrument is a financial liability or an equity
instrument?
Answer:
8. Explain a redeemable preference share.
Answer:
Redeemable preference shares are a type
of preference share. A company issues them to
shareholders and later redeems them. This means the
company can buy back the shares at a later date.
9. Explain the accounting for a compound financial
instrument.
Answer:
A compound financial instrument, such as a
convertible bond, is split into equity and liability
components. When the instrument is issued, the
equity component is measured as the difference
between the fair value of the compound
instrument and the fair value of the liability
component.
10. Explain the accounting for bonds payable issued
with share warrants and convertible bonds.
Answer:
Share warrants attached to a bond may be
detachable or nontachable. Wheather detachable
or nondetachable, the warrants have a value and
therefore shall be accounted for separately. While,
convertible bonds give the holder the right to convert
their bondholdings into share capital of the issuing
entity whithin a specified period of time.
Page 532
Problem 24-3 Multiple Choice (PAS 32)
1. D
2. C
3. C
4. B
5. B
Page 534
6. D
7. A
8. D
9. C
10. B
Page 535
Problem 24-4 Multiple Choice (IFFRS)
1. A
2. B
Page 536
3. D
4. C
5. D
Page 537
1. A
2. D
3. B
4. A
5. A
Page 538
49
49
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXV
Topic Questions
1. What entities are required to report deferred tax
asset or liability?
Answer:
Deferred tax accounting is applicable to all
entities, whether public or nonpublic entities. A public
entity is an entity: (a) whose equity and debt
securities are traded in a stock exchange or over-thecounter market and (b) whose equity or debt
securities are registered with Securities and Exchange
Commission in preparation for sale of securities.
2. Explain accounting income and taxable income.
Answer:
Accounting income or financial income is the
net income for the period before deducting income
tax expense. While Taxable income is the income for
the period determined in accordance with the rules
established by the taxation authorities upon which
income taxes are payable or recoverable.
3. Explain permanent differences.
Answer:
Permanent differences are items of revenue
and expense which are included in either accounting
income or taxable income but will never be included
in the other. Actually, permanent differences pertain
to nontaxable revenue and nondeductible expenses.
Moreover, permanent differences do not give rise to
differed tax asset and liability because they have no
future tax consequences.
4. Explain temporary differences.
Answer:
Temporary differences are items of income
and expenses which are included in both accounting
income and taxable income but at different time
periods. In addition, it gives rise either to a deferred
tax liability or deferred tax asset.
5. Explain taxable temporary differences.
Answer:
Taxable
temporary
difference
is
the
temporary difference that will result in future taxable
amount in determining taxable income of future
periods.
6. Explain deductible temporary differences.
Answer:
Expenses and losses are deductible for tax
purposes is the current period but deductible for
accounting purposes in future periods. (a)
Accelerated depreciation for accounting purposes.
(b) Prepaid expenses has already been deducted on
a cash basis in determining taxable income of the
current period.
7. Explain a deferred tax liability.
Answer:
Deferred tax liability is the amount of income
tax payable in the future periods with respect to a
taxable temporary difference. Moreover, a deferred
tax liability arises when accounting income is higher
than taxable income because of future taxable
amount.
8. Give examples of temporary differences resulting
to higher accounting income than taxable income.
Answer:
Revenues and gains are included in
accounting income of the current period but
deductible for accounting purposes in future
periods.
Expenses and losses are deductible for tax
purposes is the current period but deductible
for accounting purposes in future periods.
9. Explain a deferred tax asset.
Answer:
PAS 12, paragraph 24, provides that a
deferred tax asset shall be recognized for all
deductible temporary differences and operating loss
carryforward when it is probable that taxable income
will be available against which the deferred tax asset
can be used. In other words, a deferred tax asset is
the deferred tax consequence attributable to a
future deductible amount and operating loss
carryforward.
10. Give examples of temporary differences resulting
to higher taxable income than accounting income.
Answer:
Revenue and gains are included in taxable
income of current period but are included in
accounting income of future periods. For
example, rent received in advance is taxable
at the time of receipt but deferred in future
periods for accounting purposes.
Expenses and losses are deducted from
accounting income of current period but are
deductible for tax purposes in future periods.
For
example,
doubtful
accounts
are
deducted from accounting income but are
deductible for tax purposes when proved
worthless in future period.
11. Explain current tax asset and current tax liability.
Answer:
If the amount of tax already paid for the
current period exceeds the amount actually payable
for the period, the excess is recognized as a current
tax asset. While a current tax liability is the current tax
expense or the amount of income tax actually
payable. This is classified as current liability.
12. Explain the statement presentation of current tax
asset and current tax liability.
Answer:
A current tax liability or current tax asset shall
be measured using the tax rate that has been
enacted and effective at the end of the reporting
period.
13. Explain the statement presentation of deferred tax
asset and deferred tax liability.
Answer:
A deferred tax liability or deferred tax asset
shall be measured using the tax rate that has been
enacted by the end of the reporting period and
expected to apply to the period when the asset is
realized or the liability is settled.
50
50
14. Explain the measurement of current tax asset and
current tax liability.
Answer:
The current tax liability or current tax asset is
measured at 30% but the deferred tax liability or
deferred tax asset is measured using the new
enacted tax rate of 25%.
15. Explain the measurement of deferred tax asset
and deferred tax liability.
Answer:
PAS 12, paragraph 70, provides that deferred
tax liability is presented as noncurrent liability and
deferred tax asset is presented as noncurrent asset.
Moreover, a deferred tax asset or deferred tax liability
shall not be discounted.
Page 549
Problem 25-5 Multiple Choice (PAS 12)
1. A
2. B
3. B
4. A
5. C
Page 552
6. A
7. C
8. B
9. A
10. A
Page 553
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXVI
1. Define employee benefits.
Answer:
employee benefits are all forms of
consideration given an entity in exchange for service
rendered by employees or for termination of
employment.
2. Define short-term employee benefits.
Answer:
are employee benefits other than termination
benefits which are expected to be settled wholly
within twelve months after the end of annual
reporting period in which the employee render the
related service.
3. Explain the recognition and measurement of shortterm employee benefits.
Answer:
fairly straightforward because there are no
actuarial assumptions. There is no possibility of
actuarial gain or lose because short-term employee
benefits are measured on an undiscounted basis.
4. Define post-employment benefits.
Answer:
are employee benefits, other than termination
benefits and short-term employee benefits, which are
payable after completion of employment.
5. Explain fully a defined contribution plan.
Answer:
a postemployment benefit plan under which
an entity pays fixed contributions into a separate
entity known as the fund. The contribution is definite
but the benefit is indefinite.
6. Explain fully a defined benefit plan.
Answer:
simply defined as a postemployment plan
other than s defined contribution plan. Under a
defined benefit plan, an entity’s obligation is to
provide the agreed benefit to employees. The
benefit is definite but the contribution is indefinite.
7. Explain accounting for a defined contribution plan.
Answer:
straightforward because the obligation of the
entity is determined by the amount contributed for
each period.
8. Explain the components of a defined benefit cost.
Answer:
PAS 19, paragraph that an entity shall
recognize the following components of defined
benefits cost.
1. Service cost which comprises:
Current service cost
Past service cost
Any gain or loss on plan settlement
2. Net interest
3. Remeasurements which comprises:
Remeasurements od plan assets
Remeasurements
of
defined
benefits
obligation
Remeasurements of the effect of assets
ceiling
9. Explain plan assets and actual return on plan
assets.
Answer:
plan assets comprise assets held by a longterm benefit fund and qualifying insurance policy. The
components of actual return on plan assets include
the following:
Interest, dividend and other income derived
from the plan assets.
Realized and unrealized gains and losses on
the plan assets.
10. Explain the remeasurement of plan assets.
Answer:
the difference between actual return on plan
assets and interest income on plan assets.
Is the actual return is higher than interest
income, the difference is a remeasurement
gain.
If the actual return is less than the interest
income, the difference is a remeasurement
loss.
11. Explain the remeasurement of projected benefit
obligation.
Answer:
the recognition of actuarial gain and
actuarial loss. Actuarial gain and loss are changes in
the present value of the projected benefit obligation
resulting from experience adjustments and the effects
of changes in actuarial occurred.
51
51
12. Explain fair value of plan assets.
Answer:
the source of fund set aside in meeting future
benefit payments.
13. Explain projected benefit obligation.
Answer:
higher than the estimated amount, there is an
actuarial loss. If the actual benefit obligation is lower
than the estimated amount, there in an actuarial
gain.
14. Define other long-term employee benefits.
Answer:
all employee benefits other than short-term
employee benefits, postemployment benefits and
termination benefits. In other words, other long-term
employee benefits are empl0yee benefits which are
not expected to be settles wholly within twelve
months after the end of annual reporting period in
which the employees render the related service.
15. Define termination benefits.
Answer:
employee benefits provided in exchange for
the termination of an employee’s employment as a
result of either:
An entity’s decision to terminate an
employee’s employment before the normal
retirement date.
An employee’s decision to accept an offer of
benefits in exchange for the termination of
employment.
Page 573
Problem 26-6 Multiple Choice (PAS 19)
1. C
2. D
3. A
4. C
Page 578
5. D
6. A
7. A
8. A
Page 579
Problem 26-7 Multiple Choice (IFRS)
1. A
2. C
3. D
4. C
Page 580
Problem 26-8 Multiple Choice (PAS 19)
1. A
2. B
3. A
4. B
Page 581
5. D
6. C
7. A
8. A
Page 582
Problem 26-9 Multiple Choice (PAS 19)
1. D
2. D
3. D
4. D
5. C
Page 583
6. D
7. C
8. C
9. A
10. B
Page 584
Problem 26-10 Multiple Choice (IAA)
1. C
2. B
3. B
4. A
5. B
52
52
Page 585
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXVII
1. What is the meaning of earnings per share?
ANSWER:
Earnings per share is the amount attributable
to every ordinary share outstanding during the
period.
2. Explain the uses of earnings per share.
ANSWER:
Uses of earnings per share are;
(1) a determinant of the market price of ordinary
share, thus indicating the attractiveness of the
ordinary share as an investment,
(2) a measure of performance of management in
conducting operations,
(3) the basis of dividend policy of an entity.
3. What are the two presentations of earnings per
share?
ANSWER:
The two presentations of earnings per share
are;
(1) basic earnings per share,
(2) diluted earnings per share.
4. Explain the presentation of earnings per share in
the income statement.
ANSWER:
An entity shall present on the face of the
income statement the basic and diluted earnings per
share for income or loss from continuing operations.
An entity that reports a discontinued operation shall
disclose the basic and diluted amounts per share for
the discontinued operation either on the face of the
income statement or in the notes to the statements.
An entity shall present basic and diluted earnings per
share even if the amounts are negative, for example,
basic loss per share.
5. Explain the formula for the computation of basic
earnings per share.
ANSWER:
Basic earnings per share=net income/ordinary
shares outstanding
The net income is equal to the amount after
deducting dividends on preference share.
6. What is the treatment of preference dividend in
computing basic earnings per share?
ANSWER:
If the preference share is cumulative, the
preference dividend for the current year only id
deducted from the net income, whether such
dividend is declared or not. If the preference share is
noncumulative, the preference dividend for the
current year is deducted from net income only if
there is declaration. If there is a significant change in
the ordinary shares capital during the year, the
weighted average number of ordinary shares
outstanding during the period should be used as
denominator.
7. Explain the formula for the computation of basic
loss per share.
ANSWER:
If the preference share is cumulative, the
preference dividend is added to the net loss to get
total loss to the ordinary shareholders. However, if the
preference share is noncumulative, the preference
dividend is ignored because presumably there is no
declaration since there is a net loss.
8. Define a potential ordinary share.
ANSWER:
Potential ordinary share is a financial
instrument or other contract that may entitle the
holder to ordinary shares.
9. What are the three major types of potential
ordinary shares?
ANSWER:
Three major types of potential ordinary shares
are dilution, anti-dilution and
10. Define dilution and anti-dilution.
ANSWER:
Dilution arises when the inclusion of the
potential ordinary shares decreases the basic
earnings per share or increases the basic loss per
share. In this case, the potential ordinary shares are
dilutive securities. Anti-dilution arises when the
inclusion of the potential ordinary shares increases
basic earnings per share or decreases basic loss per
share. In this case, the potential ordinary shares are
considered as anti-dilutive and therefore ignored in
computing diluted earnings per share.
11. Explain the treatment of convertible bond
payable in computing diluted earnings per share.
ANSWER:
The computation of diluted earnings per share
assumes that the bond payable is converted into
ordinary share. Adjustments shall be made both to
net income and to the number of ordinary shares
outstanding. The net income is adjusted by adding
back the interest expense on the bond payable, net
of tax. The number of ordinary shares outstanding is
increased by the number of ordinary shares that
would have been issued upon conversion of the
bond payable.
12. Explain the treatment of convertible preference
share in computing diluted earnings per share.
ANSWER:
If there is a convertible preference share, the
computation of diluted earnings per share also
assumes that the preference share is converted into
ordinary share. The net income is not reduced
anymore by the amount of preference dividend. The
number of ordinary shares outstanding is increased by
the number of ordinary shares that would have been
issued upon conversion of the preference share.
13. Define share options and share warrants.
ANSWER:
Share options are granted to employees
enabling them to acquire ordinary shares of the entity
at a specified price during a definite period of time.
Share warrants are granted to shareholders enabling
them to acquire ordinary shares of the entity at a
specified price during a definite period of time.
By definition, options and warrants have no cash yield
but they derive their value from the right to obtain
ordinary shares at a specified price that is usually
lower than the prevailing market price. Options and
warrants are dilutive if the exercise price or option
price is less than the average market price of the
ordinary shares.
14. Explain the treasury share method of computing
incremental ordinary shares.
ANSWER:
The treasury share method is used to simplify
the computation of increment ordinary shares that
are assumed to be issued for no consideration as a
result of options and warrants.
15. Explain diluted loss per share.
ANSWER:
If the entity has a net loss, only the basic loss
per share is computed and reported. The diluted loss
per share is the same as the basic loss per share but
not reported anymore.
Page 599
Problem 27-11 Multiple Choice (PAS 33)
1. D
2. B
3. C
4. D
5. D
Page 605
6. A
7. A
8. B
9. C
10. C
Page 606
Problem 27-12 Multiple choice (IAA)
1. C
2. C
3. B
4. B
5. C
Page 607
53
53
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
requirements of each applicable Philippine Financial
Reporting Standard.
CHAPTER XXVIII
7. Give examples of selected explanatory notes to
accompany interim financial report.
ANSWER:
Examples of selected explanatory notes are;
(a) write down of inventories to net realizable value
and the reversal of such a write down,
(b) recognition of a loss from the impairment of
property, plant and equipment and intangible assets
and the reversal of such an impairment loss,
(c) the reversal of any provision for restructuring,
(d) acquisitions and disposal of items of property,
plant and equipment,
(e) commitments for the purchase of property, plant
and equipment,
(f) litigation settlements,
(g) corrections of prior period errors in previously
reported financial data,
(h) changes in the economic circumstances that
affect fair value of financial assets and financial
liabilities,
(i) any debt default or any breach of a debt
covenant that has not been corrected subsequently,
(j) related party transaction,
(k) changes in the classification of financial assets,
(l) contingent liabilities and contingent assets.
1. Explain interim financial reporting.
ANSWER:
Interim financial reporting means the
preparation and presentation of financial statements
for a period of less than one year.
2. Is it require to prepare interim financial reports?
ANSWER:
Yes, PAS 34 prescribes the minimum content
of an interim financial report and the principles for
recognition and measurement in complete or
condensed financial statements for an interim period.
Publicly traded entities are encouraged to provide
interim financial reports at least semiannually and
such reports are to be made available not later than
60 days after the end of interim period.
3. Explain the frequency of interim reporting.
ANSWER:
PAS 34 does not mandate which entities are
required to publish interim financial reports, how
frequently, or how soon after the end of an interim
period.
Interim financial reports may be presented monthly,
quarterly or semiannually.
4. Explain interim reporting under Philippine
jurisdiction.
ANSWER:
The Securities and Exchange Commission and
Philippine Stock Exchange requires entities covered
by the reportorial requirements of Revised Securities
Act to file quarterly interim financial reports within 45
days after the end of each of the first three quarters.
The SEC also requires entities covered by the Rules on
Commercial Papers and Financing Act to file
quarterly financial reports within 45 days after each
quarter end.
Entities that provide interim financial reports in
conformity with Philippine Financial Reporting
Standards shall conform to the recognition,
measurement and disclosure requirements set out in
the standard.
5. What are the components of an interim financial
report?
ANSWER:
Components of an interim financial report are;
(1) condensed statement of financial position,
(2) condensed statement of comprehensive income,
(3) condensed statement of changes in equity,
(4) condensed statement of cash flows,
(5) selected explanatory notes.
6. Explain compliance of interim financial report with
PFRS.
ANSWER:
PAS 34, paragraph 19, provides that if an
entities interim financial report is in compliance with
Philippine Financial Reporting Standard. An entity
shall not describe an interim financial reports as
complying with PFRS unless it complies with all of the
8. Explain the presentation of interim financial
statements on a comparative basis.
ANSWER:
The
presentation
of
interim
financial
statements on a comparative basis are composed of
statement of financial position, income statement,
statement of comprehensive income, statement of
changes in equity and statement of cash flows.
9. What are the basic principles in the preparation
and presentation of interim financial statements?
ANSWER:
Basic principles are;
(1) PAS 34, paragraph 28, provides that an entity shall
apply the same accounting policies in the interim
financial statements as are applied in the annual
financial statements,
(2) revenues from products sold or services rendered
are generally recognized for interim reports on the
same basis as for the annual reports,
(3) cost and expense are recognized as incurred in
an interim period,
(4) paragraph 21 provides that if the business is highly
seasonal, in addition to the current interim period
financial statements, the entity is encouraged to
disclosed financial information,
(5) paragraph 41 provides that the preparation of
interim financial reports generally requires a greater
use of estimation than annual financial reports.
54
54
10. Explain the treatment of a change in accounting
policy in interim financial reporting.
ANSWER:
PAS 34, paragraph 43, provides that a change
in accounting policy shall be reflected by restating
the financial statements of prior interim periods of the
current year and the comparable interim periods of
the financial year. The objective of this requirement is
to ensure that a single accounting policy is applied to
a particular class of transaction throughout the entire
financial year.
Page 621
Problem 28-11 Multiple choice (IFRS)
1. D
2. B
3. B
4. D
5. D
Page 626
6. C
7. D
8. A
9. B
10. B
Page 627
Problem 28-12 Multiple Choices (AICPA Adapted)
1. B
2. D
3. A
4. C
5. D
Page 628
6. D
7. B
8. A
9. D
10. B
Page 629
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXIX
TOPIC QUESTIONS
1. What are the characteristics of an economic
environment indicating hyperinflation?
Answer:
Hyperinflation is indicated by characteristics
of the economic environment of a country which
include but are not limited to the following
The general population prefers to keep its
wealth nonmonetary assets or in relatively
stable foreign currency. Accordingly, amounts
held in local currency are immediately
invested in nonmonetary assets or stable
foreign currency to maintain purchasing
power.
The general population regards monetary
amounts not in terms of local currency but in
terms of a relatively stable foreign currency
Sales and purchases on credit take place at
prices that compensate for the expected loss
of purchasing power during the credit period
even if the period is short.
Interest rates, wages and prices are linked to
a price index.
The cumulative rate over 3 years is
approaching or exceeds 100 %.
2. Explain the financial reporting in a hyperinflationary
economy.
Answer:
PAS 29, paragraph 8, provides that the
financial statements of an entity that reports in the
currency of a hyperinflationary economy, whether
they are based on historical cost approach or a
current cost approach, shall be stated in terms of the
measuring unit current at the end of reporting period.
Presentation of the information required under PAS 29
as a supplement to understated financial statements
is not permitted. The restatement of financial
statements of an entity that reports in the currency of
a hyperinflationary economy is accomplished by
means of constant peso accounting.
3. Explain monetary and nonmonetary items.
Answer:
PAS 21 defines monetary items as money held
and assets and liabilities to be received or paid in
fixed or determinable amount of money. The essential
feature of a monetary item is a right to receive or an
obligation to deliver a fixed or determinable amount
of money. In simple language, monetary items refer
to cash and assets that represent a fixed amount of
pesos to be received, or obligations that represent a
fixed amount of pesos to be paid.
Nonmonetary items, by the process of
exclusion, may be defined as those items that
cannot be classified as monetary. These items
are so called nonmonetary because their
peso amounts reported in the financial
statements differ from the amounts that are
ultimately realizable or payable. The essential
feature of a nonmonetary item is the absence
of a right to receive or an obligation to deliver
a fixed or determinable amount of money.
4. What is the formula for restatement?
Answer:
Index number at end of reporting period /
Index number on acquisition date x Historical cost
5. What are the procedures for restating financial
statements in a hyperinflationary economy?
Answer:
The items in the financial statements are
classified into monetary and nonmonetary.
Monetary items are not restated because these are
already expressed in terms of the monetary unit
current at the end of reporting period.
Nonmonetary items are restated by applying
the general price index from the date of
acquisition to the end of reporting period.
Some nonmonetary items that are carried at
amounts current at end of reporting period,
such as net realizable value and fair value are
no longer restated.
Some nonmonetary items are carried at
amount current at date other than acquisition
date, for example, property, plant and
equipment are revalued. In such case, the
carrying amounts are restated from the date
of revaluation.
55
55
All items in the income statement are restated
by applying the change in the general price
index from the dates when the items of
income and expenses were initially recorded.
However, for practical purposes, the average
index may be used.
The general purchasing power gain or loss is
computed on monetary items. The gain or loss
on purchasing power is included in profit or
loss.
The restated amount of property, plant and
equipment, goodwill and other intangible
asset is reduced when it exceeds the
recoverable amount.
Any revaluation surplus recognized previously
is eliminated.
Retained earnings would be the balancing
figure in the restated statement financial
position.
When comparative statements are prepared,
the monetary items of the preceding year are
expressed in terms of the index number at the
end of the current year.
Page 638
Problem 29-7 Multiple Choice (IFRS)
1. D
2.C
3.A
4.D
5.A
Page 643
6.A
7.C
8.D
9.A
10.A
Page 644
Problem 29-8 Multiple Choice (AICPA Adapted)
1. B
2. A
3. D
4. D
5. C
Page 645
6. A
7. A
8. C
9. D
10. A
Page 646
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXX
TOPIC QUESTIONS
1. Define first time adopter.
Answer:
A first time adopter is an entity that presents
for the first time its financial statements in conformity
with Philippine Financial Reporting Standards. In other
words, an entity is considered first time adopter when
for the first time such entity makes an explicit and
unreserved statement that its general purpose
financial statements comply with Philippine Financial
Reporting Standards.
2. Define first PFRS financial statements.
Answer:
The first PFRS financial statements are the first
annual statements in which an entity adopts PFRS by
an explicit and unreserved statement of compliance
with PFRS.
3. What are the conditions in order that financial
statements presented by an entity would qualify as
first PFRS financial statements?
Answer:
Financial statements presented by an entity in
the current year would qualify as first PFRS financial
statements under the following conditions:
When an entity presented its most recent previous
financial statements:
Under national GAAP inconsistent with PFRS in all
respects.
In conformity with PFRS in all respects but
these statements did not contain an explicit
and unreserved statement of compliance
with PFRS.
Containing
an
explicit
statement
of
compliance with some but not all PFRS.
Under national GAAP with a reconciliation of
selected figures to amounts determined
under PFRS.
When an entity prepared financial statements
in the previous period under PFRS but the
financial statements were for internal use only.
When an entity prepared financial statements
in the previous period under PFRS for
consolidation purposes without preparing a
complete set of financial statements.
When an entity did not present financial
statements in the previous period.
4. Explain the date of transition to PFRS.
Answer:
The date of transition to PFRS refers to the
beginning of the earliest period for which an entity
presents full comparative information under PFRS in its
first PFRS financial statements. The date of transition to
PFRS depends on two factors, namely:
a. The date of adoption of PFRS.
b. The number of years of comparative information
that an entity decides to present together with the
financial statements in the year of adoption.
5. Define an opening PFRS statement of financial
position.
Answer:
An opening PFRS statement of financial
position is the statement of financial position
prepared by a first time adopter а on the date of
transition to PFRS. The opening PFRS statement of
financial position is the starting point for accounting in
accordance with PFRS.
6. What are the requirements in preparing an
opening PFRS statement of financial position?
Answer:
In preparing the opening statement of
financial position, an entity is required to:
a. Recognize all assets and liabilities required by PFRS.
b. Derecognize assets and liabilities not permitted by
PFRS.
56
56
c. Reclassify items that it recognized under previous
GAAP as one type of asset, liability or equity but a
different type of asset, liability or equity under PFRS.
d. Measure all recognized assets and liabilities in
compliance with PFRS.
7. How should a first time adopter recognize the
adjustments required to present an opening PFRS
statement of financial position?
Answer:
Any adjustments required to present an
opening PFRS statement of financial position should
be recognized in retained earnings or if appropriate,
in another component of equity.
8.What are the first PFRS financial statements
prepared by a first time adopter?
Answer:
If the entity adopts PFRS for the first time in the
current year, its first PFRS financial statements include
the following:
1. Three statements of financial position at the end of
current year, at the end of prior year and at the date
of transition to PFRS
2. Two statements of comprehensive income for the
current year and prior year
3. Two separate income statements for the current
year and prior year.
4. Two statements of changes in equity for the current
year and prior year.
5. Two statements of cash flows for the current year
and prior year.
6.
Notes
to
financial
statements
including
comparative information.
Page 651
Problem 30-1 Multiple Choice (IFRS)
1. B
2. C
3. C
4. B
Page 652
5. C
6. D
7. D
Page 653
8. C
9. D
10. D
Page 654
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXI
QUESTIONS
1. Define a share-based compensation plan.
Answer:
A share-based compensation plan is a
compensation arrangement established by
the entity whereby the entity’s employees
shall receive equity shares in exchange for
their services or the entity incurs liabilities to
the employees in amounts based on the price
of its shares.
2. Explain the two share-based compensation plans.
Answer:
The two share-based compensation plans are the
following:
a. Equity settled- The entity issues equity
instruments in consideration for services
received, for example, share options.
b. Cash settled- The entity incurs a liability for
services received and the liability is based
on the entity’s equity instruments, for
example, share appreciation rights.
3. What are share options?
Answer:
Share options are granted to officers and key
employees to enable them to acquire shares
of the entity during a specified period upon
fulfilment of certain conditions at a specified
price. These are typically granted to officers
and key employees as part of their
remuneration package, in addition to a cash
salary and other employment benefits.
4. Explain briefly the fair value method of measuring
compensation arising from share options.
Answer:
Fair value method means that the
compensation is equal to the fair value of the
share options on the date of grant.
5. Explain the accounting procedure if an entity
cancels or settles share options during the vesting
period.
Answer:
PFRS 2, paragraph 28, provides that if an entity
cancels or settles a grant of share options
during the vesting period, the entity shall
account for the cancelation or settlement as
an acceleration of vesting.
6. Explain fully a cash settled share-based payment
transaction.
Answer:
Cash settled share-based transaction is when
the entity incurs a liability for services received
and the liability is based on the entity’s equity
instruments, for example, share appreciation
rights.
7. Distinguish cash settled share-based payment
transaction from an equity settled share-based
transaction.
Answer:
In cash settled share-based transaction, the
entity incurs a liability for services received
and the liability is based on the entity’s equity
instruments, while in equity settled sharebased transaction, the entity issues equity
instruments in consideration for services
received.
8. What is a share appreciation right?
Answer:
Share
appreciation
right
entitles
the
employee to a cash payment equal to the
increase in the price of a given number of
shares over a given period.
57
57
9. Distinguish a share appreciation right from a share
option.
Answer:
Like a share option, a share appreciation right
is viewed as compensation for services
rendered.
Unlike in a share option, the entity shall
recognize a liability because a share
appreciation right is actually an obligation on
the part of the entity to pay cash in the future
on exercise date.
10. Explain the recognition and measurement of
compensation arising from share appreciation right.
Answer:
The recognition of compensation includes the
following:
a. If the share appreciation right vests
immediately,
the
compensation
is
recognized immediately.
b. If the share appreciation right does not
vest until the employee completes a
definite vesting period, the compensation
is recognized over the vesting period.
The measurement of compensation states that the
compensation is based on the fair value of the liability
at the reporting date and shall be measured at every
year-end until it is finally settled.
Page 665
PROBLEM 31-7 MULTIPLE CHOICE (PFRS 2)
1. B
2. A
3. B
4. A
Page 669
5. D
6. B
7. A
8. C
Page 670
9. C
10. D
Page 671
PROBLEM 31-8 MULTIPLE CHOICE (IFRS)
1. B
2. D
3. C
4. D
5. C
Page 672
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXII
QUESTIONS
1. Define noncurrent asset and a disposal group.
Answer:
Noncurrent asset is may be an individual
asset, like land and building, or a disposal
group, while a disposal group is a group of
assets to be disposed of, by sale or otherwise,
together as a group in a single transaction,
and liabilities directly associated with those
assets that will be transferred in the
transaction.
2. When is a noncurrent asset classified as held for
sale?
Answer:
PFRS 5, paragraph 6, provides that a
noncurrent asset is classified as held for sale if
the carrying amount will be recorded
principally through a sale transaction rather
than through continuing use.
3. What are the conditions for classification as held for
sale?
Answer:
The conditions for classification as held for sale are
the following:
The asset or disposal group is available for
immediate sale in the present condition.
In other words, the current condition of the
asset should be adequate to be effectively
” sold as seen”.
The sale must be highly probable.
4. What is the meaning of “highly probable”?
Answer:
For sale to be highly probable, the following
conditions must be met:
Management must be committed to a plan
to sell the asset or disposal group.
An active program to locate a buyer and
complete the plan must have been initiated.
The sale is expected to be a “completed
sale” within one year from the date of
classification as held for sale.
The asset or disposal group must be actively
marketed for sale at a sale price that is
reasonable in relation to the fair value.
Actions required to complete the plan
indicate that it is unlikely that the plan will be
significantly changed or withdrawn.
5. Explain the measurement of noncurrent asset
classified as held for sale.
Answer:
PFRS 5, paragraph 15, provides that an entity
shall measure a noncurrent asset or disposal
group classified as held for sale at the lower of
carrying amount or fair value less cost of
disposal.
6. Explain the write-down of the noncurrent asset to
fair value less cost of disposal.
Answer:
If the fair value less cost of disposal is lower
than carrying amount of the asset or disposal
group, the write-down to fair value less cost of
disposal is treated as an impairment loss.
If the noncurrent asset is a disposal group, the
impairment loss is apportioned across the
assets based on carrying amount.
58
58
7. Explain the treatment of a subsequent increase in
fair value less cost of disposal relating to an asset
classified as held for sale.
Answer:
If subsequently there is an increase in the fair
value less cost of disposal, PFRS 5, paragraph
21, provides that an entity shall recognize a
gain but not in excess of any impairment loss
previously recognized.
8. What is the treatment of abandoned noncurrent
asset or disposal group?
Answer:
PFRS 5, paragraph 13, provides that an entity
shall not classify as held for sale a noncurrent
asset or disposal group that is to be
abandoned.
9. Explain the treatment of a change in classification
of a noncurrent asset classified as held for sale.
Answer:
PFRS 5, paragraph 27, provides that the entity
shall measure the noncurrent asset that
ceases to be classified as held for sale at the
lower between:
 Carrying amount of the asset on the basis that
the asset had not been classified as held for
sale.
 Recoverable amount at the date of the
subsequent decision not to sell.
10. Explain the presentation of noncurrent asset
classified as held for sale in the statement of financial
position.
Answer:
PFRS 5, paragraph 38, provides that if the
noncurrent asset is a disposal group classified
as held for sale, the assets and liabilities of the
group shall be presented separately and
cannot be offset as a single amount.
Page 681
PROBLEM 32-4 MULTIPLE CHOICE (PFRS 5)
1. A
2. A
3. D
4. C
Page 684
5. A
6. B
7. C
8. A
Page 685
9. B
10. C
Page 686
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXIII
QUESTIONS
1. Define a discontinued operation.
Answer:
Discontinued operations are an accounting
term that refers to parts of a company's core business
or product line that have been divested or shut
down. Discontinued operations are reported on the
income statement separately from continuing
operations.
2. Give examples of discontinued operation.
Answer:
Selling by a diversified entity of a major
division that represents the entity's only
activities in the electronics industry.
Selling by a meat packing entity of controlling
interest in a furniture entity.
Selling by a communications entity of all its
radio stations.
A conglomerate is engaged in commodity
business, real estate, manufacturing and
construction business.
3. Explain the presentation of a discontinued
operation in the income statement.
Answer:
Provides that an entity shall disclose a single
amount comprising the total of post-tax profit or loss
recognized on the measurement to fair value less to
cost of disposal or on the disposal of the assets or
disposal group constituting the discontinued
operation.
4. Explain the presentation of a discontinued
operation in the statement of financial position.
Answer:
Provides that the assets of the component shall be
presented as a single amount under current assets
and the liabilities of the component shall be
presented as a single amount under current liabilities.
The assets and liabilities of the component cannot be
offset against the other.
5. What are the disclosures about discontinued
operation.
Answer:
The amount of revenue, expenses and
income
or
loss
attributable
to
the
discontinued operation during the current
period and the related income tax.
An impairment loss is recognized when the fair
value less cost of disposal of the discontinued
operation is lower than the carrying amount
of the net assets.
Any gain or loss from the actual disposal of
the assets and settlement of the liabilities of a
discontinued operation.
The termination cost of employees and other
costs which are directly incurred as a result of
the discontinuance.
Page 693
59
59
PROBLEM 33-7 MULTIPLE CHOICE (IFRS)
1. D
2. A
3. D
Page 697
4. A
5. A
Page 698
PROBLEM 33-8 MULTIPLE CHOICE (AICPA ADAPTED)
1. C
2. C
3. A
4. B
5. C
Page 699
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXIV
PROBLEM 34-5 MULTIPLE CHOICE (IFRS)
1. B
2. C
3. D
Page 706
4. C
5. B
Page 707
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXV
QUESTIONS
1. What is the core principle of segment reporting?
Answer:
core principle of segment reporting states that
an entity shall disclose information to enable
users of financial statements to evaluate the
nature and financial effects of the business
activities in which it engages and the
economic environments in which it operates.
2. Explain briefly segment reporting.
Answer:
is the disclosure of certain financial
information about the products and services
and an entity produces and the geographical
areas in which an entity operates.
3. What is the scope of PFRS 8?
Answer:
IFRS 8 applies to the financial statements of
any entity whose debt or equity instruments
are traded in a public market or who is
seeking to issue any class of instruments in a
public market.
4. Define an operating segment.
Answer:
an operating segment can generally be
thought of as a distinguishable component of
an entity that is engage in business activities
which generates revenue and incur expenses.
5. Define a chief operating segment.
Answer:
Operating segments are components of an
entity about which separate financial
information is available that is evaluated
regularly by the chief operating decision
maker in deciding how to allocate resources
and in assessing performance.
6. What are the quantitative thresholds in identifying
reportable segments?
Answer:
If the total external revenue reported by
operating segments constitutes less than 75%
of
the
total
revenue,
additional
operating segments shall
be identified as reportable segments until at
least 75% of the entity's revenue is included
in reportable segments.
7. Explain the 75% threshold in identifying reportable
segments.
Answer:
At least 75 per cent of the total external
revenue of the entity must be reflected by
the identified reportable segment, if this is not
the case the entity will be required
to identify additional reportable
segments until at least 75 per cent of the total
external revenue of the entity is reflected
by reportable.
8. Enumerate the information to be disclose for each
reportable segment.
Answer:
An entity shall disclose the following for each
reportable operating segment:
General information about the operating
segment
Information about profit or loss, including
specified revenue and expenses included in
the measure of profit or loss
Information about segment assets and
segment
liabilities and the basis of
measurement
Reconciliation of the totals of segment
revenue, segment profit or loss, segment
assets, segment liabilities and other material
segment items to corresponding items in the
entity’s financial statements
9. Explain the disclosure about general information.
Answer:
10. Explain the disclosure about profit or loss for each
reportable segment.
Answer:
an entity shall disclose for each reportable
segment measure of profit or loss, total assets
and total liabilities, also disclose a measure of
profit or loss under all circumstances
60
60
11. What are the entity-wide disclosure?
Answer:
are additional information that is required to
be disclose by all entities if such information is
not provided as part of the reportable
segment information
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
12. What is the entity-wide disclosure about product
and services?
Answer:
an entity shall disclose the revenue from
external customers for each product and
services
1. Explain the initial measurement of financial asset.
Answer:
an entity shall measure a financial asset at a
fair value plus, in the case of financial asset
not at fair value through profit or loss,
transaction cost that are directly attribute to
the acquisition of financial asset
13. What is the entity-wide disclosure about
geographical areas?
Answer:
an entity shall disclose the following
geographical information:
(1) revenue from external customers in the entity’s
country of domicile, and in all foreign operations in
total
(2) separate disclosure of material revenue from
external customers in an individual foreign country
2. Explain the subsequent measurement of financial
asset.
Answer:
Where assets are measured at fair value,
gains and losses are either recognized entirely
in profit or loss (fair value through profit or loss,
FVTPL), or recognized in other comprehensive
income (fair value through other
comprehensive income, FVTOCI).
14. What is major customer?
Answer:
is defined as a single external customer
providing revenue which amounts to 10% or
more of an entity’s external revenue.
15. Explain the major customer disclosure.
Answer:
the entity shall disclose the fact of reliance on
major customers, the total amount of revenue
from major customers and the identity of the
segment or segments reporting the revenue.
Page 717
PROBLEM 35-5 MULTIPLE CHOICE (AICPA ADAPTED)
1. B
2. D
3. D
4. C
Page 720
CHAPTER XXXVI
3. What are the financial asset measured at fair value
through profit or loss?
Answer:
Financial asset held for trading or popularly
known as “trading securities”
All other investment in quoted equity
instruments
Debt investment that are irrevocably
designated on initial recognition as at fair
value through profit or loss
All debt investment that do not satisfy the
requirements for measurement at amortized
cost and at fair value through other
comprehensive income
4. Explain financial asset held for trading.
Answer:
are debt and equity securities that are
purchased with the intent of selling them in
the “near term” or very soon
Page 722
5. Explain measurement of equity investment at fair
value through other comprehensive income.
Answer:
All equity investments in scope of IFRS 9 are to
be measured at fair value in the statement of
financial position, with value changes
recognized in profit or loss, except for
those equity investments for which the entity
has elected to present value changes in
'other comprehensive income'.
Page 723
6. Explain measurement of debt investment at
amortized cost.
Answer:
the business model is to collect contractual
cash flow if the contractual cash flows are
solely payments of principal and interest, in
such case, the financial asset shall be
measured at amortized cost
5. B
6. C
7. D
8. D
Page 721
9. B
10. D
PROBLEM 35-6 (IFRS)
1. B
2. C
3. B
4. D
5. B
61
61
7. Explain measurement of debt investment at fair
value through other comprehensive income.
Answer:
8. Explain the treatment of unrealized gain or loss on
financial at fair value.
Answer:
Securities that are held-for-trading are
recorded on the balance sheet at their fair
value, and the unrealized gains and losses are
recorded on the income statement.
Therefore, the increase or decrease in the fair
value of held-for-trading securities impacts the
company's net income and its earnings-pershare (EPS)
9. Explain the derecognition of equity investment at
fair value through other comprehensive income.
Answer:
10. Explain derecognition of equity investment at fair
value through other comprehensive income.
Answer:
Page 733
CHAPTER 36-5
1.D
2.D
3.C
4.D
5.A
Page 736
6.B
7.C
8.B
9.C
10.D
Page 737
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXVII
1. Define Fair Value.
ANSWER:
Fair value refers to an “exit price” or market
price under current market conditions at
measurement rate. It is also the price in an orderly
transaction and agreed upon by market participants.
2. What is an orderly transaction?
ANSWER:
An orderly transaction is a transaction that
allows for normal marketing activities that are usual
and customary.
3. Explain Market Participants.
ANSWER:
Market participants are those buyers and
sellers transacting business in the principal market for
an asset or liability. These participants are
independent or unrelated parties, have reasonable
understanding of the transaction and are willing or
motivated to do and enter into a transaction to buy
and sell the item.
4. Define active market.
ANSWER:
An active market is a market that regularly
experiencing high transaction volumes.
5. Define principal market.
ANSWER:
A principal market is the market with the
greatest volume and level of activity for the asset or
liability.
6. Define most advantageous market.
ANSWER:
Most advantageous market is the market that
maximizes the amount that would be received to sell
the asset or minimizes the amount that could be paid
to transfer the liability.
7. Explain the valuation premise in measuring fair
value.
ANSWER:
In determining the fair value of an asset or a
liability, an entity may refer to information that is
directly observable or readily available. The fair value
shall not be adjusted for transaction cost.
If location is a characteristic of an asset, the fair value
shall be adjusted for transport cost that would be
incurred to transport the asset from its current
location to the principal or most advantageous
market.
8. Explain highest and best use of an asset.
ANSWER:
The highest and best use of the asset might
provide maximum value either on a stand-alone
basis, or as a group in with other asset and liability.
9. Explain the three valuation techniques in measuring
fair value.
ANSWER:
The three valuation techniques that can be
used to measure fair value:
Market approach – this approach uses prices
and relevant information for market
transactions for identical and comparable
asset.
Income approach – this income approach
focuses on converting future amounts into
discounted cash flows.
Cost approach-this approach relies on the
current replacement cost to replace the asset
with a comparable asset.
10. Explain the fair value hierarchy.
ANSWER:
The fair value hierarchy or evidence of fair
value is enumerated as follows:
Level 1 is quoted prices for identical items in
active, liquid and visible market such as stock
exchanges. This quoted price provides the
most reliable evidence of fair value and shall
be used without adjustment.
Level 2 is observable either directly or
indirectly information for similar items in active
or inactive markets, such as two similarly
situated buildings in a downtown real estate
market.
Level 3 are unobservable inputs to be used in
situations where markets don’t exist or are
illiquid such as the present credit cases. At this
point, fair market valuation becomes highly
62
62
subjective. Unobservable inputs are usually
developed by the entity using the best
available information from the entity’s own
data.
The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1), and the lowest
priority to unobservable inputs(Level3)
Page 742
1.B
2.A
3.D
4.D
Page 743
5.C
6.A
7.B
8.A
Page 744
9.B
10.B
A contract is an agreement between two or
more parties that creates enforceable rights and
obligations in a contract.
5. What are the criteria for recognizing a contract
with a customer?
ANSWER:
The parties to the contract have approved
the contract in writing, orally or in accordance with
customary business practice, rights and obligations of
the parties in the contract can be identified,
payment terms in the contract can be identified, the
contract has commercial substance and the
collection of the consideration is probable.
6. Define a performance obligation.
ANSWER:
A performance obligation is a promise to
deliver a good or service in a contract with customer.
7. Define a transaction price.
ANSWER:
The transaction price is the amount of
consideration in a contract to which an entity
expects to be entitled in exchange for transferring
good or service to a customer.
Page 745
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXVIII
1. Define revenue and income.
ANSWER:
Revenue is income in the ordinary course of
business activities.
Income is increase in economic benefit during
the accounting period in the form of an inflow or
enhancement of asset or decrease in liability that
results in an increase of equity, other than
contribution from equity participants.
2. What is the core principle of revenue recognition?
ANSWER:
Revenue is recognized in a manner that
depicts the transfer of good and service to a
customer and the revenue reflects the consideration
to which an entity expects to be entitled.
3. What is the five-step model in recognizing
revenue?
ANSWER:
An entity that recognizes revenue in
accordance with the core principle should apply the
following five-step model:
Step 1 Identify the contract with the customer
Step 2 Identify the performance obligation in the
contract
Step 3 Determine the transaction price
Step 4 Allocate the transaction price to the
performance obligations in the contract
Step 5 Recognize revenue when or as the entity
satisfies a performance obligation
4. Define a contract.
ANSWER:
8. Explain the allocation of the transaction price to
multiple performance obligations.
ANSWER:
The transaction price is allocated to each
performance obligation on the basis of relative standalone selling price of each good or service. This
stand-alone selling price is the price that the entity
would sell a promised good or service separately to a
customer.
9. When is revenue recognized?
ANSWER:
The transaction price is allocated to each
performance obligation on the basis of relative standalone selling price of each good or service.
10. Explain the revenue recognition at a point in time
or over time.
ANSWER:
The entity shall recognize revenue at a point
of time when the customer has the significant risks
and rewards of ownership, when the customer has
legal title to the asset and when the entity has the
right to receive payment for the asset and for which
the customer is obliged to pay.
The entity shall also recognize revenue when the
entity has an enforceable right to receive payment
for performance completed on date. For example,
constructing a specialized asset that only the
customer can use or constructing an asset in
accordance with customer order.
11. Explain the recognition of a sale with a right of
return.
ANSWER:
The entity shall recognize a sale with the right
return when the revenue equal to the total sale price
less the sale price of the expected return and when a
recover asset and the corresponding reduction of
cost of goods sold equal to the cost of the expected
return.
63
63
12. Define consignment.
ANSWER:
Consignment is a method of marketing goods
in which the entity called the consignor transfers
physical possession of certain goods to a dealer or
distributor called the consignee that sells the goods
on behalf of the consignor.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
13. Define bill and hold arrangement.
ANSWER:
Bill and hold arrangement is a contract under
which an entity bills a customer for a product but the
entity retains possession of the product.
1. Define a lease under the new lease standard.
Answer:
A lease is defined as a contract or part of a
contract that conveys the right to use the underlying
asset for a period of time in exchange for
consideration.
14. What are the criteria for the recognition of
revenue in a bill and hold arrangement.
ANSWER:
The following criteria must be met for the
recognition of revenue in a bill and hold
arrangement:
a. The customer has requested for the arrangement.
b. The product must be identified separately as
belonging to the customer.
c. The product must be ready for physical transfer to
the customer anytime.
d. The entity cannot have the ability to use the
product or to direct it to another customer.
15. Explain the customer loyalty program.
ANSWER:
The customer loyalty program builds to have a
brand loyalty, it was designed to reward customers
for past purchases. If the customer buys good and
services, the entity grants the customer award credits
often described as “points”. The entity can redeem
the “points” by distributing to the customer free or
discounted goods or services.
A customer may be required to accumulate to
specified minimum number of award credits or
“points” before they can have redeemed.
Page 760
1.D
2.D
3.B
4.D
5.D
Page 767
6.A
7.D
8.A
9.B
10.C
Page 768
1.B
2.C
3.B
4.C
Page 769
_
CHAPTER XXXIX
2. Explain the finance lease model on the part of the
lessee.
Answer:
IFRS 16, paragraph 22, provides that at the
commencement date, a lessee shall recognize a
right of use asset and lease liability.
This simply means that a lessee is required to
initially recognize a right of use asset for the right to
use the underlying asset over the lease term and
lease liability for the obligation to make payments.
All leases shall be accounted for by the
lessee as a finance lease under the new lease
standard.
3. Define underlying asset, lessee and lessor.
Answer:
The underlying asset is the subject of a lease
for which the right to use that asset has been
provided by the lessor to the lessee.
The lessee is the entity that obtains the right
to use an underlying asset for a period of time in
exchange for consideration.
The lessor is the entity that provides the right
to use an underlying asset for a period of time in
exchange for consideration.
4. Explain the operating lease model on the part of
the lessee.
Answer:
IFRS 16, paragraph 5, provides that a lessee is
permitted to make an accounting policy election to
apply the operating lease accounting and not
recognize an asset and lease liability in two optional
exemptions.
a. Short-term lease
b. Low value lease
5. What are the two conditions in order that a lessee
may apply the operating lease model?
Answer:
Stated differently, a lessee may or may not
apply the operating lease accounting if the lease is
short-term or if the underlying asset is of low value.
6. Explain short-term lease.
Answer:
A short-term lease as a lease is defined as that
has a term of 12 months or less at the
commencement date of the lease.
A lease that contains a purchase option is
not a short-term lease.
64
64
7. Explain a low value lease.
Answer:
Low value asset is a matter of professional
judgement.
The lease shall assess the value of an
underlying asset based on the value of asset when it
is new regardless of the age of the asset being
leased.
A lease of an underlying asset does not
qualify as a low value lease if the nature of the asset
is such that the asset is typically not of low value
when new.
For example, a lease of car would not
qualify as low value lease because a new car would
typically not be of low value.
Typically, low value underlying assets
include personal computers, office furniture and
equipment.
8. Define a finance lease.
Answer:
A finance lease is defined as a lease that
transfers substantially all of the risks and rewards
incidental to ownership of an underlying asset.
9. What are the components of the cost of right of
use of asset?
Answer:
The cost of right of use of asset comprises:
a. The present value of lease payments
b. Lease payments made to lessor such
as lease bonus, less any incentive
received.
c. Initial direct costs incurred by the lease
d. Estimate of cost of dismantling and
restoring the underlying asset for which
the lease has a present obligation.
10. Explain the depreciation of right of use of asset?
Answer:
The lessee shall apply normal depreciation
policy for right of use of asset.
IFRS 16, paragraph 32, provides that the
lessee shall depreciate the right of use asset over the
useful life of the underlying asset under the following
conditions:
a. The lease transfers ownership of the
underlying asset to the lessee at the end
of lease term.
b. The lessee is reasonably certain to
exercise a purchase option.
If there is no transfer of ownership to the lessee or if
the purchase option is not reasonably certain to be
exercised, the lessee shall depreciate the right of use
asset over the shorter between the useful life of the
asset and the lease term.
11. Explain the measurement of lease liability.
Answer:
The lessee shall measure the lease liability at
the present value of lease payments.
The lease payments shall be discounted
using the interest rate implicit in the lease desired by
the lessor.
If the implicit interest rate cannot be readily
determined, the incremental borrowing rate of the
lessee is used.
12. What are the components of lease payments?
Answer:
Components of lease payments
a. Fixed lease payments or periodic
rental
b. Variable lease payments
c. Exercise price of a purchase option if
the lessee is reasonably certain to
exercise the option
d. Amount expected to be payable by
the lessee under a residual value
guarantee
e. Termination penalties if the lease term
reflects the exercise of a termination
option.
13. When is a lease classified as finance lease or
operating lease on the part of lessor?
Answer:
Whether a lease is a finance lease or an
operating lease depends on the substance of the
transaction rather than the form of the contract.
Under IFRS 16, paragraph 63, among others,
any of the following situations would normally lead to
a lease being classified as a finance lease:
a. The lease transfers ownership of the
underlying asset to the lessee at the
end of the lease term.
b. The lessee has an option to purchase
the asset at a price which is expected
to be sufficiently lower than the fair
value at the date the option becomes
exercisable.
At the inception of the lease, it is reasonably certain
the option will be exercised.
c. The lease term is for the major part of
the economic life of the underlying
asset even if title is not transferred.
Under USA GAAP, major part means at least 75% of
the economic life of an asset.
d. The present value of the lease
payments amounts to substantially all
of the fair value of the underlying asset
at the inception of the lease.
Under USA GAAP, substantially all means at least 90%
of the fair value of the underlying asset.
14. What are the two classifications of finance lease
on the part of the lessor?
Answer:
On the part of the lessor, a finance lease is either:
a. Direct financing lease
b. Sales type lease
15. Distinguish direct financing lease from sale type
lease.
Answer:
A direct financing lease recognizes only
interest income while a sales type lease recognizes
interest income and gross profit on sale.
The main distinction between the two is the
presence or absence of a manufacturer or dealer
profit or loss.
Page 785
65
65
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
1.A
2.C
3.A
4.D
5.A
Page 790
6.D
7.A
8.A
9.B
10.C
Page 791
1.D
2.D
3.A
4.D
5.C
Page 792
1.C
2.C
3.C
4.B
Page 793
CHAPTER XXXX
1. Define a decommissioning liability.
Answer:
IFRIC 1 defines decommissioning liability as an
obligation to dismantle, remove and restore an item
of property, plant and equipment as required by law
or contract.
2. What is the treatment of a decommissioning
liability?
Answer:
The decommissioning liability is capitalized as
cost of the property and initially recognized at
present value.
3. Explain the treatment of a
decommissioning liability.
Answer:
a. A decrease in
liability is deducted
the
asset.
b. An increase in
liability is added to
asset.
change in the
decommissioning
from the cost of
decommissioning
the cost at the
4. What is a distribution of noncash asset to owners?
Answer:
The distribution of noncash asset to owners is
actually payment of property dividend to
shareholders.
5. Explain the measurement of the dividend payable
as a result of distribution of noncash asset to owners.
Answer:
IFRIC 17, paragraph 11, provides that an entity
shall measure a liability to distribute noncash asset as
a dividend to its owner at the fair value of the asset to
be distributed
The dividend payable is initially recognized
at the fair value of the noncash asset on the date of
declaration ad is increased or decreased as a result
of the change in fair value of the asset at year-end
and date of settlement.
6. Explain the measurement of noncash asset to be
distributed to owners.
Answer:
Paragraph 15A of PFRS 5 provides that an
entity shall measure a noncurrent asset classified for
distribution to owners at the lower of carrying amount
and fair value less cost to distribute.
Accordingly, if the fair value less cost to
distribute is lower than the carrying amount of the
asset at the end of the reporting period, the
difference is accounted for as impairment loss.
7. Explain the measurement of equity instrument
issued to extinguish a financial liability.
Answer:
IFRIC 19 provides that the equity instrument
issued to extinguish a financial liability shall be
measured at the following amounts in the order of
priority:
a. Fair value of equity instrument issued
66
66
b. Fair value of liability extinguished
c. Carrying
amount
of
liability
extinguished
8. What is the presentation of the gain or loss on
extinguishment of a financial liability by issuing equity
instrument?
Answer:
The difference between the carrying amount
of the financial liability and initial measurement of the
equity instrument shall be recognized as a gain or loss
on extinguishment.
The gain or loss on extinguishment shall be reported
as a separate line item in the income statement.
9. What is the classification of members’ shares in
cooperative entities?
Answer:
Member’s share in cooperative entities may
be classified as equity or liability depending on the
terms and conditions of the financial instrument.
10. What are the conditions necessary to classify
members’ shares in cooperative entities as equity?
Answer:
Members’ shares in cooperative entities are
classified as equity if the members did not have a
right to request for redemption under either of the
following conditions:
a. If the entity has an unconditional right
to refuse redemption of the members’
shares.
b. If the redemption is unconditionally
prohibited by law, regulation or the
entity’s charter.
Page 802
CHAPTER 40-6
1.B
2.A
3.A
4.C
Page 807
CHAPTER 40-7
1.A
2.A
3.C
4.B
Page 808
CHAPTER 40-8
1.A
2.B
3.C
4.D
5.A
Page 809
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67