Chapter 11
PFRS for Small and Medium-sized Entities
(SMEs)
PROBLEM 1: MULTIPLE CHOICE – THEORY
1. B
6. C
2. B
7. C
3. A
8. D
4. D
9. A
5. B
10. B
11.
12.
13.
14.
15.
D
D
C
B
D
PROBLEM 2: MULTIPLE CHOICE – THEORY
1. B
6. A
2. C
7. B
3. A
8. C
4. D
9. A
5. D
10. B
11.
12.
13.
14.
15.
A
D
B
D
A
PROBLEM 3: MULTIPLE CHOICE – THEORY
1. D
11. D
2. E
12. C
3. A
13. B
4. C
14. C
5. B
15. C
6. C
16. A
7. A
17. C
8. C
18. A
9. D
19. C
10. D
20. C
1
PROBLEM 4: MULTIPLE CHOICE – THEORY
1.
A
2.
D
3.
C
4.
B
5.
C
6.
B
7.
D
8.
D
9.
D
10. E
PROBLEM 5: TRUE OR FALSE
1. FALSE
6. TRUE
11.
FALSE
16.
FALSE
2.
FALSE
7.
FALSE
12.
TRUE
17.
FALSE
3.
TRUE
8.
FALSE
13.
FALSE
18.
TRUE
4.
FALSE
9.
TRUE
14.
FALSE
19.
FALSE
5.
FALSE
10.
FALSE
15.
TRUE
20.
FALSE
11.
FALSE
16.
FALSE
PROBLEM 6: TRUE OR FALSE
1. FALSE
6. TRUE
2.
FALSE
7.
FALSE
12.
FALSE
17.
FALSE
3.
TRUE
8.
FALSE
13.
FALSE
18.
FALSE
4.
FALSE
9.
TRUE
14.
FALSE
19.
FALSE
5.
TRUE
10.
FALSE
15.
TRUE
20.
FALSE
2
PROBLEM 7: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Revenues
Dividend income
Operating and other expenses
Profit for the year
Retained earnings, Jan. 1
2,400
Adjustments to opening balance:
Cumulative effect of change in accounting policy
(600)
(2,600 FIFO - 3,200 Average)
Retrospective effect of correction of error
(1,200)
Adjusted retained earnings, Jan. 1
Dividends declared
Retained earnings, Dec. 31
5,000
800
(3,200)
2,600
600
(350)
2,850
2. A (See solutions below)
3. A (See solutions below)
4. B (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Acquisition cost
1,000
Transaction costs
70
1,070
Initial measurement
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate
First trial: @6%
 (1,200 x PV of 1 @6%, n=5) + (50 x PV ordinary annuity of 1
@6%, n=5) = 1,070
 (1,200 x 0.747258) + (50 x 4.212364) = 1,070
 897 + 211 = 1,108 is not equal to 1,070
Second trial: @7% (we need a lower amount so we’ll increase the
rate)
 (1,200 x PV of 1 @7%, n=5) + (50 x PV ordinary annuity of 1
@7%, n=5) = 850
 (1,200 x 0.712986) + (50 x 4.100197) = 1,070
 856 + 205 = 1,061 is not equal to 1,070
3
From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x%
6%
7%
6%
1,070
1,061
-
1,108
1,108
=
0.81
Effective interest rate (x%) = 6% + .81% = 6.81%
The amortization table using 6.81% as the effective interest is
prepared as follows:
Date
Payments Int. income Amortization Present value
1,070
1/1/x0
50
73
23
1,093
12/31/x0
50
74
24
1,117
12/31/x1
50
76
26
1,143
12/31/x2
50
78
28
1,171
12/31/x3
50
80
30
1,201
12/31/x4
Use the following information for the next three questions:
On January 1, 20x0, an entity issues a bond for P900, incurring transaction
costs of P50. Interest of P40 is payable annually, in arrears, over the next five
years starting December 31, 20x0. The bond has a mandatory redemption of
P1,100 on December 31, 20x4.
5. A (See solutions below)
6. B (See solutions below)
7. D (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Issue price
900
Transaction costs
(50)
850
Initial measurement
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate
First trial: @10%
 (1,100 x PV of 1 @10%, n=5) + (40 x PV ordinary annuity of 1
@10%, n=5) = 850
 (1,100 x 0.620921) + (40 x 3.790787) = 850
 683 + 152 = 835 is not equal to 850
4
Second trial: @9% (we need a higher amount so we’ll decrease the
rate)
 (1,100 x PV of 1 @9%, n=5) + (40 x PV ordinary annuity of 1
@9%, n=5) = 850
 (1,100 x 0.649931) + (40 x 3.889651) = 850
 715 + 156 = 871 is not equal to 850
From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x%
9%
10%
9%
850
871
=
0.58
835
871
Effective interest rate (x%) = 9% + .58% = 9.58%
The amortization table using 9.58% as the effective interest is
prepared as follows:
Date
Payments Int. expense Amortization Present value
1/1/x0
850
12/31/x0
40
81
41
891
12/31/x1
40
85
45
937
12/31/x2
40
90
50
987
12/31/x3
40
95
55
1,041
12/31/x4
40
100
60
1,101
8. A
Analysis: The entity has transferred to the bank substantially all of the
risks and rewards of ownership of the receivables. Accordingly, it
removes the receivables from its statement of financial position (i.e.,
derecognizes them), and it shows no liability in respect of the
proceeds received from the bank.
9. C (850,000 proceeds – 1,000,000 carrying amount) = 150,000
loss
10. C
Analysis: In this case, the entity has retained the risk of slow payment
or non-payment by the debtors—a significant risk with respect to
receivables. Accordingly, the entity does not treat the receivables as
having been sold to the bank, and it does not derecognize them.
5
Instead, it treats the proceeds from the bank as a loan secured by the
receivables. The entity continues to recognize the receivables as
an asset until they are collected or written off as uncollectible.
11. C
Solution:
Cost model (equal to acquisition cost)
Equity model [100K + (30K x 20%) - (10K x 20%)]
Fair value model (equal to year-end fair value)
100,000
104,000
110,000
12. C
Solution:
Cost model (equal to dividend received) (10K x 20%)
Equity model - share in profit (30K x 20%)
Fair value model (dividend + fair value gain) (2K + 10K)
2,000
6,000
12,000
13. C (See solutions below)
14. C (See solutions below)
Solutions:
Year
1
2
3
4
5
(360K x 110%)
(396K x 110%)
15. A (See solutions below)
16. C (See solutions below)
17. A (See solutions below)
18. A (See solutions below)
Solutions:
Year
1
2
(100K x 105%)
3
(105K x 105%)
Total rentals
Divide by: Lease term
Annual rent expense/ income
Rent expense - Year 1
Rentals paid
Rent payable - Year 1
Annual rentals
360,000
396,000
435,600
479,160
527,076
Annual rentals
100,000
105,000
110,250
315,250
3
105,083
105,083
(100,000)
5,083
6
Rent income - Years 1 and 2 (105,083 x 2)
Rentals received (100K + 105K)
Rent receivable - Year 2
210,167
(205,000)
5,167
19. A (See solutions below)
20. B (See solutions below)
Solutions:
Major defects (5,000 x 8% x P100)
Minor defects (5,000 x 12% x P20)
Warranty expense
Actual repair costs
Year-end provision
40,000
12,000
52,000
(10,000)
42,000
7
PROBLEM 8: MULTIPLE CHOICE – COMPUTATIONAL
1. B (See solutions below)
2. D (See solutions below)
Solutions:
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate
First trial: @10%
 (340,000 x PV of 1 @10%, n=2) = 280,992
 (340,000 x 0.826446) = 280,992 is equal to 280,992
Therefore, the effective interest rate is 10%.
Revenue
Cost of sales (280,992 x 100%/130%)
Gross profit
Interest income (280,992 x 10%)
Operating expenses
Profit
280,992
(216,148)
64,844
28,099
(50,000)
42,944
D
Solution:
The carrying amount of the equipment on December 31, 20x1 is
computed as follows:
(1,600,000 – 100,000) x 7/15 + 100,000 = 800,000
3.
The recoverable amount is determined as follows:
a. Fair value less costs to sell = (700,000 – 20,000) = 680,000
b. Value in use
Net cash
Present
Year
flows
PV of 1 factors
value
20x2
180,000
0.8928571429
160,714
20x3
167,400
0.7971938776
133,450
20x4
155,682
0.7117802478
110,811
20x5
144,784
0.6355180784
92,013
20x6
134,649
0.5674268557
76,404
20x7
125,224
0.5066311212
63,442
20x8
116,458
0.4523492153
52,680
Residual value
100,000
0.4523492153
45,235
Value in use
734,750
8
The recoverable amount is the value in use of P734,750 – the higher
amount.
The impairment loss is computed as follows:
Recoverable amount
Carrying amount
Impairment loss
4.
734,750
(800,000)
(65,250)
D
Solution:
Pretax income
Permanent differences
Accounting profit subject to tax
Warranty provision (FI < TI)
Interest receivable (FI > TI)
Depreciation (FI > TI)
Taxable profit (Tax loss)
18,000
18,000
3,000
(1,000)
(30,000)
(10,000)
Depreciation for financial reporting purposes (200K ÷ 10)
Depreciation for taxation purposes (200K ÷ 4)
Taxable temporary difference (FI > TI)
or
Carrying amount (200K x 9/10)
Tax base (200K x 3/4)
Taxable temporary difference (FI > TI)
20,000
50,000
(30,000)
180,000
150,000
30,000
Required annual income tax payment
Quarterly tax payments
Prepaid income tax / Current tax asset
50,000
50,000
5. D
Solution:
Warranty provision (FI < TI)
Tax loss
Valuation allowance on tax loss (10,000 x 60%)
Total deductible temporary difference
Multiply by: Tax rate applicable to 20x2 and future periods
Deferred tax asset - Dec. 31, 20x1
3,000
10,000
(6,000)
7,000
30%
2,100
6. A
Solution:
Interest receivable (FI > TI)
Depreciation (FI > TI)
Total taxable temporary difference
1,000
30,000
31,000
9
Multiply by: Tax rate applicable to 20x2 and future periods
Deferred tax liability - Dec. 31, 20x1
30%
9,300
7. A
Solution:
Accounting profit subject to tax 18,000 x 35% current tax rate = 6,300
8. B
Solution:
Pretax income
Interest income subject to final tax
Nondeductible entertainment expense
Accounting profit subject to tax
Bad debt expense (FI < TI)
Depreciation (FI > TI) (100K - 75K)
Taxable profit
280,000
(30,000)
25,000
275,000
2,000
(25,000)
252,000
Taxable profit
Multiply by: Tax rate
Current tax expense
252,000
30%
75,600
9. D
Solution:
Change in DTA (2,000 x 30%)
Change in DTL (25,000 x 30%)
Deferred tax expense
(600)
7,500
6,900
10. A
Solution:
Accounting profit subject to tax
Multiply by: Tax rate
Income tax expense
275,000
30%
82,500
10