TEST
BANK
Advanced
Accountin
g
Part 2
ZEUS VERNON B. MILLAN
ALL RIGHTS RESERVED
2015
No part of this work covered by
the copyright hereon may be
reproduced or used in any form
or by any means - electronic or
mechanical,
including
photocopying – without the
written
permission
of
the
author.
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600,
Philippines
2
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1).............1
OVERVIEW ON THE TOPIC...........................................1
INTRODUCTION........................................................1
OBJECTIVE..............................................................4
SCOPE...................................................................5
DEFINITION OF BUSINESS COMBINATION........................5
Essential elements in the definition of a business combination 5
ACCOUNTING FOR BUSINESS COMBINATION....................7
IDENTIFYING THE ACQUIRER........................................8
DETERMINING THE ACQUISITION DATE.........................10
RECOGNIZING AND MEASURING GOODWILL..................11
Consideration transferred...............................12
Non-controlling interest..................................12
Previously held equity interest in the acquiree13
Net identifiable assets acquired.....................13
RESTRUCTURING PROVISIONS....................................22
SPECIFIC RECOGNITION PRINCIPLES............................23
1. Operating leases.......................................23
2. Intangible assets.......................................26
EXCEPTION TO THE RECOGNITION PRINCIPLE – CONTINGENT LIABILITIES
32
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES
34
Additional concepts on Consideration transferred 37
EXCEPTIONS TO THE MEASUREMENT PRINCIPLE.............40
CHAPTER 13: SUMMARY..........................................43
CHAPTER 13: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................44
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................48
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
55
CHAPTER 14
BUSINESS COMBINATIONS (PART 2)............63
SHARE-FOR-SHARE EXCHANGES.................................63
BUSINESS COMBINATION ACHIEVED IN STAGES..............67
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION 70
MEASUREMENT PERIOD............................................73
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION 79
Reacquired rights...........................................82
Settlement of pre-existing relationships between the acquirer
and acquiree...................................................82
SUBSEQUENT MEASUREMENT AND ACCOUNTING...........89
DISCLOSURES........................................................96
CHAPTER 14: SUMMARY..........................................96
CHAPTER 14: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................97
CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................99
CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................108
CHAPTER 15
BUSINESS COMBINATIONS (PART 3)..........115
3
SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATION115
GOODWILL..........................................................115
Due diligence................................................116
Methods of estimating goodwill....................117
REVERSE ACQUISITIONS.........................................122
COMBINATION OF MUTUAL ENTITIES.........................126
CHAPTER 15: SUMMARY........................................127
CHAPTER 15: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................127
CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................128
CHAPTER 15: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................132
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER........134
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS
........................................................................141
CHAPTER 16
CONSOLIDATED FINANCIAL STATEMENTS (PART 1)
142
OVERVIEW ON THE TOPIC.......................................142
SCOPE...............................................................143
CONTROL...........................................................143
POWER..............................................................144
Administrative rights....................................145
Unilateral rights............................................145
Protective rights...........................................145
Substantive rights........................................146
Voting rights.................................................147
Substantive removal and other rights held by other parties
.....................................................................151
EXPOSURE OR RIGHTS TO VARIABLE RETURNS............151
ABILITY TO USE ITS POWER TO AFFECT INVESTOR’S RETURNS 151
ACCOUNTING REQUIREMENTS..................................152
Uniform accounting policies.........................152
Reporting date..............................................152
Consolidation period.....................................153
Measurement................................................153
NON-CONTROLLING INTERESTS (NCI).......................154
PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS154
CONSOLIDATION AT DATE OF ACQUISITION.................155
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION162
Step 1: Analysis of effects of intercompany transaction 162
Step 2: Analysis of net assets.......................162
Step 3: Goodwill computation......................163
Step 4: Non-controlling interest in net assets164
Step 5: Consolidated retained earnings.......164
Step 6: Consolidated profit or loss................164
Step 7: Profit or loss attributable to owners of parent and NCI
.....................................................................165
SUBSIDIARY’S OUTSTANDING CUMULATIVE PREFERENCE SHARES
180
CHAPTER 16: SUMMARY........................................181
CHAPTER 16: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................184
CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................185
4
CHAPTER 16: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................190
CHAPTER 17
CONSOLIDATED FINANCIAL STATEMENTS (PART 2)
193
INTERCOMPANY TRANSACTIONS...............................193
Intercompany sale of inventory....................203
Intercompany sale of property, plant and equipment
212
Intercompany dividends...............................220
Intercompany bond transaction...................228
CHAPTER 17: SUMMARY........................................235
CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................236
CHAPTER 18
CONSOLIDATED FINANCIAL STATEMENTS (PART 3)
241
IMPAIRMENT OF GOODWILL....................................241
INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS.246
CONTINUOUS ASSESSMENT.....................................255
Changes in ownership interest not resulting to loss of control
.....................................................................255
Loss of control..............................................261
Derecognition of other comprehensive income266
IMPORTANCE OF CONSOLIDATION.............................269
THEORIES OF CONSOLIDATION.................................269
Historical background...................................272
Advantages and disadvantages of the entity theory
272
ADDITIONAL ILLUSTRATIONS:...................................274
CONSOLIDATION OF REVERSE ACQUISITION................288
SPECIAL PURPOSE ENTITIES....................................295
CHAPTER 18: SUMMARY........................................296
CHAPTER 18: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................297
CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................297
CHAPTER 19
CONSOLIDATED FINANCIAL STATEMENTS (PART 4)
311
COMPLEX GROUP STRUCTURES................................311
Identifying the acquisition date....................312
Consolidation of a vertical group..................313
Consolidation of a D-shaped (mixed) group. 323
Complex group structure with Associate......327
INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COST 333
PUSH-DOWN ACCOUNTING.....................................338
PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES344
CHAPTER 19: SUMMARY........................................346
CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................346
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER........353
CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................357
CHAPTER 20
SEPARATE FINANCIAL STATEMENTS..........358
OBJECTIVE..........................................................358
5
SCOPE...............................................................358
DEFINITIONS........................................................358
PREPARATION OF SEPARATE FINANCIAL STATEMENTS.....359
COST METHOD.....................................................359
FAIR VALUE METHOD.............................................359
EQUITY METHOD..................................................360
DISCLOSURE........................................................361
CHAPTER 20: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................362
CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................362
CHAPTER 20: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................363
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER........364
CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................364
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
.............................................................365
OBJECTIVE..........................................................365
Two ways of conducting foreign activities....365
Two main accounting issues.........................365
SCOPE...............................................................366
FUNCTIONAL CURRENCY.........................................366
CHANGE IN FUNCTIONAL CURRENCY.........................368
FOREIGN CURRENCY TRANSACTIONS.........................369
Initial recognition..........................................369
Subsequent measurement...........................370
Monetary items.............................................370
Direct and indirect quotation........................371
RECOGNITION OF EXCHANGE DIFFERENCES................371
ITEMS MEASURED AT OTHER THAN HISTORICAL COST...381
SEVERAL EXCHANGE RATES.....................................383
EXCHANGE DIFFERENCES RECOGNIZED IN OCI...........384
FOREIGN OPERATIONS...........................................385
Translation to the presentation currency......385
Translation procedures.................................386
Translation of a foreign operation.................393
Net investment in a foreign operation..........401
Disposal or partial disposal of a foreign operation 413
HYPERINFLATIONARY ECONOMY...............................414
Translation procedures – Hyperinflationary economy
414
DISCLOSURE........................................................419
CHAPTER 21: SUMMARY........................................419
CHAPTER 21: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................420
CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................424
CHAPTER 21: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................435
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER........445
CHAPTER 21 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................453
CHAPTER 22
6
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 1).........................454
OVERVIEW ON THE TOPIC.......................................454
INTRODUCTION....................................................454
PURPOSE OF DERIVATIVES......................................455
Risks.............................................................455
DEFINITION OF A DERIVATIVE..................................456
COMMON TYPES OF DERIVATIVES.............................458
MEASUREMENT OF DERIVATIVES..............................461
NO HEDGING DESIGNATION....................................461
HEDGING............................................................461
Hedging instrument......................................462
Hedged items...............................................463
HEDGE ACCOUNTING.............................................464
Hedging relationships...................................466
FAIR VALUE HEDGES..............................................466
CASH FLOW HEDGES.............................................467
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION468
CHAPTER 22: SUMMARY........................................469
CHAPTER 22: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................470
CHAPTER 22: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................473
CHAPTER 23
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 2).........................475
ACCOUNTING FOR FORWARD CONTRACTS..................475
Illustration 1: Fair value hedge of a recognized asset
475
Illustration 2: No hedging designation (Held for speculation)
.....................................................................478
Illustration 3: Fair value hedge of a recognized liability 479
Illustration 4: No hedging designation (Held for speculation)
.....................................................................482
FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENT 482
Illustration 5: Fair value hedge of a firm sale commitment
.....................................................................483
Illustration 6: Fair value hedge of a firm purchase commitment
.....................................................................486
Illustration 7: FV hedge - firm purchase commitment (Present
value)...........................................................489
Illustration 8: FV hedge - firm purchase commitment (Present
value)...........................................................492
FAIR VALUE HEDGE VS. CASH FLOW HEDGE...............494
FIRM COMMITMENT VS. FORECAST TRANSACTION........495
CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE
........................................................................496
SUBSEQUENT ACCOUNTING FOR ACCUMULATED OCI IN CASH FLOW HEDGE
........................................................................496
Illustration 9: Cash flow hedge – forecasted purchase transaction
.....................................................................497
Illustration 10: Cash flow hedge of a forecasted sale transaction –
Present value (Indirect quotation)................501
Illustration 11: CF hedge of a recognized liability – Present value
.....................................................................503
7
CHAPTER 23: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................506
CHAPTER 23: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................509
CHAPTER 23: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................518
CHAPTER 24
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 3).........................523
ACCOUNTING FOR FUTURES CONTRACT.....................523
Illustration 1: No hedging designation..........523
Illustration 2: FV hedge of a recognized asset measured at fair
value.............................................................525
Illustration 3: FV hedge of a recognized asset measured at
LOCON..........................................................527
Illustration 4: Fair value hedge of a firm sale commitment
.....................................................................528
CASH FLOW HEDGE – SPECIFIC ACCOUNTING.............530
Illustration 5: CF hedge – Assessment of Hedge effectiveness
.....................................................................531
ACCOUNTING FOR OPTIONS....................................535
Illustration 1: Fair value hedge of a recognized asset – Put option
.....................................................................535
Illustration 2: No hedging designation – Call option
537
Illustration 3: CF hedge - forecasted transaction (Indirect
quotation).....................................................539
ACCOUNTING FOR SWAPS.......................................541
Illustration 1: CF hedge - variable-rate debt (Payment at
maturity)......................................................541
Illustration 2: CF hedge - variable-rate debt (Periodic payments)
.....................................................................543
FAIR VALUE HEDGE – HEDGED ITEM IS MEASURED AT AMORTIZED COST
........................................................................547
Illustration 3: Fair value hedge of a fixed-rate debt547
CHAPTER 24: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................552
CHAPTER 24: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................560
CHAPTER 25
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 4).........................569
ACCOUNTING FOR NET INVESTMENT HEDGES.............569
Illustration: Hedge of a net investment in foreign operation
.....................................................................569
EMBEDDED DERIVATIVES........................................574
Hybrid contracts with financial asset hosts. .575
Separation of embedded derivative from host contract 575
ADDITIONAL ILLUSTRATIONS:...................................576
CHAPTER 25: SUMMARY........................................584
CHAPTER 25: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................585
CHAPTER 25: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................585
CHAPTER 25: THEORY OF ACCOUNTS REVIEWER........591
8
CHAPTER 25 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS
........................................................................614
QUESTIONS
CHAPTER 26
CORPORATE LIQUIDATION AND REORGANIZATION
615
INTRODUCTION....................................................615
CORPORATE LIQUIDATION.......................................615
Measurement basis......................................615
Financial reports...........................................616
REORGANIZATION.................................................642
Types of corporate reorganization................642
CHAPTER 26: SUMMARY........................................643
CHAPTER 26: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................646
CHAPTER 26: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................651
CHAPTER 26: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................658
APPENDICES
APPENDIX A...........................................664
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1A CONTENTS AT A
GLANCE
APPENDIX B...........................................665
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1B CONTENTS AT A
GLANCE
APPENDIX C...........................................666
INTERMEDIATE FINANCIAL ACCOUNTING - PART 2 CONTENTS AT A
GLANCE
APPENDIX D...........................................667
INTERMEDIATE FINANCIAL ACCOUNTING - PART 3 CONTENTS AT A
GLANCE
APPENDIX E............................................668
ADVANCED ACCOUNTING - PART 1 CONTENTS AT A GLANCE
REFERENCES..........................................669
9
Chapter 13
Business Combinations (Part 1)
Chapter 13: Multiple Choice – Computational (For classroom
instruction purposes)
Measuring goodwill / gain on bargain purchase
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and
assumed all of the liabilities of SMALL, Inc. As of this date, the
carrying amounts and fair values of the assets and liabilities of
SMALL acquired by DIMINUTIVE are shown below:
Carrying
Assets
amounts
Fair values
Cash in bank
40,000
40,000
Receivables
800,000
480,000
Allowance for probable losses
on
(120,000)
receivables
Inventory
2,080,000
1,400,000
Building – net
4,000,000
4,400,000
Goodwill
400,000
80,000
Total assets
7,200,000
6,400,000
Liabilities
Payables
1,600,000
1,600,000
On the negotiation for the business combination, DIMINUTIVE Co.
incurred transaction costs amounting to ₱400,000 for legal,
accounting, and consultancy fees.
1. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as
consideration for the assets and liabilities of SMALL, Inc., how
much is the goodwill (gain on bargain purchase) on the business
combination?
a. 1,200,000
b. 1,120,000
c. 1,280,000
d.
1,240,000
2. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as
consideration for the assets and liabilities of SMALL, Inc., how
much is the goodwill (gain on bargain purchase) on the business
combination?
a. (800,000)
b. (720,000)
c. (880,000)
d.
1,200,000
Non-controlling interests
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, KNAVE acquired 80% of the equity interests of
RASCAL, Inc. in exchange for cash. Because the former owners of
RASCAL needed to dispose of their investments in RASCAL by a
specified date, they did not have sufficient time to market RASCAL to
multiple potential buyers.
1
As January 1, 20x1, RASCAL’s identifiable assets and liabilities have
fair values of ₱4,800,000 and ₱1,600,000, respectively.
Case #1: Non-controlling interest measured at fair value
3. KNAVE Co. elects the option to measure non-controlling interest
at fair value. An independent consultant was engaged who
determined that the fair value of the 20% non-controlling interest
in RASCAL, Inc. is ₱620,000.
If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80%
interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
a. 800,000
b. 2,060,000
c. 1,440,000
d.
1,420,000
Case #2: Non-controlling interest measured at fair value
4. KNAVE Co. elects the option to measure non-controlling interest
at fair value. An independent consultant was engaged who
determined that the fair value of the 20% non-controlling interest
in RASCAL, Inc. is ₱620,000.
If KNAVE Co. paid ₱2,400,000 cash as consideration for the 80%
interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
a. (180,000)
b. (800,000)
c. (160,000)
d. (200,000)
Case #3: Non-controlling interest measured at fair value
5. KNAVE Co. elects the option to measure non-controlling interest
at fair value. A value of ₱1,000,000 is assigned to the 20% noncontrolling interest in RASCAL, Inc. [(₱4M ÷ 80%) x 20% =
1,000,000].
If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80%
interest in RASCAL, Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
a. 200,000
b. 1,800,000
c. 2,440,000
d.
1,440,000
Case #4: Non-controlling interest’s proportionate share in
net assets
6. KNAVE Co. elects the option to measure the non-controlling
interest at the non-controlling interest’s proportionate share of
RASCAL, Inc.’s net identifiable assets
If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80%
interest in RASCAL, Inc. and, how much is the goodwill (gain on
bargain purchase) on the business combination?
a. 1,440,000
b. 800,000
c. 1,400,000
c.
960,000
Transaction costs
Use the following information for the next two questions:
Fact pattern
2
On January 1, 20x1, SMUTTY acquired all of the identifiable assets
and assumed all of the liabilities of OBSCENE, Inc. On this date, the
identifiable assets acquired and liabilities assumed have fair values
of ₱6,400,000 and ₱3,600,000, respectively.
SMUTTY incurred the following acquisition-related costs: legal fees,
₱40,000, due diligence costs, ₱400,000, and general administrative
costs of maintaining an internal acquisitions department, ₱80,000.
7. Case #1: As consideration for the business combination, SMUTTY
Co. transferred 8,000 of its own equity instruments with par value
per share of ₱400 and fair value per share of ₱500 to OBSCENE’s
former owners. Costs of registering the shares amounted to
₱160,000. How much is the goodwill (gain on bargain purchase)
on the business combination?
a. 716,000
b. 556,000
c. 600,000
d.
1,200,000
8. Case #2: As consideration for the business combination, SMUTTY
Co. issued bonds with face amount and fair value of ₱4,000,000.
Transaction costs incurred in issuing the bonds amounted to
₱200,000. How much is the goodwill (gain on bargain purchase)
on the business combination?
a. 716,000
b. 556,000
c. 600,000 d.
1,200,000
Restructuring provisions
9. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable
assets and assumed all of the liabilities of BEG, Inc. by paying
cash of ₱4,000,000. On this date, the identifiable assets acquired
and liabilities assumed have fair values of ₱6,400,000 and
₱3,600,000,
respectively.
ENTREAT
Co.
has
estimated
restructuring provisions of ₱800,000 representing costs of
exiting the activity of BEG, costs of terminating employees of
BEG, and costs of relocating the terminated employees. How
much is the goodwill (gain on bargain purchase)?
a. 1,080,000
b. 1,280,000
c. 1,120,000 d. 1,200,000
Specific recognition principles – Operating leases
Fact pattern
On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable
assets and assumed all of the liabilities of THEATRICAL, Inc. by
paying cash of ₱4,000,000. On this date, the identifiable assets
acquired and liabilities assumed have fair values of ₱6,400,000 and
₱3,600,000, respectively.
Case #1: Acquiree is the lessee – terms are favorable
10. As of January 1, 20x1, HISTRIONAL holds a building and a
patent which are being rented out to THEATRICAL, Inc. under
operating leases. HISTRIONAL has determined that the terms of
the operating lease on the building compared with market terms
are favorable. The fair value of the differential is estimated at
₱80,000. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000
b. 1,280,000
c. 1,120,000 d. 1,200,000
Case #2: Acquiree is the lessee – terms are unfavorable
3
11. As of January 1, 20x1, HISTRIONAL holds a building and a
patent which are being rented out to THEATRICAL, Inc. under
operating leases. HISTRIONAL has determined that the terms of
the operating lease on the patent compared with market terms
are unfavorable. The fair value of the differential is estimated at
₱80,000. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000
c. 1,120,000
d.
1,200,000
Case #3: Acquiree is the lessor
12. As of January 1, 20x1, HISTRIONAL is renting a building and a
patent from THEATRICAL, Inc. under operating leases.
HISTRIONAL has determined that the terms of the operating lease
on the building compared with market terms are favorable. The
fair value of the differential is estimated at ₱80,000. How much is
the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000
c. 1,120,000
d.
1,200,000
Intangible assets – separability and contractual-legal criteria
13. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in
exchange for all of the net assets of FLEXIBLE, Inc. As of this date,
the carrying amounts and fair values of the assets and liabilities
of FLEXIBLE acquired by LITHE are shown below:
Carrying
Fair
Assets
amounts
values
Cash
40,000
40,000
1,480,00
2,760,000
Receivables
0
Allowance for probable losses on
(400,000)
receivables
4,400,00
4,000,000
Property, plant and equipment
0
Computer software
400,000
Patent
200,000
Goodwill
400,000
80,000
6,200,00
7,200,000
Total assets
0
Liabilities
Bonds payable (w/ face amount of
₱1,600,000)
1,600,000
1,800,00
0
In applying the recognition and measurement principles under PFRS
3, LITHE Co. has identified the following unrecorded intangible
assets:
Fair
Type of intangible asset
value
Research and development
200,000
projects
Customer list
160,000
Customer contract #1
120,000
Customer contract #2
80,000
Order (production) backlog
40,000
Internet domain name
60,000
Trademark
100,000
4
Trade secret processes
Mask works
Total
140,000
180,000
1,080,0
00
Additional information:
 The computer software is considered obsolete.
 The patent has a remaining useful life of 10 years and a
remaining legal life of 12 years.
 FLEXIBLE, Inc. recognized the research and development costs as
expenses when they were incurred.
 Customer contract #1 refers to an agreement between FLEXIBLE,
Inc. and Numbers Co., a customer, wherein FLEXIBLE, Inc. is to
supply goods to Numbers Co. for a period of 5 years. As of
acquisition date, the remaining period in the agreement is 3
years. LITHE and FLEXIBLE believe that Numbers Co. will renew
the agreement at the end of the current contract. The agreement
is not separable.
 Customer contract #2 refers to FLEXIBLE’s insurance segment’s
portfolio of one-year motor insurance contracts that are
cancellable by policyholders.
 FLEXIBLE, Inc. transacts with its customers solely through
purchase and sales orders. As of acquisition date, has a backlog
of customer purchase orders from 60% of its customers, all of
whom are recurring customers. The other 40% of FLEXIBLE’s
customers are also recurring customers. However, as of
acquisition date, FLEXIBLE has no open purchase orders or other
contracts with those customers.
 The internet domain name is registered.
How much is the goodwill (gain on bargain purchase)?
a. 900,000
b. 600,000 c. 420,000 d. 1,680,000
Other recognition and measurement principles
14. On January 1, 20x1, SUBTERFUGE Co. acquired all of the
identifiable assets and assumed all of the liabilities of
DECEPTION, Inc. by paying cash of ₱4,000,000. On this date, the
identifiable assets acquired and liabilities assumed have fair
values of ₱6,400,000 and ₱3,600,000, respectively.
Additional information:
 SUBTERFUGE intends to sell immediately a factory plant included
in the identifiable assets of DECEPTION. All of the “held for sale”
classification criteria under PFRS 5 are met. As of January 1,
20x1, the factory plant has a fair value of ₱1,200,000 and a
carrying amount of ₱1,000,000 in the books of DECEPTION. Costs
to sell the factory plant is ₱80,000.
 Not included in the identifiable asset of DECEPTION is a research
and development intangible asset that SUBTERFUGE does not
intend to use. The fair value of this asset is ₱200,000.
 Also, not included in the identifiable asset of DECEPTION is a
customer list, with an estimated value of ₱40,000, in the form of
a database where the nature of the information is subject to
national laws regarding confidentiality.
5
How much is the goodwill (gain on bargain purchase)?
a. 1,200,000 b. 1,280,000
c. 1,080,000
1,040,000
d.
Contingent liabilities
15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable
assets and assumed all of the liabilities of SCOLD, Inc. by paying
cash of ₱4,000,000. On this date, SCOLD’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively. Non-controlling interest has a fair value of ₱320,000.
As of January 1, 20x1, SCOLD had the following which were not
included in the acquisition-date fair value measurement of liabilities:
 SCOLD has an existing contract with a customer to deliver
products at a specified future date. In accordance with the
agreement, SCOLD shall pay a penalty for failure to deliver the
said goods. CHIDE determined that the fair value of the penalty is
₱40,000. However, because CHIDE expects to comply with the
agreement, it was assessed that payment of penalty is
improbable.
 SCOLD has guaranteed a bank loan of a third party. CHIDE shall
replace SCOLD as the guarantor. If the third party defaults on the
loan, CHIDE will be held liable for the guarantee. CHIDE
determined that the fair value of the guarantee is ₱120,000.
However, both SCOLD and CHIDE believe that the third party will
not default on its loan from the bank.
 There is a pending unresolved litigation filed by a third party
against SCOLD. CHIDE determined that the fair value of settling
the litigation is ₱200,000. However, because the legal counsels of
both CHIDE and SCOLD strongly believe that they will win the
case, it was assessed that payment for the settlement of the
litigation is improbable.
How much is the goodwill (gain on bargain purchase)?
a. 1,880,000
b. 1,200,000
c. 1,560,000
d. 1,520,000
Consideration transferred and indemnification asset
16. On January 1, 20x1, PRODIGIOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of
EXTRAORDINARY, Inc. by paying cash of ₱4,000,000. On this date,
the identifiable assets acquired and liabilities assumed have fair
values of ₱6,400,000 and ₱3,600,000, respectively.
The terms of the business combination agreement are shown below:
 Half of the ₱4,000,000 agreed consideration shall be paid on
January 1, 20x1 and the other half on December 31, 20x5. The
prevailing market rate as of January 1, 20x1 is 10%.
 In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of ₱2,000,000 and fair
value of ₱1,200,000 shall be transferred to the former owners
of EXTRAORDINARY.
b. After the combination, EXTRAORDINARY’s activities shall be
continued by PRODIGIOUS. PRODIGIOUS agrees to provide a
patented
technology
for
use
in
the activities
of
EXTRAORDINARY. The patented technology has a carrying
6

amount of ₱240,000 in the books of PRODIGIOUS and a fair
value of ₱320,000.
Included in the liabilities assumed is an estimated liability on a
pending lawsuit filed against EXTRAORDINARY by a third party
with an acquisition-date fair value of ₱400,000. The carrying
amount of the liability in EXTRAORDINARY’s books immediately
before the business combination is ₱480,000. EXTRAORDINARY
guarantees to indemnify PRODIGIOUS for any settlement amount
of the liability in excess of ₱480,000.
How much is the goodwill (gain on bargain purchase)?
a. 1,721,843 b. 1,561,843
c. 1,641,843
2,320,000
d.
Deferred taxes
17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets
and assumed all of the liabilities of DISHONOR, Inc. As of this
date, the carrying amounts and fair values of the assets and
liabilities of DISHONOR acquired by ATTAINDER are shown below:
Carrying
Assets
amounts
Fair values
Cash in bank
40,000
40,000
Receivables
800,000
480,000
Allowance for probable losses
on
(120,000)
receivables
Inventory
2,080,000
1,400,000
Building – net
4,000,000
4,400,000
Goodwill
400,000
80,000
Total assets
7,200,000
6,400,000
Liabilities
Payables
1,600,000
1,600,000
ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets
and liabilities of DISHONOR, Inc. It was determined on acquisition
date that DISHONOR, Inc. has an unrecorded patent with a fair value
of ₱120,000 and a contingent liability with fair value of ₱80,000.
Although adjustments are to be made to the carrying amounts of the
assets and liabilities, no adjustments shall be made to their tax
bases. All adjustments to the carrying amounts of assets and
liabilities result to temporary differences. ATTAINDER’s tax rate is
30%.
How much is the goodwill (gain on bargain purchase) on the
business combination?
a. 1,148,000
b. 1,108,000
c. 1,028,000
d. 1,240,000
Consideration transferred – Dividends on
18. On January 1, 20x1, FARCICAL Co. acquired all of the assets
and liabilities of ABSURD, Inc. for ₱6.4M. As of this date, the
7
carrying amounts and fair values of the assets and liabilities of
ABSURD are shown below:
Carrying
Assets
amounts
Fair values
Cash in bank
40,000
40,000
Receivables
800,000
480,000
Allowance for probable losses
on
(120,000)
receivables
Inventory
2,080,000
1,400,000
Building – net
4,000,000
4,400,000
Goodwill
400,000
80,000
Total assets
7,200,000
6,400,000
Liabilities
Dividends payable
Other payables
400,000
1,600,000
2,000,000
400,000
1,600,000
2,000,000
The dividends payable pertain to dividends declared by ABSURD, Inc.
on December 28, 20x0 to shareholders of record on January 15,
20x1. The dividends will be distributed on January 31, 20x1.
How much is the goodwill (gain on bargain purchase)?
a. 1,280,000
b. 2,080,000
c. 2,480,000
d. 1,680,000
8
Chapter 14
Business Combinations (Part 2)
Chapter 14: Multiple Choice – Computational (For classroom
instruction purposes)
Consideration transferred – Measurement
Use the following information for the next five questions:
On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable
assets and assumed all of the liabilities of CONVERSATION, Inc. by
issuing its own ordinary shares. Information at acquisition date is
shown below:
COLLOQUY
CONVERSATION Combine
Co.
, Co.
d entity
(carrying
amounts)
(fair values)
16,000,00
9,600,000
6,400,000
Identifiable assets
0
Goodwill
?
Total assets
9,600,000
6,400,000
?
Liabilities
Share capital
Share premium
Retained earnings
Total liabilities &
equity
2,800,000
2,400,000
1,200,000
3,200,000
3,600,000
1,200,000
1,000,000
600,000
6,400,000
2,800,000
4,800,000
?
9,600,000
6,400,000
?
Additional information:
 COLLOQUY’s share capital consists of 60,000 ordinary shares with
par value of ₱40 per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares
with par value of ₱400 per share.
1. How much is the fair value of consideration transferred on the
business combination?
a. 4,000,000 b . 2,400,000
c. 4,400,000
d. 4,800,000
2. How many shares were issued in the business combination?
a. 40,000
b. 12,000 c. 36,000 d. 10,000
3. How much is the acquisition-date fair value per share?
a. 400
b. 440
c. 280
d. 360
4. How much goodwill was recognized on acquisition date?
a. 980,000
b. 1,200,000
c. 1,280,000
d.
1,080,000
5. What is the retained earnings of the combined entity immediately
after the business combination?
a. 3,120,000 b. 3,320,000
c. 3,280,000
d. 3,200,000
Fair value of acquirer’s shares is reliably determinable
9
Use the following information for the next three questions:
On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into
a business combination effected through exchange of equity
instruments. The combination resulted to CONJUNCTION obtaining
100% interest in UNION. Both of the combining entities are publicly
listed. As of this date, CONJUNCTION’s shares have a quoted price of
₱400 per share. CONJUNCTION Co. recognized goodwill of ₱300,000
on the business combination. No acquisition-related costs were
incurred. Additional selected information at acquisition date is shown
below:
CONJUNCTION
Combined
Co.
entity
(before
acquisition)
(after acquisition)
Share capital
2,400,000
2,800,000
Share premium
1,200,000
4,800,000
Totals
3,600,000
7,600,000
6. How many shares were issued by CONJUNCTION Co. in the
business combination?
a. 40,000
b. 20,000 c. 12,000 d. 10,000
7. What is the par value per share of the shares issued?
a. 10
b. 40
c. 12
d. 32
8. What is the acquisition-date fair value of the net identifiable
assets of UNION?
a. 3,700,000 b. 3,200,000
c. 2,800,000
d. 2,400,000
Business combination achieved in stages – from PFRS 9
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest
in ENDURANCE, Inc. for ₱400,000. The investment was accounted for
under PFRS 9. From 20x1 to the end of 20x3, FORTITUDE recognized
net fair value gains of ₱200,000.
On January 1, 20x4, FORTITUDE acquired additional 60% ownership
interest in ENDURANCE, Inc. for ₱3,200,000. As of this date,
FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE’s net identifiable assets have a fair value of
₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the
non-controlling interest’s proportionate share of ENDURANCE’s
identifiable net assets.
9. Scenario #1: The previously held interest was initially classified
as FVPL. How much is the goodwill (gain on bargain purchase)?
a. 200,000
b. 420,000 c. 920,000 d. 540,000
10. Scenario #2: The previously held interest was initially
classified as FVOCI. How much is the goodwill (gain on bargain
purchase)?
a. 200,000
b. 420,000 c. 920,000 d. 540,000
10
Business combination achieved in stages – from PAS 28
11. On January 1, 20x1, OBDURATE Co. acquired 30% ownership
interest in STUBBORN, Inc. for ₱400,000. Because the investment
gave OBDURATE significant influence over STUBBORN, the
investment was accounted for under the equity method in
accordance with PAS 28.
From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net
share in the profits of the associate and ₱40,000 share in dividends.
Therefore, the carrying amount of the investment in associate
account on January 1, 20x3, is ₱560,000.
On January 1, 20x4, OBDURATE acquired additional 60% ownership
interest in STUBBORN, Inc. for ₱3,200,000. As of this date,
OBDURATE has identified the following:
a. The previously held 30% interest has a fair value of ₱720,000.
b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.
c. OBDURATE elected to measure non-controlling interests at the noncontrolling interest’s proportionate share of STUBBORN’s identifiable
net assets.
How much is the goodwill?
a. 320,000 b. 240,000 c. 280,000 d. 360,000
Business
combination
achieved
without
transfer
of
consideration
12. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same
business. On January 1, 20x1, OBSTREPEROUS and NOISY signed
a contract, the terms of which resulted in OBSTREPEROUS
obtaining control over NOISY without any transfer of
consideration between the parties.
The fair value of the identifiable net assets of NOISY, Inc. on January
1, 20x1 is ₱4,000,000. NOISY chose to measure non-controlling
interest at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets.
How much is the goodwill?
a. 4,000,000
b.0 c. a or c
d. This is not a business
combination
Business
combination
achieved
without
transfer
of
consideration
13. BUCOLIC Co. owns 36,000 shares representing 40% ownership
interest in RURAL, Inc.’s 90,000 outstanding ordinary shares.
BUCOLIC accounts for the investment under the equity method.
On January 1, 20x1, RURAL reacquired 30,000 of its own shares from
other investors so that BUCOLIC shall obtain control over RURAL. The
following were determined as of acquisition date:
a. The previously held 40% interest has a fair value of ₱720,000.
b. RURAL’s net identifiable assets have a fair value of ₱4,000,000.
c. BUCOLIC elected to measure non-controlling interests at the noncontrolling interest’s proportionate share of RURAL’s identifiable net
assets.
How much is the goodwill?
11
a. (1,680,000)
b. (1,320,000)
c. (880,000)
d. 0
Provisional amounts – identifiable assets acquired
Use the following information for the next three questions:
Fact pattern
On September 30, 20x1, INNOCUOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of HARMLESS,
Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of
₱6,400,000 and ₱3,600,000, respectively.
Case #1: Identifiable asset recognized at provisional amount
14. INNOCUOUS engaged an independent valuer to appraise a
building acquired from HARMLESS. However, the valuation report
was not received by the time INNOCUOUS authorized for issue its
financial statements for the year ended December 31, 20x1. As
such, the building was assigned a provisional amount of
₱2,800,000. Also, the building was tentatively assigned an
estimated useful life of 10 years from acquisition date.
INNOCUOUS uses the straight line method of depreciation and
recognized three months’ depreciation on the building for 20x1.
On July 1, 20x2, INNOCUOUS finally received the valuation report
from the independent valuer which shows that the fair value of the
building as of September 30, 20x1 is ₱2,000,000 and remaining
useful from that date is 5 years.
How should INNOCUOUS account for the new information obtained?
a. As a retrospective adjustment to the provisional amount of the
building resulting to increase in goodwill by ₱800,000.
b. As a retrospective adjustment to the provisional amount of the
building resulting to decrease in goodwill by ₱800,000.
c. As a retrospective restatement to the provisional amount of
the building resulting to increase in goodwill by ₱800,000. The
adjustment is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
Case #2: Unrecorded identifiable asset acquired
15. On July 1, 20x2, INNOCUOUS obtained new information that
HARMLESS has an unrecorded patent which was not identified on
September 30, 20x1. It was believed that the unrecorded patent
had a fair value of ₱400,000 and a remaining useful life of 4 years
as of September 30, 20x1.
How should INNOCUOUS account for the new information obtained?
a. As a retrospective adjustment to record the previously
unrecorded patent resulting to increase in goodwill by
₱400,000.
b. As a retrospective adjustment to record the previously
unrecorded patent resulting to decrease in goodwill by
₱400,000.
c. As a retrospective restatement to record the previously
unrecorded patent resulting to decrease in goodwill by
₱400,000. The adjustment is treated as a correction of a prior
period error.
12
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
Case #3: Information obtained beyond measurement period
16. On November 1, 20x2, the internal auditors of INNOCUOUS
discovered an error on the recorded identifiable assets acquired
from HARMLESS on the business combination. A patent with a fair
value of ₱400,000 and a remaining useful life of 4 years as of
September 30, 20x1 was omitted from the valuation listing.
How should INNOCUOUS account for the new information obtained?
a. As a retrospective adjustment to record the previously
unrecorded patent resulting to increase in goodwill by
₱400,000.
b. As a retrospective adjustment to record the previously
unrecorded patent resulting to decrease in goodwill by
₱400,000.
c. As a retrospective restatement to record the previously
unrecorded patent resulting to decrease in goodwill by
₱400,000. The adjustment is treated as a correction of a prior
period error.
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
Provisional amounts – consideration transferred
17. On September 30, 20x1, RIBALD Co. acquired all of the
identifiable assets and assumed all of the liabilities of OFFENSIVE,
Inc. by issuing 10,000 shares with par value of ₱20 per share.
On this date, RIBALD’s shares were assigned a provisional value of
₱400 per share. Also, because some identifiable assets acquired and
liabilities assumed have fair values that were not readily available, a
provisional amount of ₱2,800,000 was assigned to OFFENSIVE’s net
identifiable assets.
On April 1, 20x2, after RIBALD’s 20x1 financial statements were
issued, new information was obtained confirming that the fair value
of RIBALD’s shares on September 30, 20x1 is ₱440 per share and
that the fair value of OFFENSIVE’s net identifiable assets as of
September 30, 20x1 is ₱3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which
led to RIBALD believing that the merger with OFFENSIVE is not as
profitable as expected. RIBALD now wants to decrease the amount
assigned to the consideration transferred to OFFENSIVE on
September 30, 20x1 to ₱360 per share and the value of OFFENSIVE’s
net identifiable assets to ₱1,600,000.
How should RIBALD account for the new information obtained on July
1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill
by ₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill
by ₱400,000.
13
c. As a retrospective restatement resulting to decrease in
goodwill by ₱400,000. The adjustment is treated as a
correction of a prior period error.
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
Determining what is part of the business combination
transaction
18. On January 1, 20x1, DIAPHANOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of
TRANSPARENT, Inc. by paying cash of ₱4,000,000. On this date,
the identifiable assets acquired and liabilities assumed have fair
values of ₱6,400,000 and ₱3,600,000, respectively.
Additional information:
In addition to the business combination transaction, the following
have also transcribed during the negotiation period:
a. After the business combination, TRANSPARENT will enter into
liquidation and DIAPHANOUS agreed to reimburse TRANSPARENT
for liquidation costs estimated at ₱80,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the
appraisal fee of a building included in the identifiable assets
acquired. The agreed reimbursement is ₱40,000.
c. DIAPHANOUS entered into an agreement to retain the top
management of TRANSPARENT for continuing employment. On
acquisition date, DIAPHANOUS agreed to pay the key employees
signing bonuses totaling ₱400,000.
d. To persuade, Mr. Five-six Numerix, the previous major shareholder
of TRANSPARENT, to sell his major holdings to DIAPHANOUS,
DIAPHANOUS agreed to pay an additional ₱200,000 directly to Mr.
Numerix.
e. Included in the valuation of identifiable assets are inventories
with fair value of ₱360,000. Ms. Vital Statistix, a former major
shareholder of TRANSPARENT, shall acquire title to the goods.
How much is the goodwill (gain on bargain purchase)?
a. 1,680,000
b. 1,640,000
c. 1,760,000
1,240,000
d.
Settlement of pre-existing relationship - Reacquired right
19. On January 1, 20x1, THRALL Co. acquired all of the identifiable
assets and assumed all of the liabilities of SLAVE, Inc. by paying
cash of ₱4,000,000. On this date, SLAVE’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
Prior to business combination, THRALL has sold a license to SLAVE.
The licensing agreement granted SLAVE the right to use THRALL’s
patented technology for a period of 5 years. THRALL received
₱400,000 for the license on grant date and royalty fees based on
SLAVE’s sales.
THRALL recognized the license fee as deferred liability and
amortized it over 5 years. The carrying amount of the deferred
liability on January 1, 20x1 is ₱240,000.
14
On the other hand, SLAVE recognized the license fee paid to THRALL
as prepayment and amortized it based on the number of products
sold. The carrying amount of the prepayment on January 1, 20x1 is
₱200,000.
On January 1, 20x1, THRALL has determined that the fair value of
the license agreement is ₱480,000. The fair value determined
consists of ₱160,000 “at-market” (based on market participants'
estimates) and ₱320,000 “off-market” (based on the excess of fair
value derived from cash flow estimates over at-market values;
₱480,000 – ₱160,000) components. The off-market component is
favorable to SLAVE and unfavorable to THRALL, as royalty rates have
increased considerably in comparable markets since the initiation of
the contract. The contract does not have any cancellation clause or
any minimum royalty payment requirements.
How much is the goodwill (gain on bargain purchase)?
a. 1,200,000
b. 840,000 c. 980,000 d. 920,000
Settlement of pre-existing relationship – Not a reacquired
right
20. MULIEBRITY Co. purchases raw materials from FEMINITY, Inc.
under a five-year supply contract at fixed rates. Currently, the
fixed rates are higher than the rates at which MULIEBRITY could
purchase similar raw materials from another supplier. MULIEBRITY
is allowed under the supply agreement to terminate the contract
before the end of the five-year term, but only by paying a
₱400,000 penalty.
On January 1, 20x1, with three years remaining under the supply
contract, MULIEBRITY Co. acquired all of the identifiable assets and
assumed all of the liabilities of FEMINITY, Inc. by paying cash of
₱4,000,000. On this date, FEMINITY’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
Included in the total fair value of FEMINITY is ₱640,000 related to the
fair value of the supply contract with MULIEBRITY. The ₱640,000
represents a ₱280,000 component that is “at market” because the
pricing is comparable to pricing for current market transactions for
the same or similar items (selling effort, customer relationships and
so on) and a ₱360,000 component for pricing that is unfavorable to
MULIEBRITY because it exceeds the price of current market
transactions for similar items. There are no other assets or liabilities
related to the contract in either MULIEBRITY’s or FEMINITY’s books as
of acquisition date.
How much is the goodwill (gain on bargain purchase)?
a. 840,000 b. 1,200,000
c. 920,000 d. 980,000
Settlement of pre-existing relationship – Non-contractual
21. On January 1, 20x1, DEMULCENT Co. acquired all of the
identifiable assets and assumed all of the liabilities of
EMBARRASSING, Inc. by paying cash of ₱4,000,000. On this date,
EMBARRASSING’s identifiable assets and liabilities have fair
values of ₱6,400,000 and ₱3,600,000, respectively.
15
As of January 1, 20x1, there is a pending patent infringement suit
filed by EMBARRASSING, Inc. against DEMULCENT Co. DEMULCENT
recognized a probable loss on the lawsuit amounting the ₱520,000.
The patent in question shall be transferred to DEMULCENT after the
business combination. DEMULCENT’s legal advisers determined that
the fair value of the settlement of the pending lawsuit is ₱400,000.
How much is the goodwill (gain on bargain purchase)?
a. 840,000 b. 800,000 c. 280,000 d. 920,000
Contingent
consideration
–
Initial
and
subsequent
measurement
22. On January 1, 20x1, VERITY FIRMNESS Co. acquired all of the
identifiable assets and assumed all of the liabilities of FIRMNESS,
Inc. by paying cash of ₱4,000,000. On this date, FIRMNESS’s
identifiable assets and liabilities have fair values of ₱6,400,000
and ₱3,600,000, respectively.
VERITY agrees to pay an additional amount equal to 10% of the 20x1
year-end profit that exceeds ₱1,600,000. FIRMNESS historically has
reported profits of ₱1,200,000 to ₱1,600,000 each year.
After assessing the expected level of profits for the year based on
forecasts and plans, as well as industry trends, VERITY estimated
that the fair value of the contingent consideration is ₱40,000.
How much is the goodwill (gain on bargain purchase)?
a. 1,180,000
b. 1,200,000
c. 1,240,000
980,000
d.
23. Case #1: (Refer to previous problem) The actual profit for the
year is ₱2,200,000. The contingent consideration will be settled
on January 15, 20x2. The entry on December 31, 20x1 includes a
a. debit to loss of ₱20,000 to be recognized in profit or loss
b. credit to gain of ₱20,000 to be recognized in profit or loss
c. debit to loss of ₱20,000 to be recognized in OCI
d. credit to gain of ₱20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the
year is ₱1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of ₱40,000 to be recognized in profit or loss
b. credit to gain of ₱40,000 to be recognized in profit or loss
c. debit to loss of ₱40,000 to be recognized in OCI
d. credit to gain of ₱40,000 to be recognized in OCI
Contingent
consideration
–
Initial
and
subsequent
measurement
25. On January 1, 20x1, PRECIPITOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of STEEP, Inc.
by issuing 10,000 of its own shares with par value of ₱40 per
share. On this date, STEEP’s identifiable assets and liabilities have
fair values of ₱6,400,000 and ₱3,600,000, respectively, while
PRECIPITOUS’s shares have fair value of ₱400 per share.
In addition, PRECIPITOUS agrees to issue additional 1,000 shares to
the former owners of STEEP if the market price per share of
16
PRECIPITOUS’s shares increases to ₱480 per share as of December
31, 20x1. After consideration for the vesting conditions,
PRECIPITOUS estimated that the fair value of the contingent
consideration on January 1, 20x1 is ₱360,000.
How much is the goodwill (gain on bargain purchase)?
a. 1,200,000
b. 840,000
c. 1,560,000
d. 980,000
26. Case #1: (Refer to previous problem) The actual market price
of PRECIPITOUS’s shares on December 31, 20x1 is ₱480. The
contingent consideration will be settled on January 15, 20x2. The
entry on December 31, 20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in profit or loss
c. debit to loss of ₱120,000 in OCI
d. no entry is required
27. Case #2: The actual market price of PRECIPITOUS’s shares on
December 31, 20x1 is ₱360. The entry on December 31, 20x1
includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in OCI
c. a reclassification within equity
d. no entry is required
Contingent payments to employees
28. On January 1, 20x1, MACABRE Co. acquired 90% of the
identifiable assets and assumed all of the liabilities of HORRIBLE,
Inc. by paying cash of ₱4,000,000. On this date, HORRIBLE’s
identifiable assets and liabilities have fair values of ₱6,400,000
and ₱3,600,000, respectively. Non-controlling interest has a fair
value of ₱320,000.
Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a
ten-year contract. The contract required HORRIBLE to pay the CEO
₱400,000 if HORRIBLE is acquired before the contract expires. On
January 1, 20x1, Mr. Boss was still employed and MACABRE assumes
the obligation of paying Mr. Boss the contracted amount. How much
is the goodwill (gain on bargain purchase)?
a. 1,200,000
b. 1,920,000
c. 1,520,000
d.
1,120,000
17
Chapter 15
Business Combinations (Part 3)
Chapter 15: Multiple Choice – Computational (For classroom
instruction purposes)
Applications of the Direct valuation method
Use the following information for the next four questions:
UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The
following information was gathered through a diligence audit:
 The actual earnings of IMMATURE, Inc. for the past 5 years are
shown below:
Earning
Year
s
4,800,00
20x1
0
5,200,00
20x2
0
5,400,00
20x3
0
5,000,00
20x4
0
7,200,00
20x5
0
27,600,0
Total
00




Earnings in 20x5 included an expropriation gain of ₱1,600,000.
The fair value of IMMATURE’s net assets as of the end of 20x5 is
₱40,000,000.
The industry average rate of return is 12%.
Probable duration of “excess earnings” is 5 years.
1. How much is the estimated goodwill using the multiples of
average excess earnings method?
a. 1,600,000
b. 400,000 c. 920,000 d. 2,000,000
2. How much is the estimated goodwill using the capitalization of
average excess earnings method? (Assume a capitalization rate
of 25%)
a. 1,600,000
b. 400,000 c. 920,000 d. 2,000,000
3. How much is the estimated goodwill using the capitalization of
average earnings method? (Assume a capitalization rate of
12.5%)
a. 1,600,000
b. 400,000 c. 920,000 d. 2,000,000
4. How much is the estimated goodwill using present value of
average excess earnings method? (Assume a discount rate of
10%)
a. 1,516,136
b. 1,428,789
c. 1,516,316
d.
1,412,308
18
Applications of the Direct valuation method – Purchase price
Use the following information for the next three questions:
ABOMINATE Co. is estimating the goodwill in the expected purchase
of DISLIKE, Inc. in January 20x6. The following information was
determined.
Year
Earnings
20x1
20x2
20x3
20x4
20x5
Total
480,000
520,000
540,000
500,000
560,000
2,600,000
Year-end net
assets
1,920,000
2,320,000
2,160,000
2,240,000
2,360,000
11,000,000
Case #1: Excess earnings
5. If goodwill is to be measured by capitalizing excess earnings at
30%, with normal return on average net assets at 10%, how much
is the purchase price in the contemplated business combination?
(The year-end net assets in 20x5 approximate fair value.)
a. 5,440,000 b. 2,360,000
c. 3,360,000
d. 3,250,000
Case #2.1: Average earnings
6. If goodwill is to be measured by capitalizing earnings at 16%, how
much is the purchase price in the contemplated business
combination? (The year-end net assets in 20x5 approximate fair
value.)
a. 3,360,000 b. 3,250,000
c. 5,440,000
d. 2,360,000
Case #2.2: Average earnings
7. If goodwill is to be measured by capitalizing earnings at 16%, how
much is the goodwill? (The year-end net assets in 20x5
approximate fair value.)
a. 890,000
b. 1,000,000
c. 3,080,000
d. 0
Applications of the Direct valuation method – Purchase price
8. CONGEAL Co. acquired the net assets of THICKEN, Inc. THICKEN
has one asset whose fair value exceeds its carrying amount by
₱4,000,000. THICKEN’s equity is ₱36,000,000. CONGEAL
estimated that THICKEN’s excess earnings would last for 5 years
and that the return on investment is 10%. THICKEN 's average
earnings for negotiation purposes is ₱5,200,000 and the industry
average rate of return is 12% on the fair value of net assets.
How much is the purchase price using the "present value of average
excess earnings" approach to goodwill measurement?
a. 1,516,315
b. 3,378,901
c. 43,378,901
d.
41,516,315
Applications of the Direct valuation method – Actual earnings
9. SIBILATE Co. acquired the net assets of HISS, Inc. for ₱41.6M. The
acquisition resulted to a goodwill of ₱1,600,000 measured by
capitalizing the annual superior earnings of HISS at 25%. The
normal rate of return is 12% on net assets before recognition of
goodwill. How much is the average earnings of HISS?
a. 4,400,000 b. 4,800,000
c. 5,600,000
d. 5,200,000
19
Applications of the Direct valuation method
Use the following information for the next three questions:
DREARY Co. and DISMAL, Inc. decided to combine and set up a new
entity – Alphabets Corporation. The individual records of the
combining constituents show the following:
DREARY
DISMAL,
Co.
Inc.
Net assets (at fair
1,600,00
2,400,
values)
0
000
Average
annual
320,00
480,
earnings
0
000
Alphabets Corporation shall issue 10% preference shares with par
value per share of ₱400 for the net assets contributions of the
combining constituents and ordinary shares with par value per share
of ₱200 for the excess of total contributions (net asset contribution
plus goodwill) over net assets contributions.
It was agreed that the normal rate of return is 10% of net assets.
Excess earnings shall be capitalized at 20%.
10. How much are the total contributions by DREARY and DISMAL,
respectively?
DREARY
DISMAL
a. 3,600,000
2,400,000
b. 2,400,000
3,600,000
c. 1,600,000
2,400,000
d. 1,800,000
2,200,000
11. How much is the goodwill generated by the contributions of
DREARY and DISMAL, respectively?
DREARY
DISMAL
a. 800,000
1,200,000
b. 400,000
600,000
c. 200,000
800,000
d. 920,000
1,360,000
12. What is the ratio of total shares (preference and ordinary) to
be issued to DREARY and DISMAL, respectively?
DREARY
DISMAL
a. 20%
20%
b. 60%
40%
c. 25%
75%
d. 40%
60%
Reverse acquisition
13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires
CBA Co., a publicly listed entity, through an exchange of equity
instruments. CBA Co. issues 5 shares in exchange for each
ordinary share of ZYX, Inc. All of ZYX’s shareholders exchange
their shares in CBA Co. Therefore, CBA Co. issues 40,000 ordinary
shares in exchange for all 8,000 ordinary shares of ZYX, Inc.
20
The fair value of each ordinary share of ZYX at January 1, 20x1 is
₱800. The quoted market price of CBA’s ordinary shares at that date
is ₱160.
The statements of financial position of the combining entities
immediately before combination are shown below:
CBA Co.
ZYX, Inc.
(legal
(legal parent,
subsidiary,
accounting
accounting
acquiree)
acquirer)
Identifiable assets
6,400,000
9,600,000
Total assets
6,400,000
9,600,000
Liabilities
Share capital:
10,000 ordinary shares, ₱40
par
8,000 ordinary shares, ₱400
par
Retained earnings
Total liabilities and equity
5,200,000
2,800,000
400,000
3,200,000
800,000
6,400,000
3,600,000
9,600,000
The fair value of CBA’s identifiable assets and liabilities at January 1,
20x1 are the same as their carrying amounts. How much is the
goodwill (gain on bargain purchase)?
a. (880,000)
b. 400,000 c. 540,000 d. 600,000
Combination of mutual entities
14. HOMILY Coop. and SERMON Coop. are cooperative institutions.
On January 1, 20x1, the two entities combined, with HOMILY
identified as the acquirer. HOMILY shall issue member interests to
SERMON. As a result, members of SERMON become members of
HOMILY. An estimated cash flow model indicates an acquisitiondate fair valuation of SERMON, as an entity, at ₱4,000,000. The
fair value of SERMON’s identifiable net assets is ₱3,200,000. How
much is the goodwill?
a. 800,000
b. (800,000)
c. 3,200,000
d. 0
Chapter 15: Theory of Accounts Reviewer
1. The method required under PFRS 3 to be used in accounting for
business combinations is
a. Purchase method
c. Acquisition method
b. Buy method
d. Combination method
2. Should the following costs be included in the consideration
transferred in a business combination, according to PFRS 3
Business Combinations?
I. Costs of maintaining an acquisitions department.
II.
Fees paid to accountants to effect the combination.
a. No No
b. No Yes c. Yes No
d. Yes Yes
(Adapted)
3. PFRS 3 requires that the contingent liabilities of the acquired
entity should be recognized in the balance sheet at fair value. The
21
existence of contingent liabilities is often reflected in a lower
purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.
c. Increase the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
d. Increase the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.
(Adapted)
4. Are the following statements about an acquisition true or false,
according to PFRS 3 Business combinations?
I. The acquirer should recognize the acquiree's contingent
liabilities if certain conditions are met.
II.
The acquirer should recognize the acquiree's contingent assets
if certain conditions are met.
a. False, False
b. False, True
c. True, False
d. True,
True
(Adapted)
5. Given the following information, how is goodwill from a business
combination computed under PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the
subsidiary
a. A+B+C-D
b. A – (D x %)
c. (A+C) – (D x %)
d. (A+B) – [(D x %) – B]
6. In a business combination, an acquirer's interest in the fair value
of the net assets acquired exceeds the consideration transferred
in the combination. Under PFRS 3 Business Combinations, the
acquirer should
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive
income
c. reassess the recognition and measurement of the net assets
acquired and the consideration transferred, then recognize any
excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets
acquired and the consideration transferred, then recognize any
excess immediately in other comprehensive income
(Adapted)
7. Which one of the following reasons would not contribute to the
creation of negative goodwill?
a. Errors in measuring the fair value of the acquiree’s net
identifiable assets or the cost of the business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a
value other than fair value.
22
d. Making acquisitions at the top of a “bull” market for shares.
(Adapted)
8. The “excess of the acquirer’s interest in the net fair value of
acquiree’s identifiable assets, liabilities, and contingent liabilities
over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then
recognized immediately in profit or loss.
c. Reassessed as to the accuracy of its measurement and then
recognized in retained earnings.
d. Carried as a capital reserve indefinitely.
(Adapted)
9. This type of business combination occurs when, for example, a
private entity decides to have itself “acquired” by a smaller public
entity in order to obtain a stock exchange listing.
a. Step acquisition
c. Reverse acquisition
b. Rewind acquisition
d. Stock acquisition
10. Acquisition accounting requires an acquirer and an acquiree to
be identified for every business combination. Where a new entity
(H) is created to acquire two preexisting entities, S and A, which
of these entities will be designated as the acquirer?
a. H.
b. S.
c. A.
d. A or S.
(Adapted)
11. The aggregate cash flows arising from acquisitions and from
disposals of subsidiaries or other business units resulting to loss
or obtaining of control are presented separately and classified as
a. Operating activities
c. Financing activities
b. Investing activities
d. Disclosed only
12. Cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control are classified as
cash flows from
a. Operating activities
c. Financing activities
b. Investing activities
d. Disclosed only
13. PFRS 3 requires the acquirer in a business combination to
measure the acquiree’s identifiable tangible and intangible assets
and liabilities at (with some limited exceptions)
a. cost
c. fair value less transaction costs
b. acquisition-date fair value
d. some other amount
14. Which of the following accounting methods must be applied to
all business combinations under PFRS 3 Business Combinations?
a. Pooling of interests method. c. Acquisition method.
b. Equity method.
d. Purchase method.
(Adapted)
15. PESTER TO ANNOY is involved in a business acquisition on
January 1, 20x1. At the date of acquisition the deferred tax assets
were ₱300,000. On January 1, 20x1, the directors considered that
realization of the deferred tax assets were not probable. What
23
effect would this decision have on the allocation of the purchase
price?
a. The unrecognized deferred tax would be allocated to goodwill,
which would increase by ₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would arise.
(Adapted)
16. A parent entity is acquiring a majority holding in an entity
whose shares are dealt in on a recognized market. Under PFRS 3
Business Combinations, which of the following measurement
bases may be used in measuring the non-controlling interest at
the acquisition date?
I. The nominal value of the shares in the acquiree not acquired
II.
The fair value of the shares in the acquiree not acquired
III. The non-controlling interest in the acquiree's assets and
liabilities at book value
IV.
The non-controlling interest in the acquiree's assets and
liabilities at fair value
a. II only
b. I, II and III
c. II and IV d. IV only
(Adapted)
17. ASININE STUPID Company acquired a 30% equity interest in
OBTUSE TORPID Company many years ago. In the current
accounting period it acquired a further 40% equity interest in
OBTUSE. Are the following statements true or false, according to
PFRS 3 Business Combinations?
I. ASININE's pre-existing 30% equity interest in OBTUSE should
be remeasured at fair value at the acquisition date.
II.
ASININE's net assets should be remeasured at fair value at the
acquisition date.
a. False, False
b. False, True
c. True, False
d. True,
True
(Adapted)
18. The SKEWER Company acquired 80% of PIERCE Company for a
consideration transferred of ₱100 million. The consideration was
estimated to include a control premium of ₱24 million. PIERCE's
net assets were ₱85 million at the acquisition date. Are the
following statements true or false, according to PFRS 3 Business
Combinations?
I. Goodwill should be measured at ₱32 million if the noncontrolling interest is measured at its share of PIERCE's net
assets.
II.
Goodwill should be measured at ₱34 million if the noncontrolling interest is measured at fair value.
a. False, False
b. False, True
c. True, False
d.
True, True
(Adapted)
19. PFRS 3 requires all identifiable intangible assets of the
acquired business to be recorded at their fair values. Many
intangible assets that may have been subsumed within goodwill
must be now separately valued and identified. Under PFRS 3,
when would an intangible asset be “identifiable”?
24
a. When it meets the definition of an asset in the Conceptual
Framework document only.
b. When it meets the definition of an intangible asset in PAS 38,
Intangible Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted
accounting principles even though it does not meet the
definition in PAS 38.
d. Where it has been acquired in a business combination.
(Adapted)
20. Which of the following examples is unlikely to meet the
definition of an intangible asset for the purpose of PFRS 3?
a. Marketing related, such as trademarks and internet domain
names.
b. Customer related, such as customer lists and contracts.
c. Technology based, such as computer software and databases.
d. Pure research based, such as general expenditure on research.
(Adapted)
21. An intangible asset with an indefinite life is one where
a. There is no foreseeable limit on the period over which the
asset will generate cash flows.
b. The length of life is over 20 years.
c. The directors feel that the intangible asset will not lose value
in the foreseeable future.
d. There is a contractual or legal arrangement that lasts for a
period in excess of five years.
(Adapted)
22. An intangible asset with an indefinite life is accounted for as
follows:
a. No amortization but annual impairment test.
b. Amortized and impairment tests annually.
c. Amortize and impairment tested if there is a “trigger event.”
d. Amortized and no impairment test.
(Adapted)
23. An acquirer should at the acquisition date recognize goodwill
acquired in a business combination as an asset. Goodwill should
be accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful
life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a
trigger event occurs.
d. Recognize as an intangible asset and annually impairment test
(or more frequently if impairment is indicated).
(Adapted)
24. If the impairment of the value of goodwill is seen to have
reversed, then the company may
a. Reverse the impairment charge and credit income for the
period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
25
d. Reverse the impairment charge only if the original
circumstances that led to the impairment no longer exist and
credit retained earnings.
(Adapted)
25. On acquisition, all identifiable assets and liabilities, including
goodwill, will be allocated to cash-generating units within the
business combination. Goodwill impairment is assessed within the
cash-generating units. If the combined organization has cashgenerating units significantly below the level of an operating
segment, then the risk of an impairment charge against goodwill
as a result of PFRS 3 is
a. Significantly decreased because goodwill will be spread across
many cash-generating units.
b. Significantly increased because poorly performing units can no
longer be supported by those that are performing well.
c. Likely to be unchanged from previous accounting practice.
d. Likely to be decreased because goodwill will be a smaller
amount due to the greater recognition of other intangible
assets.
(Adapted)
26. The management of an entity is unsure how to treat a
restructuring provision that they wish to set up on the acquisition
of another entity. Under PFRS 3, the treatment of this provision
will be
a. A charge in the income statement in the postacquisition
period.
b. To include the provision in the allocated cost of acquisition.
c. To provide for the amount and, if the provision is overstated, to
release the excess to the income statement in the
postacquisition period.
d. To include the provision in the allocated cost of acquisition if
the acquired entity commits itself to a restructuring within a
year of acquisition.
(Adapted)
27. MIME TO IMMITATE Co. initially tested its goodwill for
impairment on September 30, 20x1. When should MIME perform
its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2
28. For purposes of impairment testing, PAS 36
a. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units in the
year of business combination.
b. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s corporate assets in the year
of business combination.
c. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units 12
months after the date of acquisition.
26
d. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s operating segments 3
months after the date of acquisition.
29. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a
business combination that resulted to goodwill. By December 31,
20x1, the initial allocation of goodwill is not yet completed.
According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31,
20x1.
b. complete the initial allocation before the end of December 31,
20x2.
c. complete the initial allocation before the end of November 30,
20x1.
d. complete the initial allocation before the end of September 1,
20x2.
30. Which of the following is incorrect regarding the accounting for
business combinations in accordance with PFRSs?
a. Any goodwill recognized on acquisition date should be
allocated to the acquirer’s CGUs prior to the end of the year of
acquisition. If allocation is incomplete prior to the end of the
year of acquisition, the allocation should be completed prior to
the end of the immediately preceding year.
b. PFRS 3 requires the use of the acquisition method in
accounting for business combination.
c. Goodwill is computed as the difference between the
consideration transferred and the acquisition-date fair value of
net identifiable assets acquired.
d. In applying the acquisition method, PFRS 3 requires that the
acquirer should be identified.
31. For purposes of impairment testing, PAS 36
a. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units in the
year of business combination.
b. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s corporate assets in the year
of business combination.
c. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units 12
months after the date of acquisition.
d. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s operating segments 3
months after the date of acquisition.
32. Goodwill must not be amortized under PFRS 3. The transitional
rules do not require restatement of previous balances written off.
If an entity is adopting PFRS for the first time, and it wishes to
restate all prior acquisitions in accordance with PFRS 3, then it
must apply the PFRS to
a. Those acquisitions selected by the entity.
b. All acquisitions from the date of the earliest.
c. Only those acquisitions since the issue of the PFRS 3 and PAS
22, Business Combinations, to the earlier ones.
27
d. Only past and present acquisitions of entities that have
previously and currently prepared their financial statements
using PFRS.
(Adapted)
33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a
business combination that resulted to goodwill. By December 31,
20x1, the initial allocation of goodwill is not yet completed.
According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31,
20x1.
b. complete the initial allocation before the end of December 31,
20x2.
c. complete the initial allocation before the end of November 30,
20x1.
d. complete the initial allocation before the end of September 1,
20x2.
34. PFRS 3 is mandatory for all new acquisitions from March 31,
2004. Entities have to cease the amortization of goodwill arising
from previous acquisitions. The balance of goodwill arising from
those acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next
accounting year.
d. Tested for impairment on March 31, 2004.
(Adapted)
35. Which of the following factors is used as multiplier of super
profits in valuation of goodwill of a business?
a. Average capital employed in the business
d. Normal rate
of return
b. Simple profits
e.
Normal
profits.
c. Number of years’ purchase
(Adapted)
Chapter 15 questions
1
. C 6. C
2
. A 7. D
3
. D 8. B
4
. C 9. C
5
1
. A 0. D
Suggested answers to theory of accounts
1
1.
1
2.
1
3.
1
4.
1
5.
B
C
B
C
A
16
.
17
.
18
.
19
.
20
.
C
C
D
A
D
21
.
22
.
23
.
24
.
25
.
A
A
D
C
B
28
26
.
27
.
28
.
29
.
30
.
A
A
A
B
C
31
.
32
.
33
.
34
.
35
.
A
B
B
C
C
Chapter 16
Consolidated Financial Statements (Part
1)
Chapter 16: Multiple Choice – Computational (For classroom
instruction purposes)
Consolidation – Date of acquisition
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value
of ₱40 per share. The financial statements of ABC Co. and XYZ, Inc.
immediately before the acquisition are shown below:
ABC Co.
XYZ, Inc.
Cash
40,000
20,000
Accounts receivable
120,000
48,000
Inventory
160,000
92,000
Equipment
800,000
200,000
Accumulated depreciation
(80,000)
(40,000)
Total assets
1,040,000
320,000
Accounts payable
Bonds payable
Share capital
Share premium
Retained earnings
Total liabilities and equity
80,000
120,000
480,000
160,000
200,000
1,040,000
24,000
200,000
96,000
320,000
On January 1, 20x1, the fair value of the assets and liabilities of XYZ,
Inc. were determined by appraisal, as follows:
XYZ, Inc.
Cash
Accounts receivable
Inventory
Equipment
Accumulated
depreciation
Accounts payable
Net assets
Carryi
ng
amou
nts
20,000
48,000
92,000
200,00
0
(40,00
0)
(24,00
0)
296,0
00
Fair
value
s
20,000
48,000
124,00
0
240,00
0
(48,00
0)
(24,00
0)
360,0
00
29
Fair
value
increm
ent
32,000
40,000
(8,000)
64,000
The equipment has a remaining useful life as of 4 years from January
1, 20x1.
Case #1: NCI measured at proportionate share of parent
ABC Co. elects to measure non-controlling interest as its
proportionate share in XYZ’s net identifiable assets.
1. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000
b. 1,439,000
c. 1,736,000
d.
1,376,000
2. How much is the consolidated total equity as of January 1, 20x1?
a. 1,200,000
b. 1,215,000
c. 1,212,000
d.
1,364,000
Case #2: NCI measured at fair value
ABC Co. elects the option to measure non-controlling interest at fair
value and a value of ₱75,000 is assigned to the 20% non-controlling
interest [(₱300,000 ÷ 80%) x 20% = 75,000].
3. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000
b. 1,439,000
c. 1,736,000
d.
1,376,000
4. How much is the consolidated total equity as of January 1, 20x1?
a. 1,200,000
b. 1,215,000
c. 1,212,000
d.
1,364,000
Consolidation
subsequent
to
date
of
acquisition
(Proportionate share)
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value
of ₱40 per share. On acquisition date, ABC Co. elected to measure
non-controlling interest as its proportionate share in XYZ, Inc.’s
net identifiable assets.
XYZ’s shareholders’ equity as of January 1, 20x1 comprises the
following:
(at carrying
amounts)
Share capital
200,000
Retained
earnings
96,000
Total equity
296,000
On January 1, 20x1, the fair values of the assets and liabilities of
XYZ, Inc. were determined by appraisal, as follows:
XYZ, Inc.
Cash
Accounts
receivable
Inventory
Carryi
ng
amou
nts
20,000
Fair
value
s
20,000
48,000
48,000
-
92,000
124,00
32,000
30
Fair
value
increm
ent
-
Equipment
Accumulated
depreciation
Accounts payable
Net assets
200,00
0
(40,000
)
(24,000
)
296,0
00
0
240,00
0
(48,00
0)
(24,00
0)
360,0
00
40,000
(8,000)
64,000
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ.
There were also no inter-company transactions. The group
determined that there is no goodwill impairment.
ABC’s and XYZ’s individual financial statements at year-end are
shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
XYZ, Inc.
ASSETS
92,0
00
300,0
00
420,0
00
300,0
00
800,0
00
(240,00
0)
1,672,0
00
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
228,000
88,000
60,000
200,000
(80,00
0)
496,00
0
LIABILITIES AND EQUITY
172,0
00
120,0
00
292,00
0
680,0
00
260,0
00
440,0
00
1,380,00
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
31
120,000
120,00
0
200,000
176,000
376,00
TOTAL LIABILITIES AND EQUITY
0
1,672,0
00
0
496,00
0
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
1,200,
000
(660,0
00)
540,
000
(160,0
00)
(128,0
00)
(12,0
00)
240,
000
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
XYZ, Inc.
480,00
0
(288,00
0)
192,00
0
(40,00
0)
(72,00
0)
80,0
00
5. How much is the consolidated profit for 20x1?
a. 208,000
b. 280,000 c. 240,000 d. 296,000
6. How much is the consolidated total assets as of December 31,
20x1?
a. 1,867,000
b. 1,907,000
c. 1,894,000
d.
1,904,000
7. How much is the consolidated total equity as of December 31,
20x1?
a. 1,492,000
b. 1,415,000
c. 1,412,000
d.
1,421,000
Consolidation subsequent to date of acquisition – NCI at Fair
value
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value
of ₱40 per share. On acquisition date, ABC Co. elected to measure
non-controlling interest at the non-controlling interest’s fair value.
A value of ₱75,000 is assigned to the 20% non-controlling interest
[(₱300,000 ÷ 80%) x 20% = ₱75,000].
XYZ’s shareholders’ equity as of January 1, 20x1 comprises the
following:
(at carrying
amounts)
Share capital
200,000
32
Retained
earnings
Total equity
96,000
296,000
On January 1, 20x1, the fair values of the assets and liabilities of
XYZ, Inc. were determined by appraisal, as follows:
Carrying
Fair
Fair value
XYZ, Inc.
amounts
values
increment
Cash
20,000
20,000
Accounts receivable
48,000
48,000
Inventory
92,000
124,000
32,000
Equipment
200,000
240,000
40,000
Accumulated
(40,000)
(48,000)
(8,000)
depreciation
Accounts payable
(24,000)
(24,000)
360,00
296,000
64,000
Net assets
0
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ.
There were also no inter-company transactions. The group
determined that there is no goodwill impairment.
ABC’s and XYZ’s individual financial statements at year-end are
shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
XYZ, Inc.
ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
92,000
300,000
420,000
300,000
800,000
(240,000)
1,672,000
200,000
(80,000)
496,000
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
172,000
120,000
292,000
680,000
260,000
440,000
1,380,000
1,672,000
120,000
120,000
200,000
176,000
376,000
496,000
228,000
88,000
60,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
1,200,00
Sales
33
XYZ, Inc.
480,000
0
(660,000
)
540,000
(160,000
)
(128,000
)
(12,000)
240,000
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
(288,000)
192,000
(40,000)
(72,000)
80,000
8. How much is the consolidated profit for 20x1?
a. 208,000
b. 280,000 c. 240,000 d. 296,000
9. How much is the consolidated total assets as of December 31,
20x1?
a. 1,867,000 b. 1,907,000
c. 1,894,000
d. 1,904,000
10. How much is the consolidated total equity as of December 31,
20x1?
a. 1,492,000 b. 1,415,000
c. 1,412,000
d. 1,495,000
34
Chapter 17
Consolidated Financial Statements (Part
2)
Chapter 17: Multiple Choice – Computational (For classroom
instruction purposes)
Fair value decrement
Use the following information for the next two questions:
Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for
₱800,000. The following information was determined at acquisition
date:
Popo
Momo
Momo
Co.
Co.
Co.
Carryin Carryin
g
g
Fair
amount amount
value
4,000,00 2,000,00 1,600,0
Equipment
0
0
00
Accumulated
(800,00 (400,000 ( 320,0
depreciation
0)
)
00)
3,200,00 1,600,00 1,280,0
Net
0
0
00
Remaining useful life – Jan. 1, 20x1 10 years
years
5 years
5
1. How much is the consolidated “equipment – net” in the December
31, 20x2 financial statements?
a. 3,968,000
b. 3,628,000
c. 3,428,000
d.
3,328,000
2. The consolidation journal entry for the depreciation of the fair
value adjustment on December 31, 20x2 includes
a debit to accumulated depreciation for ₱128,000
b credit to accumulated depreciation for ₱128,000
c debit to depreciation expense for ₱64,000
d debit to retained earnings of Popo Co. for ₱51,200
Fair value increment
3. On January 1, 20x1, Donkey Co. acquired 75% of Monkey Co. At
that time, Monkey’s equipment has a carrying amount of
₱400,000 and a fair value of ₱480,000. The equipment has a
remaining useful life of 10 years. On December 31, 20x2, Donkey
and Monkey reported equipment with carrying amounts of
₱2,000,000 and ₱1,200,000, respectively. How much is the
consolidated “equipment – net” in the December 31, 20x2
financial statements?
a. 3,200,0000 b. 3,384,000
c. 3,264,000
d. 3,124,000
NCI in net assets
Use the following information for the next six questions:
35
Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected
to value NCI at fair value. Owlet’s net identifiable assets
approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of ₱40,000.
Since the acquisition date, Owlet has made accumulated profits of
₱800,000. There have been no changes in Owlet’s share capital
since acquisition date. The group determined that goodwill has been
impaired by ₱32,000.
A summary of the individual statements of financial positions of the
entities as at the end of reporting period is shown below:
Owlet
Owl Co. Co.
4,000,0 2,000,0
Total assets
00
00
Total liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000 480,000
1,200,0
400,000
00
2,000,0 1,120,0
00
00
4,000,0 2,000,0
00
00
4. How much is the fair value assigned to NCI at date of acquisition?
a. 220,000
b. 250,000 c. 268,000 d. 224,000
5. How much is the goodwill to be presented in the current-year
consolidated financial statements?
a. 72,000
b. 64,000 c. 56,000 d. 68,000
6. How much is the NCI in net assets?
a. 304,000
b. 380,000 c. 412,000 d. 426,000
7. How much is the consolidated retained earnings?
a. 2,600,000 b. 2,480,000
c. 2,576,000
d. 2,276,000
8. How much is the consolidated total assets?
a. 5,468,000 b. 6,068,000
c. 5,400,000
d. 5,620,000
9. How much is the consolidated total equity?
a. 6,188,000 b. 4,188,000
c. 4,156,000
d. 5,622,000
NCI in profit and comprehensive income
Use the following information for the next six questions:
On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel
Co. for ₱600,000. At this time, Cockerel's net identifiable assets have
a carrying amount of ₱720,000 which approximates fair value. NCI
was assigned a fair value of ₱220,000.
During 20x1, Rooster sold goods to Cockerel for ₱600,000, having
bought them for ₱480,000. A quarter of these goods remain unsold
at year-end. Goodwill on acquisition of Cockerel has been tested for
36
impairment and found to be impaired (in total) by ₱32,000 for the
current year.
The individual statements of profit or loss and other comprehensive
income of the entities for the year ended December 31, 20x1 are
shown below:
Rooster
Cockerel
Co.
Co.
4,000,000
2,800,000
Revenue
(1,600,000)
(1,200,000)
Cost of sales
2,400,000
1,600,000
Gross profit
40,000
Dividend income from Cockerel Co.
(800,000)
(400,000)
Distribution costs
(320,000)
(200,000)
Administrative costs
1,320,000
1,000,000
Profit before tax
(384,000)
(300,000)
Income tax expense
936,000
700,000
Profit after tax
296,000
100,000
Other comprehensive income
1,232,000
800,000
Comprehensive income
10. How much is the consolidated sales?
a. 6,200,000
b. 6,350,000
c. 6,650,000
6,180,000
d.
11. How much is the consolidated cost of sales?
a. 2,170,000
b. 2,230,000
c. 2,770,000
2,320,000
d.
12. How much is the consolidated profit?
a. 1,574,000
b. 1,566,000
c. 1,564,000
1,534,000
d.
13. How much is the consolidated comprehensive income?
a. 1,970,000
b. 1,930,000
c. 1,962,000
d.
1,960,000
14. How much is the profit attributable to owners of the parent
and NCI, respectively?
Owners of Parent
NCI
a. 1,391,000
175,000
b. 1,367,000
167,000
c. 1,391,000
173,000
d. 1,384,000
190,000
15. How much is the comprehensive income attributable to owners
of the parent and NCI, respectively?
Owners of Parent
NCI
a. 1,663,000
267,000
b. 1,778,000
192,000
c. 1,756,000
206,000
d. 1,738,000
192,000
Acquisition during the year
Use the following information for the next four questions:
37
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At
this time, Piglet's net identifiable assets have a carrying amount of
₱720,000 which approximates fair value.
During the last month of the year, Piglet sold goods to Pig for
₱324,000. Piglet had marked up these goods by 50% on cost. Onethird of these goods remain unsold at year-end. The group assessed
that there is no impairment loss on goodwill for the current year.
The individual statements of profit or loss of the entities for the year
ended December 31, 20x1 are shown below:
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative costs
Profit before tax
Income tax expense
Profit after tax
Pig Co.
4,000,
000
(1,600
,000)
2,400
,000
(800
,000)
(320
,000)
1,280
,000
(384
,000)
89
6,000
Piglet Co.
2,8
80,000
(1,2
00,000)
1,6
80,000
(1
80,000)
1,1
00,000
(3
80,000)
720,000
All of Piglet’s income and expenses (including profit from intercompany sale) were earned and incurred evenly during the year.
16. How much is the consolidated sales?
a. 6,556,000
b. 4,852,000
c. 4,786,000
4,636,000
d.
17. How much is the consolidated cost of sales?
a. 1,712,000
b. 2,530,000
c. 1,730,000
1,876,000
d.
18. How much is the consolidated profit?
a. 1,100,000
b. 1,580,000
c. 1,360,000
1,420,000
d.
19. How much is the profit attributable to owners of the parent
and NCI, respectively?
Owners of Parent
NCI
a. 1,040,000
60,000
b. 1,049,000
51,000
c. 1,036,000
544,000
d. 1,049,000
311,000
Subsidiary’s outstanding cumulative preference shares
38
20. Bear Co. owns 75% of Cub Co.’s ordinary shares. Cub Co. has
12%, ₱400,000 outstanding cumulative preference shares, none
of which are held by Bear Co. The carrying amount of Cub’s net
identifiable assets at acquisition date approximates fair value.
Bear and Cub reported individual profits of ₱936,000 and ₱700,000,
respectively, for the year ended December 31, 20x1. Neither
company declared dividends. There are 3-year dividends in arrears
on the outstanding cumulative preference shares of Cub Co. It was
assessed that goodwill is not impaired.
How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent
NCI
a. 1,425,000
163,000
b. 1,377,000
163,000
c. 1,377,000
211,000
d. 1,425,000
211,000
39
Chapter 18
Consolidated Financial Statements (Part
3)
Chapter 18: Multiple Choice – Computational (For classroom
instruction purposes)
Impairment of goodwill
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value
of ₱40 per share.
XYZ’s shareholders’ equity as of January 1, 20x1 comprises the
following:
(at carrying
amounts)
Share capital
200,000
Retained
earnings
96,000
Total equity
296,000
On January 1, 20x1, the fair values of the assets and liabilities of
XYZ, Inc. were determined by appraisal, as follows:
Carrying
Fair
Fair value
XYZ, Inc.
amounts
values
increment
Cash
20,000
20,000
48,000
48,000
Accounts receivable
92,000 124,000
32,000
Inventory
200,000 240,000
40,000
Equipment
Accumulated
(40,000) (48,000)
(8,000)
depreciation
(24,000) (24,000)
Accounts payable
Net assets
296,000
360,00
64,000
0
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ.
There were also no inter-company transactions.
The group determined that goodwill is impaired by ₱4,000.
ABC’s and XYZ’s individual financial statements at year-end are
shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
XYZ, Inc.
ASSETS
92,
000
300,
000
Cash
Accounts receivable
40
228,0
00
88,0
00
420,
000
300,
000 800,
000
(240,
000)
1,672
,000
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
60,0
00
200,0
00
(80,0
00)
496,
000
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
Statements of profit or loss
For the year ended December 31, 20x1
172,
000
120,
000
292,
000
680,
000
260,
000
440,
000
1,380,
000
1,672
,000
ABC Co.
1,200,
000
(660,
000)
540,
000
(160,
000)
(128,
000)
(12,
000)
240
,000
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
120,0
00
120,0
00
200,0
00
176,0
00
376,0
00
496,
000
XYZ, Inc.
480,
000
(288,0
00)
192,
000
(40,0
00)
(72,0
00)
80,
000
Case #1: On acquisition date, ABC Co. elected to measure noncontrolling interest as its proportionate share in XYZ, Inc.’s net
identifiable assets.
1. How much is the consolidated profit for 20x1?
41
a. 296,000
b. 280,000 c. 208,000 d. 276,000
2. How much is the consolidated total assets as of December 31,
20x1?
a. 1,900,000 b. 1,907,000
c. 1,903,000
d. 1,904,000
3. How much is the consolidated total equity as of December 31,
20x1?
a. 1,492,000 b. 1,415,000
c. 1,488,000
d. 1,491,000
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling
interest at fair value. A value of ₱75,000 is assigned to the noncontrolling interest.
4. How much is the consolidated profit for 20x1?
a. 296,000
b. 280,000 c. 278,000 d. 276,000
5. How much is the consolidated total assets as of December 31,
20x1?
a. 1,900,000 b. 1,907,000
c. 1,903,000
d. 1,904,000
6. How much is the consolidated total equity as of December 31,
20x1?
a. 1,492,000 b. 1,415,000
c. 1,488,000
d. 1,491,000
Changes in ownership interest not resulting to loss of control
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value
of ₱40 per share. XYZ’s net identifiable assets have a fair value of
₱360,000. Goodwill has been computed under each of the available
options under PFRS 3 as follows:
(1)
(2)
(3)
Consideration transferred
Non-controlling interest
in the acquiree
Previously held equity
interest in the acquire
Total
Fair value of net
identifiable assets
acquired
Goodwill
Case #1
(proportionate)
300,000
Case #2
(fair value)
300,000
72,000
75,000
-
-
372,000
375,000
(360,000)
(360,000)
12,000
15,000
As of December 31, 20x1, XYZ, Inc. increased its net assets (after
fair value adjustments) by ₱40,000 to ₱400,000. The NCI in net
assets is updated as follows:
Case #1
Case #2
(proportiona
(fair
te)
value)
NCI at acquisition date – Jan. 1, 20x1
72,000
75,000
Subsequent increase (20% x ₱40,000)
8,000
8,000
42
Carrying amount of NCI – Jan. 1,
20x2
80,000
83,000
Scenario #1: Acquisition of all remaining NCI
On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI
in XYZ for ₱120,000.
7. If NCI is measured at “proportionate share,” how much is the gain
or loss on the transaction to be recognized in the consolidated
financial statements?
a. 80,000
b. (80,000) c. (83,000) d. 0
8. If NCI is measured at “fair value,” how much is the gain or loss on
the transaction to be recognized in the consolidated financial
statements?
a. (83,000)
b. 83,000 c. (80,000) d. 0
9. If NCI is measured at “proportionate share,” what is the effect of
the transaction on the consolidated financial statements?
a ₱80,000 decrease in NCI and ₱40,000 decrease in retained
earnings of ABC Co.
b ₱83,000 decrease in NCI and ₱37,000 decrease in retained
earnings of ABC Co.
c either a or b
d No effect on the consolidated financial statements
10. If NCI is measured at “fair value,” what is the effect of the
transaction on the consolidated financial statements?
a ₱80,000 decrease in NCI and ₱40,000 decrease in retained
earnings of ABC Co.
b ₱83,000 decrease in NCI and ₱37,000 decrease in retained
earnings of ABC Co.
c either a or b
d No effect on the consolidated financial statements
Scenario #2: Acquisition of part of remaining NCI
On January 1, 20x2, ABC Co. acquired additional 12% equity interest
held by non-controlling interests in XYZ for cash consideration of
₱80,000.
11. If NCI is measured at “proportionate share,” what is the direct
adjustment in equity?
a. 40,000
b. 32,000 c. 30,200 d. 38,500
12. If NCI is measured at “fair value,” what is the direct
adjustment in equity?
a. 40,000
b. 32,000 c. 30,200 d. 38,500
Scenario #3: Disposal of part of controlling interest – Control
not lost
On January 1, 20x2, ABC Co. sold its 10% interest in XYZ, Inc. for
₱80,000. The 70% (80% - 10%) ownership interest retained still
gives ABC control over XYZ.
43
13. If NCI is measured at “proportionate share,” what is the direct
adjustment in equity?
a. 40,000
b. 32,000 c. 30,200 d. 38,500
14. If NCI is measured at “fair value,” what is the direct
adjustment in equity?
a. 40,000
b. 32,000 c. 30,200 d. 38,500
Scenario #4: Subsidiary issues additional shares – Control
not lost
The 80% interest acquired by ABC in XYZ on January 1, 20x1
represents 40,000 shares of XYZ’s 50,000 outstanding shares as of
that date.
On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with
par value per share of ₱4 to other investors for ₱10 per share.
Although none of the shares were purchased by ABC, it was
determined that the additional share issuance has no effect on ABC’s
control over XYZ.
15. If NCI is measured at “proportionate share,” what is the direct
adjustment in equity?
a. 13,333
b. 11,332 c. 13,200 d. 0
16. If NCI is measured at “fair value,” what is the direct
adjustment in equity?
a. 13,332
b. 11,332 c. 13,200 d. 0
Loss of control – Deconsolidation
17. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc.
by issuing 5,000 shares with fair value of ₱60 per share and par
value of ₱40 per share. ABC elected to measure NCI as its
proportionate share in XYZ’s net identifiable assets. The
acquisition resulted to goodwill of ₱12,000. There has been no
impairment of goodwill.
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. gives ABC
significant influence over XYZ. The statements of financial
position immediately before the sale are shown below:
Statements of financial position
As at December 31, 20x1
ASSETS
Cash
Accounts receivable
Inventory
ABC Co.
XYZ,
Inc.
92,000
300,000
420,000
228,000
88,000
60,000
44
Consolidat
ed
320,000
388,000
480,000
Investment in
subsidiary
Equipment
Accumulated
depreciation
Goodwill
TOTAL ASSETS
300,000
-
-
800,000
(240,000
)
1,672,00
0
200,000
1,040,000
(80,000)
(336,000)
-
12,000
496,000
1,904,000
120,000
120,000
200,000
176,000
-
292,000
120,000
412,000
680,000
260,000
472,000
80,000
376,000
1,492,000
496,000
1,904,000
LIABILITIES AND EQUITY
Accounts payable
172,000
Bonds payable
120,000
Total liabilities
292,000
Share capital
680,000
Share premium
260,000
Retained earnings
440,000
Non-controlling interest
1,380,00
Total equity
0
TOTAL LIAB. &
1,672,00
EQTY.
0
How much is the gain (loss) on the disposal of controlling interest?
a. (168,000)
b. 168,000 c. 156,000 d. (156,000)
Loss of control – Derecognition of OCI
18. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc.
by issuing 5,000 shares with fair value of ₱60 per share and par
value of ₱40 per share. XYZ’s net identifiable assets have a fair
value of ₱360,000. ABC elected to measure NCI as its
proportionate share in XYZ’s net identifiable assets (i.e.,
₱360,000 x 20% = ₱72,000). Accordingly, goodwill of ₱12,000
was recognized on the business combination. There has been no
impairment of goodwill.
Subsequent to acquisition date, XYZ, Inc. increased its net assets
(after fair value adjustments) by ₱52,000 to ₱412,000. The
movement in XYZ’s net assets is shown below:
Net assets (at fair value) - Jan. 20x1
Subsequent changes:
Profit or loss after fair value adjustments
Other comprehensive income:
Gain on property revaluation
Exchange differences on translation of foreign
operation
Total subsequent change in net assets
Net assets (at fair value) - Dec. 31, 20x1
The NCI in net assets is updated as follows:
NCI at acquisition date
Increase (20% x ₱52,000)
45
360,000
40,000
8,000
4,000
52,000
412,000
72,000
10,400
Carrying amount of NCI – Dec. 31, 20x1
82,400
Accordingly, the accumulated OCI attributable to owners of the
parent presented in the consolidated financial statements comprises
the following:
Gain on property revaluation (8,000 x 80%)
6,400
Exchange differences on translation of foreign operation
3,200
(4K x 80%)
Consolidated other components of equity – Dec.
9,600
31, 20x1
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. does not give ABC
significant influence over XYZ.
How much is the gain or loss on disposal of controlling interest to be
recognized in profit or loss?
a. 152,400
b. 156,800 c. 160,200 d. 158,400
Inter-company receivables and payables
Use the following information for the next two questions:
On January 1, 20x1, Dad Co. acquired 80% interest in Son Co. by
issuing bonds with fair value of ₱1,000,000. The following
information was determined immediately before the acquisition:
Dad Co.
Son Co.
Son Co.
Carrying
Carrying
amount
amount
Fair value
1,720,0
Total assets
4,000,000
1,600,000
00
(800,000
Total liabilities
(2,400,000)
(800,000)
)
920,00
Net assets
1,600,000
800,000
0
Included in Son’s liabilities is an account payable to Dad amounting
to ₱80,000. Dad elected to measure NCI as its proportionate share in
Son’s net identifiable assets.
19. How much is the total assets in Dad’s separate financial
statements immediately after the combination?
a. 6,304,000
b. 4,000,000
c. 5,000,000
d.
4,920,000
20. How much is the total assets in the consolidated financial
statements?
a. 6,304,000
b. 5,904,000
c. 6,054,000
d.
5,984,000
Group accounting policy
Use the following information for the next five questions:
On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s
100,000 outstanding equity shares with par value per share of ₱4 for
₱16 per share. At the time of acquisition, the retained earnings of
46
Nymph were ₱320,000. The quoted price of Nymph's shares was ₱14
per share at acquisition date.
Additional information:
 Included in the total assets of Nymph is land classified as
investment property with a cost of ₱720,000. Its fair value at
acquisition date was ₱800,000 and by June 30, 20x3 this had
risen to ₱1,280,000. Nymph uses the cost model for its
investment properties. However, the group's policy for
investment properties is the fair value model.
 Also at acquisition date, Nymph's building classified as property,
plant, and equipment had a fair value of ₱120,000 in excess of its
carrying amount. The building's remaining useful life is 5 years at
that date. The group's depreciation method is straight-line basis.
 The inter-company current accounts included receivables and
payables of ₱40,000 on June 30, 20x3.
 An impairment test at June 30, 20x3 concluded that consolidated
goodwill was impaired by ₱80,000.
 Cockroach elected to measure NCI at the NCI's fair value. There
have been no changes in Nymph’s number of outstanding shares
subsequent to date of acquisition.
A summary of the individual statements of financial positions of the
entities as at June 30, 20x3 is shown below:
Cockroach Nymph
Co.
Co.
2,000,00
4,000,000
Total assets
0
Total liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000
1,200,000
2,000,000
4,000,000
480,000
400,000
1,120,00
0
2,000,00
0
21. How much is the goodwill to be presented in the June 30, 20x3
consolidated financial statements?
a. 550,000
b. 620,000 c. 485,000 d. 530,000
22. How much is the NCI in net assets?
a. 538,000
b. 584,000 c. 624,000 d. 638,000
23. How much is the consolidated retained earnings?
a. 2,864,000 b. 2,924,000
c. 2,874,000
d. 2,984,000
24. How much is the consolidated total assets?
a. 5,310,000 b. 5,942,000
c. 5,982,000
d. 5,350,000
25. How much is the consolidated total equity?
a. 4,064,000 b. 4,684,000
c. 4,702,000
d. 4,724,000
Business combination achieved in stages (‘Step acquisition’)
Use the following information for the next five questions:
47
On January 1, 20x1, Rabbit Co. acquired 40% of Bunny Co. for
₱160,000. At this time, Bunny's net identifiable assets has a carrying
amount of ₱400,000 which approximates fair value. The investment
was classified as “investment in associate.”
On January 1, 20x3, Rabbit Co. acquired additional 35% interest in
Bunny Co. for ₱800,000. On this date, the fair value of the existing
holdings of Rabbit in Bunny was ₱400,000. Bunny's net identifiable
assets on January 1, 20x3, has a carrying amount of ₱720,000 which
approximates fair value. Bunny’s net assets comprised of share
capital amounting to ₱400,000 and retained earnings amounting to
₱320,000. Rabbit assigned a fair value of ₱220,000 to the NCI.
The group determined on Dec. 31, 20x3 that there is no impairment
in goodwill. A summary of the individual statements of financial
positions of the entities as at December 31, 20x3 is shown below:
Rabbit
Bunny
Co.
Co.
2,000,00
4,000,000
Total assets
0
Total liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000
1,200,000
2,000,000
4,000,000
480,000
400,000
1,120,00
0
2,000,00
0
26. How much is the goodwill to be presented in the December 31,
20x3 consolidated financial statements?
a. 480,000
b. 700,000 c. 300,000 d. 80,000
27. How much is the NCI in net assets?
a. 380,000
b. 340,000 c. 480,000 d. 420,000
28. How much is the consolidated retained earnings?
a. 2,600,000 b. 2,680,000
c. 2,740,000
d. 2,860,000
29. How much is the consolidated total assets?
a. 5,460,000 b. 5,500,000
c. 4,880,000
d. 5,280,000
30. How much is the consolidated total equity?
a. 4,180,000 b. 4,280,000
c. 4,420,000
d. 4,220,000
Reconstruction of financial information
Use the following information for the next three questions:
On January 1, 20x1, Sheep Co. acquired 75% interest in Lamb Co. for
₱600,000. At this time, Lamb's net identifiable assets have a
carrying amount of ₱720,000 which approximates fair value. NCI
was assigned a fair value of ₱220,000.
There were no inter-company transactions during the year.
Goodwill on acquisition of Lamb has been tested and found to be
impaired (in total) by ₱32,000 for the current year.
48
Sheep's separate financial statements reported profit of ₱866,000
for the year ended December 31, 20x1. Profit attributable to NCI was
appropriately determined at ₱167,000.
31. How much is the profit of Lamb for the year ended December
31, 20x1?
a. 175,000
b. 625,000 c. 700,000 d. 225,000
32. How much is the consolidated profit?
a. 1,558,000
b. 1,534,000
c. 1,834,000
1,526,000
d.
33. How much is the profit attributable to owners of the parent
and to NCI, respectively?
Parent
NCI
a. 1,367,000
167,000
b. 1,391,000
167,000
c. 1,359,000
167,000
d. 1,436,000
398,000
Comprehensive problem
Use the following information for the next ten questions:
On January 1, 20x1, Peter Co. acquired 90% ownership interest in
Simon Co. for ₱488,000. Peter Co. elected to measure NCI at fair
value. NCI was assigned a fair value of ₱60,000.
On January 1, 20x1, the fair values of the assets and liabilities of
XYZ, Inc. were determined by appraisal, as follows:
Carrying
Fair
Fair value
Simon Co.
amounts
values
increment
Cash
40,000
40,000
Accounts
60,000
60,000
receivable
100,000 124,000
24,000
Inventory
240,000 360,000
120,000
Equipment
Accumulated
(120,00
(80,000)
(40,000)
depreciation
0)
80,000
80,000
Patent
(24,000) (24,000)
Accounts payable
520,00
336,000
184,000
Net assets
0
The remaining useful life of the equipment is 5 years while the
patent has a remaining legal and useful life of 8 years. Simon’s share
capital has a balance of ₱200,000.
Among the transactions of Peter and Simon during 20x1 were the
following:
 Peter's accounts receivable include a receivable from Simon
amounting to ₱12,000 while Simon's accounts payable include a
payable to Peter amounting to ₱8,000. The difference was due to
a check amounting to ₱4,000 deposited by Simon directly to
Peter's bank account which was not yet recorded by Peter in its
49
books. The check has already cleared in Simon’s bank account.









Peter sold goods costing ₱80,000 to Simon for ₱128,000. Onethird of the inventory remains as of Dec. 31, 20x1.
Simon sold goods costing ₱40,000 to Peter for ₱60,000. One-half
of the goods remain in inventory as of December 31, 20x1.
On January 1, 20x1, Simon sold to Peter equipment for ₱20,000.
The equipment has a historical cost of ₱40,000 and accumulated
depreciation of ₱16,000 and a remaining useful life of 5 years on
the date of sale.
On July 1, 20x1, Simon Co. purchased 50% of the outstanding
bonds of Peter Co. from the open market for ₱240,000. The
interest income accruing on the bonds for the year was received
by Simon from Peter.
The bonds payable carry an interest rate of 10% and were
originally issued by Peter at face amount.
Peter declared dividends of ₱160,000.
Simon declared dividends of ₱80,000.
Goodwill is impaired by ₱8,000.
There have been no changes in Simon’s share capital.
The individual financial statements of the entities at December 31,
20x1 are shown below:
Statements of financial position
As at December 31, 20x1
Peter Co.
Simon Co.
ASSETS
Cash
Accounts receivable
Inventory
Investment in bonds
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
488,000
4,020,000
(1,444,000)
5,664,000
200,000
(91,200)
720,000
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
284,000
400,000
684,000
3,200,000
1,780,000
4,980,000
5,664,000
83,200
83,200
200,000
436,800
636,800
720,000
1,448,000
712,000
440,000
85,200
20,000
268,000
238,000
Statements of profit or loss
For the year ended December 31, 20x1
Peter
Co.
50
Simon Co.
3,728,00
0
(1,700,00
0)
2,028,00
0
Sales
Cost of goods sold
Gross profit
Interest income
1,020,000
(472,000)
548,000
8,000
(644,000
)
(256,000
)
(40,000)
72,000
1,160,0
00
Depreciation expense
Distribution costs
Interest expense
Loss on sale of equipment
Dividend income
Profit for the year
(144,000)
(4,000)
380,800
34. How much is the consolidated sales?
a. 4,364,000 b. 4,560,000
c. 4,540,000
d. 4,650,000
35. How much is the consolidated cost of sales?
a. 1,862,000 b. 2,034,000
c. 2,128,000
d. 1,934,000
36. How much is the consolidated ending inventory?
a. 708,000
b. 634,000 c. 674,000 d. 682,000
37. How much is the goodwill in the December 31, 20x1
consolidated financial statements?
a. 20,000
b. 18,800 c. 22,000 d. 19,800
38. How much is the NCI in net assets as of December 31, 20x1?
a. 82,080
b. 82,720 c. 82,800 d. 82,880
39. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 1,939,200 b. 1,979,000
c. 1,946,400
d. 1,929,200
40. How much is the consolidated profit or loss in 20x1?
a. 1,398,000 b. 1,263,100
c. 1,470,000
d. 1,350,000
41. How much are the profit attributable to the owners of the
parent and to NCI, respectively?
Owners of parent
NCI
a. 1,239,500
23,600
b. 1,326,400
71,600
c. 1,319,200
30,800
d. 1,432,600
37,400
42. How much is the total consolidated assets as of December 31,
20x1?
a. 5,781,200 b. 5,797,200
c. 5,823,200
d. 5,689,200
43. How much is the total consolidated liabilities as of December
31, 20x1?
a. 559,200
b. 567,200 c. 526,200 d. 498,600
51
Reverse acquisition - NCI
Fact pattern
On January 1, 20x1, Small Co. issues 2.5 shares in exchange for each
ordinary share of Big Co. The fair value of Big Co.'s shares on January
1, 20x1 is ₱480 while the fair value of Small Co.'s shares is ₱192.
The statements of financial position of the combining entities
immediately before combination show the following information:
Identifiable assets
Total assets
Liabilities
Share capital:
100 ordinary
shares
60 ordinary
shares
Retained earnings
Total liabilities and
equity
Small Co.
(legal parent,
accounting
acquiree)
21,600
21,600
Big Co.
(legal subsidiary,
accounting acquirer)
44,400
44,400
8,400
20,400
3,600
7,200
9,600
16,800
21,600
44,400
The fair value of Small’s liabilities at January 1, 20x1 is the same as
their carrying amount; however, the fair value of Small's identifiable
assets at January 1, 20x1 is ₱24,000.
Case #1: (Refer to fact pattern) All of Big Co.’s shares were
exchanged for Small Co.’s shares.
44. How much is the goodwill?
a. 4,800
b. 6,960
c. 3,600
d. 5,733
45. How much is the consolidated total assets?
a. 72,000
b. 49,260 c. 68,443 d. 69,600
46. How much is the consolidated total share capital?
a. 22,800
b. 25,680 c. 16,800 d. 26,400
47. How much is the NCI in net assets?
a. 2,400
b. 3,600
c. 4,800
d. 0
48. How much is the consolidated total retained earnings?
a. 9,600
b. 16,800 c. 15,120 d. 22,240
Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were
exchanged for Small Co.’s shares.
49. How much is the goodwill?
a. 4,800
b. 6,960
c. 3,600
d. 5,733
50. How much is the consolidated total assets?
a. 72,000
b. 49,260 c. 68,443 d. 69,600
51.
How much is the consolidated total share capital?
52
a. 22,800
b. 25,680
c. 16,800
d. 26,400
52. How much is the NCI in net assets?
a. 2,400
b. 3,600
c. 4,800
d. 0
53. How much is the consolidated total retained earnings?
a. 9,600
b. 16,800 c. 15,120 d. 22,240
53
Chapter 19
Consolidated Financial Statements (Part
4)
Chapter 19: Multiple Choice – Computational (For classroom
instruction purposes)
Acquisition date – Vertical group
Scenario #1:
1. On January 1, 20x1, S1 acquires 60% interest in S2. On January 1,
20x3, P acquires 80% interest in S1. What is the acquisition date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
2. When is goodwill computed?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
Scenario #2:
3. On January 1, 20x1, P acquires 80% interest is S1. On January 1,
20x3, S1 acquires 60% interest in S2. What is the acquisition
date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
Acquisition date – D-shaped group
Scenario #1:
4. P acquires 80% interest in S1 on January 1, 20x1. P acquires 25%
interest in S2 on January 1, 20x2. S1 acquires 30% interest in S2
on January 1, 20x3. What is the acquisition date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x2 for S2
d a and c
e a and b
Scenario #2:
5. S1 acquires 30% interest in S2 on January 1, 20x1. P acquires
25% interest in S2 on January 1, 20x2. P acquires 80% interest in
S1 on January 1, 20x4.
a January 1, 20x4 for S1 only
b January 1, 20x2 for S2 only
c January 1, 20x4 for both S1 and S2
d a and c
e a and b
54
Consolidation of a vertical group – Same acquisition date
Use the following information for the next seven questions:
The following transactions occurred on January 1, 20x1:
 P acquired 80% interest in S1 for ₱400,000 when the retained
earnings of S1 were ₱120,000. NCI in S1 has a fair value of
₱100,000.
 S1 acquired 60% interest in S2 for ₱200,000 when the retained
earnings of S2 were ₱40,000. NCI in S2 (direct and indirect) has a
fair value of ₱160,000.
The carrying amounts of the net identifiable assets of S1 and S2
approximate their fair values on January 1, 20x1. The group
determined on December 31, 20x1 that goodwill has been impaired
by 20%. There have been no changes in the share capitals of S1 and
S2 during the year.
A summary of the individual financial statements of the entities is
shown below:
Statements of financial position
As at December 31, 20x1
P
Investment in Subsidiary
Other assets
Total assets
Liabilities
Share capital
Retained earnings
Total liabilities and
equity
400,0
00
800,0
00
1,200,
000
S1
200,0
00
480,0
00
680,
000
120,000
480,000
600,000
152,000
320,000
208,000
8,000
200,000
112,000
1,200,000
680,000
320,000
408,
000
(320,0
00)
88,
000
192,0
00
(120,0
00)
72,
000
Statements of profit or loss
For the year ended December 31, 20x1
720,
Revenues
000
(400,
Expenses
000)
320
Profit
,000
S2
320,0
00
320,
000
6. How much is the goodwill as of December 31, 20x1?
a. 144,000
b. 132,600 c. 112,000 d. 128,000
7. How much is the total NCI in net assets as of December 31, 20x1?
a. 305,620
b. 264,320 c. 265,220 d. 236,220
55
8. How much is the consolidated retained earnings as of December
31, 20x1?
a. 687,680
b. 667,280 c. 698,020 d. 688,420
9. How much is the consolidated profit or loss in 20x1?
a. 460,320
b. 446,000 c. 484,000 d. 452,000
10. How much is the
NCI, respectively?
Owners of parent
a. 406,730
b. 407,680
c. 407,930
d. 408,840
profit attributable to owners of parent and to
NCI in S1
15,480
15,200
15,380
15,120
NCI in S2
38,110
29,120
22,690
60,040
11. How much is the consolidated total assets as of December 31,
20x1?
a. 1,712,000
b. 1,680,000
c. 1,340,000
d.
1,722,000
12. How much is the consolidated total equity as of December 31,
20x1?
a. 1,060,000
b. 1,432,000
c. 1,442,000
d.
1,400,000
Consolidation of a vertical group – Different acquisition dates
Use the following information for the next seven questions:
The following transactions occurred during 20x1:
 On January 1, 20x1, P acquired 80% interest in S1 for ₱400,000.
 On December 31, 20x1, S1 acquired 60% interest in S2 for
₱200,000.
The following information has been determined:
Retained earnings
S1
January 1, 20x1
120,000
December 31, 20x1
208,000
Fair value of NCI
January 1, 20x1
December 31, 20x1
S1
100,000
112,000
S2
40,000
112,000
S2
192,000
168,000
A summary of the individual statement of financial position of the
entities as at December 31, 20x1 is shown below:
P
S1
S2
Investment in
400,000 200,000
Subsidiary
800,000 480,000 320,000
Other assets
1,200,0 680,00
320,000
Total assets
00
0
Liabilities
120,000 152,000
8,000
480,000 320,000 200,000
Share capital
Retained earnings 600,000 208,000 112,000
Total liabilities
1,200,0 680,00
320,000
and equity
00
0
56
Statements of profit or loss
For the year ended December 31, 20x1
720,
Revenues
000
(400,
Expenses
000)
320
Profit
,000
408,
000
(320,0
00)
88,
000
192,0
00
(120,0
00)
72,
000
The carrying amounts of the net identifiable assets of S1 and S2
approximate their fair values at their acquisition dates. The group
determined that the goodwill to S1 has been impaired by ₱40,000 as
at December 31, 20x1. There have been no changes in the share
capitals of S1 and S2 during the year.
13. How much is the total goodwill as of December 31, 20x1?
a. 28,000
b. 18,240 c. 34,000 d. 36,000
14. How much is the total NCI in net assets as of December 31,
20x1?
a. 229,600
b. 237,600 c. 237,088 d. 232,680
15. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 638,400
b. 640,000 c. 637,780 d. 639,880
16. How much is the consolidated profit or loss in 20x1?
a. 368,000
b. 356,600 c. 446,000 d. 452,000
17. How much are the profit attributable to owners of parent and
to the NCIs?
Parent
NCI in S1
NCI in S2
a. 348,200
8,400
0
b. 358,400
9,600
0
c. 407,680
15,200
29,120
d. 407,930
15,380
22,690
18. How much is the consolidated total assets as of December 31,
20x1?
a. 1,680,000
b. 1,712,000
c. 1,636,000 .
d.
1,722,000
19. How much is the consolidated total equity as of December 31,
20x1?
a. 1,356,000
b. 1,432,000
c. 1,400,000
d.
1,442,000
Consolidation of a D-shaped (mixed) group
Use the following information for the next seven questions:
The following transactions occurred on January 1, 20x1:
 P acquired 64,000 shares in S1 for ₱400,000 and 12,500 shares in
S2 for ₱160,000.
 S1 acquired 15,000 shares in S2 for ₱200,000.
Additional information:
57
Retained earnings – January 1, 20x1
Fair value of NCI – January 1, 20x1
S1
120,000
100,000
S2
40,000
160,000
The carrying amounts of the net identifiable assets of S1 and S2
approximate their fair values on January 1, 20x1. The group
determined on December 31, 20x1 that there is no impairment of
goodwill. There have been no changes in the share capitals of S1
and S2 during the year.
A summary of the individual financial statements of the entities on
December 31, 20x1 is shown below:
Statements of financial position
As at December 31, 20x1
P
Investment in Subsidiary
Other assets
Total assets
Liabilities
Share capital (₱4.00 par
value)
Retained earnings
Total liabilities and
equity
560,
000
800,
000
1,360
,000
S1
200,
000
480,
000
680,
000
280,
000
480,
000
600,
000
1,360
,000
152,
000
320,
000
208,
000
680,
000
S2
320,00
0
320,0
00
8,00
0
200,00
0
112,00
0
320,0
00
Statements of profit or loss
For the year ended December 31, 20x1
720,
408,
192,0
Revenues
000
000
00
(400,
(320,0
(120,0
Expenses
000)
00)
00)
320
88,
72,
Profit
,000
000
000
The profits above do not include inter-company investment income.
20. How much is the total goodwill as of December 31, 20x1?
a. 280,000
b. 300,000 c. 320,000 d. 360,000
21. How much is the total NCI in net assets as of December 31,
20x1?
a. 232,680
b. 237,600 c. 274,320 d. 229,600
58
22. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 638,400
b. 705,680 c. 637,780 d. 698,480
23. How much is the consolidated profit or loss in 20x1?
a. 368,000
b. 356,600 c. 480,000 d. 452,000
24. How much are the profit attributable to
to the NCIs?
Parent
NCI in S1
NCI in S2
a. 324,800
15,600
b. 358,400
9,600
c. 425,680
17,600
d. 366,480
17,680
67,840
owners of parent and
27,600
0
36,720
25. How much is the consolidated total assets as of December 31,
20x1?
a. 1,900,000
b. 1,712,000
c. 1,636,000
d.
1,722,000
26. How much is the consolidated total equity as of December 31,
20x1?
a. 1,356,000
b. 1,282,000
c. 1,460,000
d.
1,272,000
Complex group structure with Associate
Use the following information for the next eight questions:
The following transactions occurred on January 1, 20x1:
 A acquired 80% interest in B for ₱400,000.
 A acquired 25% interest in C for ₱160,000.
 B acquired 30% interest in C for ₱200,000.
 B acquired 20% interest in E for ₱240,000.
 C acquired 40% interest in D for ₱320,000.
Additional information:
Retained earnings – Jan. 1,
20x1
Fair value of NCI – Jan. 1,
20x1
B
120,00
0
100,00
0
C
D
E
40,000
160,00
0
8,000
32,000
192,00
0
72,000
The carrying amounts of the net identifiable assets of each of the
investees approximate their fair values on January 1, 20x1. The
group determined on December 31, 20x1 that there is no
impairment in goodwill. There have been no changes in the share
capitals of S1 and S2 during the year.
A summary of the individual financial statements of the entities on
December 31, 20x1 is shown below:
Statements of financial position
As at December 31, 20x1
A
Investments
B
C
440,00 320,00
560,000
0
0
59
D
E
-
-
Other assets
Total assets
Liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000
1,360,0
00
480,00 320,00 240,00 280,00
0
0
0
0
920,0 640,0 240,0 280,0
00
00
00
00
392,00 328,00 120,00
40,000
0
0
0
320,00 200,00
160,00
480,000
80,000
0
0
0
208,00 112,00
600,000
40,000 80,000
0
0
1,360,0 920,0 640,0 240,0 280,0
00
00
00
00
00
280,000
The investment accounts pertain solely to the investment
transactions described earlier and are not adjusted for any
investment income from investees.
Statements of profit or loss
For the year ended December
A
B
C
Reven 720,0 408,0 192,0
ues
00
00
00
Expen (400,0 (320,0 (120,0
ses
00)
00)
00)
Profi
320,0 88,00 72,00
t
00
0
0
31, 20x1
D
E
256,0 128,0
00
00
(224,0 (80,0
00)
00)
32,00 48,0
0
00
Profits do not include income from investments.
27. Assuming the existence of control is based solely on
shareholdings, which of the entities above are considered
subsidiaries of A Co.?
a. B and C
b. B, C and D
c. B only
d. A, B, C, D
and E
28. How much is the total goodwill as of December 31, 20x1?
a. 280,000
b. 300,000 c. 320,000 d. 360,000
29. How much is the total NCI in net assets as of December 31,
20x1?
a. 282,768
b. 237,600 c. 274,320 d. 229,600
30. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 638,400
b. 705,680 c. 719,632 d. 698,480
31. How much is the consolidated profit or loss in 20x1?
a. 500,560
b. 502,400 c. 489,420 d. 399,272
32. How much are the profit attributable to owners of parent and
to the NCIs?
Parent
NCI in B NCI in C
NCI in D
NCI in
E
60
a. 439,632
b. 358,400
c. 425,680
d. 443,932
19,520
9,600
17,600
18,768
0
43,248
31,272
36,720
37,860
0
0
6,890
0
0
2,530
0
33. How much is the consolidated total assets as of December 31,
20x1?
a. 1,900,000
b. 2,482,400
c. 1,636,000
d.
1,317,600
34. How much is the consolidated total equity as of December 31,
20x1?
a. 1,356,000
b. 1,482,400
c. 1,460,000
d.
1,282,000
Chapter 19: Theory of Accounts Reviewer
1. The accounting for business combinations is currently prescribed
under
a. PAS 22
c. PFRS 3 – revised 2008
b. PFRS 3
d. PAS 27 – revised 2011
2. KINK Co. has acquired an investment in a subsidiary, TWIST Co.,
with the view to dispose of this investment within six months. The
investment in the subsidiary has been classified as held for sale
and is to be accounted for in accordance with PFRS 5. The
subsidiary has never been consolidated. How should the
investment in the subsidiary be treated in the financial
statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should
be used.
d. The subsidiary should remain off balance sheet.
(Adapted)
3. The consolidation theory currently applied under PFRSs is
a. Proprietary theory/Proportionate consolidation theory/
b. Parent company theory
c. Entity theory/ Contemporary theory
d. Hybrid theory/ Traditional theory
4. The proprietary theory is applied under which of the following
standards?
a. PAS 31
b. PAS 36
c. PFRS 3d. PAS 27
5. What is the basis for consolidation?
a. significant influence
c. control
b. joint control
d. variable returns
6. FALLACIOUS Co. controls an overseas entity MISLEADING Co.
Because of exchange controls, it is difficult to transfer funds out
of the country to the parent entity. FALLACIOUS Co. owns 100% of
the voting power of MISLEADING Co. How should MISLEADING Co.
be accounted for?
61
a. It should be excluded from consolidation and the equity
method should be used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in
accordance with PFRS 9.
d. It is not permitted to be excluded from consolidation because
control is not lost.
(Adapted)
7. TIPPLE has control over the composition of DRINK’s board of
directors. TIPPLE owns 49% of DRINK and is the largest
shareholder. TIPPLE has an agreement with Mr. Bartek, which
owns 10% of DRINK, whereby Mr. Bartek will always vote in the
same way as TIPPLE. Can TIPPLE exercise control over DRINK?
a. TIPPLE cannot exercise control because it owns only 49% of
the voting rights.
b. TIPPLE cannot exercise control because it can control only the
makeup of the board and not necessarily the way the directors
vote.
c. TIPPLE can exercise control solely because it has an agreement
with Mr. Bartek for the voting rights to be used in whatever
manner TIPPLE wishes.
d. TIPPLE can exercise control because it controls more than 50%
of the voting power, and it can govern the financial and
operating policies of DRINK through its control of the board of
directors.
(Adapted)
8. On January 1, 20x1, MIME Co. acquired one-third equity interest in
IMITATE Co. which resulted in MIME having significant influence
over IMITATE Co. On July 1, 20x4, MIME Co. acquired a further
one-third equity interest in IMITATE Co. which resulted in MIME
having a controlling interest over IMITATE. For financial reporting
purposes, which of the following statements is correct?
a. Goodwill shall be computed on July 1, 20x4 and the one-third
equity interest acquired in 20x1 does not affect the goodwill
computation.
b. Goodwill shall be computed on July 1, 20x4 and the one-third
equity interest acquired in 20x1 affects the goodwill
computation.
c. Goodwill shall be computed both on January 1, 20x1 and July
1, 20x4 because the transactions are considered to constitute
a ‘step acquisition.’
d. Goodwill shall be computed only on January 1, 20x1. The
subsequent change in ownership interest which did not result
to loss of control is accounted for directly in equity.
9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The
board of directors consists of six members; LASSITUDE Co.
appoints three of them and WEARINESS Co. appoints the other
three. The casting vote at meetings always lies with the directors
appointed by LASSITUDE Co. Does LASSITUDE Co. have control
over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and
FATIGUE Co.
62
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the
casting vote at board meetings in the event that there is not a
majority decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and
therefore does not have control.
d. No, control can be exercised only through voting power, not
through a casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public.
The company was formerly a state-owned entity. The national
regulator has retained the power to appoint the board of
directors. An overseas entity acquires 55% of the voting shares,
but the regulator still retains its power to appoint the board of
directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
11. A manufacturing group has just acquired a controlling interest
in a football club that is listed on a stock exchange. The
management of the manufacturing group wishes to exclude the
football club from the consolidated financial statements on the
grounds that its activities are dissimilar. How should the football
club be accounted for?
a. The entity should be consolidated as there is no exemption
from consolidation on the grounds of dissimilar activities.
b. The entity should not be consolidated using the purchase
method but should be consolidated using equity accounting.
c. The entity should not be consolidated and should appear as an
investment in the group accounts.
d. The entity should not be consolidated; details should be
disclosed in the financial statements.
(Adapted)
12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co.
Subsequently, there have changes in the ownership interests over
INSTANT; however, the TRICE’s control over INSTANT was
unaffected. Which of the following statements is incorrect?
a. Once control has been achieved, further transactions whereby
the parent entity acquires further equity interests from noncontrolling interests, or disposes of equity interests but without
losing control, are accounted for as equity transactions
b. The carrying amounts of the controlling and non-controlling
interests are adjusted to reflect the changes in their relative
interests in the subsidiary.
c. Any difference between the amount by which the noncontrolling interests is adjusted and the fair value of the
consideration paid or received is recognized directly in equity
and attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted and
gain or loss is recognized in profit or loss.
63
13. Which of the following exemplifies the application of the ‘entity
theory’ of consolidation?
a. Consolidated profit = Parent’s separate profit + Share of
Parent in Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit
14. Under the ‘entity theory’ of consolidation, the consolidated
profit equals
a. Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Profit of the group – NCI profit
c. Parent’s separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit attributable
to NCI
15. During the year, COMITY Co. sold equipment to its subsidiary,
MUTUAL COURTESY Co., at a gain. The equipment has a
remaining useful life of 5 years. Which of the following
statements is true in the preparation of the consolidated financial
statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the
equipment is sold to an unrelated party.
c. The carrying amount of the asset and the related depreciation
are adjusted downwards.
d. The carrying amount of the asset and the related depreciation
are adjusted upwards.
16. During the year, BAFFLE Co. sold part of its controlling interest
in TO COFUSE Co. The sale did not affect BAFFLE’s control over
TO CONFUSE. Which of the following statements is true?
a. The equity adjustment would be larger if BAFFLE measures NCI
at the NCI’s proportionate share in the subsidiary’s net
identifiable assets rather than at fair value.
b. The equity adjustment would be larger if BAFFLE measures NCI
at fair value rather than at the NCI’s proportionate share in the
subsidiary’s net identifiable assets.
c. There would be no equity adjustment if the net disposal
proceeds equal the original cost of the interest sold.
d. c and d
17. Which of the following terms best describes the financial
statements of a parent in which the investments are accounted
for on the basis of the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements
18. Are the following statements true or false?
1. Consolidated financial statements must be prepared using
uniform accounting policies.
2. The non-controlling interest in the net assets of subsidiaries
may be shown by way of note to the consolidated statement of
financial position.
64
a. False, False
True
b. False, True c. True, False
d.
True
19. Which of the following is not a valid condition that will exempt
an entity from preparing consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another
entity.
b. The parent entity’s debt or equity capital is not traded on the
stock exchange.
c. The ultimate parent entity produces consolidated financial
statements available for public use that comply with PFRS.
d. The parent entity is in the process of filing its financial
statements with a securities commission.
(Adapted)
20. Where should non-controlling interests be presented in the
consolidated balance sheet?
a. Within long-term liabilities.
b. In between long-term liabilities and current liabilities.
c. Within the parent shareholders’ equity.
d. Within equity but separate from the parent shareholders’
equity.
(Adapted)
Chapter 19 - Suggested answers to review theory questions
1
.
2
.
3
.
4
.
5
.
C
6. D
C
7. D
C
8. B
A
9. B
1
0. C
C
1
1.
1
2.
1
3.
1
4.
1
5.
A
16. A
D
17. C
B
18. C
D
19. D
C
20. D
65
Chapter 20
Separate Financial Statements
Chapter 20: Multiple Choice – Computational (For classroom
instruction purposes)
Separate financial statements
Use the following information for the next four questions:
Bandolin Co. had the following investment transactions during 20x1:
 Acquired 80% interest in Zaskar, Inc. for ₱4,000,000 on January 1,
20x1. Zaskar reported profit of ₱40M and declared dividends of
₱1,200,000 during 20x1. The fair value of the investment on
December 31, 20x1 is ₱4.8M.
 Acquired 20% interest in Goat Co. for ₱400,000 on July 1, 20x1.
Transaction costs incurred amounted to ₱80,000. Goat reported
profit of ₱8M for the six months ended December 31, 20x1 and
declared year-end dividends of ₱800,000. The fair value of the
investment on December 31, 20x1 is ₱420,000.
Bandolin’s policy is to measure investments in subsidiaries at cost
and investments in associates at fair value through profit or loss in
the separate financial statements.
1. How much is the carrying amount of the investment in subsidiary
in the December 31, 20x1 consolidated financial statements?
a. 4,000,000 b. 4,800,000
c. 36,000,000
d. 0
2. How much is the carrying amount of the investment in subsidiary
in the December 31, 20x1 separate financial statements?
a. 4,000,000 b. 4,800,000
c. 36,000,000
d. 0
3. How much is the carrying amount of the investment in associate
in the December 31, 20x1 separate financial statements?
a. 480,000
b. 420,000 c. 1,920,000
d. 0
4. How much is net investment income recognized in the 20x1
separate financial statements for the investments referred to
above?
a. 100,000
b. 180,000 c. 33,600,000
d. 1,060,000
Chapter 20: Theory of Accounts Reviewer
1. Which of the following are required under PAS 27 to produce
separate financial statements?
a. A listed entity with at least one wholly owned subsidiary
b. A listed entity with at least one subsidiary, whether wholly or
partially owned.
c. An entity, whether listed or unlisted, with at least one affiliate
(e.g., a subsidiary, an associate or an interest in a joint
venture)
d. PAS 27 does not mandate which entities should produce
separate financial statements.
66
2. These are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic
entity.
a. General purpose financial statements c.
Individual
financial
statements
b. Consolidated financial statements
d.
Separate
financial
statements
3. These are those presented by a parent (i.e., an investor with
control of a subsidiary) or an investor with joint control of, or
significant influence over, an investee, in which the investments
are accounted for at cost or in accordance with PFRS 9 Financial
Instruments.
a. General purpose financial statements c.
Individual
financial
statements
b. Consolidated financial statements
d.
Separate
financial
statements
4. In the separate financial statements of a parent entity,
investments in subsidiaries that are not classified as held for sale
should be accounted for
a. At cost.
c.
Using
the
equity
method.
b. In accordance with PFRS 9.
d. a or b
Chapter 20 - Suggested answers to review theory questions
1
.
2
.
3
.
4
.
D
B
D
D
67
Chapter 21
The Effects of Changes in Foreign
Exchange Rates
Chapter 21: Multiple Choice – Computational (For classroom
instruction purposes)
Foreign currency transaction – Direct quotation – Purchase
Use the following information for the next six questions:
On November 29, 20x1, ABC Co. placed a non-cancellable purchase
order for the importation of a machine with a purchase price of
€40,000 from a company based in France. The contract term is FOB
shipping point. The machine was shipped on December 1, 20x1 and
was received by ABC on December 15, 20x1. The purchase price was
settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱55:€1
December 1, 20x1………………………………………….₱58:€1
December 15, 20x1………………………………………..₱57:€1
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1
1. The entry on November 29, 20x1 includes
a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
2. The entry on December 1, 20x1 includes
a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
3. The total FOREX gain (loss) recognized in 20x1 is
a. 40,000
b. (80,000) c. (200,000)
d. (120,000)
4. The adjustment to the machinery account on December 31, 20x1
is – increase (decrease)
a. 80,000
b. (80,000) c. 40,000 d. 0
5. The total FOREX gain (loss) recognized in 20x2 is
a. (40,000)
b. (80,000) c. (200,000)
d. (120,000)
6. The net adjustment to the machinery account on January 3, 20x2
is – increase (decrease)
a. 80,000
b. (120,000)
c. (40,000) d. 0
Foreign currency transaction – Direct quotation – Sale
Use the following information for the next four questions:
On November 29, 20x1, ABC Co. received a non-cancellable sale
order for the exportation of inventories from a UK-based company.
68
The contract price is £40,000 (pound sterling). The contract term is
FOB shipping point. The inventories were shipped on December 1,
20x1. The sale was settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱67:£1
December 1, 20x1………………………………………….₱68:£1
December 31, 20x1………………………………………..₱70:£1
January 3, 20x2…………………………………………….₱71:£1
7. How much sale revenue is recognized in 20x1?
a. 2,680,000 b. 2,720,000
c. 2,800,000
d. 2,840,000
8. How much FOREX gain (loss) is recognized in 20x1?
a. 120,000
b. (120,000)
c. 80,000 d. (80,000)
9. How much FOREX gain (loss) is recognized in 20x2?
a. 40,000
b. (40,000) c. 120,000 d. 160,000
10. How much is the total FOREX gain (loss) resulting from the
sale transaction?
a. 160,000
b. 120,000 c. 80,000 d. 40,000
Foreign currency transaction – Indirect quotation
Use the following information for the next two questions:
ABC Co. had the following transactions during the last month of the
current reporting period:
 Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 400,000 rupees on December 17, 20x1 to be settled
on January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for
80,000 kroners on December 20, 20x1 to be settled on January 5,
20x2.
The exchange rates are as follows:
Rupee
Kroner
Dec. 17, 20x1…………Php 1 : PKR 2.04
Dec. 20, 20x1………………………………………Php 1 : SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2
Php 1 : SEK 0.2000
Jan. 5, 20x2…………..Php 1: PKR 2.083
Php 1 : SEK 0.2400
11. How much are the total FOREX gains/losses recognized by ABC
Co. from the purchase and sale transactions described above?
Purchase
Sales
a. (4,048)
146,570
b. 4,048
(146,572)
c. 3,922
(66,667)
d. (3,922)
66,667
12. How much are the total FOREX gains/losses recognized by
Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
Pakistani
a. (4,048)
b. 3,922
Swedish
146,572
(66,667)
69
c. (3,922)
d. 0
66,667
0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000
(Brazilian reals) when the exchange rate is ₱24:BRL1. ABC Co.
reported foreign exchange loss of ₱80,000 in its 20x1 statement of
profit or loss and a ₱20,000 foreign exchange gain of ₱20,000 in its
20x2 statement of profit or loss.
13. What is the exchange rate on December 31, 20x1?
a. ₱24:BRL1
b. ₱26:BRL1
c. ₱25.5:BRL1
of these
d. None
14. What is the exchange rate on settlement date in 20x2?
a. ₱24:BRL1
b. ₱26:BRL1
c. ₱25.5:BRL1
d. None
of these
15. What is the carrying amount of the accounts payable in the
20x1 statement of financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d. None of
these
16. How much is the cost of the equipment in the 20x1 statement
of financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d. None of
these
17. How much is the cost of the equipment in the 20x2 statement
of financial position?
a. 1,040,000
b. 960,000
c. 1,020,000
d. None of
these
Exchange rate on initial recognition
18. ABC Co. obtained a $40,000 loan at the middle of the year. At
the end of the year, the loan payable is appropriately reported at
₱2,200,000. None of the principal on the loan has been paid
during the year. There has been a 10% increase in the exchange
rate (expressed in direct quotation) from the date the loan has
been obtained to the end of reporting period. What is the
exchange rate at the date the loan has been obtained?
a. ₱55:$1
b. ₱50:$1 c. ₱45:$1 d. ₱60:$1
Loan transaction
19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year. How much is the foreign
exchange gain (loss) to be recognized in the year-end statement
of profit or loss?
a. (200,000)
b. (220,000)
c. (210,000)
d.
210,000
Cash account
Use the following information for the next two questions:
70
ABC Co., a domestic corporation based in the Philippines, frequently
sells goods overseas through the internet. All online sales are on
cash basis. The movements in ABC’s US dollar account are shown
below:
Cash in bank - U.S.
dollar
$40,00
Jan. 1 (₱48:$1)
0
80,00
Sept. 30 (₱45:$1)
0
20,000 Dec. 16 (₱44:$1)
$100,00
0 Dec. 31 (₱45:$1)
20. How much is the balance of cash in bank to be presented in
the year-end statement of financial position?
a. 4,640,000
b. 4,500,000
c. 100,000 d. 4,650,000
21. What is the net foreign exchange gain (loss) to be recognized
in the year-end statement of profit or loss?
a. 100,000
b. (100,000)
c. (140,000)
d.
140,000
Average rate
Use the following information for the next two questions:
On December 15, 20x1, ABC Co. sent one of its key management
personnel to a seminar in Malaysia. ABC Co. advanced MYR 40,000
(ringgits) to the manager subject to liquidation. The exchange rate
on December 15, 20x1 is ₱14: MYR1.
The liquidation report submitted by the key manager showed the
following:
 MYR 32,000 were spent from December 15 to December 31,
20x1. The exchange rate on December 31, 20x1 is ₱13: MYR 1.
 MYR 6,000 were spent from January 1, 20x2 to January 3, 20x2.
The manager returned the MYR 2,000 excess to the cashier on
January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12:
MYR 1.
22. How much is the total FOREX gain (loss) on December 31,
20x1?
a. (24,000)
b. (32,000) c. 24,000 d. (38,000)
23. How much is the FOREX gain (loss) on January 3, 20x2?
a. (5,000)
b. (4,000) c. (7,000) d. (2,000)
Items measured at other than historical cost
Use the following information for the next two questions:
ABC Co. had the following foreign currency transactions during the
year:
 Acquired equipment on January 1, 20x1 for THB 40,000 (bahts)
from a Thailand-based company when the current exchange rate
was ₱1.2: THB 1. The equipment is depreciated over 5 years
using the straight-line method.
71

Purchased inventories on December 1, 20x1 for ZAR 4,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the acquisitions described above are on cash basis. At yearend, ABC Co. determined the following:
 The equipment was found to have a recoverable amount of THB
28,000. The closing rate is ₱1.3: THB 1.
 Half of the inventories purchased remain unsold. ABC estimated
that the net realizable value of the unsold inventories is ZAR
1,200. The closing rate is ₱6.
24. How much is the impairment loss on the equipment?
a. 11,600
b. 2,000
c. 9,280
d. None
25. How much is the impairment loss on the inventory?
a. 2,800
b. 800
c. 2,240
d. None
Buying and selling rates
Use the following information for the next two questions:
ABC Co. had the following foreign currency transactions on April 1,
20x1:
 Purchased goods worth CHF 40,000 (francs) from Swiss Company,
a company based in Switzerland.
 Sold goods with sale price of VEB 4,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying
Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1
₱48: CHF1
April 30, 20x1……………………….₱47:CHF1
₱50: CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1
April 30, 20x1……………………….₱13:CHF1
₱12: CHF1
₱16: CHF1
26. How much is the FOREX gain (loss) on the purchase
transaction?
a. (120,000) b. 120,000 c. 80,000 d. (80,000)
27. How much is the FOREX gain (loss) on the sale transaction?
a. 16,000
b. 12,000 c. (16,000) d. (12,000)
Revaluation of asset
28. On January 1, 20x1, ABC Co. acquired equipment for MWK
4,000,000 (kwachas) from a company based in Malawi. The
equipment’s estimated useful life is 4 years. ABC Co. uses the
straight line method of depreciation and the revaluation model.
On December 31, 20x1, the equipment was determined to have a
net appraised value of MWK 4,800,000 (kwachas). The relevant rates
are as follows:
72
Jan. 1, 20x1………………………………………….₱0.20 : MWK 1
Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
How much is the revaluation surplus?
a. 648,000 b. 3,461,538
c. 448,000 d. None
Exchange difference recognized in OCI
29. ABC Co. has a wholly-owned subsidiary in Indonesia. The
following information is available about the subsidiary for the
year to December 31, 20x1:
(IDR Rupiahs)
400,000,00
Net assets, Jan. 1, 20x1
0
160,000,00
Profit for the year
0
Dividends
560,000,00
Net assets, Dec. 31, 20x1
0
No goodwill arose from the business combination. The following are
the relevant exchange rates:
Jan. 1, 20x1………………………………₱0.003 : IDR 1
Average for the year…………………….₱0.004 : IDR 1
Dec. 31, 20x1…………………………….₱0.005 : IDR 1
How much is the total gain (loss) on translation for the year?
a. 1,280,000
b. (1,120,000)
c. 1,120,000
d.
960,000
Goodwill
Use the following information for the next two questions:
On January 1, 20x1, a Philippine holding company acquired 100%
interest in a subsidiary based in Kenya for KES 40M (shillings). The
fair value of the net assets of the subsidiary at that date was KES 32
million (shillings).
The following are the relevant exchange rates:
Jan. 1, 20x1………………………………………..₱0.04 : KES 1
Dec. 31, 20x1………………………………………₱0.05 : KES 1
The group determined that there is no impairment in goodwill.
30. How much is the goodwill as of January 1, 20x1?
a. 100,000
b. 240,000 c. 320,000 d. 480,000
31. How much is the goodwill as of December 31, 20x1?
a. 400,000
b. 440,000 c. 480,000 d. 560,000
Translation of a subsidiary’s financial statements
Use the following information for the next nine questions:
ABC Co. owns 80% of the ordinary shares of a foreign subsidiary,
XYZ, Inc., a company based in Korea. XYZ, Inc.'s functional currency
is won. The subsidiary was acquired at the start of the reporting
period for 6,000,000 wons, when the subsidiary's retained earnings
were 3,200,000 wons.
73
At the date of the acquisition the fair value of the net assets of the
subsidiary were 5,600,000 wons. This included a fair value
adjustment in respect of land.
ABC Co. elected to measure non-controlling interest at the NCI’s
proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
The relevant exchange rates are as follows:
Date
Exchange rates
Jan. 1, 20x1………………………………….₱0.03: KRW 1
Average for the year………………………..₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05: KRW 1
A summary of the individual financial statements of the entities at
the end of reporting period are shown below:
Statements of financial position
As at December 31, 20x1
ASSETS
Investment in subsidiary
Other assets
TOTAL ASSETS
ABC Co.
(pesos)
180,000
8,000,000
8,180,000
XYZ, Inc.
(wons)
5,200,000
5,200,000
LIABILITIES AND EQUITY
Liabilities
Share capital
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
1,600,000
4,000,000
2,580,000
6,580,000
8,180,000
240,000
800,000
4,160,000
4,960,000
5,200,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
(pesos)
3,600,00
0
(2,160,0
00)
1,440,0
00
Revenues
Expenses
Profit for the year
XYZ, Inc.
(wons)
2,400,000
(1,440,000
)
960,00
0
32. How much is the goodwill as of December 31, 20x1?
a. 45,600
b. 76,000 c. 66,500 d. 64,500
33. How much is the non-controlling interest in the net assets of
the subsidiary (NCI) as of December 31, 20x1?
a. 39,360
b. 56,600 c. 54,360 d. 65,600
34. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 2,618,400 b. 2,702,400
c. 2,672,340
d. 2,610,720
74
35. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. 152,000
b. 121,600 c. 161,600 d. 136,000
36. How much is the consolidated profit in 20x1?
a. 1,478,400 b. 1,488,000
c. 1,596,400
d. 1,696,000
37. How much is the consolidated total comprehensive income in
20x1?
a. 1,640,000 b. 1,630,400
c. 1,718,000
d. 1,832,000
38. How much is the comprehensive income attributable to owners
of the parent?
a. 1,592,320 b. 1,606,080
c. 1,598,400
d. 1,638,080
39. How much is the consolidated total assets as of December 31,
20x1?
a. 8,416,000 b. 9,680,000
c. 8,340,000
d. 9,860,000
40. How much is the equity attributable to owners of the parent as
of December 31, 20x1?
a. 6,676,320 b. 6,828,320
c. 6,738,400
d. 6,804,000
Net investment in a foreign operation
Use the following information for the next six questions:
On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a
company situated in a foreign country. The currency of this country
is the Armenian Dram (AMD). ABC elected to measure noncontrolling interest as its proportionate share of the fair value of the
subsidiary‘s net assets.
The year-end financial statements of the combining constituents
show the following information:
Statements of financial position
As of December 31, 20x1
ABC Co.
₱m*
8,000
1,760
12,000
21,760
Current assets
Investment in subsidiary
Property, plant and equipment
TOTAL ASSETS
Current liabilities
Noncurrent liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
*Amounts in millions.
Statements of profit or loss
75
XYZ, Inc.
ADMm*
8,800
7,200
16,000
4,000
4,800
8,800
4,000
2,800
6,800
4,000
2,000
6,960
12,960
21,760
400
800
8,000
9,200
16,000
For the year ended December 31, 20x1
ABC Co.
₱m
Revenue
16,000
Cost of sales
(10,000)
Gross profit
6,000
Operating expenses
(2,000)
Dividends received
240
Interest expense
(400)
Interest income
160
Profit before tax
4,000
Income tax expense
(1,200)
Profit after tax
2,800
Extraordinary item
Profit for the year
2,800
XYZ, Inc.
ADMm
32,000
(16,000)
16,000
(4,000)
(1,200)
400
11,200
(4,000)
7,200
(800)
6,400
The movements in retained earnings during 20x1 are shown below:
Retained earnings – Jan. 1, 20x1
4,560
4,800
Dividends paid
(400)
(3,200)
Profit for the year
2,800
6,400
Retained earnings – Dec. 31, 20x1
6,960
8,000
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRSs (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM400
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM8,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years
on the straight line basis.
d) During the year, ABC Co. sold ₱120 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by year-end, but only one half of the relevant finished goods have
been sold. XYZ, Inc. received the goods on September 1 and paid
on September 21. The foreign exchange difference remains in
current liabilities.
e) ABC Co. made a loan of ₱200 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at yearend. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
The following exchange rates are relevant:
ADM to ₱1.00
January 1…………………………………………………….5
September 1…………………………………………………6
September 21……………………………………………….6.5
December 31………………………………………………..8
Weighted average for year……………………………….. 7
76
41. How much is the goodwill as of December 31, 20x1?
a. 4,000
b. 620
c. 500
d. 1,400
42. How much is the NCI in net assets as of December 31, 20x1?
a. 523
b. 553
c. 624
d. 829.50
43. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 7,176
b. 7,214
c. 7,245
d. 7,385
44. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. (1,087)
b. (1,792) c. (1,903) d. (1,093)
45. How much is the consolidated profit in 20x1?
a. 3,442
b. 3,483
c. 3,647
d. 3,328
46. How much is the comprehensive income attributable to NCI?
a. 36
b. 38
c. 43
d. 41
Disposal of a foreign operation
47. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for ₱500,000.
The following information was determined as of this date:
Carrying amount of XYZ’s net identifiable assets
412,000
Carrying amount of NCI (including accumulated OCI
attributable to NCI)
82,400
Goodwill
12,000
ABC Co. had previously recognized translation gains of ₱3,200 in
other comprehensive income on its investment in XYZ, Inc. How
much is the total gain to be recognized in profit or loss on disposal
date?
a. 158,400
b. 161,600 c. 155,200 d. 164,800
Translation of a foreign operation – Hyperinflationary
economy
Use the following information for the next four questions:
ABC Co., a corporation based in the Philippines, has a foreign branch
that is operating in a hyperinflationary economy. The financial
statements of the branch prior to restatement and translation are
shown below:
Statement of financial position
As of December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Cash
Accounts receivable
Inventory
Building
Accumulated depreciation
Total assets
184,000
296,000
160,000
400,000
(80,000)
960,000
77
Loan payable
Share capital
Retained earnings
Total equity
Total liabilities and
equity
120,000
400,000
440,000
840,000
960,000
Statement of profit or loss
For the year ended December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Sales
Cost of sales:
Inventory - Jan. 1
240,000
Purchases
120,000
Total goods available for sale
360,000
Inventory - Dec. 31
(160,000)
Gross profit
Depreciation expense
Other operating expenses
Profit for the year
480,000
(200,000)
280,000
(40,000)
(160,000)
80,000
Additional information:
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly during
the year.
 Selected values of general price indices (CPI) are shown below:
January 1, 20x0
100
Average for 20x0
110
January 1, 20x1
120
Average for 20x1
125
December 31, 20x1
140


The net monetary assets as of January 1, 20x1 is ₱160,000.
The exchange rates are as follows:
1.00 AOA : 0.45
January 1, 20x1
PHP
1.00 AOA : 0.47
Average for 20x1
PHP
1.00 AOA : 0.50
December 31, 20x1
PHP
48. How much is the gain (loss) on net monetary position?
a. (53,224)
b. (51,887) c. (50,667) d. (48,333)
49. How much is the translated total assets as of December 31,
20x1?
a. 552,400
b. 553,600 c. 554,800 d. 556,300
50. How much is the translated total equity as of December 31,
20x1?
a. 553,600
b. 489,600 c. 495,600 d. 493,600
78
51. How much is the translated profit (loss) for 20x1?
a. (4,461)
b. 4,240
c. (4,561) d. (4,362)
Chapter 21: Exercises (For classroom instruction purposes)
1. ABC Co. is a mining company registered in Canada whose shares
are traded in the Toronto Stock Exchange. ABC’s operating
activities take place in the gold and silver mines in the
Philippines.
Requirements:
a. What is the presentation currency of ABC Co.?
b. What is the functional currency of ABC Co.?
c. ABC acquired specialized mining equipment from Japan, invoiced
in Japanese yen. What type of currency is the Japanese yen under
PAS 21 definitions?
2. ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines
operates in a Philippine Economic Zone Authority (PEZA) Special
Economic Zone. ABC Philippines is engaged in the apparel
business. All of its raw materials are imported from its main office
in the U.S. and all of its finished products are exported directly to
U.S. customers. The U.S. customers remit payments to the U.S.
main office. The U.S. main office will then provide the Philippine
branch its working capital needs. None of ABC Philippines’
finished products are sold in the Philippines. The raw materials
imported and finished goods exported are denominated in U.S.
dollars.
Requirements:
a. What is ABC Philippines Co.’s functional currency?
b. What is ABC Philippines Co.’s presentation currency?
3. ABC Co. started its operations in China, where the currency is the
yuan. After several years, ABC Co. expanded and exported its
product to the Philippines, and conducted business through a
branch. The functional currency of the group was deemed to be
the yuan but by the end of 20x1, 80% of the business was
conducted in the Philippines. At the beginning of 20x1, 30% of
the business was conducted in Philippine pesos.
Question: Should the functional currency of the group remains at
yuan or changed to Philippine pesos?
4. On November 29, 20x1, ABC Co. placed a non-cancellable
purchase order for the importation of a machine with a purchase
price of €20,000 from a company based in France. The contract
term is FOB shipping point. The machine was shipped on
December 1, 20x1 and was received by ABC on December 15,
20x1. The purchase price was settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱55:€1
December 1, 20x1………………………………………….₱58:€1
December 15, 20x1………………………………………..₱57:€1
79
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1
Requirement: Provide the journal entries.
5. On November 29, 20x1, ABC Co. received a non-cancellable sale
order for the exportation of inventories from a UK-based company.
The contract price is £40,000 (pound sterling). The contract term
is FOB shipping point. The inventories were shipped on December
1, 20x1. The sale was settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1………………………………………..₱67:£1
December 1, 20x1………………………………………….₱68:£1
December 31, 20x1………………………………………..₱70:£1
January 3, 20x2…………………………………………….₱71:£1
Requirement: Provide the journal entries.
6. ABC Co. had the following transactions during the last month of
the current reporting period:
 Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 200,000 rupees on December 17, 20x1 to be settled
on January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for
40,000 kroners on December 20, 20x1 to be settled on January 5,
20x2.
The exchange rates are as follows:
Rupee
Kroner
Dec. 17, 20x1…………Php 1 : PKR 2.04
Dec. 20, 20x1………………………………………Php 1 : SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2
Php 1 : SEK 0.2000
Jan. 5, 20x2…………..Php 1: PKR 2.083
Php 1 : SEK 0.2400
Requirements:
a. How much are the FOREX gains/losses recognized by ABC Co.
from the purchase and sale transactions described above?
b. How much are the total FOREX gains/losses recognized by
Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
7. ABC Co. is a Philippine-based company. During the year, ABC
recognized a foreign exchange gain on its $2,000 receivable and
a foreign exchange loss on its ¥200,000 payable. If exchange
rates are expressed in indirect quotations (i.e., $xx : ₱1.00 and
¥xx : ₱1.00), what would have been the movements in the
exchange rates during the period?
8. On December 1, 20x1, ABC Co. acquired equipment for BRL
20,000 (Brazilian reals) when the exchange rate is ₱24:BRL1. ABC
Co. reported foreign exchange loss of ₱40,000 in its 20x1
statement of profit or loss and a ₱10,000 foreign exchange gain
of ₱10,000 in its 20x2 statement of profit or loss.
Requirements: Compute for the following:
80
a. Exchange rates on December 31, 20x1 and on settlement date in
20x2.
b. Carrying amount of accounts payable in the 20x1 statement of
financial position.
c. Cost of equipment in the 20x1 and 20x2 statements of financial
position.
9. ABC Co. obtained a $40,000 loan at the middle of the year. At the
end of the year, the loan payable is appropriately reported at
₱2,200,000. None of the principal on the loan has been paid
during the year. There has been a 10% increase in the exchange
rate (expressed in direct quotation) from the date the loan has
been obtained to the end of reporting period.
Requirement: What is the exchange rate at the date the loan has
been obtained?
10. On July 1, 20x1, ABC Co. obtained a $20,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year.
Requirement: Compute for the foreign exchange gain/loss to be
recognized in the year-end statement of profit or loss.
11. ABC Co., a domestic corporation based in the Philippines,
frequently sells goods overseas through the internet. All online
sales are on cash basis. The movements in ABC’s US dollar
account are shown below:
Cash in bank - U.S.
dollar
Jan. 1 (₱48:$1)
$20,000
10,00
Sept. 30 (₱45:$1)
40,000
0 Dec. 16 (₱44:$1)
$50,00
0 Dec. 31 (₱45:$1)
Requirements: Compute for the following:
a. Amount of cash in bank to be presented in the year-end
statement of financial position.
b. Net foreign exchange gain or loss to be recognized in the yearend statement of profit or loss.
12. On December 15, 20x1, ABC Co. sent one of its key
management personnel to a seminar in Malaysia. ABC Co.
advanced MYR 20,000 (ringgits) to the manager subject to
liquidation. The exchange rate on December 15, 20x1 is ₱14:
MYR1.
The liquidation report submitted by the key manager showed the
following:
 MYR 16,000 were spent from December 15 to December 31,
20x1. The exchange rate on December 31, 20x1 is ₱13: MYR 1.
 MYR 3,000 were spent from January 1, 20x2 to January 3, 20x2.
The manager returned the MYR 1,000 excess to the cashier on
81
January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12:
MYR 1.
Requirements: Compute for the following:
a. FOREX gain or loss on December 31, 20x1.
b. FOREX gain or loss on January 3, 20x2.
13. ABC Co. had the following foreign currency transactions during
the year:
 Acquired equipment on January 1, 20x1 for THB 20,000 (bahts)
from a Thailand-based company when the current exchange rate
was ₱1.2: THB 1. The equipment is depreciated over 5 years
using the straight-line method.
 Purchased inventories on December 1, 20x1 for ZAR 2,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the acquisitions described above are on cash basis. At yearend, ABC Co. determined the following:
 The equipment was found to have a recoverable amount of THB
14,000. The closing rate is ₱1.3: THB 1.
 Half of the inventories purchased remain unsold. ABC estimated
that the net realizable value of the unsold inventories is ZAR 600.
The closing rate is ₱6.
Requirement: Provide the year-end adjustments.
14. ABC Co. had the following foreign currency transactions on
April 1, 20x1:
 Purchased goods worth CHF 20,000 (francs) from Swiss Company,
a company based in Switzerland.
 Sold goods with sale price of VEB 2,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying
Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1
₱48: CHF1
April 30, 20x1……………………….₱47:CHF1
₱50: CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1
April 30, 20x1……………………….₱13:CHF1
Requirements:
transactions:
Compute
for
the
FOREX
₱12: CHF1
₱16: CHF1
gain/loss
from
the
15. On January 1, 20x1, ABC Co. acquired equipment for MWK
2,000,000 (kwachas) from a company based in Malawi. The
equipment’s estimated useful life is 4 years. ABC Co. uses the
straight line method of depreciation and the revaluation model.
82
On December 31, 20x1, the equipment was determined to have a
net appraised value of MWK 2,400,000 (kwachas). The relevant rates
are as follows:
Jan. 1, 20x1………………………………………….₱0.20 : MWK 1
Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
Requirement: Provide the year-end entry to account for the
revaluation.
16. ABC Co. has a wholly-owned subsidiary in Indonesia. The
following information is available about the subsidiary for the
year to December 31, 20x1:
(IDR - Rupiahs)
Net assets, Jan. 1, 20x1
200,000,000
Profit for the year
80,000,000
Dividends
Net assets, Dec. 31, 20x1
280,000,000
No goodwill arose from the business combination. The following are
the relevant exchange rates:
Jan. 1, 20x1………………………………₱0.003 : IDR 1
Average for the year…………………₱0.004 : IDR 1
Dec. 31, 20x1…………………………….₱0.005 : IDR 1
Requirement: Calculate the total gain or loss on translation for the
year, analyzing it between (1) the gain or loss on re-translating the
opening net assets and (2) the gain or loss on re-translating income
and expenses.
17. On January 1, 20x1, a Philippine holding company acquired
100% interest in a subsidiary based in Kenya for KES 20M
(shillings). The fair value of the net assets of the subsidiary at
that date was KES 16 million (shillings).
The following are the relevant exchange rates:
Jan. 1, 20x1………………………………………..₱0.04 : KES 1
Dec. 31, 20x1……………………………………..₱0.05 : KES 1
The group determined that there is no impairment in goodwill.
Requirements: Compute for the goodwill to be included in the
consolidated financial statements on January 1, 20x1 and on
December 31, 20x1.
18. ABC Co. owns 80% of the ordinary shares of a foreign
subsidiary, XYZ, Inc., a company based in Korea. XYZ, Inc.'s
functional currency is won. The subsidiary was acquired at the
start of the reporting period for 3,000,000 wons, when the
subsidiary's retained earnings were 1,600,000 wons.
At the date of the acquisition the fair value of the net assets of the
subsidiary were 2,800,000 wons. This included a fair value
adjustment in respect of land.
83
ABC Co. elected to measure non-controlling interest at the NCI’s
proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
The relevant exchange rates are as follows:
Date
Exchange rates
Jan. 1, 20x1………………………………….₱0.03: KRW 1
Average for the year…………………….₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05: KRW 1
A summary of the individual financial statements of the entities at
the end of reporting period are shown below:
Statements of financial position
As at December 31, 20x1
ASSETS
Investment in subsidiary
Other assets
TOTAL ASSETS
ABC Co.
(pesos)
90,000
4,000,000
4,090,000
XYZ, Inc.
(wons)
2,600,000
2,600,000
LIABILITIES AND EQUITY
Liabilities
Share capital
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
800,000
2,000,000
1,290,000
3,290,000
4,090,000
120,000
400,000
2,080,000
2,480,000
2,600,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
(pesos)
1,800,0
00
(1,080,0
00)
720,
000
Revenues
Expenses
Profit for the year
XYZ, Inc.
(wons)
1,200,0
00
(720,0
00)
480,
000
Requirement: Prepare the consolidated statement of financial
position and consolidated statement of profit or loss and other
comprehensive income.
19. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ,
Inc., a company situated in a foreign country. The currency of this
country is the Armenian Dram (AMD). ABC elected to measure
non-controlling interest as its proportionate share of the fair value
of the subsidiary‘s net assets.
The year-end financial statements of the combining constituents
show the following information:
Statements of financial position
As of December 31, 20x1
84
Current assets
Investment in subsidiary
Property, plant and equipment
TOTAL ASSETS
Current liabilities
Noncurrent liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
*Amounts in millions.
ABC Co.
₱m*
4,000
880
6,000
10,880
XYZ, Inc.
ADMm*
4,400
2,000
2,400
4,400
2,000
1400
3,400
2,000
1000
3,480
6,480
10,880
200
400
4,000
4,600
8,000
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
₱m
8,00
Revenue
0
(5,000
Cost of sales
)
Gross profit
3,000
(1,000
Operating expenses
)
12
Dividends received
0
(200
Interest expense
)
8
Interest income
0
Profit before tax
2,000
(600
Income tax expense
)
1,40
Profit after tax
0
Extraordinary item
1,40
0
Profit for the year
3,600
8,000
XYZ, Inc.
ADMm
16,00
0
(8,000
)
8,000
(2,000
)
(600
)
20
0
5,600
(2,000
)
3,60
0
(400
)
3,20
0
The movements in retained earnings during 20x1 are shown below:
2,40
2,280
Retained earnings – Jan. 1, 20x1
0
(1,600
(200)
Dividends paid
)
3,20
1,400
Profit for the year
0
Retained earnings – Dec. 31, 20x1
3,480
4,000
Additional information:
85
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRS (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM200
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM4,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years on
the straight line basis.
d) During the year, ABC Co. sold ₱60 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by the year-end, but only one half of the relevant finished goods
have been sold. XYZ, Inc. received the goods on September 1 and
paid on September 21. The foreign exchange difference remains
in current liabilities.
e) ABC Co. made a loan of ₱100 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at yearend. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
The following exchange rates are relevant:
ADM to ₱1.00
January 1…………………………………………………….5
September 1…………………………………………………6
September 21……………………………………………….6.5
December 31………………………………………………..8
Weighted average for year…………………………….7
Requirements: Compute for the following (round-off amounts to
nearest million):
a. Consolidated total assets.
b. Consolidated total liabilities.
c. Consolidated total equity.
d. Prepare the consolidation working paper for comprehensive
income.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for ₱250,000.
The following information was determined as of this date:
Carrying amount of XYZ’s net identifiable assets
206,000
Carrying amount of NCI (including accumulated OCI
attributable to NCI)
41,200
Goodwill
6,000
ABC Co. had previously recognized translation gains of ₱1,600 in
other comprehensive income on its investment in XYZ, Inc.
Requirement: Compute for the total gain to be recognized in profit
or loss on disposal date.
86
21. ABC Co., a corporation based in the Philippines, has a foreign
branch that is operating in a hyperinflationary economy. The
financial statements of the branch prior to restatement and
translation are shown below:
Statement of financial position
As of December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Cash
92,000
Accounts receivable
148,000
Inventory
80,000
Building
200,000
Accumulated depreciation
(40,000)
Total assets
480,000
Loan payable
60,000
Share capital
200,000
Retained earnings
220,000
Total equity
Total liabilities and
equity
420,000
480,000
Statement of profit or loss
For the year ended December 31, 20x1
Amounts in Angolan Kwanza (AOA)
Sales
Cost of sales:
Inventory - Jan. 1
120,000
Purchases
60,000
Total goods available for sale
180,000
Inventory - Dec. 31
(80,000)
Gross profit
Depreciation expense
Other operating expenses
Profit for the year
240,000
(100,000)
140,000
(20,000)
(80,000)
40,000
Additional information:
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly during
the year.
 Selected values of general price indices (CPI) are shown below:
January 1, 20x0
100
Average for 20x0
110
87
January 1, 20x1
Average for 20x1
December 31, 20x1


120
125
140
The net monetary assets as of January 1, 20x1 is ₱20,000.
The exchange rates are as follows:
1.00 AOA : 0.45
January 1, 20x1
PHP
1.00 AOA : 0.47
Average for 20x1
PHP
1.00 AOA : 0.50
December 31, 20x1
PHP
Requirement: Prepare the translated financial statements of the
branch.
Chapter 21: Theory of Accounts Reviewer
1. The accounting for the effects of foreign currencies on financial
statements is prescribed under which standard?
a. PAS 12
b. PFRS 21 c. PFRS 9
d. PAS 21
2. Which of the following statements is correct regarding the
preparation of financial statements in accordance with PFRSs?
a. A reporting entity is encouraged under the PFRSs to identify its
functional currency when preparing financial statements.
b. A reporting entity is required under the PFRSs to identify its
functional currency when preparing financial statements only
when the entity engages in foreign activities.
c. The functional currency must be the currency of the country in
which the entity operates or is based.
d. A reporting entity must identify its functional currency when
preparing its financial statements.
3. Which of these considerations would not be relevant in
determining the entity’s functional currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are
retained.
d. The currency that is the most internationally acceptable for
trading.
(Adapted)
4. When translating foreign currency transactions in accordance
with PAS 21, if exchange rates fluctuate significantly,
a. the use of the average rate for a period is appropriate for as
long as it remains relevant all throughout the period.
b. the use of the average rate for a period is required under PAS
21 only if it can be determined without undue cost and effort.
c. the use of average rate is always appropriate
d. the use of the average rate for a period is inappropriate.
88
5. In preparing consolidated financial statements of a U.S. parent
company with a foreign subsidiary, the foreign subsidiary's
functional currency is the currency:
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily generates
and expends cash.
(Adapted)
6. A foreign subsidiary's functional currency is its local currency,
which has not experienced significant inflation. The weighted
average exchange rate for the current year would be the
appropriate exchange rate for translating:
(Item #1) Sales to customers; (Item #2) Wages expense
a. No, no
b. Yes, yes c. No, yes d. Yes, no
7. Monetary items are
a. Cash only.
b. Cash and bank balances.
c. Cash, short-term receivables, and marketable securities
d. Money held, assets receivable, and liabilities payable, in fixed
or determinable amount of cash or cash equivalents.
8. According to PAS 21, a foreign operation is:
a. an undertaking with foreigners
b. a branch, associate, joint venture or subsidiary, where the
activities are conducted in a different country to that of the
parent undertaking.
c. a foreign representative where the activities are not an
integral part of the parent.
d. a parent operating in foreign shores
9. The functional currency is:
a. the currency which is functioning in the country where the
parent operates.
b. the currency of the country where an entity’s operations are
based.
c. the currency of the primary economic environment in which
the undertaking operates.
d. the currency used in the group’s consolidated financial
statements.
10. The presentation currency is:
a. the local currency of a foreign operation in which it reports.
b. used in the parent’s and in the group’s consolidated financial
statements.
c. the currency which results to largest exchange gains.
d. the currency of the country where an entity’s operations are
based.
11. Exchange difference is
a. the difference between two different currencies.
b. the difference between the cost and fair value of monetary
item
89
c. the difference calculated from reporting the same number of
units of a foreign currency, in the presentation currency, at
different exchange rates.
d. the average difference between the exchange rate at the
beginning and end of a period.
12.
a.
b.
c.
d.
The
The
The
The
The
closing rate is:
exchange rate at which all assets and liabilities are stated.
average rate used in the year an entity closes its books.
spot exchange rate at the end of reporting period.
rate that is closed to the financial statements.
13. The net investment in a foreign operation is:
a. The parent’s share of the net assets of the undertaking.
b. The non-controlling interest’s share of the net assets of the
undertaking.
c. The amount invested in the undertaking stated at cost.
d. Investments less liabilities and other costs.
14. An entity has a subsidiary that operates in a foreign country.
The subsidiary issued a legal notice of a dividend to the parent of
€2.4 million, and this was recorded in the parent entity’s financial
statements. The exchange rate at that date was €2 = $1. The
functional currency of the entity is the dollar. At the date of
receipt of the dividend, the exchange rate had moved to €3 = $1.
The exchange difference arising on the dividend would be treated
in which way in the financial statements?
a. No exchange difference will arise as it will be eliminated on
consolidation.
b. An exchange difference of $400,000 will be taken to equity.
c. An exchange difference of $400,000 will be taken to the parent
entity’s income statement and the group income statement.
d. An exchange difference of $400,000 will be taken to the parent
entity’s income statement only.
(Adapted)
15. Transactions and investments in foreign currencies:
I. Decrease business risk.
II.
Increase business risk.
a. True, true
b. True, false
c. False, true
d. False, false
16. The foreign operation may trade profitably, but the investment
may be adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
c. Exchange rates remaining the same.
d. a or b
(Adapted)
17. An entity started trading in country A, whose currency was the
dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro, and
conducted business through a branch. The functional currency of
the group was deemed to be the dollar but by the end of 20X7,
80% of the business was conducted in country B using the euro.
90
At the end of 20X6, 30% of the business was conducted in the
euro. The functional currency should
a. Remain the dollar.
b. Change to the euro at the beginning of 20X7.
c. Change to the euro at the end of 20X7.
d. Change to the euro at the end of 20X7 if it is considered that
the underlying transactions, events, and conditions of business
have changed.
(Adapted)
18. Opportunities for performance improvement will more likely
come from:
a. A review of the realized gains and losses.
c. a or b
b. A review of the unrealized gains and losses.
d.
neither a nor b
19. The exchange rate on the day of the transaction is called:
a. The spot rate.
c. The average rate.
b. The closing rate.
d. A rate sometime in the future.
20.
a.
b.
c.
d.
The date of the transaction is:
The date cash is transferred.
The date when the transaction is contracted or recognized.
When the transaction is entered into the books of account.
The date when the rights or obligations on the contract are
settled or discharged.
(Adapted)
21. If the $ (dollar) strengthens:
a. Less pesos would be received from an account receivable in $.
b. More pesos would be received from an account receivable in $.
c. Less pesos would be paid to settle an account payable in $.
d. a and c
(Adapted)
22. An entity started trading in country A, whose currency was the
dollar. After several years the entity expanded and exported its
product to country B, whose currency was the euro. The business
was conducted through a subsidiary in country B. The subsidiary
is essentially an extension of the entity’s own business, and the
directors of the two entities are common. The functional currency
of the subsidiary is
a. The dollar.
b. The euro.
c. a or b
d.
Difficult to determine.
(Adapted)
23. An entity has a subsidiary that operates in a country where the
exchange rate fluctuates wildly and there are seasonal variations
in the income and expenditure patterns. Which of the following
rates of exchange would probably be used to translate the foreign
subsidiary’s income statement?
a. Year-end spot rate.
b. Average for the year.
c. Average of the quarter-end rates.
d. Average rates for each individual month of the year.
(Adapted)
91
24. If the $ falls in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
25. If the $ rises in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
26. If the $ falls in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
27. If the $ rises in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
28.
a.
b.
c.
d.
Monetary items will be reported:
at the closing rate on the balance sheet date.
at the exchange rate of the transaction.
at the average rate for the year.
any of these
29.
a.
b.
c.
d.
Non-monetary items should be reported:
at the closing rate on the balance sheet date.
at the exchange rate of the transaction.
at the average rate for the year.
any of these
30. Exchange differences on monetary items should be:
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d. Ignored.
(Adapted)
31. Where a monetary item forms part of the parent’s net
investment in a foreign operation, the exchange difference should
be:
92
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d. Ignored.
(Adapted)
32. For a Dependent Foreign Operation, each transaction is
entered at:
a. The exchange rate that would have been used in the parent’s
books – the parent’s functional currency.
b. Closing rate.
c. Average rate.
d. None of these
(Adapted)
33. For foreign operations, closing rate should be used for:
a. Income and expenses.
c. Each transaction.
b. Assets and liabilities.
d. all of these
(Adapted)
34. For foreign operations, the rate of the day of transactions
should be used for:
a. Income and expenses.
c. Each transaction.
b. Assets and liabilities.
d. all of these
(Adapted)
35. The opening net investment of the period needs to be restated
at the:
a. Closing exchange rate.
c. Previous year’s opening rate.
b. Average exchange rate. d. Previous year’s closing rate.
36. Exchange differences arising from changes to equity, such as
capital increases or dividends, should:
a. Be recognized in the period’s income statement. c. a or b
b. Be transferred to equity.
d. Ignored.
(Adapted)
37. Where there are minority interests relating to foreign
undertakings, their share of exchange gains (and losses) should
be:
a. Included with the parent’s share of exchange gains.
b. Added to the non-controlling interests in the consolidated
balance sheet.
c. a or b
d. Ignored.
(Adapted)
38. Inter-company balances should be:
a. Transferred to the Holding Company.
b. Eliminated in the separate financial statements
c. Ignored.
d. Agreed by each party.
(Adapted)
39. Exchange differences
transactions should be:
on
93
most
inter-company
trading
a. ignored.
b. recognized in profit or loss
c. recognized in equity.
d. a or c
40. On disposal of a foreign operation, all exchange differences
accumulated in a separate component of equity should be:
a. Added to the gain, or loss, on disposal in the income
statement.
b. Recognized directly in equity
c. Ignored.
d. b or c
41. In the case of a partial disposal, how much exchange
difference should be included in the income statement?
a. All.
c. None.
b. Proportionate share.
d. Any of these
42. An entity, whose functional currency is the dollar, has a foreign
subsidiary .The subsidiary declared a dividend to the parent of 9
million euros which was recorded in the parent’s financial
statements. The exchange rate at that date was 1.5 euros = 1
dollar. At the date of receipt of the dividend, the exchange rate
had moved to 1.6 euros = 1 dollar. The exchange difference
arising on the dividend would be treated as follows in the
financial statements:
a. an exchange difference of $375,000 will be taken to the parent
entity’s and the group’s statement of profit or loss and other
comprehensive income
b. an exchange difference of $375,000 will be taken to equity
c. no exchange difference will arise as it will be eliminated on
consolidation
d. an exchange difference of $5.6 million will be taken to the
parent entity’s income statement
(ACCA)
43. An entity, whose functional currency is the dollar, purchases
machinery from a foreign supplier for 8 million euros on 31
October 2008 when the exchange rate was 1.5 euros = 1 dollar.
At the entity’s year-end of 31 December 2008, the amount has
not been paid. The closing exchange rate was 1.25 euros = 1
dollar. Which of the following statements are correct?
a. Cost of plant $5.33million dollars, exchange loss $1.07 million,
trade payable $6.4 million
b. Cost of plant $5.33 million dollars, no exchange loss, trade
payable $5.33 million
c. Cost of plant $6.4 million dollars, no exchange gain, trade
payable $6.4 million
d. Cost of plant $6.4 million dollars, exchange gain $1.07 million,
trade payable $5.33
(ACCA)
44. When conversions due to exchange rates leads to
disagreement on the trial balance then, which account should be
opened?
a. Foreign exchange account
c. No account should be opened
b. Suspense account
d. Difference on exchange account
(Adapted)
94
45. According to the relevant accounting standard, when assets
are bought by foreign branches on different dates how should we
account for changes in the exchange rates on those dates?
a. The rates on the dates of purchase should be used for each
asset bought
b. A weighted average should be used for the exchange rate
c. An average exchange rate should be used to convert
d. The exchange rate on the earliest date of purchase should be
used
(Adapted)
46. How should monetary asset and liabilities of foreign branches
be valued?
a. Using the exchange rate at the date they were incurred
b. Using an average rate for the exchange rate
c. Using the exchange rate at the date of the trial balance
d. No attempt should be made to convert liquid resources as they
will change quickly anyway
(Adapted)
47. A change in the exchange rate of two currencies may not be
known as:
a. devaluation
c. depreciation.
b. amortization.
d. appreciation.
(Adapted)
48. An entity will primarily generate and expend cash in one
primary economic environment. According to PAS 21 The Effects
of Changes in Foreign Exchange Rates, the correct term for the
currency of this primary economic environment is the
a. presentation currency
c. reporting currency
b. functional currency
d. foreign currency
(Adapted)
49. According to PAS 21 The Effects of Changes in Foreign
Exchange Rates, at which rate should an entity's non-current
assets be translated when its functional currency figures are
being translated into a different presentation currency?
a. The historical exchange rate
c. The average rate
b. The closing rate
d. The spot exchange rate
(Adapted)
50. According to PAS 21 The effects of changes in foreign
exchange rates, exchange differences should be recognized
either in profit or loss or in other comprehensive income. Are the
following statements about the recognition of exchange
differences in respect of foreign currency transactions reported in
an entity's functional currency true or false according to PAS 21?
I. Any exchange difference on the settlement of a monetary item
should be recognized in profit or loss.
II.
Any exchange difference on the translation of a monetary item
at a rate different to that used at initial recognition should be
recognized in other comprehensive income.
a. False, False
b. False, True
c. True, False
d. True,
True
(Adapted)
95
51. The central bank of Country X buys and sells its own currency
to ensure that the currency is always exchanged in a ratio of 2:1
with the currency of Country Y. What can we conclude about
these two currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country
Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency
of Country Y.
(Adapted)
52. What is the proper treatment of unrealized foreign exchange
gains?
a. They should be deferred on the statement of financial position
until cash is received.
b. The principle of conservatism requires that they should never
be recognized.
c. They should not be recorded until cash is received and the
exchange transaction is completed.
d. They should be recognized in profit or loss on the date the
exchange rate changes.
(Adapted)
53. RIGHTEOUS Co., a foreign subsidiary of MORAL Co., has written
down its inventory to net realizable value under the “lower of cost
and NRV” rule. When consolidating RIGHTEOUS Co’s statement of
financial position into the group’s financial statements, what
exchange rate should be used for the inventory?
a. historical rate
c. closing rate
b. average rate
d. cannot be determined
(Adapted)
54. Foreign operations that are an integral part of the operations
of the entity would have the same functional currency as the
entity. Where a foreign operation functions independently from
the parent, the functional currency will be
a. That of the parent.
b. Determined using the guidance for determining an entity’s
functional currency.
c. That of the country of incorporation.
d. The same as the presentation currency.
(Adapted)
Chapter 21 - Suggested answers to review theory questions
1. D
2. D
3. D
4. D
5. D
11
.
12
.
13
.
14
.
15
C
C
A
C
C
21
.
22
.
23
.
24
.
25
B
A
D
B
B
31
.
32
.
33
.
34
.
35
41
.
42
.
43
.
44
.
45
A
A
B
A
A
96
B
A
A
D
A
51
.
52
.
53
.
54
.
B
D
C
B
6. B
7. D
8. B
9. C
10
. B
.
16
.
17
.
18
.
19
.
20
.
B
D
B
A
B
.
26
.
27
.
28
.
29
.
30
.
A
A
A
B
B
.
36
.
37
.
38
.
39
.
40
.
.
46
.
47
.
48
.
49
.
50
.
B
B
D
B
A
97
C
B
B
B
C
Chapter 23
Accounting for Derivatives and Hedging
Transactions (Part 2)
Chapter 23: Multiple Choice – Computational (For classroom
instruction purposes)
Fair value hedge of a recognized asset
Use the following information for the next eight questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for
4,000,000 yens. ABC Co. was concerned about the fluctuation in the
Japanese yen, so on this date, ABC Co. entered into a 30-day forward
contract to sell 4,000,000 yens for ₱1,880,000 to a bank at the
forward rate of ₱0.47.
Relevant rates are shown below:
Dec. 15,
20x1
Spot rate
₱0.48
Forward rate
₱0.47
Dec. 31,
20x1
₱0.49
₱0.485
Jan. 15,
20x2
₱0.46
₱0.46
1 The entry to record the hedging instrument on December 15,
20x1 includes
a a debit to accounts receivable for ₱1,880,000
b a credit to sales for ₱1,880,000
c both a and b
d none
2 How much is the FOREX gain (loss) on foreign currency
transaction on December 31, 20x1?
a. 40,000
b. (40,000)
c. 60,0000 d. (60,000)
3 How much is the gain (loss) on change in fair value of the
derivative on December 31, 20x1?
a. 40,000
b. (40,000)
c. 60,0000 d. (60,000)
4 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 1,960,000 b. (1,920,000)
c. 60,0000 d. (60,000)
5 How much is the FOREX gain (loss) on foreign currency
transaction on January 15, 20x2?
a. 120,000
b. (120,000)
c. 100,0000d.
(100,000)
6 How much is the gain (loss) on change in fair value of the
derivative on January 15, 20x2?
a. 120,000
b. (120,000)
c. 100,0000d.
(100,000)
7 If the forward contract is settled on a net cash basis, how much is
the net cash settlement receipt (payment)?
a. 40,000
b. (40,000)
c. 100,000 d. 0
98
8 The total net effect of the two contracts in 20x1 and 20x2 profit
or loss is – gain (loss)
a. 40,000
b. (40,000)
c. 100,000 d. 0
No hedging designation (Held for speculation)
Use the following information for the next five questions:
ABC Co. expects the value of yens to decrease in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day
forward contract to sell 4,000,000 yens at the forward rate of ₱0.47.
On December 31, 20x1, the forward rate was ₱0.485 and by January
15, 20x2, the spot rate moved to ₱0.46.
9 The entry to record the forward contract on December 15, 20x1
includes
a a debit to forward contract for ₱60,000
b a credit to forward contract for ₱60,000
c a debit to loss on forward contract for ₱60,000
d none
10 How much is the gain (loss) on change in fair value of the
derivative on December 31, 20x1?
a. 60,000 in profit or loss c. (60,0000) in OCI
b. (40,000) in OCI
d. (60,000) in profit or loss
11 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 1,960,000 b. (1,920,000)
c. 60,0000 d. (60,000)
12 How much is the gain (loss) on change in fair value of the
derivative on January 15, 20x2?
a. 120,000
b. (120,000)
c. 100,000 d.
(100,000)
13 How much is the net cash settlement receipt (payment) on
January 15, 20x2?
a. 40,000
b. (40,000)
c. 1,840,000
d.
(1,840,000)
Fair value hedge of a recognized liability
Use the following information for the next seven questions:
On December 15, 20x1, ABC Co. purchased goods from a Korean
firm for 40,000 wons. ABC Co. was concerned about the fluctuation
in the Korean won, so on this date, ABC Co. entered into a 30-day
forward contract to buy 40,000 wons for ₱49,600 from a bank at the
forward rate of ₱1.24.
Relevant rates are shown below:
Spot rate
Forward rate
Dec. 15, 20x1
1.20
1.24
Dec. 31,
20x1
1.26
1.27
14 The purchased inventory shall be recognized at
a. 48,000
b. 49,600 c. 50,400
99
Jan. 15,
20x2
1.30
1.30
d. 50,800
15 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 2,400
b. (2,400) c. 1,200
d. (1,200)
16 The adjustment to the inventory account on December 31, 20x1
is – increase (decrease)
a. 2,400
b. (2,400) c. 1,200
d. 0
17 How much is the FOREX gain (loss) on foreign currency
transaction on January 15, 20x2?
a. (2,400)
b. (1,600) c. 1,200
d. (1,200)
18 How much is the gain (loss) on change in fair value of the
derivative on January 15, 20x2?
a. 1,200
b. (1,200) c. 1,600
d. (1,600)
19 The total net effect of the two contracts on profit or loss in 20x2 is
– gain (loss)
a. (1,600)
b. (400)
c. 1,600
d. 0
20 Assuming the forward contract is settled on a net cash basis, how
much is the net cash settlement receipt (payment) on January 15,
20x2?
a. 1,600
b. (400)
c. 2,400
d. (2,400)
No hedging designation (Held for speculation)
Use the following information for the next two questions:
ABC Co. expects the value of wons to increase in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day
forward contract to buy 40,000 wons at the forward rate of ₱1.24.
On December 31, 20x1, the forward rate was ₱1.27 and by January
15, 20x2, the spot rate moved to ₱1.30.
21 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 2,400
b. (2,400) c. 1,200
d. (1,200)
22 The total net effect of the transaction on profit or loss in 20x2 is –
gain (loss)
a. 2,400
b. (2,400) c. 1,200
d. (1,200)
Fair value hedge of a firm sale commitment
Use the following information for the next six questions:
On December 15, 20x1, ABC Co. received a sale order from a
Japanese firm in the amount of 4,000,000 yens. The delivery of the
goods sold is due on January 15, 20x1. ABC Co. was concerned about
the fluctuation in the Japanese yen, so on this date, ABC Co. entered
into a 30-day forward contract to sell 4,000,000 yens for ₱1,880,000
to a bank at the forward rate of ₱0.47.
Relevant rates are shown below:
Dec. 15,
20x1
Spot rate
₱0.48
Forward rate
₱0.47
Dec. 31,
20x1
₱0.49
₱0.485
100
Jan. 15,
20x1
₱0.46
₱0.46
23 The entries on December 15, 20x1 include
a a debit to accounts receivable for ₱1,880,000
b a credit to sales for ₱1,880,000
c both a and b
d none
24 The entry on December 31, 20x1 for the hedged item includes
a debit to loss on forward contract for ₱60,000
b debit to gain on forward contract for ₱60,000
c a credit to firm commitment for ₱60,000
d a debit to firm commitment for ₱60,000
25 The derivative asset (liability) on December 31, 20x1 is
a. 60,000
b. (60,000) c. 40,000 d. (40,000)
26 The effectiveness of the hedging instrument as of December 31,
20x1 is
a. 60%
b. 80%
c. 100%
d. 125%
27 The entry on January 15, 20x2 pertaining to the hedged item
includes
a. a credit to sales for ₱1,880,000
b. a debit to cash (foreign currency) ₱1,880,000
c. a credit to gain for ₱100,000
d. a and b
28 Assuming the forward contract is settled on a net cash basis, how
much is the net cash settlement receipt (payment) on January 15,
20x2?
a. 40,000
b. (40,000) c. 2,400
d. (2,400)
Fair value hedge of a firm purchase commitment
Use the following information for the next four questions:
On December 15, 20x1, ABC Co. entered into a firm commitment to
purchase goods from a Korean firm for 40,000 wons. If ABC Co. will
not purchase the goods from the Korean firm, it would be required to
pay a penalty of 24,000 wons (i.e., ABC’s contract with the Korean
firm is a firm commitment).
ABC Co. was concerned about the fluctuation in the Korean won, so
on this date, ABC Co. entered into a 30-day forward contract to buy
40,000 wons for ₱49,600 from a bank at the forward rate of ₱1.24.
Relevant rates are shown below:
Spot rate
Forward rate
Dec. 15, 20x1
1.20
1.24
Dec. 31,
20x1
1.26
1.27
Jan. 15,
20x2
1.30
1.30
29 The gain (loss) on the firm commitment on December 31, 20x1 is
a. (2,400)
b. (1,200) c. (800)
d. 800
30 The derivative asset (liability) on December 31, 20x1 is
a. 60,000
b. (60,000) c. 1,200
d. (1,200)
31 How much inventory is recognized on January 15, 20x2?
a. 49,600
b. 52,000 c. 50,400 d. 48,000
101
32 Assuming the forward contract is settled on a net cash basis, how
much is the net cash settlement receipt (payment) on January 15,
20x2?
a. 4,000
b. (4,000) c. 2,400
d. (2,400)
Fair value hedge of a firm purchase commitment – Present
value
Use the following information for the next six questions:
ABC Co. operates a chain of coffee shops nationally. On October 1,
20x1, ABC Co. entered into a firm commitment to purchase 4,000
kilograms of coffee beans for a contract price of ₱160 per kilogram
on March 31, 20x2.
ABC Co. expects that there is a possible decrease in the price of
coffee beans, so on this date, ABC Co. entered into a six-month
forward contract with a bank to sell 4,000 kilograms of coffee beans
at the current forward rate of ₱160 per kilogram.
102
Information on fair values is shown below:
Date
Oct. 1, 20x1
Dec. 31, 20x1
Mar. 31, 20x2
Spot
price
155
151
147
Forwa
rd
price
160
153
147
Fair value
of forward
contract
(asset)
27,727 a
52,000 b
Fair value
of firm
commitme
nt
(liability)
(27,727)
(52,000)
a
[(160 – 153) x 4,000] x present value factor using 4%, assumed
appropriate rate, for three months (or 0.9902427).
b
[(160 – 147) x 4,000.
33 The entry on October 1, 20x1 to record the firm purchase
commitment includes a
a debit to inventory for ₱640,000
b credit to accounts payable for ₱640,000
c both a and b
d none
34 The entries on December 31, 20x1 includes a
a a debit to loss on firm commitment for ₱27,727, recognized
profit or loss
b a debit to loss on firm commitment for ₱27,727, recognized
OCI
c a credit to gain on firm commitment for ₱27,727, recognized
profit or loss
d a credit to gain on firm commitment for ₱27,727, recognized
OCI
in
in
in
in
35 The derivative asset (liability) on December 31, 20x1 is
a. 27,727
b. (27,728) c. 1,200
d. (1,200)
36 The debit to inventory on March 31, 20x2 is
a. 640,000
b. 612,000 c. 588,000 d. 0
37 The gain (loss) on forward contract on March 31, 20x2 is
a. (24,273)
b. 24,273 c. 52,000 d. (52,000)
38 The net cash settlement receipt (payment) on the forward
contract on March 31, 20x2 is
a. 52,000
b. (52,000) c. (24,273) d. 24,273
Fair value hedge of a firm purchase commitment – Present
value
Use the following information for the next six questions:
ABC Co. supplies cabbage to various hotels and restaurants. On
October 1, 20x1, ABC Co. entered into a firm commitment to
purchase 4,000 kilograms of cabbage for a contract price of ₱40 per
kilogram on March 31, 20x2.
ABC Co. is worried about fluctuations in the price of cabbage.
Therefore, on October 1, 20x1, ABC Co. entered into a six-month,
over-the-counter (OTC) forward contract with a broker to sell 4,000
103
kilograms of cabbage at the current forward rate of ₱40 per kilogram
to be settled on a net cash basis on March 31, 20x2.
Date
Oct. 1,
20x1
Dec. 31,
20x1
Mar. 31,
20x2
Spot
price
Forwar
d price
Fair value
of forward
contract
(asset)
41
40
-
32
30
39,608
50
50
(40,000)b
a
Fair value of
firm
commitment
(liability)
(39,608)
40,000
a
[(40 – 30) x 4,000] x present value factor using 4%, assumed
appropriate rate, for three months (or 0.9902427).
b
[(50 – 40) x 4,000.
39 The fair value of the forward contract on Oct. 1, 20x1 is
a. 4,000
b. 164,000 c. 160,000 d. 0
40 The fair value of the firm commitment on Oct. 1, 20x1 is
a. 4,000
b. 164,000 c. 160,000 d. 0
41 The fair value of the forward contract on Dec. 31, 20x1 is – asset
(liability)
a. 39,608
b. (39,608) c. 40,000 d. 0
42 The fair value of the firm commitment on Dec. 31, 20x1 is – asset
(liability)
a. 39,608
b. (39,608) c. (40,000) d. 0
43 The gain (loss) on the derivative on March 31, 20x2 is
a. 38,608
b. (40,000) c. (79,608) d. 79,608
44 The net cash settlement – receipt (payment) – on March 31, 20x2
is
a. (79,608)
b. 79,608 c, 40,000 d. (40,000)
Cash flow hedge of a forecasted purchase transaction
Use the following information for the next eight questions:
ABC Co. produces potato chips. On December 15, 20x1, ABC Co.
anticipates purchasing 4,000 kilograms of potatoes on January
15, 20x2.
ABC Co. is concerned about the fluctuation in the price of potatoes,
so on December 15, 20x1, ABC Co. enters into a 30-day forward
contract to purchase 4,000 kilograms of potatoes at a forward rate
of ₱45 per kilogram (or ₱180,000). The forward contract will be
settled net on January 15, 20x2.
Relevant prices per kilogram of potatoes are shown below:
Dec. 31,
Jan. 15,
Dec. 15, 20x1 20x1
20x1
Spot price
40
50
60
104
Forward price
45
55
60
45 The fair value of the hedging instrument on Dec. 15, 20x1 is
a. 20,000
b. 180,000 c. 160,000 d. 0
46 The fair value of the hedged item on Dec. 15, 20x1 is
a. 20,000
b. 180,000 c. 160,000 d. 0
47 The fair value of the hedging instrument on Dec. 31, 20x1 is
a. 40,000
b. (40,000) c. 20,000 d. 0
48 The fair value of the hedged item on Dec. 31, 20x1 is
a. 40,000
b. (40,000) c. 20,000 d. 0
49 The net effect of the derivative instrument on the 20x1 profit or
loss is – gain (loss)
a. 40,000
b. (40,000) c. 20,000 d. 0
50 How much is the gain (loss) on the forward contract on January
15, 20x2?
a. 20,000 profit or loss
c. 20,000 OCI
b. (20,000) profit or loss
d. (20,000) OCI
51 The net cash settlement – receipt (payment) – on January 15,
20x2 is
a. 60,000
b. (60,000) c. 40,000 d. (40,000)
52 Assume that all of the potatoes purchased were used to produce
potato chips at a total manufacturing cost of ₱400,000 and that
all of the potato chips were sold on February 14, 20x2 for
₱1,440,000, how much cost of goods sold is recognized on
February 14, 20x2?
a. 400,000
b. 460,000 c. 340,000 d. 420,000
Cash flow hedge of a forecasted sale transaction – Present
value (Indirect quotation)
Use the following information for the next five questions:
ABC Co. produces tomato paste. On October 1, 20x1, ABC Co.
anticipates selling goods worth DOP 59,400,000 (Dominican Peso)
on April 1, 20x2. ABC Co. enters into to a six-month forward contract
to sell DOP 59,400,000 at a forward rate of ₱1:DOP 140 or ₱424,284.
The appropriate discount rate is 6% per annum. The following are
the relevant exchange rates:
Date
Spot rate
Forward rate
Oct. 1, 20x1
₱1 : DOP 135
₱1 : DOP 140
Dec. 31, 20x1
₱1 : DOP 140
₱1 : DOP 142
Apr. 1, 20x2
₱1 : DOP 144
₱1 : DOP 144
53 How much is the gain (loss) on the forward contract on December
31, 20x1?
a. 5,887 profit or loss
c. (5,887) profit or loss
b. 5,887 OCI
d. (5,887) OCI
54 How much is the gain (loss) on the hedged item on December 31,
20x1?
a. 5,887 profit or loss
c. (5,887) OCI
105
b. (5,887) profit or loss
d. 0
55 How much sale revenue is recognized in 20x2?
a. 424,286
b. 400,716 c. 406,772 d. 412,500
56 How much is the gain (loss) on the forward contract on April 1,
20x2?
a. 5,899 profit or loss
c. (5,899) profit or loss
b. 5,899 OCI
d. (5,899) OCI
57 The net cash settlement – receipt (payment) – on January 15,
20x2 is
a. 60,000
b. (60,000) c. 11,786 d. (11,786)
Cash flow hedge of a recognized liability – Present value
Use the following information for the next seven questions:
On December 1, 20x1, ABC Co. purchased goods from a Korean firm
for 400,000 wons. ABC Co. was concerned about the fluctuation in
the Korean won, so on this date, ABC Co. entered into a 2-month
forward contract to buy 400,000 wons for ₱496,000 from a bank at
the forward rate of ₱1.24.
Relevant rates are shown below:
Spot rate
Forward rate
Dec. 1, 20x1
1.20
1.24
Dec. 31,
20x1
1.23
1.27
Jan. 31,
20x2
1.30
1.30
Additional information:
 ABC Co. chooses to account for the hedging instrument as a cash
flow hedge.
 The initial spot/forward difference (or ‘forward points’) amounts to
₱16,000 over the 2-month term of the forward contract [400,000
x (1.24 forward rate - 1.20 spot rate)]. This difference will be
amortized as interest expense using the effective interest
method.
 Given the spot/forward relationship above, the implicit interest
rate is 19.84% per annum or 1.6530% per month.
 The following are the relevant present value factors:
Dec. 31, 20x1: PV of ₱1, @ 0.5%, n=1 (1 month)………0.99502
Jan. 31, 20x2: PV of ₱1, @ 0.5%, n=0 (maturity date)…1
58 The inventory account is debited on December 1, 20x1 for
a. 400,000
b. 480,000 c. 496,000 d. 0
59 The FOREX gain (loss) on the hedged item on December 31, 20x1
is
a. (12,000)
b. 12,000 c. 9,886
d.
60 How much is recognized in other comprehensive income on
December 31, 20x1? debit (credit)
a. 19,876
b. (19,874) c. 16,312 d. 0
61 The derivative asset (liability) recognized on December 31, 20x1
is
106
a. 19,876
b. (19,874) c. 11,940
d. (11,940)
62 The FOREX gain (loss) on the hedged item on January 31, 20x2 is
a. (28,000)
b. 28,000 c. 26,399 d. 0
63 How much is recognized in other comprehensive income on
January 31, 20x2? debit (credit)
a. 20,126
b. (20,126) c. 18,234 d. 0
64 The net cash settlement – receipt (payment) – on January 15,
20x2 is
a. (20,130)
b. 20,130 c. (24,000) d. 24,000
107
Chapter 24
Accounting for Derivatives and Hedging
Transactions (Part 3)
Chapter 24: Multiple Choice – Computational (For classroom
instruction purposes)
No hedging designation
Use the following information for the next four questions:
On December 1, 20x1, ABC Co. enters into a silver futures contract
to purchase 4,000 ounces of silver on February 1, 20x2 for ₱200
per ounce. The broker requires an initial margin deposit of ₱80,000.
The quoted prices per ounce of silver are as follows:
Dec. 1, 20x1
Dec. 31, 20x1
Feb. 1, 20x2
200
190
185
1. The entries on December 1, 20x1 include
a debit to “deposit with broker” for ₱80,000
b credit to cash for ₱80,000
c a and b
d none
2. How much is the derivative asset (liability) as of December 31,
20x1?
a. 0
b. (34,668) c. (40,000) d. 40,000
3. How much is the total net effect of the derivative on the 20x1 and
20x2 profit or loss? Gain (loss)
a. (60,000)
b. 60,000 c. (40,000) d. 40,000
4. How much is the net settlement on February 1, 20x2? – Receipt
(payment)
a. 20,000
b. (20,000) c. (60,000) d. 60,000
Fair value hedge of a recognized asset – hedged item
measured at fair value
Use the following information for the next seven questions:
ABC Co. is a commodity trader. On December 1, 20x1, ABC Co.
carries in its inventory 400 troy ounces of gold valued at ₱4,800,000
(or ₱12,000 per troy ounce). ABC Co. measures its inventory of gold
at fair value less costs to sell through profit or loss.
To protect the fair value of its inventory against a potential decline in
prices, ABC Co. enters into a “short” futures contract on December
1, 20x1 to sell 400 troy ounces of gold at ₱12,100 per troy ounce on
February 1, 20x2 (the expected date of sale of the inventory). The
futures contract requires an initial margin deposit of ₱384,000.
We will assume that the fair values shown below already reflect
costs to sell.
Dec. 1,
20x1
Dec. 31, 20x1
Feb. 1, 20x2
Spot price
12,000
12,250
108
11,800
Futures price
12,100
12,300
11,800
5. The entries on December 1, 20x1 include
a debit to “deposit with broker” for ₱384,000
b credit to cash for ₱384,000
c a and b
d none
6. How much is the adjustment to the inventory account on
December 31, 20x1? Increase (decrease)
a. 100,000
b. (100,000)
c. 80,000 d. 0
7. How much is the derivative asset (liability) as of December 31,
20x1?
a. (100,000) b. 100,000
c. (80,000) d. 80,000
8. How much is the gain (loss) on the futures contract on February
1, 20x2?
a. 0
b. (80,000)
c. (200,000)
d.
200,000
9. How much is the net settlement on February 1, 20x2? – Receipt
(payment)
a. 120,000
b. (120,000)
c. 504,000 d.
504,000
10. How much is the total net cash receipt (payment) on the two
contracts?
a. 4,840,000 b. (4,840,000)
c. (504,000)
d. 504,000
Fair value hedge of a recognized asset – hedged item
measured at lower of cost or net realizable value (NRV)
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. has a soybean inventory of 4,000
bushels carried at a cost of ₱240 per bushel (or total cost of
₱960,000). ABC Co. measures its inventory of soybeans at the lower
of cost or net realizable value (NRV).
ABC Co. intends to sell the whole inventory by February 1, 20x1. On
December 1, 20x1, ABC Co. enters into a futures contract to sell the
whole inventory on February 1, 20x1 at a price of ₱360 per bushel.
The broker requires a deposit of ₱80,000.
Information on fair values is as follows:
Dec. 1,
20x1
Dec. 31, 20x1
Feb. 1, 20x2
Spot price
354
371
338
Futures price
360
374
338
11. How much is the adjustment to the inventory account on
December 31, 20x1? Increase (decrease)
a. 100,000
b. 68,000 c. (68,000) d. 0
109
12. How much is the derivative asset (liability) as of December 31,
20x1?
a. 0
b. (68,000) c. (56,000) d. 56,000
13. How much is the gain (loss) on the futures contract on
February 1, 20x2?
a. 0
b. (56,000) c. (144,000)
d. 144,000
14. How much is the net settlement on the derivative instrument
on February 1, 20x2? – Receipt (payment)
a. 168,000
b. (168,000)
c. 88,000 d. (88,000)
15. How much gross profit from sales is recognized on February 1,
20x2?
a. 0
b. 364,000 c. 388,000 d. 456,000
Fair value hedge of a firm sale commitment
Use the following information on the next five questions:
On December 1, 20x1, ABC Co. enters into a fixed-price contract to
sell 4,000 ounces of silver on February 1, 20x2 for ₱210 per ounce.
ABC Co. prefers to have the sales contract settled at market value on
delivery date. Therefore, on December 1, 20x1, ABC Co. enters into
a “long” futures contract to purchase 4,000 ounces of silver at
₱200 per ounce. The futures contract requires an initial margin
deposit of ₱120,000.
Information on market values is shown below:
Dec. 1,
20x1
Dec. 31, 20x1
Feb. 1, 20x2
Spot price
210
240
250
Futures price
200
235
250
16. How much is the firm commitment asset (liability) on
December 31, 20x1?
a. 120,000
b. (120,000)
c. (140,000)
d.
(100,000)
17. How much is the derivative asset (liability) on December 31,
20x1?
a. 140,000
b. (140,000)
c. 120,000 d. (120,000)
18. How much is the sale revenue recognized on February 1,
20x2?
a. 1,000,000 b. 840,000 c. 800,000 d. 960,000
19. How much gain (loss) from firm commitment is recognized on
February 1, 20x2?
a. 40,000
b. (40,000) c. (60,000) d. 60,000
20. How much is the net cash settlement on the derivative
instrument on February 1, 20x2?
110
a. 200,000
320,000
b. (200,000)
c. (320,000)
d.
Cash flow hedge of a forecasted purchase transaction –
Assessment of Hedge ineffectiveness
Use the following information for the next eleven questions:
On July 1, 20x1, ABC Co., a vegetable dealer, forecasts the purchase
of 4,000 kilograms of broccoli in 6 months. Because ABC Co. is
worried that the price of broccoli will increase during the coming
months, it enters into 10 long cauliflower futures contracts on July
1, 20x1. Each futures contract is based on the purchase of 400
kilograms of cauliflower at ₱92.98 per kilogram on July 1, 20x1.
Relevant prices per kilogram of commodity are shown below:
Broccoli
Cauliflower
Jan. 1
93.76
92.98
Mar. 31
95.18
94.52
June 30
96.20
95.36
21. What is the percentage of effectiveness of the hedging
instrument on March 31, 20x1 and June 30, 20x1, respectively?
March 31, 20x1
June 30, 20x1
a. 102%
96%
b. 95%
103%
c. 108%
98%
d. 97%
85%
22. How much is derivative asset (liability) on March 31, 20x1?
a. (6,160)
b. 6,160
c. (5,680) d. 5,680
23. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on March
31, 20x1? – Gain (loss)
a. 5,680
b. (5,680) c. 6,160
d. (6,160)
24. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on March 31, 20x1? –
Gain (loss)
a. 0
b. 560
c. 480
d. (480)
25. As of March 31, 20x1, the effect of the futures contract is
referred to as
a. overhedge b. underhedge
c. middle hedge d. bottom
hedge
26. How much is the debit to inventory on June 30, 20x1?
a. 375,280
b. 371,920 c. 384,800 d. 381,440
27. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on June 30,
20x1? – Gain (loss)
a. (3,840)
b. 3,840
c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on June 30, 20x1? – Gain
(loss)
111
a. (480)
b. 480
c. (960)
d. 960
29. How much is the net cash settlement receipt (payment) on the
derivative instrument on June 30, 20x1?
a. 3,360
b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on
profit or loss? Favorable (unfavorable)
a. 3,840
b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1,
how much is the cost of goods sold?
a. 384,800
b. 375,280 c. 381,440 d. 371,920
Fair value hedge of a recognized asset – Put option
Use the following information for the next three questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for
4,000,000 yens. ABC Co. was concerned about the fluctuation in the
Japanese yen, so on this date, ABC Co. purchased a foreign currency
put option for ₱30,000 to sell 4,000,000 yens at ₱0.47 on January
15, 20x2.
Dec. 15, Dec. 31, Jan. 15,
20x1
20x1
20x1
Spot rate
₱0.48
₱0.49
₱0.46
Fair values of the foreign
currency put option
30,000
20,000
32,000
32. How much is the gain (loss) on the put option on December
31, 20x1?
a. 0
b. 40,000 c. (10,000) d. 10,000
33. How much is the net gain (loss) on the exercise of the put
option on January 15, 20x1?
a. (20,000)
b. 20,000 c. 12,000 d. 8,000
34. Assume that the spot rate on January 15, 20x2 is ₱0.48. How
much is the gain (loss) on the put option on January 15, 20x1?
a. (20,000)
b. 20,000 c. (32,000) d. (40,000)
No hedging designation – Call option
Use the following information for the next three questions:
On April 1, 20x1, ABC Co. enters into a call option contract with an
investment banker which gives ABC Co. the option to purchase 4,000
XYZ, Inc. shares of stocks at a strike price of ₱100 per share. The call
option expires on July 1, 20x1. ABC Co. pays the investment banker
₱2,400 for the call option. The market price of the XYZ, Inc. shares
on April 1, 20x1 is ₱100 per share.
Additional information:
Market price of XYZ, Inc. shares
Time value
112
April 1,
20x1
June 30,
20x1
100/sh.
2,400
106/sh.
1,600
35. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in intrinsic value?
a. 24,000
b. (24,000) c. 800
d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in time value?
a. 800
b. (800)
c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on the
call option on July 1, 20x1?
a. 24,000
b. (24,000) c. 23,200 d. (23,200)
Cash flow hedge of a forecasted sale transaction (Indirect
quotation)
Use the following information for the next six questions:
ABC Co. forecasts a sale to an Indian customer of INR 1,120,000
(Indian Rupee) in six months. On October 1, 20x1 when the spot rate
is ₱1: INR 1.40, ABC Co. obtained an option to sell INR 1,120,000 for
₱783,216 (₱1 : INR1.43). The option has a cost and fair value of
₱25,600 on inception date.
ABC Co. chose to base effectiveness on the changes in the intrinsic
value of the option, as measured by the spot rate of the currency
underlying the option (e.g., “spot” intrinsic value). Changes in the
fair value of the option other than “intrinsic value” (e.g., time value,
impact of counterparty nonperformance risk) are excluded from the
assessment of effectiveness and will be reported in profit or loss as
they occur.
The following information was determined:
Date
Spot rate
Time value
of option a
Fair
value
of
option
a
Oct. 1,
20x1
Dec. 31,
20x1
Apr. 1,
20x2
₱1 : INR
1.40
₱1 : INR
1.45
₱1 : INR
1.50
25,600
25,600
13,196
24,000
-
36,552
a
These amounts are determined using an option pricing model. They
are provided in order to simplify the problem.
38. How much derivative asset (liability) is recognized on October
1, 20x1?
a. 23,664
b. (25,600) c. 25,600 d. 0
39. The hedging instrument is most likely designated as a
a. fair value hedge b. cash flow hedge
c. a or b
none
d.
40. The effective portion of the hedge recognized in other
comprehensive income on December 31, 20x1 is
a. 10,802
b. 25,746 c. 13,366 d. 0
113
41. How much derivative asset (liability) is recognized
December 31, 20x1?
a. 13,196
b. (24,000) c. 24,000 d. 37,196
on
42. The effective portion of the hedge recognized in other
comprehensive income on April 1, 20x2 is
a. 10,802
b. 24,000 c. 12,404 d. 25,747
43. The adjusted sale revenue recognized on April 1, 20x2 is
a. 798,364
b. 788,312 c. 783,215 d. 776,325
Cash flow hedge of a variable-rate debt (Swap payment at
maturity)
Use the following information for the next five questions:
On January 1, 20x1, ABC Co. obtained a two-year, ₱4,000,000
variable-rate loan with interest payments due at each year-end
and the principal due on December 31, 20x2.
As protection from possible fluctuations in current market rates, ABC
Co. enters into an interest rate swap for the whole principal of the
loan. Under the agreement, ABC Co. shall receive variable interest
and pay fixed interest based on a fixed rate of 8%. The interest rate
swap will be settled net on maturity date.
The following are the current market rates:
Jan. 1,
20x1
8%
Jan. 1,
20x2
10%
44. The hedging instrument is most likely designated as a
a. fair value hedge b. cash flow hedge
c. a or b
none
d.
45. How much derivative asset (liability) is recognized
December 31, 20x1?
a. 80,000
b. (72,728) c. 72,728 d. 74,074
on
46. How much is the derivative gain (loss) recognized in profit or
loss on December 31, 20x1?
a. 74,074
b. (72,728) c. 72,728 d. 0
47. The net cash settlement on the interest rate swap on
December 31, 20x2 is – Receipt (payment)
a. 80,000
b. (80,000) c. 72,728 d. 0
48. The interest expense recognized in profit or loss in 20x2 is
a. 320,000
b. 240,000 c. 335,728 d. 0
Cash flow hedge of a variable-rate debt (Swap payments at
each year-end)
Use the following information for the next nine questions:
114
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000
variable-rate loan with interest payments due at each year-end
and the principal due on December 31, 20x3.
As protection from possible fluctuations in current market rates, ABC
Co. enters into an interest rate swap for the whole principal of the
loan. Under the agreement, ABC Co. shall receive variable interest
and pay fixed interest based on a fixed rate of 9%. Swap payments
shall be made at each year-end.
The following are the current market rates:
Jan. 1,
20x1
9%
Jan. 1,
20x2
8%
Jan. 1,
20x3
12%
49. The net cash settlement on December 31, 20x1 is
a. 40,000
b. 37,037 c.36,697
d. 0
50. The derivative asset (liability) on December 31, 20x1 is
a. 37,037
b. (71,331) c. 36,697 d. 40,000
51. The net cash settlement receipt (payment) on December 31,
20x2 is
a. 36,697
b. (71,331) c. (40,000) d. 0
52. The balance of accumulated OCI recognized on the hedging
instrument as of December 31, 20x2 is – Debit (credit)
a. (67,140)
b. (107,141)
c. (138,472)
d. 0
53. The interest expense recognized in profit or loss in 20x2 is
a. 400,000
b. 387,542 c. 421,984 d. 0
54. The derivative asset (liability) on December 31, 20x2 is
a. 107,141
b. (107,141)
c. 138,472 d. (67,140)
55. How much is the derivative gain (loss) recognized in OCI on
December 31, 20x2?
a. 138,472
b. (138,472)
c. 107,141 d. (107,141)
56. The net cash settlement – receipt (payment) – on the interest
rate swap on December’ 31, 20x3 is
a. 50,000
b. 120,000 c. 80,000 d. (120,000)
57. The interest expense recognized in 20x3 is
a. 400,000
b. 240,000 c. 520,000 d. 320,000
Fair value hedge of a fixed-rate debt
Use the following information for the next eight questions:
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000, 10%
fixed-rate loan with interest payments due at each year-end and
the principal due on December 31, 20x3.
115
ABC Co. expects that the current interest rates will decrease in the
future. Thus, ABC Co. enters into a “receive fixed, pay variable”
interest rate swap. Swap payments shall be made at each year-end.
The following are the current market rates:
Jan. 1,
20x1
10%
Jan. 1,
20x2
12%
Jan. 1,
20x3
14%
58. The derivative asset (liability) on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. (80,000)
59. Unrealized gain (loss) on the derivative instrument recognized
in profit or loss on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. 0
60. Unrealized gain (loss) on the hedged item recognized in profit
or loss on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. 0
61. The interest expense recognized in 20x2 is
a. 400,000
b. 264,796 c. 463,776 d. 535,204
62. The derivative asset (liability) on December 31, 20x2 is
a. 140,352
b. (140,352)
c. 168,342 d. (168,342)
63. Unrealized gain (loss) on the derivative instrument recognized
in profit or loss on December 31, 20x2 is
a. 140,352
b. (140,352)
c. (168,342)
d. 0
64. Unrealized gain (loss) on the hedged item recognized in profit
or loss on December 31, 20x2 is
a. 140,352
b. (140,352)
c. (168,342)
d. 0
65. The interest expense recognized in 20x3 is
a. 400,000
b. 540,351 c. 493,867 d. 565,304
116
Chapter 25
Accounting for Derivatives and Hedging
Transactions (Part 4)
Chapter 25: Multiple Choice – Computational (For classroom
instruction purposes)
Hedge of a net investment in foreign operation
Use the following fact pattern for the next eight questions:
Fact pattern
On July 1, 20x1, ABC Co. acquired 100% interest in XYZ, Inc., a
company situated in a foreign country. The currency of this country
is the Armenian Dram (AMD). The business combination did not
result to any goodwill. The year-end financial statements of the
combining constituents show the following information:
July 1, 20x1
Date of acquisition
ABC Co.
XYZ, Inc.
(in
(in AMD)
pesos)
40,000,00 24,000,00
0
0
Dec. 31, 20x1
Reporting date
ABC Co.
XYZ, Inc.
(in
(in AMD)
pesos)
56,000,00 40,000,00
0
0
8,000,000
-
8,000,000
-
-
-
4,000,000
-
Total assets
48,000,00
0
24,000,00
0
68,000,00
0
40,000,00
0
Liabilities
32,000,00
0
12,000,00
0
32,000,00
0
14,000,00
0
-
-
-
7,000,000
16,000,00
0
12,000,00
0
48,000,00
0
24,000,00
0
Assets
Investment in
subsidiary
Receivable from
XYZ, Inc.
Payable to ABC
Co.
Equity - Jan. 1,
20x1
Profit for the
year
Total liabilities
and equity
16,000,00 12,000,00
0
0
20,000,00
7,000,000
0
68,000,00 40,000,00
0
0
The following are the relevant exchange rates:
Spot rate at 7/1/20x1
Spot rate at 12/31/20x1
Average spot rate from 7/1/20x1 to 12/31/20x1
Twelve-month forward rate at 7/1/20x1
Six-month forward rate at 12/31/20x1
₱1
₱1
₱1
₱1
₱1
:
:
:
:
:
AMD
AMD
AMD
AMD
AMD
1.50
2.00
1.75
1.54
2.02
Case#1: No hedging instrument
1. How much is the FOREX gain (loss) arising from translation of
inter-company accounts recognized in the subsidiary’s 20x1
separate financial statements?
117
a. 2,400,000
1,000,000
b. (2,400,000)
c. (1,000,000)
d.
2. How much is the subsidiary’s 20x1 adjusted separate profit
immediately before consolidation?
a. 6,000,000
b. 8,000,000
c. 6,362,524
d.
8,429,824
3. How much is the translation adjustment to be recognized in OCI
in the 20x1 consolidated financial statements? - gain (loss)
a. (2,571,429)
b. 2,571,429
c. 2,428,571
d.
(2,428,571)
4. How much is the year-end consolidated total assets?
a. 76,000,000 b. 80,000,000
c. 74,362,428
d. 78,522,542
5. How much is the year-end consolidated total equity?
a. 37,571,428 b. 40,000,000
c. 37,000,000
d. 42,376,542
Case #2: With hedging instrument
Use the same fact pattern, except that ABC Co. decided on July 1,
20x1 to limit its foreign currency exposure as it relates to the initial
net investment by entering into a forward contract to sell ADM
20,000,000 (tax rate 40%) at a forward rate of 1.54 in 12 months
and to designate it as a hedge of the net investment. The
appropriate discount factor is 0.971286.
6. How much is the translation adjustment to be recognized in OCI
in the 20x1 consolidated financial statements? - gain (loss)
a. (630,124) b. 621,739
c. 428,571
d. (428,571)
7. How much is the year-end consolidated total assets?
a. 72,340,242 b. 80,000,000
c. 71,798,447
78,000,000
d.
8. How much is the year-end consolidated total equity?
a. 38,798,448 b. 40,000,000
c. 37,000,000
42,376,542
d.
Forward contract – Hedge of a recognized asset
Use the following information for the next three questions:
On March 1, 20x1, ABC Co. sold inventory to a foreign company for
FC 4,000,000 (‘FC’ means foreign currency) when the spot exchange
rate is FC 40: ₱1. The payment is due on April 1, 20x1.
ABC Co. is concerned about the possible fluctuation in exchange
rates, so on this date, ABC Co. entered into a forward contract to sell
FC 4,000,000 for ₱100,000 to a broker. According to the terms of the
forward contract, if FC 4,000,000 is worth less than ₱100,000 on
April 1, 20x1, ABC Co. shall receive from the broker the difference; if
it is worth more than ₱100,000, ABC Co. shall pay the broker the
difference.
9. Case #1: If the exchange rate on April 1, 20x1 is FC35: ₱1, how
much is the net cash settlement? - Receipt / (Payment)
a. 14,286
b. (14,286) c. 12,366 d. (12,366)
118
10. Case #2: If the exchange rate on April 1, 20x1 is FC50: ₱1,
how much is the net cash settlement? - Receipt / (Payment)
a. 23,478
b. (23,478) c. 20,000 d. (20,000)
11. Case #3: If the exchange rate on April 1, 20x1 is FC45: ₱1,
how much is the fair value of the interest rate swap? – Asset /
(Liability)
a. 11,111
b. (11,111) c. 12,366 d. (12,366)
Forward contract – Hedge of a forecast transaction
Use the following information for the next two questions:
ABC Co. does printing jobs for various customers. On January 1,
20x1, ABC Co. forecasted the purchase of 1,000 reams of paper in
the next quarter. The expected purchase date is on April 15, 20x1.
ABC Co. expects that the price of paper will fluctuate because of the
upcoming elections. Thus, on January 1, 20x1, ABC Co. enters into a
forward contract to purchase 1,000 reams of paper at a forward rate
of ₱2,400 per ream. If the market price on April 15, 20x1 is more
than ₱2,400, ABC Co. shall receive the difference from the broker. On
the other hand, if the market price is less than ₱2,400, ABC Co. shall
pay the difference to the broker. The forward contract will be settled
net on April 15, 20x1. The discount rate is 10%.
12. If the price of paper is ₱2,800 per ream on March 31, 20x1,
how much is the derivative asset (liability) to be recognized in
ABC Co.’s first quarter financial statements?
a. 367,338
b. (367,338)
c. 400,000 d. (400,000)
13. If the price of paper is ₱2,200 per ream on March 31, 20x1,
how much is the derivative asset (liability) to be recognized in
ABC Co.’s first quarter financial statements?
a. 187,333
b. (187,333)
c. 200,000 d. (200,000)
Forward contract – Present value
Use the following information for the next three questions:
ABC Co. produces feeds for hogs and chickens. In its long-term
budget completed on November 1, 20x1, ABC Co. forecasts a
purchase of 100,000 kilos of corn on January 1, 20x3.
To protect itself from fluctuation in prices, ABC Co. enters into a
forward contract on November 1, 20x1 to purchase 100,000 kilos of
corn for ₱20,000,000 (or ₱200 per kilo). The forward contract will be
settled net on January 1, 20x3.
14. What is the notional value of the forward contract?
a. 20,000,000 b. 30,000,000
c. 40,000,000
d. 50,000,000
15. If the current market price of corn is ₱260 per kilo on
December 31, 20x1, what amount of derivative asset (liability)
shall be reported in ABC Co.’s 20x1 year-end financial
statements? The appropriate discount rate is 10%.
a. 5,454,545
b. (5,454,545)
c. 6,000,000
d.
(6,000,000)
119
16. If the current market price of corn is ₱160 per kilo on
December 31, 20x2, what amount of derivative asset (liability)
shall be reported in ABC Co.’s 20x2 year-end financial
statements? The appropriate discount rate is 10%.
a. 3,636,364
b. (3,636,364)
c. 4,000,000
d.
(4,000,000)
Futures contract
17. ABC Co. has the following futures contract:
Futures
Qua
price ntity
1/1/x1
1 "Long" futures contract
400
2,000
to purchase gold
2 "Long" futures contract
800
1,600
to purchase silver
3 "Short" futures contract 4,00
250
to sell coffee beans
0
4 "Short" futures contract 6,00
60
to sell potatoes
0
Market
price 12/31/x1
1,800
1,900
220
75
How much is the total net derivative asset (liability) on December
31, 20x1?
a. 220,000
b. (220,000)
c. 190,000
d.
(190,000)
Call option
Use the following information for the next two questions:
On May 6, 20x1, ABC Co. entered into a firm commitment to
purchase equipment from a foreign company for FC 4,000,000 when
the exchange rate was FC 40: ₱1. Payment is due on June 1, 20x1.
ABC Co. is concerned about the possible fluctuation in exchange
rates, so on this date, ABC Co. entered into a call option to purchase
FC 4,000,000 for ₱100,000 to a broker. ABC Co. paid ₱4,000 for the
purchased option.
18. Case #1: If the exchange rate on June 1, 20x1 is FC 35: ₱1,
how much did ABC Co. save by purchasing the call option?
a. 14,286
b. (14,286) c. (14,000) d. 0
19. Case #2: If the exchange rate on June 1, 20x1 is FC 50: ₱1,
how much did ABC Co. save by purchasing the call option?
a. 20,000
b. (20,000) c. (6,000) d. 0
Put option
20. On March 31, 20x1, ABC Co. acquired for ₱40,000 a put option
which entitles ABC Co. to sell 20,000 units of a commodity for
₱880 per unit. The option expires on July 1, 20x1. On July 1, 20x1,
the current market price of the commodity is ₱1,000 per unit.
How much is the loss on the put option to be recognized by ABC
Co. in its 20x1 financial statements?
a. 40,000
b. 240,000 c. 280,000 d. 0
Call option – No hedging designation
120
Use the following information for the next four questions:
On October 1, 20x1, ABC Co. acquired for ₱40,000 a call option
which entitles ABC Co. to purchase 20,000 units of a commodity for
₱880 per unit. The option is exercisable on March 31, 20x2. The call
option was not designated as a hedging instrument. The following
are the current market prices:
88
October 1, 20x1
0
96
December 31, 20x1
0
1,0
March 31, 20x1
00
21. How much is the derivative asset (liability) on December 31,
20x1?
a. (1,600,000) b. 1,640,000
c. 1,600,000
d. (1,560,000)
22. How much is the unrealized gain (loss) on December 31, 20x1?
a. (1,560,000) b. 1,560,000
c. 1,600,000
d. (1,600,000)
23. How much is the net cash settlement – receipt (payment) – on
March 31, 20x2?
a. 2,440,000 b. 2,360,000
c. (2,400,000)
d. 2,400,000
24. How much is the realized gain (loss) on the call option on
March 31, 20x2?
a. 760,000
b. (840,000)
c. (800,000)
d.
800,000
Interest rate swap (swap payment at maturity)
Use the following fact pattern for the next four questions:
On January 1, 20x1 when the current market rate of interest was
10%, ABC Co. obtained a two-year, ₱4,000,000, variable-rate loan.
Interest payments on the loan are due every year-end.
ABC Co. was worried about future fluctuations in interest rates. Thus,
on January 1, 20x1, ABC Co. entered into an interest rate swap
wherein ABC Co. shall receive interest at whatever the current
market rate of interest is at the beginning of the year and pay fixed
interest at 10%. Swap payment shall be made only at maturity date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%,
how much is the net cash settlement at maturity date? – Receipt
(Payment)
a. (80,000)
b. 80,000 c. (30,000) d. 0
26. If the current market rate of interest on December 31, 20x2 is
8%, how much is the fair value of the interest rate swap? - Asset
(Liability)
a. (74,072)
b. 74,072 c. (80,000) d. (72,727)
Case #2:
27. If the current market rate of interest on January 1, 20x3 is
12%, how much is the net cash settlement at maturity date? –
Receipt (Payment)
121
a. (80,000)
b. 80,000
c. (30,000) d. 0
28. If the current market rate of interest on December 31, 20x2 is
12%, how much is the fair value of the interest rate swap? – Asset
(Liability)
a. (71,432)
b. 71,432 c. 80,000 d. 72,727
Interest rate swap (periodic swap payments)
Use the following information for the next three questions:
On January 1, 20x1, ABC Co. obtained a five-year, ₱4,000,000
variable-rate loan with interest payments due at each year-end
and the principal due on December 31, 20x5.
As protection from possible fluctuations in current market rates, ABC
Co. enters into an interest rate swap for the whole principal of the
loan. Under the agreement, ABC Co. shall receive variable interest
and pay fixed interest based on a fixed rate of 8%. Swap payments
shall be made at each year-end.
The following are the current market rates:
Jan. 1,
20x1
8%
Jan. 1,
20x2
9%
Jan. 1,
20x3
12%
29. What is the “notional” amount of the interest rate swap
agreement?
a. 4,000,000 b. 320,000 c. 4,320,000
d. 0
30. How much is the fair value of the interest rate swap on
December 31, 20x1? – Asset (Liability)
a. 40,000
b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on
December 31, 20x2? – Asset (Liability)
a. 384,292
b. 202,806 c. 143,234 d. 36,697
122
Chapter 25: Theory of Accounts Reviewer
1. In accordance with PFRS 7, which of the following best describes
the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities?
a. Liquidity risk
b. Credit risk
c. Financial risk
d.
Payment risk
(Adapted)
2. In accordance with PFRS 7, which of the following best describes
credit risk?
a. The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an
obligation
b. The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities
c. The risk that the fair value associated with an instrument will
vary due to changes in the counterparty's credit rating
d. The risk that an entity's credit facilities will be withdrawn due
to cash flow sensitivities
(Adapted)
3. Which of the following are types of hedging relationship?
I. Cash flow hedge
II.
Credit risk hedge
III. Interest rate hedge
IV.
Fair value hedge
a. I only
b. I and II
c. I and IV d. All of these
(Adapted)
4. In accordance with PFRS 7, which of the following are components
of market risk?
I. Credit risk
II.
Currency risk
III. Interest rate risk
IV.
Liquidity risk
a. I only
b. I and II
c. I and IV d. All of these
(Adapted)
5. Techniques such as hedging, forward contracts and options can:
a. Reduce risk.
c. Totally eliminate risk.
b. Increase risk.
d. Are purely for speculation.
6. Which of the following is the characteristic of a perfect hedge?
a. No possibility of future gain or loss
b. No possibility of future gain only
c. No possibility of future loss only
d. The possibility of future gain and no future loss
(AICPA)
7. It is a financial instrument which its return is based on the return
of some other underlying asset
a. FVPL b. FVOCI
c. Amortized cost
d. Derivative
123
8. When an entity is unable to separate an embedded derivative
from its host contract, the entity should classify the hybrid
instrument as
a. FVPL b. FVOCI
c. Amortized cost
d. a or b
9. If a company having a floating-rate debt is concerned that
interest rates will rise causing interest costs to increase, it would
most likely to enter into a swap to
a. Pay-variable rate and receive-fixed rate.
b. Pay-fixed rate and receive-floating rate.
c. Swaps are not used for this purpose.
d. It would depend on whether the swap is in, at, or out-of-the
money.
10. Arnold Co. purchased a call option on the rice field of Robert
Co. on January 1, 200A exercisable on or before January 1, 200B.
On December 31, 200A, the fair market value of the rice field was
below the call option price, making the instrument “out of the
money,” and Arnold Co. decided not to exercise the call option.
Which of the following statements is correct?
a. The call option does not meet the definition of a derivative
under PFRSs regarding settlement at a future date.
b. The call option does not meet the definition of a derivative
under PFRSs regarding the absence of initial net investment or
the presence of a little initial net investment
c. The call option meets the definition of a derivative under
PFRSs regarding settlement at a future date since expiry at
maturity is a form of settlement even though there is no
additional exchange of consideration.
d. The call option meets the definition of a derivative; however, it
should be written off on December 31, 200A and a
corresponding financial liability should be recognized.
11. On January 1, 200A, Clifton Co. enters into a forward contract
to purchase 10,000 shares of stock from Jane Co. on December
31, 200A at a forward price of ₱100 per share. Clifton Co. prepays
the shares at ₱100 per share which is the current price of the
shares on January 1, 200A. Which of the following is correct?
a. The forward contract meets the definition of a derivative.
b. The forward contract fails the “underlying” test for a derivative
since the current price and forward price are equal on
inception.
c. The forward contract fails the “future settlement” test for a
derivative since Clifton Co. prepaid the shares at inception at
an amount equal to settlement price. Prepayment at an
amount equal to settlement price is tantamount to settlement.
d. The forward contract fails the “no initial net investment or an
initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a
similar response to changes in market factors” test for a
derivative.
12. Which of the following may qualify as net investment in a
foreign operation, of a Philippine company, to be a hedged item
for hedge accounting purposes?
a. fish ball and kikyam operations in the US
124
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all
over the world
d. investment in subsidiary on a domestic corporation selling eload and auto load only within the Philippines.
13. To be considered highly effective, actual results of the hedge
should
a. be 100% effective
c. result to no gain or loss
b. be within a range of 80 to 125%
d. be documented properly
14. Which of the following is not a derivative?
a. Equity contracts
c. Option Contract
b. Futures contract
d. Swap contracts
(Adapted)
15. An interest rate swap in which company has fixed rate of
interest and pays a variable rate is called a :
a. cash flow hedge
b. fair value hedge
c. deferred hedge
d. hedge of foreign currency exposure of net investment in
foreign operations
(Adapted)
16. A derivative may be:
a. an asset account
c. an equity account
b. a liability account
d.
either an asset or liability
account
(Adapted)
17. The PFRSs require a company to recognize in its current net
income any gain or loss from a change in the fair value of the
derivative for a: (Item #1) Fair Value Hedge; (Item #2) Cash Flow
Hedge
a. Yes, Yes
b. Yes, No c. No, No d. No, Yes
(Adapted)
18. Uncertainty about the future market value of an asset is
referred to as
a. price risk.
c. interest rate risk.
b. credit risk.
d. exchange rate risk.
(Adapted)
19. Uncertainty that the party on the other side of an agreement
will abide by the terms of the agreement is referred to as
a. price risk.
c. interest rate risk.
b. credit risk.
d. exchange rate risk.
(Adapted)
20. A contract, traded on an exchange, that allows a company to
buy a specified quantity of a commodity or a financial security at
a specified price on a specified future date is referred to as a(n)
a. interest rate swap.
c. futures contract.
b. forward contract.
d. option.
(Adapted)
125
21. An agreement between two parties to exchange a specified
amount of a commodity, security, or foreign currency at a
specified date in the future with the price or exchange rate being
set now is referred to as a(n)
a. interest rate swap.
c. futures contract.
b. forward contract.
d. option.
(Adapted)
22. If a cannery wanted to lock in the price they would pay for
peaches in August four months before harvest (in April of the
same year), they would be most likely to enter into which kind of
agreement?
a. Interest rate swap
c. Futures contract
b. Fixed commodities contract
d. Option
(Adapted)
23. A contract giving the owner the right, but not the obligation, to
buy or sell an asset at a specified price any time during a
specified period in the future is referred to as a(n)
a. interest rate swap.
c. futures contract.
b. forward contract.
d. option.
(Adapted)
24. In exchange for the rights inherent in an option contract, the
owner of the option will typically pay a price
a. only when a call option is exercised.
b. only when a put option is exercised.
c. when either a call option or a put option is exercised.
d. at the time the option is received regardless of whether the
option is exercised or not.
(Adapted)
25. Which type of contract is unique in that it protects the owner
against unfavorable movements in the prices or rates while
allowing the owner to benefit from favorable movements?
a. interest rate swap.
c. futures contract.
b. forward contract.
d. option.
(Adapted)
26. When gains or losses on derivatives designated as fair value
hedges exceed the gains or losses on the item being hedged, the
excess
a. affects reported net income.
b. is recognized as an equity adjustment.
c. is recognized as part of comprehensive income.
d. is not recognized.
(Adapted)
27. For which type of derivative are changes in the fair value
deferred and recognized as an equity adjustment?
a. Fair value hedge
c. Operating hedge
b. Cash flow hedge
d. Notional value hedge
(Adapted)
126
28. Which choice best describes the information that should be
disclosed related to derivative contracts?
a. Fair value
c. Both a and b
b. Notional amount
d. Neither a nor b
(Adapted)
29. On February 1, Shoemaker Corporation entered into a firm
commitment to purchase specialized equipment from the Okazaki
Trading Company for ¥80,000,000 on April 1. Shoemaker would
like to reduce the exchange rate risk that could increase the cost
of the equipment in U.S. dollars by April 1, but Shoemaker is not
sure which direction the exchange rate may move. What type of
contract would protect Shoemaker from an unfavorable
movement in the exchange rate while allowing them to benefit
from a favorable movement in the exchange rate?
a. Interest rate swap
c. Call option
b. Forward contract
d. Put option
(Adapted)
30. A company enters into a futures contract with the intent of
hedging an account payable of DM400,000 due on December 31.
The contract requires that if the U.S. dollar value of DM400,000 is
greater than $200,000 on December 31, the company will be
required to pay the difference. Alternatively, if the U.S. dollar
value is less than $200,000, the company will receive the
difference. Which of the following statements is correct regarding
this contract?
a. The Deutsche mark futures contract effectively hedges against
the effect of exchange rate changes on the U.S. dollar value of
the Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a
fixed price.
c. The futures contract is a contract to sell Deutsche marks at a
fixed price.
d. The contract obligates the company to pay if the value of the
U.S. dollar increases.
(Adapted)
31. A company enters into a futures contract with the intent of
hedging an expected purchase of some equipment from a
German company for DM400,000 on December 31. The contract
requires that if the U.S. dollar value of DM800,000 is greater than
$400,000 on December 31, the company will receive the
difference. Alternatively, if the U.S. dollar value is less than
$400,000, the company will pay the difference. Which of the
following statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against
the effect of exchange rate changes on the U.S. dollar value of
the Deutsche mark commitment.
b. The futures contract exceeds the amount of the commitment
and thus hedges movements in the Deutsche mark exchange
rate.
c. The futures contract is a contract to sell Deutsche marks at a
fixed price.
d. The extra DM400,000 would be accounted for as a speculative
investment.
127
(Adapted)
32. A company enters into an interest rate swap in order to hedge
a $5,000,000 variable-rate loan. The loan is expected to be fully
repaid this year on June 10. The contract requires that if the
interest rate on April 30 of next year is greater than 11%, the
company receives the difference on a principal amount of
$5,000,000. Alternatively, if the interest rate is less than 11%, the
company must pay the difference. Which of the following
statements is correct regarding this contract?
a. The swap agreement effectively hedges the variable interest
payments.
b. The timing of the swap payment matches the timing of the
interest payments and, therefore, the variable interest
payments are hedged.
c. The timing of the swap payment does not match the timing of
the interest payments and, therefore, the variable interest
payments are not hedged.
d. This swap represents a fair value hedge.
(Adapted)
Use the following information for the next four questions:
Fact pattern
Hall, Inc., enters into a call option contract with Bennett Investment
Co. on January 2, 2002. This contract gives Hall the option to
purchase 1,000 shares of WSM stock at $100 per share. The option
expires on April 30, 2002. WSM shares are trading at $100 per share
on January 2, 2002, at which time Hall pays $100 for the call option.
33.
a.
b.
c.
d.
The call option would be recorded in the accounts of Hall as
an asset.
a liability.
a gain.
would not be recorded in the accounts (memorandum entry
only).
(Adapted)
34. Assume that the price of the WSM shares has risen to $120 per
share on March 31, 2002, and the Hall is preparing financial
statements for the quarter ending March 31. As regards this
option, Hall, Inc., would report which of the following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the
notes to the financial statements, but would not be reflected in
the financial statements.
d. Nothing would be reported in the financial statements or the
notes thereto.
(Adapted)
35. The 1,000 shares of WSM stock in this contract is referred to as
a. the collateral.
c. the option premium.
b. the notional amount.
d. the derivative.
(Adapted)
128
36. The $400 paid by Hall, Inc., to Baird Investment is referred to
as
a. the option premium.
c. the strike price.
b. the notional amount.
d. the intrinsic value.
(Adapted)
37. Assume that the price per share of WSM stock is $120 on April
30, 2002, and that the time value of the option has not changed.
In order to settle the option contract, Hall, Inc., would most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the
shares at $120 per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird Investment.
(Adapted)
38. Alpha Company purchases a call option to hedge an
investment in 20,000 shares of Beta Company stock. The option
agreement provides that if the prices of a share of Beta Company
stock is greater than $30 on October 25, Alpha receives the
difference (multiplied by 20,000 shares). Alternatively, if the price
of the stock is less than $30, the option is worthless and will be
allowed to expire. Which of the following statements regarding
this call option is correct?
a. The call option effectively hedges the investment in the shares
of Beta stock.
b. The call option is an option to sell Beta Company stock at a
fixed price.
c. The call option represents a speculative option rather than a
hedge.
d. Alpha could have purchased a put option or a call option to
effectively hedge the investment in the shares of Beta stock.
(Adapted)
39. Which of the following statements about options and their
underlying assets is FALSE?
a. The value of an option, in comparison to its underlying asset,
has the potential of creating an arbitrage opportunity.
b. The owner of the option is legally required to engage in a
transaction involving the asset.
c. The holder of a long position on an option is the only party
with the right to initiate a transaction involving the asset.
d. The seller of the option is legally required to engage in a
transaction involving the asset.
(Adapted)
40. Which of the following statements about forward and future
contracts is FALSE?
a. A future requires the contract purchaser to receive delivery of
the good at a specified time.
b. A predetermined price to be paid for a good is a necessary
requirement in the terms of a forward contract.
c. The future value of a financial derivative depends on the value
of its underlying asset.
d. The primary difference between forwards and futures is that
only futures are considered financial derivatives.
129
(Adapted)
41. Futures contracts differ from forward contracts in which of the
following ways?
a. Performance of each party in a futures transaction is
guaranteed by a clearinghouse.
b. All of these choices are correct.
c. Futures contracts require a daily settling of any gains or loses.
d. Futures contracts are standardized.
(Adapted)
42. Which of the following statements accurately describes how
futures contracts differ from forward contracts?
a. Futures contracts are standardized.
b. Futures contracts require a daily settling of gains and losses.
c. All of these choices are correct.
d. The performance of counterparties to a futures contract is
guaranteed by a clearinghouse.
(Adapted)
43. When a call option on a future is exercised, the buyer receives:
a. a short position in the underlying future.
b. an option to purchase the underlying future.
c. the physical good.
d. a long position in the underlying future and a cash payment.
(Adapted)
44. Which of the following statements about swap agreements is
FALSE?
a. They are standardized agreements, similar to futures.
b. Counterparties are the principles who engage in a swap
agreement.
c. They allow for the exchange of different sets of future cash
flows.
d. Interest rate and currency are common types of swaps.
(Adapted)
45. Which of the following requires the purchase of
underlying asset at a specified price?
a. Purchasing a call option.
c. Writing a call option.
b. Writing a put option.
d. Purchasing a put option.
(Adapted)
the
46. Frank Jameson is a portfolio manager with 90 percent of the
large-cap diversified mutual fund he controls invested in common
stocks. Jameson is concerned the overall market will decline by a
significant amount over the next two months due to a slowing of
the general economy. Which of the following actions will provide a
hedge for the mutual fund?
a. Selling interest rate future contracts.
b. Writing put options on the S&P 500.
c. Purchasing put options on the Standard and Poor's 500 Index
(S&P 500).
d. Purchasing call options on the S&P 500.
(Adapted)
130
47. Ron Jensen is a speculator who does not currently own GHP
Corporation common stock but believes it will increase in market
value by 25 percent over the next month. Jensen can most likely
achieve the highest percentage return on the expected stock
price increase by:
a. writing GHP put options.
c. buying GHP put options.
b. buying GHP call options.
d. buying GHP common stock.
(Adapted)
48. Which of the following statements about derivatives is TRUE?
a. Although forwards have terms that are not standardized, the
clearinghouse of that exchange still takes the opposite position
of each trade, thereby protecting the counterparties from
default risk.
b. Although minimal, arbitragers face the risk of the market value
of the underlying asset declining by an amount greater then
what was protected with the hedge.
c. When a call option on a future is exercised, the seller receives
a short position in the underlying future plus pays cash to the
holder of the option.
d. The market value of a financial derivative is primarily a
function of the relative demand and supply for that contract.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his
customers in the future and wants to hedge his risk, he needs to:
a. sell gasoline now.
c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures contract.
(Adapted)
50. Which of the following statements about forward contracts is
CORRECT? A long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take delivery.
(Adapted)
51. If a farmer expects to sell his wheat in anticipation of a harvest
and wants to hedge his risk, he needs to:
a. sell wheat now.
c. buy wheat futures contracts now.
b. buy wheat now.
d. sell wheat futures contracts now.
(Adapted)
52. Which of the following statements about speculators and
hedgers in the futures market is TRUE?
a. Hedging can allow a business to guard against a price increase
in a commodity without sacrificing profit if the commodity
price decreases.
b. A speculator would use futures to take a long position in a
commodity if its price is expected to decrease.
c. A speculator would use futures to take a short position in a
commodity if its price is expected to increase.
d. Hedgers guard against market price changes that would cause
a reduction in their operating profit.
(Adapted)
131
53. Standardized futures contracts are an aid to increased market
liquidity because:
a. standardization results in less trading activity.
b. uniformity of the contract terms broadens the market for the
futures by appealing to a greater number of traders.
c. standardization of the futures contract stabilizes the market
price of the underlying commodity.
d. non-standardized forward contracts are not allowed to trade.
(Adapted)
54. Futures have greater market liquidity than forward contracts,
because futures are:
a. developed with specific characteristics to meet the needs of
the buyer.
b. standardized contracts.
c. sold only for widely traded commodities, unlike forwards.
d. written for shorter periods of time.
(Adapted)
55. Standardization features of futures contracts do not include
the:
a. quality of the good that can be delivered.
b. delivery time.
c. quantity of the good to be delivered.
d. delivery price of the commodity.
(Adapted)
56. What is the primary difference between an American and a
European option?
a. American and European options are never written on the same
underlying asset.
b. The European option can only be traded on overseas markets.
c. The American option can be exercised at any time on or before
its expiration date.
d. American and European options always have different strike
prices when written on the same underlying asset.
(Adapted)
57. American options are worth no less than European options
with the same maturity, exercise price, and underlying stock
because:
a. purchasers of American options receive stock dividends, while
purchasers of European options do not.
b. American options are traded in U.S. exchanges where trading
costs are less than in European exchanges.
c. all of these choices are correct.
d. American options can be exercised before maturity, while
European options can be exercised only at maturity.
(Adapted)
58. Which of the following statements about European and
American options is FALSE?
a. European options offer more flexible trading opportunities for
speculators.
b. American options can be exercised at any time on or before
the expiration date.
c. European options are easier to analyze and value than
American options.
132
d. American options are far more common than European
options.
(Adapted)
59. Which of the following statements regarding options is TRUE?
a. An American option is worth no less than a European option
with the same maturity, exercise price, and underlying stock.
b. European options are always worth the same as American
options with the same maturity, exercise price, and underlying
stock.
c. European options are always worth more than American
options with the same maturity, exercise price, and underlying
stock.
d. All of these choices are correct.
(Adapted)
60. The writer of the put option has the:
a. obligation to sell the underlying asset in the future under
certain conditions.
b. right to buy the underlying asset in the future under certain
conditions.
c. right to sell the underlying asset in the future under certain
conditions.
d. obligation to buy the underlying asset in the future under
certain conditions.
(Adapted)
61. The writer of an option has:
a. neither the right nor obligation.
c. the right.
b. both the right and obligation.
d. the obligation.
(Adapted)
62. John Elam has a position in an option in which Elam pays an
upfront fee to receive payments if the value of a stock is below
$18 at expiration. If the stock is not below $18 at expiration, Elam
receives nothing. Elam’s position in the option is:
a. short a put option.
c. long a call option.
b. short a call option.
d. long a put option.
(Adapted)
63. James Anthony has a short position in a put option with a strike
price of $94. If the stock price is below $94 at expiration, what
will happen to Anthony’s short position in the option?
a. The person who is long the put option will not exercise the put
option.
b. He will have the option exercised against him at $94 by the
person who is long the put option.
c. He will exercise the option at $94.
d. He will let the option expire.
(Adapted)
64. Which of the following represents a long position in an option?
a. Writing a call option.
c. Writing a naked call option.
b. Writing a put option.
d. Buying a put option.
(Adapted)
65.
The options market is a zero-sum game in that:
133
a. whatever the long call gains, the short call loses.
b. the short put position has limited gain but also has limited
loss.
c. the long put position can gain infinitely, but the long call
position can only lose the premium.
d. the long put position has limited gain but also has limited loss.
(Adapted)
66. The options market is a zero-sum game because:
a. there are no net profits or losses in the market.
b. the profits from the buyer and seller of a call option together
are always zero.
c. all of these choices are correct.
d. profits come only at the expense of another trader.
(Adapted)
67. Which of the following statements regarding buyers of call and
put options is TRUE?
a. Buyers of calls anticipate the value of the underlying asset to
decrease, while the buyers of puts anticipate the value of the
underlying asset to increase.
b. Buyers of calls anticipate the value of the underlying asset to
decrease, and buyers of puts also anticipate the value of the
underlying asset to decrease.
c. Buyers of calls anticipate the value of the underlying asset to
increase, and buyers of puts also anticipate the value of the
underlying asset to increase.
d. Buyers of calls anticipate the value of the underlying asset to
increase, while the buyers of puts anticipate the value of the
underlying asset to decrease.
(Adapted)
68. Which of the following is a reason to use the swaps market
rather than the futures market? To:
a. maintain the firm's privacy.
b. increase the liquidity of the contract.
c. reduce the credit risk involved with the contract.
d. provide for a standardized contract.
(Adapted)
69. Which of the following statements about notional principal in
swaps is TRUE?
a. Notional principal is used as a base for computation of
payments.
b. Notional principal is useless in most swaps.
c. Notional principal is not actually exchanged.
d. Notional principal is not actually exchanged and notional
principal is used as a base for computation of payments.
(Adapted)
70. Parties agreeing to swap cash flows are:
a. dealers.
b. agents. c. counterparties.
facilitators.
(Adapted)
134
d. swap
71. Consider a commercial bank that is about to make a large
variable-rate loan. Which of the following would be an appropriate
position for the bank to hedge its risk with this loan? Pay:
a. variable to a currency swap counterparty and receive fixed.
b. variable to an interest rate swap counterparty and receive
fixed.
c. fixed to an interest rate swap counterparty and receive
variable.
d. fixed to a currency swap counterparty and receive variable.
(Adapted)
72. Consider a commercial bank that has many floating-rate
liabilities and has many fixed-rate assets. Which of the following
would be an appropriate position for the bank to hedge its risk?
Pay:
a. variable to an interest rate swap counterparty and receive
fixed.
b. fixed to a currency swap counterparty and receive variable.
c. variable to a currency swap counterparty and receive fixed.
d. fixed to an interest rate swap counterparty and receive
variable.
(Adapted)
73. A typical savings and loan association accept deposits (which
is floating rate in nature) and lend those funds on fixed rate
terms. As a result, it can be left with floating rate liabilities and
fixed rate assets. To escape this interest rate risk, the savings and
loan might be motivated to engage in:
a. a currency swap.
c. an interest rate swap.
b. an equity swap.
d. swaps can never help.
(Adapted)
74. An interest rate swap:
a. all of these choices are correct.
b. allows a firm to convert outstanding fixed rate debt to floating
rate debt.
c. allows a firm to convert outstanding floating rate debt to fixed
rate debt.
d. obligates two counterparties to exchange cash flows at one or
more future dates.
(Adapted)
75. The main motivation for engaging in swap transactions is:
a. commercial needs.
c. both of these choices are
correct.
b. comparative borrowing advantages. d. none of these choices are
correct.
(Adapted)
76. Which of the following MUST be part of ANY swap transaction?
a. Swap dealers.
c. Counterparties.
b. Swap facilitators.
d. Counterparties and swap facilitators.
(Adapted)
77.
A derivative designated as a fair value hedge must be:
135
I.
Specifically identified to the hedged asset, liability or
unrecognized firm commitment.
II.
Expected to be highly effective in offsetting changes in the fair
value of the hedged item.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
(AICPA)
78. In order for a financial instrument to be a derivative for
accounting purposes, the financial instrument must:
I. Have one or more underlyings.
II.
Require an initial net investment.
a. I only.
b. II only.
c. Both I and II. d. Neither I nor II.
(AICPA)
79. The determination of the value or settlement amount of a
derivative involves a calculation which uses:
I. An underlying.
II.
A notional amount.
a. I only.
b. II only.
c. Both I and II. d. Neither I nor II.
(AICPA)
80. On December 31, 199X, the end of its fiscal year, Smarti
Company held a derivative instrument which it had acquired for
speculative purposes during November, 199X. Since its
acquisition the fair value of the derivative had increased
materially. On December 31, how should the increase in fair value
of the derivative instrument be reported by Smarti in its financial
statements?
a. Recognized as a deferred credit until the instrument is settled.
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income
for 199X.
d. Disregarded until the instrument is settled.
(AICPA)
81. Gains and losses from changes in the fair value of a derivative
designated and qualified as a fair value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the
balance sheet until the derivative is settled.
c. Recognized in current net income in the period in which the
fair value of the derivative changes.
d. Recognized as a component of other comprehensive income in
the period in which the fair value of the derivative changes.
(AICPA)
82. Qualified derivatives may be used to hedge the cash flow
associated with an/a: (Item #1) Forecasted; (Item #2) Asset
transaction
a. Yes Yes
b. Yes No c. No Yes
d. No No
(AICPA)
83. A change in the fair value of a derivative qualified as a cash
flow hedge is determined to be either effective in offsetting a
change in the hedged item or ineffective in offsetting such a
change. How should the effective and ineffective portions of the
136
change in value of a derivative which qualifies as a cash flow
hedge be reported in financial statements?
Effective portion in
Ineffective portion in
a. Current income
Current income
b. Current income
Other comprehensive income
c. Other comprehensive income
Current income
d. Other comprehensive income
Other
comprehensive
income
(AICPA)
84. Which of the following risks are inherent in an interest rate
swap agreement?
I. The risk of exchanging a lower interest rate for a higher
interest rate.
II.
The risk of nonperformance by the counterparty to the
agreement.
a. I only.
b. II only.
c. Both I and II. d. Neither I nor II.
(AICPA)
85. Which of the following financial instruments is not considered
a derivative financial instrument?
a. Interest-rate swaps.
c. Stock-index options.
b. Currency futures.
d. Bank certificates of deposit.
(AICPA)
86. Derivatives that are not hedging instruments are always
classified in which category of financial instruments?
a. Financial assets or liabilities with fair values through profit or
loss
b. Held-to-maturity investments.
c. Loans and receivables originated by the enterprise.
d. Available-for-sale financial assets.
(AICPA)
87. Which of the following is the best description of a financial
instrument?
a. Any monetary contract denominated in a foreign currency.
b. Cash, an investment in equities, and any contract to receive or
pay cash.
c. Any form of a company’s own capital stock.
d. Any transaction with a bank or other financial institution.
(Adapted)
88. On November 1, Year One, the Jeter Company signs a contract
to receive one million Japanese yen on February 1, Year Two, for
$10,000 based on the three-month forward exchange rate at that
time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000).
Why would Jeter obtain this contract?
a. Jeter believes the value of the Japanese yen will be increasing
in relation to the value of the US dollar.
b. Jeter believes the value of the Japanese yen will be decreasing
in relation to the value of the US dollar.
c. Jeter believes that the economy of Japan will be growing at a
rate faster than that of the US economy.
137
d. Jeter could be hedging a future need to make a payment in
Japanese yen or it could be speculating that the Japanese yen
will become more valuable.
(Adapted)
89. On November 1, Year One, the Haynie Company signs a
contract to receive one million Japanese yen on February 1, Year
Two, for $10,000 based on the three-month forward exchange
rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100
or $10,000). This contract is a derivative because its value is
derived from the future value of the Japanese yen in relation to
the US dollar. On December 31, Year One, the Haynie Company is
producing financial statements. How is this forward exchange
contract reported?
a. It is shown as an asset or a liability at its fair value.
b. It is shown only as an asset at its fair value.
c. It is shown only as a liability at its fair value.
d. It is only disclosed in the notes to the financial statements
because it is a future transaction.
(Adapted)
90. On December 1, Year One, a company acquires two threemonth financial instruments that qualify as derivatives. Financial
instrument A was bought to serve as a fair value hedge. Financial
instrument B was bought to serve as a cash flow hedge. By the
end of Year One, both of these financial instruments have
increased in value by $1,000. How should these gains in value be
reported by the company on the Year One financial statements?
a. Both gains are reported within net income.
b. Both gains are reported within accumulated other
comprehensive income.
c. The gain on the fair value hedge is reported within net income
whereas the gain on the cash flow hedge is reported within
accumulated other comprehensive income.
d. The gain on the fair value hedge is reported within
accumulated other comprehensive income whereas the gain
on the cash flow hedge is reported within net income.
(Adapted)
91. Some financial instruments qualify as derivatives. Which of the
following is the best description of a derivative?
a. A contract denominated in two different currencies.
b. A contract that derives its value from some other index, item,
or security.
c. A contract that may happen but is not guaranteed to happen.
d. A contract made by two parties but which directly impacts a
third party.
(Adapted)
92. The functional currency of Nash, Inc.’s subsidiary is the French
franc. Nash borrowed French francs as a partial hedge of its
investment in the subsidiary. In preparing consolidated financial
statements, Nash’s translation loss on its investment in the
subsidiary exceeded its exchange gain on the borrowing. How
should the effects of the loss and gain be reported in Nash’s
consolidated financial statements?
138
a. The translation loss less the exchange gain is reported
separately as other comprehensive income.
b. The translation loss less the exchange gain is reported in the
income statement.
c. The translation loss is reported separately in the stockholders’
equity section of the balance sheet and the exchange gain is
reported in the income statement.
d. The translation loss is reported in the income statement and
the exchange gain is reported separately in the stockholders’
equity section of the balance sheet.
(AICPA)
93. A gain in the fair value of a derivative may be included in
comprehensive income if the derivative is appropriately
designated as a
a. Speculation in Foreign Currency.
b. Hedge of a Foreign Currency exposure of an available-for-sale
security.
c. Hedge of a Foreign Currency exposure of a forecasted foreign
currency denominated transaction.
d. Hedge of a foreign currency firm commitment.
(AICPA)
94. Shore Co. records its transactions in US dollars. A sale of goods
resulted in a receivable denominated in Japanese yen, and a
purchase of goods resulted in a payable denominated in euros.
Shore recorded a foreign exchange transaction gain on collection
of the receivable and an exchange transaction loss on settlement
of the payable. The exchange rates are expressed as so many
units of foreign currency to one dollar. Did the number of foreign
currency units exchangeable for a dollar increase or decrease
between the contract and settlement dates?
(Item #1) Yen exchangeable for ₱1; (Item #2) Euros exchangeable
for ₱1
a. Increase Increase
c. Decrease Increase
b. Decrease Decrease
d. Increase Decrease
(AICPA)
95. On October 1, 2003, Mild Co., a US company, purchased
machinery from Grund, a German company, with payment due on
April 1, 2004. If Mild’s 2003 operating income included no foreign
exchange transaction gain or loss, then the transaction could
have
a. Resulted in an extraordinary gain.
b. Been denominated in US dollars.
c. Caused a foreign currency gain to be reported as a contra
account against machinery.
d. Caused a foreign currency translation gain to be reported as
other comprehensive income.
(AICPA)
96. On October 1, 2003, Velec Co., a US company, contracted to
purchase foreign goods requiring payment in Qatari rials, one
month after their receipt at Velec’s factory. Title to the goods
passed on December 15, 2003. The goods were still in transit on
December 31, 2003. Exchange rates were one dollar to twenty-
139
two rials, twenty rials, and twenty-one rials on October 1,
December 15, and December 31, 2003, respectively. Velec should
account for the exchange rate fluctuation in 2003 as
a. A loss included in net income c. An extraordinary gain.
b. A gain included in net income d. An extraordinary loss.
(AICPA)
97. Derivatives are financial instruments that derive their value
from changes in a benchmark based on any of the following
except
a. Stock prices.
c. Commodity prices.
b. Mortgage and currency rates.
d. Discounts on accounts
receivable.
(AICPA)
98. Derivative instruments are financial instruments or other
contracts that must contain
a. One or more underlyings, or one or more notional amounts.
b. No initial net investment or smaller net investment than
required for similar response contacts.
c. Terms that do not require or permit net settlement or delivery
of an asset.
d. All of the above.
(AICPA)
99. The basic purpose of derivative financial instruments is to
manage some kind of risk such as all of the following except
a. Stock price movements. c. Currency fluctuations.
b. Interest rate variations.
d. Uncollectibility of accounts
receivables.
(AICPA)
100. Which of the following statements is(are) true regarding
derivative financial instruments?
I. Derivative financial instruments should be measured at fair
value and reported in the balance sheet as assets or liabilities.
II.
Gains and losses on derivative instruments not designated as
hedging activities should be reported and recognized in
earnings in the period of the change in fair value.
a. I only.
b. II only.
c. Both I and II. d. Neither I nor II.
(AICPA)
101. Which of the following is an underlying?
a. A credit rating.
c. An average daily temperature.
b. A security price.
d. All of the above could be
underlyings.
(AICPA)
102. If the price of the underlying is greater than the strike or
exercise price of the underlying, the call option is
a. At the money.
c. On the money.
b. In the money.
d. Out of the money.
(AICPA)
103. Which of the following is not a distinguishing characteristic of a
derivative instrument?
a. Terms that require or permit net settlement.
140
b. Must be “highly effective” throughout its life.
c. No initial net investment.
d. One or more underlyings and notional amounts.
(AICPA)
104. An example of a notional amount is
a. Number of barrels of oil. c. Currency swaps.
b. Interest rates.
d. Stock prices.
(AICPA)
105. Disclosures related to financial instruments, both derivative
and nonderivative, used as hedging instruments must include
a. A list of hedged instruments.
b. Maximum potential accounting loss.
c. Objectives and strategies for achieving them.
d. Only a. and c.
(AICPA)
106. Which of the following financial instruments or other contracts
is not specifically excluded from the definition of derivative
instruments in PAS 39?
a. Leases.
c. Adjustable rate loans.
b. Call (put) option.
d. Equity securities.
(AICPA)
107. Which of the following is not a derivative instrument?
a. Futures contracts.
c. Interest rate swaps.
b. Credit indexed contracts.
d. Variable annuity contracts.
(AICPA)
108. Which of the following criteria must be met for bifurcation to
occur?
a. The embedded derivative meets the definition of a derivative
instrument.
b. The hybrid instrument is regularly recorded at fair value.
c. Economic characteristics and risks of the embedded
instrument are “clearly and closely” related to those of the
host contract.
d. All of the above.
(AICPA)
109. Financial instruments sometimes contain features that
separately meet the definition of a derivative instrument. These
features are classified as
a. Swaptions.
c. Embedded derivative instruments.
b. Notional amounts.
d. Underlyings.
(AICPA)
110. The process of bifurcation
a. Protects an entity from loss by entering into a transaction.
b. Includes entering into agreements between two counterparties
to exchange cash flows over specified period of time in the
future.
c. Is the interaction of the price or rate with an associated asset
or liability.
d. Separates an embedded derivative from its host contract.
141
(AICPA)
111. Hedge accounting is permitted for all of the following types of
hedges except
a. Trading securities.
b. Unrecognized firm commitments.
c. Available-for-sale securities.
d. Net investments in foreign operations.
(AICPA)
112. Which of the following is a general criterion for a hedging
instrument?
a. Sufficient documentation must be provided at the beginning of
the process.
b. Must be “highly effective” only in the first year of the hedge's
life.
c. Must contain a nonperformance clause that makes
performance probable.
d. Must contain one or more underlyings.
(AICPA)
113. For an unrecognized firm commitment to qualify as a hedged
item it must
a. Be binding on both parties.
b. Be specific with respect to all significant terms.
c. Contain a nonperformance clause that makes performance
probable.
d. All of the above.
(AICPA)
114. A hedge of the exposure to changes in the fair value of a
recognized asset or liability, or an unrecognized firm
commitment, is classified as a
a. Fair value hedge.
c. Foreign currency hedge.
b. Cash flow hedge.
d. Underlying.
(AICPA)
115. Gains and losses on the hedged asset/liability and the hedged
instrument for a fair value hedge will be recognized
a. In current earnings.
b. In other comprehensive income.
c. On a cumulative basis from the change in expected cash flows
from the hedged instrument.
d. On the balance sheet either as an asset or a liability.
(AICPA)
116. Gains and losses of the effective portion of a hedging
instrument will be recognized in current earnings in each
reporting period for which of the following? (Item #1) Fair value
hedge; (Item #2) Cash flow hedge
a. Yes No
b. Yes Yes c. No No
d. No Yes
(AICPA)
117. Which of the following risks are inherent in an interest rate
swap agreement?
142
I.
The risk of exchanging a lower interest rate for a higher
interest rate.
II.
The risk of nonperformance by the counterparty to the
agreement.
a. I only.
b. II only.
c. Both I and II. d. Neither I nor II.
(AICPA)
118. Which of the following meet the definition of assets and/or
liabilities?
(Item #1) Derivative instruments; (Item #2) G/L on the fair value of
derivatives
a. Yes No b. No Yes c. Yes Yes d. No No
(AICPA)
119. The risk of an accounting loss from a financial instrument due
to possible failure of another party to perform according to terms
of the contract is known as
a. Off-balance-sheet risk.
c. Credit risk.
b. Market risk.
d. Investment risk.
(AICPA)
120. Examples of financial instruments with off-balance sheet risk
include all of the following except
a. Outstanding loan commitments written.
c.
Warranty
obligations
b. Recourse obligations on receivables.
d. Futures contracts.
(AICPA)
121. Off-balance-sheet risk of accounting loss does not result from
a. Financial instruments recognized as assets entailing
conditional rights that result in a loss greater than the amount
recognized in the balance sheet.
b. Financial instruments not recognized as either assets or
liabilities yet still expose the entity to risk of accounting loss.
c. Financial instruments recognized as assets or liabilities where
the amount recognized reflects the risk of accounting loss to
the entity.
d. Financial instruments recognized as liabilities that result in an
ultimate obligation that is greater than the amount recognized
in the balance sheet.
(AICPA)
122. Are there any circumstances when a contract that is not a
financial instrument would be accounted for as a financial
instrument under PAS 32 and PAS 39 (and PFRS 9)?
a. No. Only financial instruments are accounted for as financial
instruments.
b. Yes. Gold, silver, and other precious metals that are readily
convertible to cash are accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a
commodity or other nonfinancial item (e.g., gold, electricity, or
gas) generally is accounted for as a financial instrument if the
contract can be settled net.
d. Yes. An entity may designate any nonfinancial asset that can
be readily convertible to cash as a financial instrument.
(Adapted)
143
123. All of the following are characteristics of a derivative except:
a. It is acquired or incurred by the entity for the purpose of
generating a profit from short-term fluctuations in market
factors.
b. Its value changes in response to the change in a specified
underlying (e.g., interest rate, financial instrument price,
commodity price, foreign exchange rate, etc.).
c. It requires no initial investment or an initial net investment
that is smaller than would be required for other types of
contracts that would be expected to have a similar response to
changes in market factors.
d. It is settled at a future date.
(Adapted)
124. Is a derivative (e.g., an equity conversion option) that is
embedded in another contract (e.g., a convertible bond)
accounted for separately from that other contract?
a. Yes. PFRSs require all derivatives (both freestanding and
embedded) to be accounted for as derivatives.
b. No. PFRSs preclude entities from splitting financial instruments
and accounting for the components separately.
c. It depends. PFRSs require embedded derivatives to be
accounted for separately as derivatives if, and only if, the
entity has embedded the derivative in order to avoid
derivatives accounting and has no substantive business
purpose for embedding the derivative.
d. It depends. PFRSs require embedded derivatives to be
accounted for separately if, and only if, the economic
characteristics and risks of the embedded derivative and the
host contract are not closely related and the combined
contract is not measured at fair value with changes in fair
value recognized in profit or loss.
(Adapted)
125. Which of the following is not a condition for hedge accounting?
a. Formal designation and documentation of the hedging
relationship and the entity’s risk management objective and
strategy for undertaking the hedge at inception of the hedging
relationship.
b. The hedge is expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable to
the hedged risk, the effectiveness of the hedge can be reliably
measured, and the hedge is assessed on an ongoing basis and
determined actually to have been effective.
c. For cash flow hedges, a forecast transaction must be highly
probable and must present an exposure to variations in cash
flows that could ultimately affect profit or loss.
d. The hedge is expected to reduce the entity’s net exposure to
the hedged risk, and the hedge is determined actually to have
reduced the net entity-wide exposure to the hedged risk.
(Adapted)
126. What is the accounting treatment of the hedging instrument
and the hedged item under fair value hedge accounting?
144
a. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized in profit or
loss.
b. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized directly in
equity to the extent the hedge is effective.
c. The hedging instrument is measured at fair value with changes
in fair value recognized directly in equity to the extent the
hedge is effective. The accounting for the hedged item is not
adjusted.
d. The hedging instrument is accounted for in accordance with
the accounting requirements for the hedged item (i.e., at fair
value, cost or amortized cost, as applicable), if the hedge is
effective.
(Adapted)
127. What is the accounting treatment of the hedging instrument
and the hedged item under cash flow hedge accounting?
a. The hedged item and hedging instrument are both measured
at fair value with respect to the hedged risk, and changes in
fair value are recognized in profit or loss.
b. The hedged item and hedging instrument are both measured
at fair value with respect to the hedged risk, and changes in
fair value are recognized directly in equity.
c. The hedging instrument is measured at fair value, with
changes in fair value recognized directly in equity to the
extent the hedge is effective. The accounting for the hedged
item is not adjusted.
d. The hedging instrument is accounted for in accordance with
the accounting requirements for the hedged item (i.e., at fair
value, cost or amortized cost, as applicable), if the hedge is
effective.
(Adapted)
Chapter 25 - Suggested answers to theory of accounts
questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
A
A
C
B
A
A
D
A
B
C
D
A
B
A
B
D
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
B
C
D
D
D
A
B
C
C
C
D
C
A
C
B
A
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
B
C
D
A
B
C
B
C
D
B
D
D
B
B
D
C
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
D
D
B
D
A
C
D
A
D
C
B
D
C
A
C
C
145
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
C
A
C
C
D
A
B
D
A
C
B
A
C
B
B
B
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
D
B
B
A
D
B
D
A
C
D
A
A
D
A
A
A
121.
122.
123.
124.
125.
126.
127.
C
C
A
D
D
A
C
17.
18.
19.
20.
B
A
B
C
37.
38.
39.
40.
C
C
B
D
57.
58.
59.
60.
D
A
A
D
77.
78.
79.
80.
C
A
C
B
146
97.
98.
99.
100.
D
B
D
C
117.
118.
119.
120.
C
A
C
C
Chapter 26
Corporate Liquidation and
Reorganization
Chapter 26: Multiple Choice – Computational (For classroom
instruction purposes)
Statement of affairs
Use the following information for the next eleven questions:
Fact pattern
Andrix Asterix Co. has filed for voluntary insolvency and is about to
liquidate its business. Andrix Asterix Co.’s statement of financial
position immediately prior to the liquidation process is shown below:
Andrix Asterix Co.
Statement of financial position
As of December 31, 20x0
ASSETS
Current assets:
Cash
Accounts receivable
Note receivable
Inventory
Prepaid assets
160,000
880,000
400,000
2,120,000
40,000
3,600,000
Noncurrent assets:
Land
Building, net
Equipment, net
2,000,000
8,000,000
1,200,000
11,200,000
14,800,000
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses
Current tax payable
Accounts payable
884,000
1,400,000
4,000,000
6,284,000
Noncurrent liabilities:
Note payable (secured by equipment)
Loan payable (secured by land and building)
Capital deficiency:
Share capital
Retained earnings (deficit)
1,200,000
8,000,000
9,200,000
2,000,000
(2,684,000)
(684,000)
14,800,000
Total liabilities and equity
Additional information:
The
following
information
was
determined
commencement of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
147
before
the
b. The note receivable is fully collectible. An accrued interest
receivable of ₱40,000 was not yet recorded.
c. The inventory has an estimated selling price of ₱1,680,000 and
estimated costs to sell of ₱40,000.
d. The prepaid assets are non-refundable.
e. The land and building have fair values of ₱8,000,000 and
₱3,200,000, respectively. However, Andrix Asterix Co. expects to
sell both the land and building for a total selling price of
₱10,400,000. Costs to sell the land and building are negligible as
the prospective buyer agrees to shoulder all necessary costs of
transferring title to the property.
f. The equipment is expected to be sold at a net selling price of
₱800,000.
g. Administrative expenses expected to be incurred during the
liquidation process is ₱120,000. This amount is not yet reflected
on the statement of financial position.
h. Accrued expenses include accrued salaries of ₱100,000.
i. Accrued interest on the loan payable amounting to ₱60,000 was
not reflected in the statement of financial position.
j. All of the other liabilities are stated at their expected settlement
amounts.
1. How much are the total assets pledged to fully secured creditors?
a. 11,200,000 b. 12,000,000
c. 10,400,000
d. 0
2. How much are the total assets pledged to partially secured
creditors?
a. 800,000
b. 3,140,000
c. 1,200,000
d.
400,000
3. How much are the total free assets?
a. 2,788,800 b. 5,248,800
c. 4,048,800
d. 2,908,800
4. How much are the total net free assets?
a. 3,682,800 b. 4,048,800
c. 2,908,800
d. 3,628,800
5. How much are the total unsecured liabilities with priority?
a. 1,620,000 b. 220,000 c. 1,520,000
d. 100,000
6. How much are the total fully secured creditors?
a. 8,000,000 b. 8,060,000
c. 8,800,000
d. 9,620,000
7. How much are the total partially secured creditors?
a. 1,200,000 b. 1,260,000
c. 2,820,000
d. 3,920,000
8. How much are the total unsecured liabilities without priority?
a. 4,784,000 b. 4,884,000
c. 4,904,000
d. 5,184,000
9. How much is the estimated deficiency to unsecured creditors
without priority?
a. 1,655,200
b. 1,555,200
c. 1,380,200
d.
1,456,200
10.
What is the estimated recovery percentage of
unsecured creditors without priority?
a. 75.85%
b. 31.71% c. 70%
d. 24.15%
148
11.
How much can the shareholders expect to
recover from their equity interests?
a. 483 ,000
b. (478,800)
c. (165,186)
d. 0
Statement of realization and liquidation
Use the following information for the next ten questions:
Use the fact pattern in the preceding problem (Andrix Asterix Co.) in
addition to the information provided below:
Additional information:
a. An accrued interest receivable of ₱40,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the
liquidation process is ₱120,000. This amount is not yet reflected
on the statement of financial position.
c. Accrued interest on the loan payable amounting to ₱60,000 was
not reflected in the statement of financial position.
The following are the transactions that have transcribed during the
period:
a. Of the total account receivable, only ₱660,000 have been
collected. The remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining
balance was written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for ₱1,200,000. Actual costs to sell
were ₱20,000.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for ₱10,400,000, as expected.
f. The equipment was sold for ₱880,000.
g. Of the total accrued expenses, only the accrued salaries of
₱100,000 were paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. ₱880,000 were paid for the note payable. The lender waived
payment for the balance.
k. Actual administrative expenses paid amounted to ₱108,000.
12.
The opening entry in the books of the receiver
includes an estate equity (deficit) of
a. (1,555,200) b. (684,000)
c. (1,435,200)
d. (1,415,200)
13.
The statement of realization and liquidation will
show total “assets to be realized” of
a. 14,640,000 b. 14,800,000
c. 14,068,800
d. 14,234,200
14.
The statement of realization and liquidation will
show total “assets acquired” of
a. 180,000
b. 800,000 c. 40,000 d. 0
15.
The statement of realization and liquidation will
show total “assets realized” of
a. 13,250,000 b. 13,540,000
c. 12,920,000
d. 13,520,000
16.
The statement of realization and liquidation will
show total “assets not realized” of
a. 1,060,000 b. 820,000 c. 724,000 d. 0
149
17.
The statement of realization and liquidation will
show total “liabilities to be liquidated” of
a. 15,664,000 b. 15,484,000
c. 15,544,000
d. 15,244,000
18.
The statement of realization and liquidation will
show total “liabilities assumed” of
a. 60,000
b. 180,000 c. 160,000 d. 0
19.
The statement of realization and liquidation will
show total “liabilities liquidated” of
a. 10,560,000 b. 10,548,000
c. 10,440,000
d. 10,988,000
20.
The statement of realization and liquidation will
show total “liabilities not liquidated” of
a. 4,748,000 b. 5,104,000
c. 4,784,000
d. 0
21.
The statement of realization and liquidation will
show net gain (loss) for the period of
a. 220,000
b. 112,000 c. (112,000)
d. 0
Recovery of claims by order of priority
Use the following information for the next two questions:
The statement of affairs of Darrell Putix Co. indicates that unsecured
creditors without priority with total claims of ₱720,000 may expect
to recover ₱288,000 if all of the assets of Darrell Putix Co. were sold.
Among the creditors of Darrell Putix Co. are the following:
 Government – taxes payable of ₱400,000, inclusive of ₱80,000
assessments and surcharges.
 XYZ bank – loan payable of ₱4,000,000 and accrued interest of
₱200,000, backed by collateral security with realizable value of
₱4,800,000.
 Alpha Financial Co. – loan payable of ₱3,200,000 backed by
collateral security with realizable value of ₱2,000,000.
 Mr. Bombay – loan payable of ₱1,000,000 and accrued interest of
₱200,000. No collateral security.
22.
How much is the expected recovery of partially
secured creditors?
a. 2,480,000 b. 2,160,000
c. 1,280,000
d. 0
23.
Bombay?
a. 780,000
How much is the expected recovery of Mr.
b. 480,000 c. 288,000 d. 0
Recovery of claims
Use the following information for the next five questions:
Rex Toothpix Co. is undergoing liquidation. Information on Rex
Toothpix Co.’s assets and liabilities is shown below:
Book
Realizabl
ASSETS
value
e value
Assets pledged to fully secured
360,000
480,000
creditors
Assets pledged to partially secured
208,000
192,000
creditors
Free assets
600,000
576,000
150
1,168,000
1,248,000
LIABILITIES
Unsecured liabilities with priority
Fully secured creditors
Partially secured creditors
Unsecured creditors without priority
288,000
288,000
384,000
384,000
240,000
240,000
432,000
432,000
1,344,000
1,344,000
24.
If the assets are sold at realizable values, how
much cash is available to pay unsecured creditors without
priority?
a. 336,000
b. 384,000 c. 624,000 d. 288,000
25.
What is the estimated recovery percentage of
unsecured creditors without priority?
a. 89%
b. 78%
c. 80%
d. 75%
26.
How much is the total estimated deficiency to
unsecured creditors?
a. (89,000)
b. (72,000) c. (192,000)
d. (96,000)
27.
How much can the partially secured creditors
expect to recover from their claims?
a. 384,000
b.234,000 c. 230,400 d. 276,000
28.
How much can the “unsecured creditors
without priority” expect to recover from their claims?
a. 432,000
b. 345,600 c. 384,000 d. 348,000
Recovery percentage of shareholders
29.
The following summarizes the results of the
liquidation process of Rhadvix Co.’s operations:
Gains on realization of assets
720,000
1,280,00
Losses on realization of assets
0
Additional assets discovered and realized during
200,000
liquidation
Additional liabilities recorded and settled during
120,000
liquidation
2,800,00
Share capital (at original book value)
0
1,200,00
Deficit (at original book value)
0
How much is the recovery percentage of shareholders?
a. 80%
b. 70%
c. 76%
d. 75%
Recovery of shareholders’ claims
Use the following information for the next two questions:
Raymund Lipstix Co. owns 80% of PH Care, Inc. During the year, PH
Care, Inc. filed for bankruptcy and is about to enter into liquidation.
Raymund Lipstix Co. has an outstanding unsecured receivable of
₱4,000,000 from PH Care, Inc. together with an investment in
subsidiary of ₱20,000,000. The statement of affairs of PH Care, Inc.
shows a 100% recovery for outside creditors and a 20% recovery for
inside creditors.
151
30.
How much can Raymund Lipstix Co. expect to
recover from its receivable?
a. 800,000
b. 4,800,000
c. 640,000 d.0
31.
How much can Raymund Lipstix Co. expect to
recover from its investment in subsidiary?
a. 20,000,000 b. 4,000,000
c. 4,640,000
d. 0
Errors
32.
Berns Sunog-kutix Co. has voluntarily filed
petition for bankruptcy. Berns Sunog-kutix Co.’s inexperienced
accountant determined that the expected recovery percentage of
unsecured creditors without priority is 20%. The unsecured
creditors have refuted this and demanded an audit of the
accountant’s computations. The following information was
determined from the accountant’s working papers:
 Assets and liabilities immediately before the commencement of
liquidation process:
Total assets - at book value
8,000,000
Unsecured creditors with priority
1,040,000
Fully secured creditors
3,600,000
Partially secured creditors
2,080,000
Unsecured creditors without priority
1,760,000
 During the period, assets with total book value of ₱4,000,000
were sold for ₱3,760,000. A portion of the proceeds were used to
settle fully secured liabilities of ₱2,160,000 and partially secured
liabilities of ₱1,480,000.
 The remaining unsold assets have the following realizable values:
Assets pledged to fully secured creditors
1,280,000
Assets pledged to partially secured creditors
560,000
All other assets
2,060,000
 Further investigations revealed the following:
a. Estimated liquidation expenses amounting to ₱160,000 were
not yet recorded.
b. Additional unsecured liability without priority of ₱200,000
should be accrued.
What is the correct estimated recovery percentage of unsecured
creditors without priority?
a. 40%
b. 42.53% c. 45.37% d. 47.33%
Receivership – journal entry
Use the following information for the next two questions:
Joseph Fantastix Co. has filed a petition for insolvency. The winding
up of Joseph Fantastix Co.’s affairs will be entrusted to a receiver.
The following information was gathered:
Book
Realizable
value
value
Assets
1,200,000
1,000,000
Liabilities:
Unsecured liabilities with priority
Fully secured creditors
Partially secured creditors
Unsecured liabilities without priority
152
80,000
480,000
160,000
560,000
80,000
480,000
160,000
560,000
1,280,000
Unrecorded items:
Dividend receivable
Interest payable
Estimated administrative expenses
1,280,000
20,000
8,000
40,000
33.
How much is the estate equity (deficit) in the
opening journal entry made by the receiver in its books?
a. (80,000)
b. 80,000 c. (308,000)
d. (68,000)
34.
How much is the estimated deficiency to
unsecured creditors without priority in the statement of affairs?
a. (308,000)
b. 308,000 c. (80,000) d. (280,000)
Statement of realization and liquidation
Use the following information for the next two questions:
The following information was taken from the statement of
realization and liquidation of Jury and John Bombastix Co., which is
undergoing liquidation:
ASSETS:
8,000,00
Assets to be realized
0
Assets acquired
60,000
4,720,00
Assets realized
0
Assets not realized
880,000
LIABILITIES:
Liabilities liquidated
Liabilities not liquidated
Liabilities to be
liquidated
Liabilities assumed
SUPPLEMENTARY ITEMS:
Supplementary
expenses
Supplementary income
8,520,00
0
4,760,00
0
11,480,0
00
128,000
100,000
72,000
35.
How much is the net gain (loss) for the period?
a. (4,132,000) b. (28,000) c. 4,160,000
d. (4,160,000)
36.
If the estate deficit at end of the period is
₱3,480,000, how much is the ending balance of cash?
a. 400,000
b. 388,000 c. 960,000 d. 460,000
153