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A. THEORIES. Select the best answer for each of the following.
1.
S1: Internally generated brands, mastheads, publishing titles, customer lists, and items similar in
substance should be recognized as intangible assets.
S2: In website development, application and infrastructure, graphical design and content development are
always charged to expense.
S3: Copyright is an example of an artistic-based intangible asset.
S4: Valuation cost related to intangible asset cannot be capitalized.
A. Only 1 statement is true
B. Only 2 statements are true
C. Only 3 statements are true
D. No statements are true
2. How should the value of the stock rights received by an existing investor as a result of a preemptive
right be accounted for at the time the stock rights are received?
A. No value should be assigned to the stock right
B. The market value of the stock rights at the time of issuance should be debited to investment in
stock rights and credited to investment income
C. A portion of the book value of the ordinary shares should be allocated to the new rights received
using the relative fair value method.
D. The market value of the stock right at the time of issuance should be debited to investment in
stock rights and credited to income from investment
3. Which of the following are the disclosure requirements BOTH for cost and fair value model?
I. Criteria to distinguish owner-occupied from an investment property.
II. Whether fair value or cost model applied
III. Contractual obligations to develop, repair, maintain or enhance investment property.
IV. Useful lives
V. Rental income
A. Items I, II, III.
B. Items I, II, III, IV.
C. Items I, II, III, V.
D. Items I, III, IV, V.
4. During reclassification from investment at fair value to investment in associate, if the investor does not
have the intention of disposing the shares within twelve months from the date significant influence is
acquired, the securities shall be reclassified as investment in associate using:
A. Equity Method
B. Fair value through profit or loss
C. Fair value through OCI
D. Either, depends on company’s discretion.
5. S1. Reclassification shall be made prospectively from the reclassification date. S2. If the majority
ownership of the investee is concentrated among a small group of shareholders who operate the investee
without regard to the views of the investor, then the investor does not exercise significant influence over
the investee
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false
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6. How should the investment in associate be measured and presented in the consolidated financial
statements and in the financial statements of an investor that does not have a subsidiary?
A. Measured at fair value and presented in a separate line item.
B. Measured in accordance with equity method and included in the line item “Other Non-Current
Financial Assets”.
C. Measured at fair value and included in the line item “Other Non-Current Financial Assets”.
D. Measured in accordance with equity method and presented in a separate line item.
7. Jiji Company declares and distributes dividend that is a result of current earnings. How will the receipt
of the dividends affect the investment balance of the investor under each of the following classifications?
Measured at FV
Investment in Associate
A.
No effect
No effect
B.
Increase
Decrease
C.
No effect
Decrease
D.
Decrease
No effect
8. PFRS 5 states that a non-current asset that is to be abandoned should not be classified as held for sale,
the reason for this is because
A. It cannot be valued
B. It is unlikely that there will be an active market for the noncurrent asset
C. Its carrying amount will be recovered principally through continuing use
D. It is unlikely that the noncurrent asset will be sold within 12 months
9. Investments in debt securities are generally recorded at
A. cost including accrued interest.
B. maturity value.
C. cost including brokerage and other fees.
D. maturity value with a separate discount or premium account.
10. When an investor's accounting period ends on a date that does not coincide with an interest receipt
date for bonds held as an investment, the investor must:
A. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the
amount of interest accrued since the last interest receipt date.
B. notify the issuer and request that a special payment be made for the appropriate portion of the
interest period.
C. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total
amount of interest to be received at the next interest receipt date.
D. do nothing special and ignore the fact that the accounting period does not coincide with the
bond's interest period.
11. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding
gains or losses and are included as other comprehensive income and as a separate component of
stockholders' equity are:
A. held-to-maturity debt securities
B. trading debt securities
C. available-for-sale debt securities
D. never-sell debt securities
12. Use of the effective-interest method in amortizing bond premiums and discounts results in:
A. a greater amount of interest income over the life of the bond issue than would result from use of
the straight-line method.
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B. a varying amount being recorded as interest income from period to period.
C. a variable rate of return on the book value of the investment.
D. a smaller amount of interest income over the life of the bond issue than would result from use of
the straight-line method.
13. In accounting for investments in debt securities that are classified as trading securities,
A. a discount is reported separately.
B. a premium is reported separately.
C. any discount or premium is not amortized.
D. none of these.
14. Which of the following is not an essential characteristic for an item to be reported as a liability on the
balance sheet?
A. The liability is the present obligation of a particular enterprise.
B. The liability arises from past transactions or events.
C. The liability is payable to a specifically identified payee.
D. The settlement of the liability requires an outflow of resources embodying economic benefits.
15. Malaya Company. issued bonds with a maturity amount of P200,000 and a maturity ten years from
date of issue. If the bonds were issued at a premium, this indicates that:
A. the effective yield or market rate of interest exceeded the stated (nominal) rate.
B. the nominal rate of interest exceeded the market rate.
C. the market and nominal rates coincided.
D. no necessary relationship exists between the two rates.
16. When the effective-interest method is used to amortize bond premium or discount, the periodic
amortization will:
A. increase if the bonds were issued at a discount.
B. decrease if the bonds were issued at a premium.
C. increase if the bonds were issued at a premium.
D. increase if the bonds were issued at either a discount or a premium.
17. When a note payable is issued for property, goods, or services, the present value of the note is
measured by:
A. the fair value of the property, goods, or services.
B. the fair value of the note.
C. using an imputed interest rate to discount all future payments on the note.
D. any of these.
18. If bonds are issued between interest dates, the entry on the books of the issuing corporation could
include a:
A. debit to Interest Payable.
B. credit to Interest Receivable.
C. credit to Interest Expense.
D. credit to Unearned Interest.
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B. PROBLEMS. Select the best answer for each of the following.
1. The following are some transactions of Bb company during the year:
• Mm’s Dec. 31, 2021, balance sheet reports assets of P6,000,000 and liabilities of
P2,500,000. All of Mm’s assets’ book values approximate their fair value, except for
building, which has a fair value that is P400,000 greater than its book value. On Dec. 31,
2021, Bb Company paid P6,100,000 to acquire Mm.
• Bb Company acquires a patent from Gg Co. in exchange for 2,500 shares of Bb’s P5 par
value common stock and P75,000 cash. When the shares was initially issued to Gg Co.,
Bb’s stock was selling at P7.50 per share. When Bb acquired the patent, its stock was
selling for P9 a share.
• Bb acquires 3 patents from Oo Corp. for a total of P360,000. The patents were carried on
Oo’s books as follows: Patent X: P5,000; Patent Y: P2,000; and Patent Z: P3,000. When
Bb acquired the patents their fair market values were: Patent X: P20,000; Patent Y:
P240,000; and Patent Z: P60,000.
How much is the total intangible assets based on the foregoing transactions?
A. P2,647,500
B. 2,657,000
C. 2,647,000
D. 2,657,500
Suggested Solution:
Goodwill
Patent
Patent
P2,200,000
97,500
360,000
___________
Total Intangible Asset P2,657,500
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2. On January 1, 2020, Shishi Company had capitalized cost of P20,000,000 for a new computer software
product with an economic life of 5 years. Sales for 2020 for the software product amounted to
P5,000,000. The total sales of the software over its economic life are expected to be P20,000,000.
However, the pattern of future sales from the computer software cannot be determined reliably. In its
2020 income statement, Shishi should record the amortization of computer software at
A. P0
B. P2,000,000
C. P5,000,000
D. P4,000,000
Suggested Solution:
Capitalized cost P20,000,000/ 5 years= P4,000,000
3. Daniel Company accounts for non-current assets using the revaluation model. On February 28, 2020
Daniel Company classified a freehold property as held for sale in accordance with PFRS5. At that date the
property’s carrying amount was P290,000 and the balance on the revaluation reserve was P20,000. At that
date, its fair value was estimated at P330,000 and the costs to sell at P20,000. On 31 December 2020, the
property’s fair value was estimated at P325,000 and the costs to sell at P25,000. What amount should be
included as an impairment loss in Daniel’s statement of comprehensive income for the year ended 31
December 2020?
A. P0
B. P5,000
C. P10,000
D. 30,000
Suggested Solution:
Carrying value
Add: revaluation reserve
NCAHFS amount (Feb. 28)
Less: FV-cts
Loss
Add revaluation reserve
Impairment loss, Dec. 31,2020
P290,000
20,000
P310,000
300,000
P10,000
20,000
P30,000
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4. On December 1, 2020, Dahyun Corp. decided to dispose of an item of plant that is carried in its records
at a cost of P450,000, with accumulated depreciation of P80,000. Depreciation on the plant since it was
originally acquired has been charged at P5,000 per month. The plant will continue to be operated until it
is sold, at which time the operations of the plant will be outsourced. The company undertook all necessary
actions to be able to classify the asset as held for sale. It is estimated that it could sell the plant for its fair
value, P350,000, incurring P10,000 selling costs in the process. The plant has been depreciated at an
amount of P5,000 per month. On December 31, 2020, the plant had not been sold but, due to a shortage of
this type of plant, there had been an increase in the fair value to P360,000 while expected costs to sell
remain at P10,000. If Dahyun Corp. sold the plant on March 1, 2021 for a net proceeds of P361,000, what
amount should be included as gain on disposal in entity’s statement of comprehensive income for year
ended December 31, 2021?
A. P1,000
B. P19,000
C. P11,000
D. 12,000
Suggested Solution:
Dahyun Corp, Dec. 1, 2020
Less Cost to sell
Fv-cts
Less Proceeds
Gain
P360,000
10,000
————P350,000
361,000
----———P11,000
5. KD Company has 100,000 shares of Kang’s ordinary share as equity investments at fair value through
other comprehensive income. These shares were acquired at fair market value, which was P60 per share
on September 02, 2020. On December 22, 2020, the market value of these shares is P70 per share. On
December 24, 2020, KD Company sold 60,000 shares of its investment in Kang for P90/share, which is
the current quoted price also in the market, and incurred a commission expense of P30,000. The market
value of Kang’s stock has increased by P2 per share by year-end. The company’s policy is to derecognize
the related amount in the OCI whenever the Equity Investment at Fair value through OCI was disposed
of.
What amount of unrealized gain or loss should be recycled in the profit or loss as a result of the disposal
of 60,000 shares?
A. P30,000
B. P1,920,000
C. P1,890,000
D. P0
6. Ong Company received dividends from its ordinary share investments during the year 2021 as follows:
• A stock dividend of 10,000 shares from Jonghyun Corp. when the market price of Jonghyun’s share was
P10.
• A cash dividend of P1,500,000 from Daehwi Company in which Ong owns a 15% interest.
• 5,000 shares of Gualin Company in lieu of a cash dividend of P20 per share. The market price of Gualin
Company’s share was P150. Ong Company holds originally 50,000 shares of Gualin Company. Ong
Company owns 5% interest in Gualin Company.
What amount of dividend revenue should Ong Company report in its 2021 income statement?
A. P1,000,000
B. P2,250,000
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C. 2,500,000
D. P2,350,000
Suggested Solution:
Cash Dividend
Add: Gualin Company (5,000sh x P150)
Dividend Revenue, Dec. 31, 2021
P1,500,000
750,000
--------———
P2,250,000
7. On July 01, 2020, Jihoon Company purchases an investment property at a cost of P50,000,000
including transaction costs. On September 01, 2020, the fair value of the property increases to
P51,000,000. On December 31, 2020, the fair value of the property is P48,000,000. The rental income
received per quarter is P1,500,000. The property has a useful life of 50 years. If the company uses the cost
model, what is the net impact on the profit or loss for the 6 months ended December 31, 2020, in relation
to the investment property?
A. P (500,000)
B. P1,000,000
C. P1,500,000
D. P2,500,000
Suggested Solution:
Rental Income (P1,500,000 x 2)
Less: Depreciation (50M/50x0.5)
Investment Property, Dec. 31,2020
P3,000,000
500,000
------------——P2,500,000
8. On January 1, 2021, Z Corp. which uses the fair value model, purchases an investment property at a
cost of P45,000,000. On December 31, 2021, the market value of the property is P50,000,000. The fair
market value on December 31, 2022, is P60,000,000. On January 1, 2022, the property was reclassified to
PPE. At what amount should the PPE be initially recorded?
A. P60,000,000
B. P50,000,000
C. P45,000,000
D. P5,000,000
9. On January 2, 2020, Aguilar Company purchased 10% of Abejo Company’s outstanding ordinary shares
for P20,000,000. Aguilar is the largest single shareholder in Abejo and this gives Aguilar the power to
participate in the financial and operating policy decisions of the Abejo but is not control or joint control
over those policies. Abejo reported profit of P10,000,000 and paid dividend of P4,000,000. What should
be the balance in Aguilar’s investment in Abejo Company at the end of 2020?
A. P20,000,000
B. P20,600,000
C. P21,000,000
D. P21,400,000
Suggested Solution:
Cost
Share of Profit of Associate (10M x 10%)
P20,000,000
1,000,000
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Dividends (4M x 10%)
Carrying Amount, 12/31/20
(400,000)
P20,600,000
10. Bartolome Company bought 20% of Ruth Corporation’s ordinary shares on January 1, 2020 for
P20,000,000. Carrying amount of Ruth’s net assets at purchase date totaled P60,000,000. Fair value and
carrying amounts were the same for all items except for plant and inventory, for which fair values exceed
their carrying amounts by P15,000,000 and P5,000,000 respectively. The plant has a 5-year life. All
inventory was sold during 2020. Goodwill, if any, has an indefinite life. During 2020, Ruth reported profit
of P40,000,000 and paid P15,000,000 cash dividends. What amount should Bartolome report as investment
income for 2020?
A. P6,200,000
B. P3,400,000
C. P6,400,000
D. P7,600,000
Suggested Solution:
Share on reported profit (40M x 20%)
Excess – Inventory (5M x 20%)
Excess – Plant (15M x 20% ) / 5
Investment Income
P8,000,000
(1,000,000)
(600,000)
P6,400,000
11. Entity H has 25% interest in Entity A and 30% interest in Entity B. During the reporting period, Entity
A sold inventory to Entity B for P1,200,000. The cost of inventory for A is P1,000,000 and remains on
Entity B’s statement of financial position at the end of the reporting period. In accordance with PIC Q&A
2017-03, Entity H should eliminate unrealized profit of
A. P200,000
B. P 50,000
C. P15,000
D. P0
Suggested Solution:
200,000 x 25% x 30% = P15,000
12. An investor has the following accounts with an associate:
Investment in ordinary shares
P5,000,000
Investment in preference shares
2,000,000
Accounts receivable
200,000
Loans receivable - unsecured
1,000,000
Loans receivable - secured
500,000
The investor’s ‘interest in associate’ is
A. P5,000,000
B. P7,000,000
C. P8,000,000
D. P8,500,000
Suggested Solution:
Investment in ordinary shares
Investment in preference shares
Loans receivable - unsecured
Investor’s interest in associate
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
P5,000,000
2,000,000
1,000,000
P8,000,000
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13. For P3,691,500, Magayon Company purchased a 5-year, 8% P 4,000,000 face value bonds of
Santonilyo Company on June 1, 2020. The bonds were purchased to yield 10% and pay interest
every June 1 and December 1. The market value of the bonds on December 31, 2020, December 31,
2021 and December 31, 2022 were quoted at 97, 99, and 98, respectively. If the investment in bonds
were designated as Investment at fair value through profit or loss, determine the unrealized gain to
be reported in 2020 profit or loss section of the Statement of comprehensive income.
A. P 188,500
B. P 120,000
C. P 110,745
D. P 73,830
Suggested Solution:
Market Value
Rate
Total Market Value
Acquisition Price
Unrealized gain
P 4,000,000.00
0.97
3,880,000.00
3,691,500.00
P 188,500.00
14. Lalahon Company carried out the following transactions in bond investments held for trading during
the current year:
8/1
Purchased 5,000, P 1,000, 12% bonds of Lihangin Company at 104 plus
accrued interest. The bonds pay interest semi-annually on May 1 and
November 1.
8/31
Purchased 2,000, P 1,000, 12% bonds of Lidagat Company at 98 plus accrued
interest. Semi-annual payments of interest are on June 30 and December 31.
12/1
Sold 2,000 of the Lihangin bonds at 102 plus accrued interest. Brokerage fee
of P 160,000 was incurred.
12/31
Lihangin bonds were selling at 98. Lidagat bonds were selling at 99.
Determine the gain/ loss on sale of Lihangin bonds.
A. P 40,000 loss
B. P 40,000 gain
C. P 200,000 loss
D. P 200,000 gain
Suggested Solution:
Selling price (2,000 bonds x P1,000 face value per bond x 102%)
Brokerage Fee
Total
Cost (2,000 bonds x P1,000 face value per bond x 104%)
Loss on Sale
2,040,000.00
160,000.00
1,880,000.00
2,080,000.00
(200,000.00)
15. On July 1, Year 2, Libulan Company purchased P10 million of Liadlaw Company’s 8% bonds due
on July 1, Year 10. Based on the company’s business model for the portfolio of investments, Libulan
designates the bonds as investments measured at amortized cost. The bonds, which pay interest
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semiannually semiannually on January 1 and July 1 were purchased purchased for P8,750,000 to
yield 10%. In this statement of comprehensive income for the year ended December 31, Year 2,
Libulan should report interest income of:
A. P350,000
B. P400,000
C. P437,500
D. P500,000
Suggested Solution:
Interest income/Effective interest (8,750,000 x 5%)
P437,500
16. On June 1, Year 1, Ribung Linti Company purchased as held for collection securities 8,000 of the
P1,000 face value, 8% bonds of Barangaw Company for P7,383,000. The bonds were purchased to
yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds mature on
June 1, Year 5. On June 1, Year 2, Ribung sold the bonds for P7,850,000. This amount includes the
appropriate accrued interest. What is the gain or loss on the sale of the bond investment?
a. P368,700
b. P366,240
c. P48,700
d. P46,242
Suggested Solution:
Total proceeds from sale of bonds
Accrued interest included (8.0M x .08 x 6/12)
Selling price
Carrying value of bond investment sold
Acquisition cost
Amortization, June 1, Year 1
Effective interest (7,383,000 x 5%)
Nominal interest (8.0M x 4%)
Carrying value, June 1, Year 2
Amortization, June 1, Year 2
Effective interest (7,342,150 x 5%)
Nominal interest
Gain on sale
P7,850,000
320,000
P7,530,000
7,383,000
369,150
320,000
371,608
320,000
49,150
7,342,150
51,608
7,483,758
P 46,242
17. On July 1, Year 2, Dalikmata Company purchased 4,000 of the P1,000 face amount, 8% bonds of
Amihan Corp. for P3,692,000 to yield 10% per annum. The bonds, which mature on July 1, Year 5,
pay interest semiannually on January 1 and July 1. Dalikmata classifies the securities as at amortized
cost. What is the investment carrying value at December 31, Year 2?
a. P3,975,400
b. P3,741,200
c. P3,716,600
d. P3,667,400
Suggested Solution:
Acquisition cost
Amortization of discount (3,692,000 x 5%) – (4.0M x 4%)
Investment carrying value, December 31, Year 2
P3,692,000
24,600
P3,716,600
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18. Sidapa Co.’s accounts payable balance at December 31, year 2, was P2,200,000 before considering
the following data:
• Goods shipped to Sidapa FOB shipping point on December 22, year 2, were lost in
transit. The invoice cost of P40,000 was not recorded by Sidapa. On January 7, year 3,
Sidapa filed a P40,000 claim against the common carrier.
• On December 27, year 2, a vendor authorized Sidapa to return, for full credit, goods
shipped and billed at P70,000 on December 3, year 2. The returned goods were shipped
by Sidapa on December 28, year 2. A P70,000 credit memo was received and recorded by
Sidapa on January 5, year 3.
• Goods shipped to Sidapa FOB destination on December 20, year 2, were received on
January 6, year 3. The invoice cost was P50,000.
What amount should Sidapa report as accounts payable in its December 31, year 2 balance sheet?
a. P2,170,000
b. P2,180,000
c. P2,230,000
d. P2,280,000
Suggested solution:
Accounts Payable (P2,200,000 + P40,000 - P70,000)
P2,170,000
19. Mapulon Company issues P10,000,000 of 10-year, 9% bonds on March 1, 2020 at 97 plus accrued
interest. The bonds are dated January 1, 2020 and pay interest on June 30 and December 31. What is
the total cash received on the issue date?
a. P9,700,000
b. P10,225,000
c. P9,850,000
d. P9,550,000
Suggested solution:
Cash received (P10,000,000 × .97) + (P900,000 × 2/12)
P9,850,000
20. Lakapati company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2021. Interest
is paid on June 30 and December 31. The proceeds from the bonds are P19,604,145. Using
effective-interest amortization, how much interest expense will be recognized in 2021?
a. P780,000
b. P1,560,000
c. P1,568,498
d. P1,568,332
Suggested solution:
Interest expense (P19,604,145 × .04) + (P19,608,310 × .04)
P1,568,498
21. The 10% bonds payable of Mayari Company had a net carrying amount of P570,000 on December
31, 2020. The bonds, which had a face value of P600,000, were issued at a discount to yield 12%.
The amortization of the bond discount was recorded under the effective-interest method. Interest was
paid on January 1 and July 1 of each year. On July 2, 2021, several years before their maturity,
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Mayari retired the bonds at 102. The interest payment on July 1, 2021 was made as scheduled. What
is the loss that Mayari should record on the early retirement of the bonds on July 2, 2021? Ignore
taxes.
a. P12,000
b. P37,800
c. P33,600
d. P42,000
Suggested solution:
P570,000 + [(P570,000 × .06) – (P600,000 × .05)] = 574,200 (CV of bonds)
P574,200 – (P600,000 × 1.02) = P37,800
22. On December 31, 2020, Anitun Tabu Co. is in financial difficulty and cannot pay a note due that
day. It is a P600,000 note with P60,000 accrued interest payable to Amanikable Corporation.
Amanikable agrees to accept from Anitun Tabu equipment that has a fair value of P290,000, an
original cost of P480,000, and accumulated depreciation of P230,000. Amanikable also forgives the
accrued interest, extends the maturity date to December 31, 2023, reduces the face amount of the
note to P250,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
Anitun Tabu should recognize a gain or loss on the transfer of the equipment of :
a. P0
b. P40,000 gain
c. P60,000 gain
d. P190,000 loss
Suggested solution:
P290,000 – (P480,000 – P230,000) = P40,000.