ADVANCED FINANCIAL ACCOUNTING & REPORTING - THEORIES
BUSINESS COMBINATION - PFRS 3
1. It is a transaction or other event in which an acquirer obtains control of one or more
businesses.
a. Business combination
b. Merger
c. Consolidation
d. Intercorporate directorship
2. This is defined as an integrated set of activities and assets that is capable of being conducted
and
managed for the purpose of providing a return directly to investors or other owners, members or
participants.
a. Business
b. Transaction
c. Isolated event
d. Undertaking
3. Which of the following accounting methods must be applied to all business combinations?
a. Pooling method
b. Equity method
c. Proportionate consolidation
d. Acquisition method
4. This is defined as “the entity that obtains control of the acquiree”.
a. Acquirer
b. Investor
c. Parent
d. Subsidiary
5. It is the power to govern the financial and operating policies of an entity or business so as to
obtain benefits from its activities.
a. Significant influence
b. Undue influence
c. Control
d. Managerial dependence
6. An acquirer might obtain control of an acquire in all of the following, except
a. By transferring cash, cash equivalents and other assets
b. By issuing equity interests
c. By contract alone, even without consideration
d. By acquiring interest in a joint venture
7. A business combination may be structured in all of the following, except
a. One or more businesses become subsidiaries of an acquirer
b. One entity transfers its net assets to another entity
c. A group of former owners of one of the combining entities obtains control of the
combined entity
d. An entity acquires assets that are not a business.
8. It is a business combination in which all of the combining entities or businesses are ultimately
controlled by the same party or parties both before and after the combination and the control is
not transitory.
a. Business combination involving entities under common control
b. Business combination involving entities under diversified control
c. Full business combination
d. Business reorganization
9. What is the term for the business combination where all combining entities transfer their net
assets to a newly formed entity?
a. True merger
b. Legal merger
c. “Roll up” or ”put together” transaction
d. Spin off
10. This is defined as holders of equity interest of investor-owned entities, or members and
participants in mutual entities.
a. Shareholders
b. Investors
c. Owners
d. Participants
11. The application of the acquisition method of accounting for a business combination requires
all
of the following (choose the incorrect one)
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in acquiree.
d. Not recognizing goodwill or gain from bargain purchase
12. Which statement is incorrect concerning an acquirer?
a. In a business combination effected by transferring cash or other assets, the acquirer is
usually the entity that transfers the cash or other assets.
b. In a business combination effected by issuing equity interest, the acquirer is usually the
entity that issues the equity interest.
c. The acquirer is usually the combining entity whose relative size is significantly greater
than that of the combining entity or entities.
d. If a new entity is formed to issue equity interests to effect a business combination,
the new entity formed is necessarily the acquirer.
13. The following statements relate to an acquisition date of a business combination. Which
statement is incorrect?
a. The acquisition date is the date on which an acquirer obtains control over the acquiree.
b. The acquisition date is normally the “closing date”, meaning the date on which the
acquirer legally transfers the consideration, acquires the assets and assumes the liabilities
of the acquiree.
c. Where several dates are key to a business combination, the date on which control passes
is the acquisition date.
d. The acquisition date can never precede the closing date.
14. The following statements relate to recognition and measurement of a business combination.
Which statement is correct?
I. As of the acquisition date, the acquirer shall recognize, separately from goodwill,
the identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree.
II. The acquirer shall measure the identifiable assets acquired and the liabilities
assumed at their acquisition-date fair value.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
15. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a
recognized market. Under PFRS 3, which of the following measurement bases may be used in
measuring the non-controlling interest at the acquisition date?
I. Fair value of the non-controlling interest in the acquiree
II. A proportionate share of the acquiree’s identifiable net assets.
b. I only
c. II only
d. Both I and II
e. Neither I nor II
16. The consideration transferred in a business combination shall be measured at
a. Fair value
b. Carrying amount
c. Fair value determined by the acquirer
d. Transaction value
17. An acquirer holds 30% equity interest in an acquiree and subsequently purchases another
25%
equity interest in order to gain control. This transaction is known as
a. Business combination of entities under common control
b. Business combination achieved in stages
c. Business combination by installment
d. Step by step acquisition
18. In a business combination achieved in stages, the acquirer shall
a. Not remeasure the previously held equity interest.
b. Remeasure the previously held interest at fair value with any resulting gain or loss
included in profit or loss.
c. Remeasure the previously held interest at fair value with any resulting gain or loss
included in other comprehensive income.
d. Remeasure the previously held interest at fair value with any resulting gain or loss
included in retained earnings.
19. In a business combination, goodwill is measured as the excess of
a. The consideration transferred over the identifiable net assets acquired.
b. The total of the consideration transferred and the amount of any noncontrolling interest in
the acquiree over the identifiable net assets acquired.
c. The total of the consideration received and the fair value of the previously held interest in
the acquiree over the identifiable net assets acquired.
d. The total consideration received, the amount of any noncontrolling interest in the
acquiree and the fair value of previously held interest in the acquiree over the
identifiable net assets acquired.
20. In a business combination, any “gain on bargain purchase” shall
a. Be recognized in profit or loss.
b. Be recognized in other comprehensive income.
c. Be recognized in retained earnings.
d. Not be recognized.
21. The acquisition-related costs in a business combination to be expensed immediately include
all
of the following, except
a. Professional and consulting fees
b. Finder’s fees
c. Costs of maintaining an internal acquisition department
d. Costs of issuing debt securities
22. It is the equity in a subsidiary not attributable directly to a parent.
a. Controlling interest
b. Subsidiary interest
c. Non-controlling interest
d. Residual interest
23. The following statements relate to a contingent consideration in a business combination.
Which
statement is correct?
i. The acquirer shall recognize the acquisition-date fair value of any contingent
consideration as part of the consideration transferred in a business combination.
ii. The acquirer shall not recognize the acquisition-date fair value of any contingent
consideration as part of the consideration transferred in a business combination.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
24. The acquirer shall classify the obligation to pay the contingent consideration as
a. Financial liability only
b. Equity only
c. Either financial liability or equity in accordance with PAS 32
d. Neither financial liability nor equity
25. In the final settlement of the contingent consideration classified as equity, the amount
a. Shall not be remeasured but instead recognized as part of equity.
b. Shall be remeasured at fair value with any gain or loss included in profit or loss.
c. Shall be remeasured at fair value with any gain or loss included in retained earnings.
d. Shall be remeasured at fair value with any gain or loss included in other comprehensive
income.
26. In the final settlement of the contingent consideration classified as financial liability, the
amount
a. Shall not be remeasured.
b. Shall be remeasured at fair value with any gain or loss included in profit or loss.
c. Shall be remeasured at fair value with any gain or loss included in retained earnings.
d. Shall be remeasured at fair value with any gain or loss included in other comprehensive
income.
CONSOLIDATION- PAS 27 & PFRS 10
1. Consolidated financial statements are
i. The financial statements of a group presented as those of a single economic entity.
ii. Those presented by a parent, an investor in an associate, or a venture in jointly
controlled entity, in which the investments are accounted for on the basis of the
direct equity interest rather than on the basis of the reported results and net assets
of the investee.
b. I only
c. II only
d. Both I and II
e. Neither I nor II
2. A “group” for consolidation purposes is
a. A parent and all its subsidiaries.
b. An entity that has one or more subsidiaries.
c. An entity, including an unincorporated entity such as partnership that is controlled by
another entity.
d. An entity that obtains control other entities or businesses.
3. It is the entity that has one or more subsidiaries.
a. Investor
b. Parent
c. Associate
d. Affiliate
4. It is the equity in a subsidiary not attributable directly or indirectly to a parent.
a. Controlling interest
b. Subsidiary interest
c. Noncontrolling interest
d. Residual interest
5. 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.
6. A subsidiary shall be excluded from consolidation when
a. The investor is a venture capital organization, mutual fund, unit trust or similar entity.
b. The business activities of the subsidiary are dissimilar from those of the other entities
within the group.
c. The subsidiary is acquired with the intention to dispose of it within twelve months
from date of acquisition.
d. The subsidiary is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the parent.
7. Which of the following subsidiaries should be deconsolidated?
a. A subsidiary that has been previously excluded from consolidation and is not disposed of
within the 12-month period.
b. A subsidiary with severe restriction on the repatriation of dividends to the parent.
c. Two subsidiaries located in one country that are individually immaterial but collectively
material.
d. None of the subsidiaries mentioned.
8. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
a. More than half of the equity of an entity.
b. More than half of the ordinary shares of an entity.
c. More than half of the preference and ordinary shares of an entity
d. More than half of the voting power of an entity.
9. Control exists even if the parent owns half or less of the voting power of an entity where there
is
(choose the incorrect one)
a. Power over more than half of the voting rights by virtue of an agreement with other
investors.
b. Power to govern the financial and operating policies of the entity under a statute or an
agreement.
c. Power to appoint or remove the key officers an employees of the entity.
d. Power to cast the majority of votes at meetings of the board of directors or equivalent
governing body.
10. Non-controlling interest shall be presented in the consolidated statement of financial position
a. Separately from liabilities and the parent shareholders’ equity.
b. Within equity, separately from the parent shareholders’ equity.
c. As noncurrent liability
d. As component of the parent shareholders’ equity
11. When a parent loses control of a subsidiary, the investment in subsidiary retained by the
investor
a. Shall continue to be accounted for a investment in subsidiary
b. Shall be accounted for an investment property
c. Shall be accounted for in accordance with PAS 39 on the measurement of financial
asset
d. Shall be accounted for as nonmarketable equity security.
12. What is the initial measurement of an investment in subsidiary retained by the investor when
control is lost?
a. Fair value at the date when control is lost
b. Fair value at the beginning of the reporting period
c. Carrying amount at the date when control is lost
d. Carrying amount at the beginning of the reporting period
13. When separate financial statements are prepared, investments in subsidiaries shall be
accounted
for at
a. Cost
b. In accordance with PAS 39 on measurement of financial asset
c. Either at cost or in accordance with PAS 39 on measurement of financial asset
d. Neither at cost nor in accordance with PAS 39 on measurement of financial asset
14. The following statements relate to consolidated financial statements. Which statement is
incorrect?
a. A parent shall present consolidated financial statements in which it consolidates its
investments in subsidiaries.
b. Consolidated financial statements shall include all subsidiaries of the parent.
c. A subsidiary is excluded from consolidation if the investor is a venture capital
organization, mutual fund, unit trust or similar entity.
d. A subsidiary is not excluded from consolidation even if its business activities are
dissimilar from those of the other entities within the group.
15. A parent is not required to present consolidated financial statements under all of the
following
conditions, except
a. When the parent is itself a wholly-owned subsidiary, or is partially-owned subsidiary and
its owners do not object to the parent not presenting consolidated financial statements.
b. When the parent’s debt and equity instruments are not traded in public market.
c. When the parent has filed or it is in the process of filing its financial statements with
SEC for the purpose of issuing any class of instruments in a public market.
d. When the ultimate or any intermediate parent of the parent produces consolidated
financial statements for public use that comply with PFRS.
16. A parent loses control of a subsidiary (choose the incorrect one)
a. When there is change in absolute or relative ownership level.
b. When a subsidiary becomes subject to the control of a government, court, administrator
or regulator.
c. When the loss of control is the result of a contractual agreement.
d. When the subsidiary is operating under severe long-term restrictions that impair its
ability to transfer funds to the parent.
17. If a parent loses control of a subsidiary (choose the incorrect one)
a. The parent shall derecognize the assets and liabilities of the subsidiary at their carrying
amounts.
b. The parent shall not derecognize the carrying amount of any noncontrolling interest
in the former subsidiary.
c. Any gain or loss arising from the recognition shall be included in profit or loss.
d. Any amounts that have been recognized in other comprehensive income in relation to the
subsidiary shall be reclassified to profit or loss or retained earnings in accordance with
relevant accounting standard.
18. Where there is a change in a parent’s ownership interest in a subsidiary that does not result in
a
loss of control (choose the incorrect one)
a. The change shall be accounted for as an equity transaction.
b. The carrying amounts of the controlling and noncontrolling interests shall be adjusted to
reflect the change in the level of ownership.
c. Any difference between the consideration received and the amount of adjustment of the
noncontrolling interest shall be recognized directly in equity.
d. Any difference between the consideration received and the amount of adjustment of
the noncontrolling interests shall be recognized in other comprehensive income.
19. Which is incorrect concerning the preparation of consolidated financial statements?
a. The financial statements of the parent ant its subsidiaries shall be consolidated on a line
by line basis by adding together like items of assets, liabilities, equity, income and
expenses.
b. Intragroup balances, transactions, income and expenses shall be eliminated in full.
c. When the reporting dates of the parent and a subsidiary are different, the difference
shall be no more than six months.
d. Consolidated financial statements shall be prepared using uniform accounting policies for
like transactions and other events in similar circumstances.
20. Which is incorrect concerning the cost method of accounting?
a. The investment is recognized at cost.
b. The investor recognizes income from the investment only to the extent that the investor
receives distributions from accumulated profits of the investee arising after the date of
acquisition.
c. Distributions received in excess of profits after acquisition are regarded as a recovery of
investment and are recognized as a reduction of the cost of the investment.
d. The investment is initially recorded at cost and any changes in value of the
investment at each reporting date are recognized in profit or loss.
FOREIGN CURRENCY- PAS 21
1. It is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which
are based or conducted in a country or currency other than that of the reporting entity.
a. Foreign entity
b. Foreign operation
c. Domestic operation
d. Branch operation
2. Exchange rate is
a. The ratio of exchange for two currencies
b. The spot exchange rate at the end of reporting period
c. The exchange rate for immediate delivery
d. The difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.
3. Which statement is incorrect?
a. Functional currency is the currency of the primary economic environment in which the
entity operates.
b. Foreign currency is a currency other than the functional currency of the entity.
c. Presentation currency is the currency in which the financial statements are presented.
d. Net investment in a foreign operation is the amount of the reporting entity’s interest
in the total assets of that operation.
4. 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. The dollar or the euro
d. Difficult to determine
5. 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 the current year, 80% of the business was conducted in country B using
the euro. At the end of prior year, 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 the current year
c. Change to the euro at the end of the current year
d. Change to the euro at the end of the current year if it is considered that the
underlying transactions, events and conditions of business have changed.
6. Initially, a foreign currency transaction shall be recorded by applying to the foreign currency
amount
a. The spot exchange rate at the date of transaction.
b. The closing rate at the end of reporting period
c. The average exchange rate during the year
d. The spot exchange rate at the date of the settlement of the transaction.
7. Foreign currency monetary items are subsequently translated at
a. Closing rate
b. Historical rate
c. Forward rate
d. Spot exchange rate
8. Exchange differences arising from foreign currency transactions shall
a. Be recognized in profit or loss of the period in which they arise
b. Be included in other comprehensive income
c. Be deferred and amortized over a reasonable period
d. Be charged to retained earnings
9. In translating the financial statements of a foreign operation for inclusion in the reporting
entity’s
financial statements, assets and liabilities are translated at
a. Closing rate
b. Historical rate
c. Weighted average rat
d. Forward rate
10. Income and expense items of a foreign operation shall be translated at
a. Exchange rate on the date of transaction (for practical purposes at average rate)
b. Spot exchange rate
c. Closing rate
d. Forward rate
11. If the foreign operation reports in the currency of a hyperinflationary economy, assets,
liabilities,
income and expenses shall be translated at
a. Exchange rate on the date of transaction
b. Closing rate
c. Forward rate
d. Average rate
12. Exchange differences arising from the translation of financial statements of a foreign
operation
shall be accounted for as
a. Translation gain or loss component of other comprehensive income
b. Translation gain or loss component of profit or loss
c. Transaction gain or loss component of other comprehensive income
d. Transaction gain or loss component of other comprehensive income
13. It is the currency of the primary economic environment in which the entity operates.
a. Reporting currency
b. Functional currency
c. Presentation currency
d. Foreign currency
14. These are money held and financial assets to be received and financial liabilities to be paid in
fixed or determinable amount of money.
a. Foreign currency loans
b. Long term items
c. Monetary items
d. Nonmonetary items
15. A foreign currency transaction is a transaction which is denominated or requires settlement in
a
foreign currency and includes
I. Purchase and sale of goods and services whose price is denominated in a foreign
currency.
II. Borrowing and lending of funds when the amounts payable or receivable are
denominated in a foreign currency.
a. I only.
b. II only.
c. Both I and II
d. Neither I nor II
16. Nonmonetary items that are measured in terms of the historical cost denominated in a foreign
currency shall be reported using the
a. Exchange rate at the date of transaction
b. Closing rate
c. Average rate
d. Spot exchange rate
17. Exchange differences arising on a monetary item that forms part of a reporting entity’s net
investment in a foreign operation shall be recognized
I. In profit or loss in the separate financial statements of the reporting entity or the
individual statements of the foreign operation.
II. In other comprehensive income in the consolidated financial statements of the reporting
entity and the foreign operation and recognized in profit or loss on disposal of the net
investment.
a. I only.
b. II only.
c. Both I and II
d. Neither I nor II
ACQUISITION OF NET ASSETS AND ACQUISITION OF STOCKS
PROBLEM 1.
STAR Corporation is a company involved in manufacturing cars. On January 1, 2013, the board
of directors of the said company has decided to acquire the net assets of NOVA Corporation and
RISE Corporation, suppliers of materials they use in production. The merger is expected to result
in producing higher quality cars with lower total cost.
The deal was closed on February 29, 2013 and the following information was gathered from the
books of the entities:
STAR
NOVA
RISE
Current Assets
P1,375,000
P390,000
P260,000
Noncurrent Assets
3,125,000
2,550,000
1,700,000
Total Assets
P4,500,000
P2,940,000
P1,960,000
Liabilities
Common stock, P100 par
Additional Paid-in capital
Retained earnings
Total equity & liability
P325,000
2,748,500
176,500
1,250,000
P4,500,000
P210,000
1,780,200
169,800
780,000
P2,940,000
P140,000
1,186,800
113,200
520,000
P1,960,000
Star will issue 22,500 of its common stock in exchange for the net assets of Nova and 11,200 of
its common stock in exchange for the net assets of Rise. The fair value of Star’s shares is P150.
In addition, the following adjustments should be made:
 Current assets of Nova and Rise have a fair value of P450,000 and P230,000 respectively.
 Noncurrent assets have a fair value of P2,150,000 and P1,975,000 for Nova and Rise,
respectively.
Compute for the following balances of Star Company on the date of acquisition:
Stockholders’ equity
A. P6,118,500
B. P7,980,000
C. P3,496,500
D. P9,615,000
Assets
A. P10,290,000
B. P9,240,000
C. P10,500,000
D. P9,840,000
PROBLEM 2.
Denim Co. merged into Kraft Corp. on July 1, 2013. In exchange for the net assets at fair market
value of Denim Co. amounting to P696,450, Kraft issued 68,000 common shares at P9 par value
with a market price of P12 per share.
Out of pocket costs of the combination were as follows:
Legal fees for the contract of business combination
P35,600
Audit fee for SEC registration of stock issue
90,000
Printing costs of stock certificates
14,500
Broker’s fee
Accountant’s fee for pre-acquisition audit
Other direct cost of acquisition
General and allocated expenses
Listing fees in issuing new shares
23,600
80,000
75,000
43,000
36,000
Denim will pay an additional cash consideration of P455,000 in the event that Kraft’s net income
will be equal or greater than P950,000 for the period ended December 31, 2013. At acquisition
date, there is a high probability of reaching the target net income and the fair value of the
additional consideration was determined to be P195,000.
Actual net income for the period ended December 31, 2013 amounted to P1,250,000. The
additional cash consideration was paid.
What is the amount of goodwill to be recognized in the statement of financial position as of
December 31, 2013?
A. P295,450
B. P308,500
C. P314,550
D. P326,550
What is the amount of expense to be recognized in the statement of comprehensive income for
the year ended December 31, 2013?
A. P257,200
B. P517,200
C. P307,400
D. P412,500
PROBLEM 3.
On October 1, 2013, Winner Corporation acquired all the assets and assumed all the liabilities of
Getter Company by issuing 20,000 shares with a fair value of P67.5 per share and an obligation
to pay a contingent consideration with a fair value of P750,000.
In addition, Winner paid the following acquisition related costs:
Legal fees
P 105,600
Audit fee for SEC registration of stock issue
320,400
Costs of stock certificates
35,000
Broker’s fee
49,000
Other direct cost of acquisition
50,000
General and allocated expenses
14,000
The Statement of Financial Position as of September 30, 2013 of Winner and Getter, together
with the fair market value of the assets and liabilities are presented below:
Winner
Getter
Book value
Fair value
Book value Fair value
Cash
P640,000
P640,000
P45,000
P45,000
Accounts Receivable
360,000
335,000
70,000
54,000
Inventories
475,000
390,000
87,000
78,000
Prepaid expenses
25,000
13,500
5,000
Land
Building
Equipment
Goodwill
Total Assets
2,000,000
800,000
700,000
5,000,000
2,900,000
900,000
585,000
5,750,000
900,000
723,000
361,500
300,000
2,500,000
1,550,000
768,000
360,000
2,860,000
Accounts Payable
Notes payable
Capital stock, P50 par
Additional paid in capital
Retained earnings
Total Liability & Equity
312,500
937,500
2,000,000
1,000,000
750,000
5,000,000
312,500
980,000
200,000
700,000
850,000
400,000
350,000
2,500,000
200,000
765,000
Compute for the balances that will be shown on the October 1, 2013 statement of financial
position of the surviving company:
Retained earnings
A. P480,000
B. P540,000
C. P526,000
D. P475,000
Total Assets
A. P7,015,000
B. P6,980,000
C. P7,118,000
D. P7,491,000
PROBLEM 4.
The Statement of Financial Position of Luster Corporation on June 30, 2013 is presented below:
Current assets
P32,500
Land
220,000
Building
110,000
Equipment
87,500
Total Assets
P450,000
Liabilities
Capital stock, P5 par
Additional paid in capital
Retained earnings
Total equities
87,500
150,000
137,500
75,000
P450,000
All the assets and liabilities of Luster assumed to approximate their fair values except for land
and building. It is estimated that the land have a fair value of P350,000 and the fair value of the
building increased by P80,000.
Kernel Corporation acquired 80% of Luster’s capital stock for P500,000.
Assuming the consideration paid includes control premium of P142,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
A. P60,000
B. P48,000
C. P42,000
D. P50,000
Assuming the consideration paid excludes control premium of P23,000, and the fair value of the
noncontrolling interest is P122,750, how much is the goodwill/(gain on acquisition) on the
consolidated financial statement?
A. P78,250
B. P73,250
C. P69,500
D. P74,750
Assuming the consideration paid includes control premium of P37,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
A. P43,250
B. P73,250
C. P56,750
D. P68,350
PROBLEM 5.
Better Company has gained control over the operations of Calm Corporation by acquiring 85%
of its outstanding capital stock for P2,580,000. This amount includes a control premium of
P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000
respectively.
Better
Calm
Book Value
Book Value
Fair Value
Cash
P3,541,500
P128,000
Accounts receivable
300,000
325,000
Inventories
550,000
360,000
Prepaid expenses
148,500
125,000
Land
2,350,000
879,000
Building
1,560,000
558,000
Equipment
300,000
185,000
Goodwill
0
300,000
Total Assets
P8,750,000
P2,860,000
Accounts Payable
Notes payable
Capital stock, 50 par
Additional paid in capital
Retained earnings
Total equities
675,000
1,400,000
3,400,000
1,575,000
1,700,000
P8,750,000
253,000
730,000
800,000
600,000
477,000
P2,860,000
The following was ascertained on the date of acquisition for Calm Corporation:
 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land and building has
increased by P471,000 and P107,000 respectively.
 There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes
is P738,000.
Compute for the following balances to be presented in the consolidated statement of financial
position at the date of business combination:
Total Assets
A. P9,875,000
B. P10,093,000
C. P10,112,000
D. P9,215,000
Total Shareholders’ Equity
A. P7,000,000
B. P7,500,000
C. P8,200,000
D. P8,000,000
PROBLEM 6.
On January 2, 2013, the Statement of Financial Position of Pepper and Steak Company prior to
the combination are:
Pepper Co.
Steak Co.
Cash
P450,000
P 15,000
Inventories
300,000
30,000
PPE, net
750,000
105,000
Total Assets
P1,500,000
P150,000
Current Liabilities
Common stock, P100 par
Additional Paid in capital
Retained earnings
Total Liabilities and Stockholders’ equity
P 90,000
150,000
450,000
810,000
P1,500,000
P 15,000
15,000
30,000
90,000
P150,000
The fair value of Steak Company’s equipment is P153,000.
Assume the following independent cases:
1. Assuming Pepper Company acquired 70% of the outstanding common stock of Steak
Company for P105,000 and Non-controlling interest is measured at fair value of P61,000,
how much is the goodwill (gain on acquisition)?
A. P(17,000)
B. P17,000
C. P23,100
D. P(23,100)
2. Assuming Pepper Company acquired 80% of the outstanding common stock of Steak
Company for P136,800 and non-controlling interest is measured at non-controlling interest’s
proportionate share of Steak Company’s identifiable net assets, how much is the consolidated
stockholders’ equity on the date of acquisition?
A. P1,410,000
B. P1,419,600
C. P1,446,600
D. P1,456,200
3. Assuming Pepper Company acquired 90% of the outstanding common stock of Steak
Company for P243,000 and Non-controlling interest is measured at fair value, how much is
the total consolidated assets on the date of acquisition?
A. P1,542,000
B. P1,785,000
C. P1,737,000
D. P1,494,000
PROBLEM 7.
Acquirer Company acquires 25% of Acquired Company’s common stock for P190,000 cash and
carries the investment using the cost method. After three months, Parent purchases another 60%
of Subsidiary’s common stock for P540,000. On this date, acquired company reports identifiable
net assets with carrying value of P720,000 and fair value of P920,000. The liabilities of the
acquired company has a book value and a fair value of P280,000. The fair value of the 15% noncontrolling interest is P125,000.
How much is the goodwill or (gain on acquisition)?
A. P(17,000)
B. P250,000
C. P(30,000)
D. P263,000
PROBLEM 8.
Condensed statements of financial position of Care Corp. and Charm Corp. as of December 31,
2012 are as follows:
Care
Charm
Current Assets
P 43,750
P 16,250
Noncurrent assets
181,250
106,250
Total assets
P225,000
P122,500
Liabilities
Common stocks, P20 par
Additional paid in capital
Retained earnings
P 16,250
137,500
8,750
62,500
P8,750
75,000
6,250
32,500
On January 1, 2013, Care Corp. issued 8,750 stocks with a market value of P25/share for the
assets and liabilities of Charm Corp. The book value reflects the fair value of the assets and
liabilities, except that the noncurrent assets of Charm has a temporary appraisal of P157,500 and
the noncurrent assets of Care are overstated by P7,500. Contingent consideration, which is
determinable, is equal to P3,750. Care also paid for the stock issuance costs worth P8,500 and
other acquisition costs amounting to P4,750.
On March 1, 2013, the contingent consideration has a determinable amount of P5,000. On June
1, 2013, the provisional fair value of the noncurrent assets of Charm increased by P2,250.
How much is the combined total assets at the end of 2013?
A. P435,500
B. P443,000
C. P442,000
D. P444,250
*** END ***
BUSINESS COMBINATION – SUBSEQUENT TO ACQUISITION & INTERCOMPANY
TRANSACTIONS
#0013
PROBLEM 1.
On January 2, 2013, Phillips Corporation purchase 80% of Signage Company’s outstanding
shares for P648,000. P30,000 of the excess is attributable to goodwill and the balance to an
equipment with an economic life of ten years. Non-controlling interest is measured at its fair
value on date of acquisition. On the date of acquisition, stockholders’ equity of the two
companies were as follows:
Phillips Corporation Signage Company
Ordinary shares
P1,050,000
P 240,000
Retained earnings
1,560,000
420,000
On December 31, 2013, Signage Company reported net income of P105,000 and paid dividends
of P36,000 to Philips. Philips reported from its separate operations of P285,000 and paid
dividends of P138,000. Goodwill had been impaired and should be reported at P6,000 on
December 31, 2013.
1. What is the non-controlling interest in profit of Signage Company on December 31, 2013?
A. P21,000
B. P13,800
C. P18,750
D. P18,600
2. What is the consolidated profit attributable to parent shareholders on December 31, 2013?
A. P340,200
B. P360,000
C. P336,000
D. P356,400
3. What is the consolidated retained earnings attributable to parent’s shareholders equity on
December 31, 2013?
A. P1,757,400
B. P2,079,750
C. P1,762,200
D. P1,758,000
4. What amount of non-controlling interest is to be presented in the consolidated statement of
financial position on December 31, 2013?
A. P164,250
B. P145,500
C. P166,800
D. P154,500
PROBLEM 2.
On January 2, 2012, D Corporation purchased 80% of the outstanding shares of C Company for
P4,750,000. At that date, C had P4,000,000 of ordinary shares outstanding and retained earnings
of P1,600,000.
 C’s equipment with a remaining life of 5 years had a book value of P2,250,000 and a fair
value of P2,630,000. C’s remaining assets had book values equal to their fair values.
 All intangibles except goodwill are expected to have remaining lives of 8 years.
 The income and dividend figures for both D and C are as follows: Net income of D in 2012 is
P900,000; 2013 is P1,100,000. Net income of C in 2012 is P340,000; 2013 is P510,000.
 Dividends of D in 2012 is P220,000; 2013 is P390,000. Dividends of C in 2012 is P70,000;
2013 is P130,000.
 D’s retained earnings balance at the date of acquisition was P3,450,000.
1. How much is the consolidated retained earnings attributable to controlling interest in 2013?
A. P5,272,400
B. P5,333,200
C. P5,238,400
D. P5,232,400
2. Share of D Corporation in the adjusted and undistributed earnings of C Company in 2012
A. P211,200
B. P155,200
C. P216,000
D. P182,400
3. How much is the consolidated profit in 2013?
A. P1,343,200
B. P1,438,000
C. P1,430,000
D. P1,464,000
4. How much is the non-controlling interest in net assets in 2013?
A. P1,295,600
B. P1,250,000
C. P1,302,400
D. P1,289,500
PROBLEM 3.
Positive Corporation acquired 80% of the outstanding common stock of Synergy Company on
June 1, 2013 for P586,250.
Synergy Company’s stockholder’s equity components at the end of this year are as follows:
Ordinary shares, P100 par, P250,000, APIC P112,500, Retained Earnings P222,500.
 Non-controlling interest is measured at fair value.
 All the assets of Synergy were fairly valued, except for inventories, which are overstated by
P11,000, and equipment, which was understated by P15,000. Remaining useful life of
equipment is 4 years.
 Both companies use the straight-line method for depreciation and amortization. Stockholder’s
equity of Positive on January 1, 2013 is composed of Ordinary shares P750,000, Share
premium P175,000, Retained Earnings P525,000.
 Fair value of non-controlling interest on the date of acquisition is P117,500.
 Goodwill, if any, should be written down by P14,225 at year-end.
 Net income for the first year of parent and subsidiary are P75,000 and P42,500 (from date of
acquisition) respectively.
 Dividends declared at the end of the year amounted to P20,000 and P15,000. During the year,
there was no issuance of new ordinary shares.
1. What is the balance of the non-controlling interest in net assets of subsidiary on December
31, 2013?
A. P145,167.50
B. P127,242.50
C. P124,242.50
D. P121,917.50
2. What is the amount of consolidated shareholder’s equity?
A. P1,520,345
B. P1,642,262.50
C. P1,462,262.50
D. P1,644,587.50

PROBLEM 4.
Pure Corporation acquired an 80% interest in Sincere Company on January 2, 2012 for
P2,520,000. On this date, the share capital and retained earnings of the two companies follow:
Pure Corp.
Sincere Co.
Share Capital
P6,000,000
P2,250,000
Retained earnings
3,000,000
450,000
On January 2, 2012, the assets and liabilities of Sincere Co. were stated at their fair values except
for machinery which is undervalued by P225,000 (remaining life is 3 years). On September 30,
2012, Sincere sold merchandise to Pure at an inter-company profit of P150,000; 25% was still
unsold at year-end. Likewise, on October 1, 2013, Sincere purchased merchandise from Pure for
P3,600,000. The selling affiliate included a 20% mark-up on cost on this sale. Only 75% of these
purchases had been sold to unrelated parties as of December 31, 2013. As of December 31, 2013,
goodwill was determined to be impaired by P60,000.
The following is the summary of the 2013 transactions of the affiliated companies:
Pure Corp.
Sincere Co.
Net Income
P1,500,000
P600,000
Dividends declared and paid
600,000
180,000
On the 2013 consolidated financial statements, how much would be the:
1. Net income attributable to Parent
A. P1,638,000
B. P1,708,500
C. P1,608,000
D. P1,686,000
2. Non-controlling interest in net income
A. P70,500
B. P100,500
C. P82,500
D. P85,500
PROBLEM 5.
On January 2, 2012, Power Company acquired 90% of the outstanding shares of Solar Inc. at
book value. During 2012 and 2013, intercompany sales amounted to P2,000,000 and P4,000,000,
respectively. Power Company consistently recognized a 25% mark-up based on cost while Solar
Inc. had a 25% gross profit on sales. The inventories of the buying affiliate, which all came from
inter-company transactions show:
December 31, 2012
December 31, 2013
Power
P240,000
P160,000
Solar
100,000
40,000
On October 1, 2012, Solar Inc. purchased a piece of land costing P1,000,000 from Power
Company for P1,500,000. On December 1, 2013, Solar Inc. sold this land to unrelated party for
P1,500,000. On the other hand, on July 1, 2013, Solar Inc. sold a used photo-copier with a
carrying value of P60,000 and remaining life of 3 years to Power Company for P42,000.
Separate Statement of Comprehensive income for the two companies for the year 2013 follow:
Power Company
Solar Inc.
Sales
P25,000,000
P14,000,000
Cost of sales
(15,000,000)
(8,400,000)
Gross Profit
P10,000,000
P5,600,00
Operating expenses
(6,000,000)
(3,800,000)
Operating Profit
P4,000,000
P1,800,000
Loss on Sale of Office Equipment
(18,000)
Dividend Revenue
40,000
Net Income
P4,000,000
P1,822,000
Compute the following amount s for/as December 31, 2013
1. Consolidated Gross Profit
A. P19,632,000
B. P15,712,000
C. P15,632,000
D. P15,584,000
2. Consolidated Net Income attributable to Parent
A. P6,183,300
B. P6,369,000
C. P6,169,800
D. P6,191,300
3. Non-controlling interest in Net income
A. P189,700
B. P185,700
C. P188,200
D. P184,200
4. Consolidated Operating expense
A. P9,800,000
B. P9,788,000
C. P9,803,000
D. P9,789,500
PROBLEM 6.
On January 1, 2012, P Corporation purchased 80% of S Company’s outstanding stock for
P620,000. At that date, all of S Company’s assets and liabilities had market values approximately
equal to their book values and no goodwill was included in the purchase price. The following
information was available for 2012: Income from own operations of P Corporation, P150,000;
Operating loss of S Company, P20,000. Dividends paid in 2012 by P Corporation, P75,000; by S
Company to P Corporation, P12,000.
On July 1, 2012, there was a downstream sale of equipment at a gain of P25,000. The equipment
is expected to have a remaining useful life of 10 years from the date of sale. Also, on January 1,
2012, there was an upstream sale of furniture at a loss of P7,500. The furniture is expected to
have a useful life of five years from the date of sale. Non-controlling interest is measured at fair
market value.
1. How much is the consolidated net income attributable to parent shareholders’ equity?
A. P97,250
B. P115,050
C. P112,250
D. P103,050
PROBLEM 7.
On July 1, 2013, Issue Company purchased 80% of the outstanding shares of Intrigue Company
at a cost of P1,600,000. On that date, Intrigue had P1,000,000 of capital stock and P1,400,000 of
retained earnings. For 2013, Issue had income of P560,000 from its separate operations and paid
dividends of P300,000. For 2013, Intrigue reported income of P130,000 and paid dividends of
P60,000. All the assets and liabilities of Intrigue have book values equal to their respective fair
market values. Assume income was earned evenly throughout the year except for the
intercompany transaction on October 1. On October 1, 2013, Issue purchased an equipment from
Intrigue for P200,000. The book value of the equipment on that date was P240,000. The loss of
P40,000 is reflected in the income of Intrigue indicated above. The equipment is expected to
have a useful life of 5 years from the date of sale.
1. In the December 31, 2013 consolidated statement of financial position, how much is the
consolidated net income attributable to the parent company?
A.
B.
C.
D.
P642,400
P930,400
P946,400
P962,400
*** END ***
NEW GOVERNMENT ACCOUNTING SYSTEM & NON-PROFIT ORGANIZATION
#0005
New Government Accounting System
 Budgeted accounts of appropriations and allotments are entered in the registry maintained by
DBM (Department of Budget and Management). Allotments and obligations are entered in
the registry maintained by the agency.
 The notice of cash allocation (NCA) received by the agency from the DBM is journalized in
the regular agency books (RA books). The other set of books of an agency is the national
government books (NG books) for income items they are not authorized to use.
 The obligations incurred by the agency are not journalized, but posted to the appropriate
registry, as follows:
For Capital Outlay
-RAOCO
Personal Services
-RAOPS
Maintenance & Others
-RAOMO
Financial Expenses
-RAOFE
 Generally, withheld taxes by the agency are no longer remitted to BIR, but retained and
credited to Subsidiary Income from National Government (SING) under the Tax Remittance
Advice (TRA) System. The NCA released to the agency is reduced by the amount of
estimated withholding taxes pertinent to the allotment covered by the cash allocation.
 Asset/perpetual inventory method will be followed in the recording of expenditures if it
applies to more than one period or when payment is for materials for stock. The expense is
taken up when the items are consumed.
 Costs of assets being constructed are debited to construction in progress account (using
construction period theory). This CIP account is closed to the appropriate asset account upon
completion.
 Constructed Public Infrastructures are not shown among the fixed assets on the Statement of
Financial Position, rather they are deducted from government equity (as part of closing
entries) and transferred out to an appropriate registry.
 Depreciation on fixed assets are taken up on the month following the month of purchase or
completion of construction. A 10% scrap value on the asset is always assumed and the
estimated life is prescribed by COA.
 Income for which the agency is authorized to use for its operation is recorded in the regular
agency books. If the authority is with limitations, such as any excess is to be remitted to the
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National Treasury the collections shall first be recorded in the regular agency books, the
expenses journalized, and the excess is to be remitted to the National Treasury and recorded
in the agency’s NG books.
Two trial balances are prepared:
a) Pre-closing trial balance which is also the adjusted trial balance from which the
statement of income and expense is prepared.
b) Post-closing trial balance from which the statement of financial position is prepared.
Adjusting entries at end of period are the same as those recorded in commercial accounting.
Closing entries are similar to commercial accounting with some minor differences.
Records of the BTR (Bureau of Treasury). Upon receipt of the copy of the NCA from the
DBM, the BTR shall enter it in the Registry of NCA and Replenishment (RENREP). It shall
also enter the transfer of cash from its bank account(s) to the appropriate MDS account.
The obligation is recognized and will be entered in the appropriate RAO when obligation is
incurred as evidenced by the approved Allotment and Obligation Slips (ALOBS)
Upon receipt of the NCA, the Accountant shall journalize it as “Cash in the Treasury for
Modified Disbursement System (MDS)” and “Subsidiary Income from National
Government” which in effect identifies the share, of the Agency in the income of the
National Government.
The accountant shall credit “Cash, National Treasury-MDS” each time a payment is made
charged against the NCA and debit the specific account being paid for, either asset or expense
account.
Note that there is a new expense classification, the financial expenses. They are categorized
separately from the MOOE since they are not operating expenses. It shall maintain separate
registry for leases from the Special Purpose Fund, the Registry for Special Purpose Funds
Appropriation (RESPFA).
The DBM shall maintain the Registry of Allotment and NCA (RANCA) for the allotments
and the NCA issued to the agency. The RANCA shall be the control and monitoring record of
the DBM. The DBM shall furnish the Bureau of Treasury a copy of the NCA.
Not for Profit Organization
FINANCIAL STATEMENTS REQUIRED FOR PRIVATE NOT FOR PROFIT
ORGANIZATIONS
1. Statement of Financial Position
2. Statement of Activities
3. Statement of Cash Flows
4. Specific for Voluntary Health and Welfare Organizations – Statement of Functional
Expenses
Statement of Financial Position – shows assets and liabilities similar to commercial
accounting. Net assets are classified into:
1. Unrestricted – no donor imposed restrictions
2. Temporarity restricted – with donor imposed stipulations (expiration of time and
fulfilment of use restrictions)
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3. Permanently restricted – with donor imposed restrictions that do not expire nor can be
removed by NPO activity.
Statement of Activities – show revenues, expenses, gains and losses as well as
reclassification among the different types of net assets. The change in net assets for each type
is required. Expenses are required (reported) only in unrestricted net assets.
Statement of Cash Flows – similar to the Cash Flows prepared in commercial accounting.
Specific funds used by not for profit organizations:
1. Unrestricted fund – include all the resources that are available for use by authority of
the Board of Directors (even though designated for specific purposes) and are not
restricted by donors.
2. Restricted fund – accounts for assets available for current use but are not derived
from the operations of the NPOs. These assets are transferred to unrestricted funds at
the time the designated expenditure is made.
3. Endowment fund
a. Permanent – principal is to be maintained indefinitely in revenue providing
investments
b. Term – principal may be expensed after passage of a period of time
c. Quasi-endowment – established by Board of Directors under its control
4. Agency fund – used to account for assets held by NPO as a custodian.
5. Others – like annuity funds, loss funds (for colleges) and plant funds.
Revenues and gains come from own principal and auxiliary activities or from donors.
Contributions – contributions of cash and other assets are recognized when received and
credited to contributions revenue (Restricted or Unrestricted). Contributed services and
facilities are recognized both as expense and contributions revenues, net of expenses.
Pledges – unconditional pledges are recognized as receivables and contributions revenue
(restricted or unrestricted). Appropriate provisions for doubtful pledges are also to be set up.
Expenses and losses – all expenses of the NPO are recognized in the unrestricted fund.
Expenses can be classified into:
a. Program – activities that result in the distribution of goods and services to beneficiaries.
b. Supporting – all other activities other than program, fund raising and membership
development.
GOVERNMENT ACCOUNTING
1. The Department of Health received an allotment from Department of Budget and
Management for capital outlay P2,300,000; Maintenance and other operating expenses,
P740,000; and Personal services P1,100,000. What will be the entry of the DOH in its regular
agency books upon receipts of allotment?
A. Cash – National Treasury, MDS
4,140,000
Subsidy Income from National Gov’t
4,140,000
B. National Clearing Account
4,140,000
Notice of Cash Allocation
4,140,000
C. Cash Collecting Officer
4,140,000
Cash in Bank – LCCA
4,140,000
D. Memo entry
2. The Department of Foreign Affairs issued purchase order for the acquisition of office
equipment costing P1,920,000. The equipment was received with the charge invoice and was
subsequently paid by check after withholding taxes of 10%. The DFA remitted the tax
withheld to Bureau of Internal Revenue thru an authorized government depository bank.
What is the entry of DFA to record the payment?
A. Accounts Payable
1,920,000
Cash – Disbursing Officer
1,728,000
Due to BIR
192,000
B. Office Equipment
1,920,000
Cash – Disbursing Officer
1,728,000
Due to BIR
192,000
C. Accounts Payable
1,920,000
Cash – Collecting Officer
1,728,000
Due to BIR
192,000
D. Accounts Payable
1,920,000
Due to BIR
192,000
Cash – National Treasury, MDS
1,728,000
3. On July 28, 2012, Department of Public Works and Highways transfers cash of P5,400,000 to
Department of Tourism for a People’s Park project. The project was completed by the
implementing agency/department on December 17, 2012. What is the entry of source
agency/department to record the completion of the project?
A. People’s Park Project
5,400,000
Cash – Check Disbursements-MDS
5,400,000
B. People’s Park Project
5,400,000
Cash – National Treasury-MDS
5,400,000
C. People’s Park Project
5,400,000
Due to National Gov’t-DOT
5,400,000
D. People’s Park Project
5,400,000
Due to National Gov’t-DOT
5,400,000
4. The Department of Education signed a construction contract with ABC Builders Corp. for the
construction of Building, P7,500,000. The agency paid 20% of the contract price. After 6
months, the Department of Education received its first billing from ABC Builders Corp., 90%
of the contract price. On the 7th month, the company paid the first billing less P1,500,000
withholding tax. What will be the entry of the department on its books upon receiving the
first billing?
A. Building
6,750,000
Accounts Payable
6,750,000
B. Accounts Payable
6,750,000
Cash National Treasury MDS
5,250,000
Due to BIR
1,500,000
C. Construction in progress
6,750,000
5.
6.
7.
8.
Accounts Payable
5,250,000
Advances from contractors
1,500,000
D. Construction in progress
6,750,000
Advances to contractors
1,500,000
Accounts Payable
5,250,000
What is the entry to record the collection of P3,250,000 corporate income tax by the Bureau
of Internal Revenue in its national government books?
A. Cash National Treasury MDS
3,250,000
Income tax – Corporation
3,250,000
B. Cash – Collecting Officer
3,250,000
Income tax – Corporation
3,250,000
C. Cash in Bank – LCCA
3,250,000
Income tax – Corporation
3,250,000
D. Income tax – Corporation
3,250,000
Cash – Disbursing officer
3,250,000
The Department of Labor and Employment received an allotment from the Department of
Budget and Management amounting to P25,000,000 which is accompanied by a notice of
cash allocation of 90% of the allotment. During the year, the agency incurred an obligation of
90% of the allocation but only 40% of these obligation were paid by the agency. The entry to
record the unused NCA is:
A. Subsidy Income from National Gov’t12,150,000
Cash – NT, MDS
12,150,000
B. Subsidy Income from National Gov’t14,400,000
Cash – NT, MDS
14,400,000
C. Cash – NT, MDS
12,150,000
Subsidy Income from NG
12,150,000
D. Cash – NT, MDS
14,400,000
Subsidy Income from NG
14,400,000
The Department of Justice provided travelling expenses to one of its officers, Mr. Ping for an
amount of P25,000. The travelling expenses was granted to Mr. Ping on February 1, 2013.
Subsequently, Mr. Ping liquidated its cash advance in the amount of P20,000. The excess
were returned to DOJ by Mr. Ping.
The entry to record the granting of cash advance to Mr. Ping was:
A. Due from Officers and employees 25,000
Cash – NT, MDS
25,000
B. Travelling expenses – Local
25,000
Cash – NT, MDS
25,000
C. Cash Disbursing Officer
25,000
Cash – NT, MDS
25,000
D. Cash Collecting Officer
25,000
Cash – NT, MDS
25,000
The Department of Social Welfare and Development’s obligation of rent for four years
amounted to 375,000. The entry to record this transaction would be:
A. Prepaid Rent
375,000
Cash – NT, MDS
375,000
B. Memorandum entry in RAOMO
C. Rent Expense
375,000
Cash – NT, MDS
375,000
D. Prepaid Rent
375,000
Cash Disbursing Officer
375,000
9. The Department of Trade and Industry was granted advances for payroll amounting to
P1,500,000. The entry would be:
A. Cash Disbursing Officer
1,500,000
Payroll
1,500,000
B. Cash – NT, MDS
1,500,000
Cash Disbursing Officer
1,500,000
C. Memorandum entry in RAOPS
D. Cash Disbursing Officer
1,500,000
Cash – NT, MDS
1,500,000
10. Agency ABC collected cash of P200,000 for services rendered. The collection was deposited
to PSBank. What is the entry to record the deposit?
A. Cash in Bank – LCCA
Cash – Disbursing Officer
B. Cash – NT, MDS
Cash – Collecting Officer
C. Cash in Bank – LCCA
200,000
200,000
200,000
200,000
200,000
Cash – Collecting Officer
200,000
D. Cash – NT, MDS
200,000
Cash – Disbursing Officer
200,000
11. The entry to record bank charges of P10,000
A. Bank Charges
10,000
Accounts Payable
10,000
B. Bank Charges
10,000
Cash – NT, MDS
10,000
C. Bank Charges
10,000
Cash in Bank – LCCA
10,000
D. Bank Charges
10,000
Cash Disbursing Officer
10,000
NON-PROFIT ORGANIZATION
1. QPS Hospital had the following cash receipts and disbursements for the year ended
December 31, 2013:
Collection from patients
P2,500,000
Contribution for an establishment of term endowment
500,000
Tuition from nursing school
1,000,000
Interest received from investment in permanent endowments
175,000
Dividends received from investment in term endowments
200,000
Payment of supporting expenses
750,000
Payment of program expenses
1,075,000
The interest received from permanent endowment is restricted by the donor for
acquisition of medical equipment.
How much is the net cash provided by operating activities?
A. P1,675,000
B. P1,875,000
C. P2,050,000
D. P2,175,000
2. NPC University, a private not-for-profit university, had the following cash inflows during the
year ended June 30, 2013:
 P4,000,000 from students for tuition.
 P2,250,000 from a donor who stipulated that the money be invested indefinitely.
 P1,400,000 from a donor who stipulated that the money be spent in accordance with the
wishes of NPC’s governing board.
On NPC University’s statement of cash flows for the year ended June 30, 2013, what amount
of these cash flows should be reported as financing activities?
A. P1,400,000
B. P3,650,000
C. P5,400,000
D. P2,250,000
3. NGO College, a private not-for-profit college received P4,800,000 from Dr. Wu on May 25,
2013. Dr. Wu stipulated that his contribution can be used to support faculty research and
book writing seminars during the fiscal year beginning on July 1, 2013. On July 15, 2013,
administrators of NGO College awarded seminar and training grants totalling P3,900,000 to
several faculty members in accordance with the wishes of the donor.
For the year ended June 30, 2013, NGO College should report the P4,800,000 contribution as
A. Temporarily restricted revenues on the statement of activities.
B. Unrestricted revenue on the statement of activities
C. Temporarily restricted deferred revenue on the statement of activities
D. An increase in fund balance on the statement of financial position
4. VPS College, a private not-for-profit college, received the following contributions during
2013:
 P3,125,000 from CHED for faculty academic advancements starting academic year 2014.
 P625,000 from a donor who stipulated that the contribution be invested in perpetuity and
that the earnings be used for renovation of the main library. As of December 31, 2013,
earnings from investment amounted to P31,250.
For the year ended December 31, 2013, what amount of these contributions should be
reported as temporarily restricted revenues on the statement of activities?
A. P31,250
B. P3,156,250
C. P3,125,000
D. P3,781,250
5. YKB hospital, a not-for-profit hospital affiliated with a religious group, reported the
following information for the year ended December 31, 2013:
Gross patient service rendered
P12,000,000
Bad debts expense
250,000
Contractual adjustments with third party payors
1,000,000
Charity care
750,000
Courtesy allowances to hospital employees
450,000
A. P11,250,000 B. P10,550,000
C. P9,800,000
D. P9,550,000
6. During 2013, ZTS hospital purchased medicines for hospital use totalling P1,000,000.
Included in the P1,000,000 was an invoice of P100,000 that was cancelled in 2013 by the
vendor because the vendor wished to donate this medicine to ZTS. The donation should be
recorded as
A. An increase of P100,000 to Patient Service Revenue
B. An increase of P100,000 to Other Non-Operating Revenue
C. An increase of P100,000 to Other Operating Revenue
D. A decrease of P100,000 to Other Non-Operating Revenue
7. Fund established at a public college by donors who have stipulated that the principal is
nonexpendable, but that the income generated may be expended by current operating funds,
would be accounted for in the
A. Annuity fund
B. Temporarily restricted fund
C. Pure-endowment fund
D. Current-fund restricted
8. Which of the following is most likely to be classified as other operating revenue?
A. Unrestricted gift
B. State research grant
C. Dividend income
D. Parking fee
9. The statement of financial position for JDS Library, a private non-profit organization, should
report separate amounts for the library’s net assets according to which of the following
classifications?
A. Unrestricted and permanently restricted
B. Temporarily restricted and permanently restricted
C. Unrestricted and temporarily restricted
D. Unrestricted, temporarily restricted, and permanently restricted
10. On the statement of activities for a private not-for-profit performing arts center, expenses
should be deducted from
I.
Unrestricted revenue
II.
Temporarily restricted revenues
III.
Permanently restricted revenues
A. I, II and III
B. Both I and II
C. I only
D. II only
11. OBT Museum, a private non-profit organization, has both regular and term endowments. On
the museum’s statement of financial position, how should the net assets of each type of
endowment be reported?
Term Endowments
A. Temporarily restricted
B. Permanently restricted
Regular Endowments
Permanently restricted
Permanently restricted
C. Unrestricted
Temporarily restricted
D. Temporarily restricted
Temporarily restricted
12. Revenue from room charges for telephone calls and television, proceeds from cafeterias, gift
shops and snack bars of not for profit hospitals are recorded as:
A. Patent service revenue – Unrestricted
B. Resident Service Revenue – Unrestricted
C. Other operating revenue – Unrestricted
D. Non – operating revenue – Unrestricted
13. During the year ended December 31, 2013 a not for profit performing arts entity received the
following donor-restricted contribution and investment income:
 Cash contribution of P1,350,000 to be permanently invested
 Cash dividends and interest of P75,000 to be used for the acquisition of theatre
equipment.
As a result of these cash receipts, the statement of cash flows for the year ended
December 31, 2013, would report an increase of:
A. P1,425,000 from operating activities
B. P1,425,000 from financing activities
C. P75,000 from operating activities and an increase of P1,350,000 from financing activities
D. P1,350,000 from operating activities and an increase of P75,000 from financing activities
*** END ***
PARTNERSHIP FORMATION, OPERATION, ADMISSION and RETIREMENT
#0010
PROBLEM 1.
AK and BK decided to form a partnership on October 1, 2014. Their Statement of Financial
Position on this date were:
AK
Bk
Cash
65,625.00
164,062.50
Accounts Receivable
1,487,500.00
896,875.00
Merchandise Inventory
875,000.00
885,937.50
Equipment
656,250.00
1,268,750.00
Total
3,084,375.00
3,215,625.00
Accounts Payable
AK, Capital
BK, Capital
Total
459,375.00
2,625,000.00
3,084,375.00
1,159,375.00
2,056,250.00
3,215,625.00
They agreed the following adjustments shall be made:
 Equipment of AK is underdepreciated by P87,500 and that BK is overdepreciated by
P131,250.
 Allowance for doubtful accounts is to be set up amounting to P297,500 for AK and P196,875
for BK.
 Inventories of P21,875 and P15,312.50 are worthless in the books of AK and BK
respectively.
 The partnership agreement provides for a profit and loss ratio of 70% to AK and 30% to BK.
Assuming the use of transfer of capital method, how much is the agreed capital of AK to bring
the capital balances proportionate to their profit and loss ratio.
A. P2,390,937.50
C. P2,218,125.00
B. P2,935,406.25
D. P1,024,687.50
PROBLEM 2.
On January 1, 2014, AB and QR agreed to form a partnership. The following are their assets and
liabilities:
Accounts
AB
QR
Cash
136,000
76,000
Accounts Receivable
88,000
48,000
Inventories
304,000
364,000
Machinery
480,000
440,000
Accounts Payable
216,000
144,000
Notes Payable
140,000
60,000
AB decided to pay off his notes payable from his personal assets. It was also agreed that QR
inventories were overstated by P24,000 and AB machinery was over depreciated by P20,000. QR
is to invest/withdraw cash in order to receive a capital credit that is 20% more than AB’s total net
investment in the partnership.
How much cash will be presented in the partnership’s statement of financial position?
A. P486,400
C. P450,400
B. P410,400
D. P274,400
PROBLEM 3.
On December 1, 2014, MV and CD agreed to invest equal amounts and share profits equally to
form a partnership. MV invested P3,120,000 cash and a piece of equipment. CD invested some
assets which are shown on the next page:
Book value
Accounts Receivable
400,000
Inventory
1,120,000
Machineries, net
2,240,000
Intangibles, net
920,000
The assets invested by CD are not properly valued, P32,000 of the accounts receivable are
proven uncollectible. Inventories are to be written down to P1,040,000. Included in the
machineries is an obsolete apparatus acquired for P384,000 with an accumulated depreciation
balance of P336,000. Part of the intangibles is a patent with a carrying value of P56,000 which
was sued upon by a competitor. CD unsuccessfully defended the case and the final decision of
the court was released on November 29, 2014.
What is the fair value of the equipment invested by MV?
A. P1,400,000
C. P1,344,000
B. P968,000
D. P1,560,000
PROBLEM 4.
On December 1, 2014, MG and AN are combining their separate businesses to form a
partnership. Cash and noncash assets are to be contributed. The noncash assets to be contributed
and the liabilities to be assumed are as follows:
MG
AN
Book value
Fair value
Book value
Fair value
Accounts Receivable
250,000
262,500
200,000
195,000
Inventory
400,000
450,000
200,000
207,500
PPE
1,000,000
912,500
862,500
822,500
Accounts Payable
150,000
150,000
112,500
112,500
MG and AN are to invest equal amount of cash such that the contribution of MG would be 10%
more than the investment of AN.
What is the amount of cash presented on the partnership’s statement of Financial Position on
December 1, 2014?
A. P2,762,500
C. P5,525,000
B. P2,512,500
D. P5,025,000
PROBLEM 5.
CC Partnership began operations on June 1, 2014. On that date, CY and CR have capital credits
of P175,000 and P240,000, respectively. The partnership has the following profit-sharing plan:
a.) 10% interest on partners’ capital balances at the end of the year
b.) P60,000 and P75,000 annual salaries for CY and CR, respectively.
c.) Remaining profit will be divided to CY and CR on a 3:2 ratio, respectively.
During the year, CY invested P150,000 worth of merchandise and withdrew P40,000 cash, while
CR invested P120,000 cash. The partnership earned a profit of P266,375 during the year.
How much is CY’s capital balance at the end of 2014?
A. P422,375
C. P426,625
B. P444,825
D. P413,625
PROBLEM 6.
AY and AN are partners who have the agreement to share profit and loss in the following
manner:
Annual salaries
Interest on average balances
Bonus (based on net income after salaries and interest)
Remainder
AY
261,000
5%
10%
50%
AN
259,000
10%
50%
During the year ended December 31, 2014, the partnership generated a profit of P575,000 before
any deductions. AY’s and AN’s average capital balances for the year are P600,000 and P300,000,
respectively. Income is distributed to the partners only as far as it is available.
How much is the total share of AN in the net income for the year ended 2014?
A. P286,500
C. P288,500
B. P287,500
D. P295,665
PROBLEM 7.
Hans, Lance, Arthur and Sidd own a publishing company that they operate as a partnership.
Their agreement includes the following:
 Hans will receive a salary of P20,000 and a bonus of 3% of income after all the bonuses.
 Lance will receive a salary of P10,000 and a bonus of 2% of income after all the bonuses.
 All the partners are to receive the following: Hans – P5,000; Lance – P4,500; Arthur –
P2,000; and Sidd – P4,700, representing 10% interest on their average capital balances.
 Any remaining profits are to be divided equally among the partners
 Partnership reports a profit of P40,000
How much is Lance’s share in the profit if profit is distributed in the following order of priority:
interest on invested capital, then bonuses, then salary and then according to profit and loss
percentage?
A. P12,560
C. P12,433
B. P13,235.75
D. P12,830.75
PROBLEM 8.
Partners PG, SX and TD have average capital balances of P96,000, P48,000 and P32,000,
respectively, during 2014. Each partner receives 10% interest on his capital balance. After
deducting salaries of P24,000 for PG and P16,000 for TD, the residual profit or loss is divided
equally. In 2014, the partnership sustained a P26,400 net loss before partners’ interests and
salaries.
By how much would TD’s capital account change?
a. P12,800 decrease
c. P8,800 decrease
b. P19,200 increase
d. P8,000 increase
PROBLEM 9.
Vida, Vina and Vita, sharing profits and losses 50%, 30% and 20%, have capital credit balances
of P400,000, P300,000 and P200,000 respectively. They decided to admit a new partner, Vera to
a 30% interest in the partnership upon Vera’s investment of an amount equal to five-sixths of her
capital credit with no asset adjustment recognized.
Immediately after the admission of Vera, the capital credit balance of Vina will be:
a. P300,000
c. P330,000
b. P318,000
d. P282,000
PROBLEM 10.
SG, AP and TS are partners with capital balances of P784,000, P2,730,000 and P1,190,000
respectively, sharing profits and losses in the ratio of 3:2:1. DJ is admitted as a new partner
bringing with him expertise and is to invest cash for a 25% interest in the partnership which
includes a credit of P735,000 for bonus upon his admission.
How much cash should DJ contribute?
A. P1,323,000
C. P2,100,000
B. P1,575,000
D. P588,000
PROBLEM 11.
PV, BK and TF were partners in Omaha Investments Corp. Their profit ratio is 5:3:2 while their
original capital interest ratio is 4:4:2. On July 1, 2014, JP was admitted by the partnership for
20% interest in capital and 25% in profits by contributing P87,500 cash, and the old partners
agree to bring their interest to their original capital and profit interest sharing ratio. JP is the
recipient of the transfer of capital of P280,000 from the existing partners. The partnership had net
income of P210,000 before admission of JP and the partners agree to revalue its overvalued
equipment by P35,000. Capital balance of BK increased by P10,500 as a result of the admission
of JP while the capital balance of TF at the start of the year is P700,000.
The capital balance of PV at the start of the year is:
a. P577,500
c. P354,200
b. P350,000
d. P441,000
PROBLEM 12.
PV, BK and TF were partners with capital balances on January 2, 2014 of P350,000, P525,000
and P700,000, respectively. Their profit ratio is 5:3:2 while their capital interest ratio is 4:4:2. On
July 1, 2014, JP was admitted by the partnership for 20% interest in capital and 25% in profits by
contributing P87,500 cash, and the old partners agree to bring their interest to their old capital
and profit interest sharing ratio. The partnership had net income of P210,000 before admission of
JP and the partners agree to revalue its overvalued equipment by P35,000.
The capital balance of PV after admission of JP is:
a. P297,500
c. P588,000
b. P354,200
d. P470,400
PROBLEM 13.
On December 30, 2014, the Statement of Financial Position of DG Co. has the following
balances: Total assets P2,250,000; VL loan P125,000; VL Capital P518,750; MD Capital
P481,250; and LV capital P1,125,000. The partners share profits and losses in the ratio of 25% to
VL, 25% to MD, and 50% to LV. It was agreed among the partners that VL retires from the
partnership and the partnership assets be adjusted to their fair value of P2,550,000 as of
December 31, 2014. The partnership also suffered net loss of P750,000. The partnership would
pay VL the amount of P542,500 cash for his total interest in the partnership.
What is the total capital of MD after retirement of VL?
a. P383,750
c. P365,000
b. P368,750
d. P380,000
PROBLEM 14.
TD decided to withdraw from his partnership with SM and MR. Before his withdrawal, TD’s
capital balance was P101,500, while SM’s was P112,000 and MR’s was P134,750. Also, the
partnership’s total assets amounted to P787,500, but the partners agreed that a fixed asset was
under depreciated by P26,250. TD, SM and MR share profits and losses in the ration of 2:4:4,
respectively. If TD was paid P93,100 upon his retirement, how much is the remaining partnership
net assets after TD’s withdrawal?
a. P228,900
c. P346,150
b. P319,900
d. P281,400
PROBLEM 15.
Ester, Judith and Martha were partners with capital balances on January 2, 2014 of P70,000,
P84,000 and P56,000, respectively. Their loss sharing ratio is 3:5:2. On July 1, 2014, Ester retires
from the partnership. On the date of retirement the partnership net profit from operations is
P48,000. The partners agreed further to pay Ester P76,560 in settlement of her interest.
How much will be the capital of Judith after retirement of Ester?
a. P103,200
c. P108,864
b. P114,743
d. P107,904
PROBLEM 16.
On January 1, 2014, L, M, and N formed a partnership with capital contributions of P625,000;
P750,000; and P937,500, respectively. The partners agreed that profit and loss would be
allocated as follows: P75,000 salary to each partner, 3% interest on initial capital contributions,
the remainder divided in the ratio 2:4:4, respectively to L, M, and N. The partnership generated
income amounting to P375,000 for the year 2014. During 2014, the following partnership errors
were discovered before the distribution of profit:
 In 2014, a purchase of piece of equipment costing P50,000 was expensed. The equipment has
an estimated life of ten years with equal service potential each year.
 On December 31, 2014, ending inventory was understated by P50,000.
On January 1, 2015, N decided to retire from the partnership.
If the balance of the capital of L after retirement amounts to P770,000, how much is the
settlement to N for his retirement?
a. P1,120,000
c. P1,085,000
b. P1,062,500
d. P1,110,875
If the balance of the capital of M after retirement amounts to P890,000, how much is the
settlement to N for his retirement?
a. P1,127,500
c. P1,231,500
b. P1,090,500
d. P1,152,500
*** END ***
FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
PROBLEM 1
X Trading purchases goods from Y, a company based on France for 1,200,000 Euros (€). The
exchange rate at this time is P1 = €12.5. X pays 22 days later when the prevailing exchange rate
is P1 = €16.
How much is the foreign currency gain/loss on the books of X and Y respectively?
A. P21,000 gain; P21,000 loss
B. P21,000 gain; 0
C. P4,200,000 loss; 0
D. P4,200,000 loss; P4,200,000 gain
(B)
For payment, the currency used
is Euros. X Trading is the
company that used foreign
exchange.
Whereas, Y company has been using euros
as its currency so no forex transaction in
its case. Y Company received the payment
in euros.
X
Tra
din
g
Date of
purchase
(1200000/12.
5)
Date of
payment
(1200000/16
)
Forex Gain /
(Loss)
Y
(Pe
so)
(Eur
os)
96,0
00.0
0
1,20
0,00
0.00
75,0
00.0
0
1,20
0,00
0.00
21,0
00.0
0
-
The exchange rate used
herein is indirect. To get
the direct exchange rate:
Date of
Please note
that the
exchange rate
is for problem
use only.
Real
exchange
rates are not
taken into
consideration.
purchase (see
formula)
0.08
Date of
payment
0.06
Decline in
rates (Gain
on the part of
a buyer)
0.02
x Price of
the product
purchased
1,20
0,00
0.00
Gail (Loss)
on forex
transaction
21,0
00.0
0
PROBLEM 2
Celica Motors sold a car for P180,000 pounds (£) to a customer in London on March 16, 2013
when the spot rate was P68.45 = £1. On April 20, 2013, Celica received thirty percent of the
selling price as partial payment. The spot rate at that time was P67.48 = £1. The balance was paid
on May 5 when the spot rate was P68.63 = £1.
How much was the foreign currency gain/loss on this transaction?
A. P29,700 loss
B. P29,700 gain
C. P142,200 loss
D. P142,200 gain
(A)
Direct exchange rate:
Spot rate
Celica Motors (seller)
180,000.00
68.45
12,321,000.
00
Down payment
54,000.00
67.48
3,643,920.0
0
Balance
Gain (Loss) on forex
transaction
126,000.00
68.63
8,647,380.0
0
(29,700.00)
It was a loss because at the time of purchase, the peso value was
12,321,000.
The peso value received by the seller for down payment and balance is
only 12,291,300.
Thus, there is a forex loss
of P29,700.
To a seller, any decline in currency value of a receivable is a loss,
because he would be receiving less.
To a buyer, any decline in currency value of a payable is a gain, because
he would be paying less.
Vice versa for an increase in currency
value.
PROBLEM 3
Levin intends to sell ¥400,400 under a forward contract dated December 1. At what amount must
Forward Contract Receivable and Forward Contract Payable be presented on December 31?
Dates
Forward Rates
Spot Rates
December 1
P 0.55
P 0.53
December 31
P 0.50
P 0.49
March 22
P 0.48
P 0.46
A.
B.
C.
D.
FC Receivable
P220,220
P200,200
P212,212
P200,200
FC Payable
P200,200
P220,220
P196,196
P200,200
(A)
Levin is a buyer of goods, and a seller of foreign currency under a forward contract. Hedging
is setting aside a fund to a bank or financial institution that is willing to absorb any gain or loss
resulting from a hedged transaction.
It is called a hedged transaction because, no matter what the spot rates are, the buyer
(or seller) who made a hedged contract, he would be paying (or receiving) the stated
amount in the hedge contract.
FC
Receivable
FC Payable
400400
x0.55
220,220.00
400400 x
0.50
200,200.00
As a buyer of goods (hedged transaction), he would be recording his payable using current
rates. So, on December 31, his payable is 400400 x 0.50. You use the forward rates because it
was done through a forward contract.
As a seller of forex (hedging instrument), he would be recording the value of
the forward contract at its value upon incepcion (December 1). So, it would
be 400,400 x 0.55.
PROBLEM 4
On January 1, 2013 Lucky Inc. paid P9,800 to acquire a put option. This is in relation to the sale
of merchandise worth $65,000. (Strike price = P4.965)
1/1/2013
3/31/2013
6/20/2013
Spot rate
P4.934
P4.908
P4.75
Fair value of option
P9,800
P11,400
P13,935
How much is the foreign currency gain/loss on the intrinsic portion on March 31, 2013?
A. P1,690
B. (P1,690)
C. P1,600
D. (P90)
(A) Correction on the problem: The FV of option on 6/20/2013 is
13,975.
1/1
3/31
6/20
Fair value of put option
9,800.00
11,400.00
13,975.00
- Intrinsic value
2,015.00
3,705.00
13,975.00
Time value
7,785.00
7,695.00
-
The intrinsic value may be computed as (Strike price minus spot rate) x foreign currency.
On March 31, the gain would be 3705 minus 2015 = 1690. (The intrinsic value increased, so
it's a gain.)
PROBLEM 5
On November 1, 2013, Word Inc. paid P45,000 to acquire call foreign exchange option for
Hk$90,000. The option is acquired to hedge the 2013 anticipated purchase of merchandise for
Hk$90,000. The option expires on March 30, 2014.
11/1/2013
12/31/2013
3/31/2014
Spot rate
P3.46
P3.40
P3.39
Fair value of option
P45,000
P50,500
P72,000
Strike price
P3.47
P3.47
P3.47
At what amount must the merchandise be presented as of December 31, 2013?
A. P3,114,000 B. P3,123,000
C. P3,060,000
D. P0
D
There's that phrase "anticipated purchase". The purchase hasn't happened yet although they
already acquired a hedging instrument.
Since the purchase hasn't occurred yet, no merchandise
would be recorded.
PROBLEM 6
On December 12, 2013, Winning Co. entered into a forward exchange contract to purchase
225,000 euros in 90 days. The relevant exchange rates are as follows:
Spot rate
Forward rate (for March 12,
2014
November 30, 2013
P0.57
P0.59
December 12, 2013
P0.58
P0.60
December 31, 2013
P0.62
P0.63
The purpose of this forward contract is to hedge a purchase of inventory in November 2013,
payable in March 2014.
At December 31, 2013, what amount of foreign currency transaction from this forward contract
should Winning include in profit or loss?
A. P9,000 loss B. P6,750 gain
C. 6,750 loss
D. P9,000 gain
PROBLEM 7
On October 1, 2013, R Corporation purchased goods from a U.S. based corporation worth
$93,750. Payment is due in 120 days on January 30, 2014. In view of the transaction, R
Corporation enters into a forward contract to buy $93,750 from Philippine National Bank (PNB)
in 120 days. The relevant exchange rates are as follows:
10/01/2013
12/31/2013
1/30/2014
Spot rate
P43
P47
P50
Forward rate
P44
P46
P50
Which of the following is correct?
A. Forward Contract Receivable on Dec. 31, 2013 is P4,125,000
B. Net foreign exchange loss on settlement date is P93,750
C. Foreign exchange gain on the derivative instrument on the transaction date is P187,500
D. Foreign exchange loss on the importing transaction on year-end is P375,000
PROBLEM 8
On October 31, 2013, Pointers Philippines took delivery from a British firm of inventory costing
£1,450,000. Payment is due on January 31, 2014. At the same time, Pointers paid P16,500 cash
to acquire a 90-day call option for £1,450,000.
10/31/2013
12/31/2013
1/31/2014
Strike Price
P12.60
P12.60
P12.60
Spot rate
P12.61
P12.62
P12.64
Forward rate
P12.72
P12.77
P12.78
Fair Value of Call
?
P34,000
?
Option
Given the information above, compute for the following:
Foreign exchange gain or loss on option contract due to change in time value on December 31,
2013, and foreign exchange gain or loss due to change in intrinsic value on January 31, 2014.
A. P3,000 gain; P29,000 gain
C. P10,500 loss; P29,000 gain
B. P10,500 loss; P14,500 gain
D. P3,000 gain; P14,500 gain
PROBLEM 9
Manila Company sold merchandise for 315,000 pounds to a customer in London on November
01, 2013. Collection in British pounds was due on January 30, 2014. On the same date, Manila
entered into a 90-day futures contract to sell 315,000 pounds to a bank. Exchange rate for pound
on different dates are as follows:
Nov. 1
Dec. 31
Jan. 31
Spot rate
P51.3
P52.6
P51.8
30-day futures
P52.2
P52.4
P53.1
60-day futures
P51.7
P52.1
P52.5
90-day futures
P50.5
P52.5
P53.3
How much is the net foreign exchange gain or loss on January 30, 2014?
A. P63,000 loss
B. P31,500 loss
C. P63,000 gain
P31,500 gain
D.
PROBLEM 10
On November 1, S Company entered into a firm commitment to sell a machinery. Delivery and
passage of title would be on February 28, 2014 at the price of $15,750 Singapore dollars. On the
same date, S Company entered into a 120-day forward contract with China Bank to sell the
$15,750 Singapore dollars. Exchange rate were as follows:
Spot rate
Forward rate
November 01, 2013
P46.25
P44.30
December 31, 2013
P47.40
P46.70
February 28, 2014
P49.50
P49.50
How much is the foreign exchange gain or loss recognized by S Company on the firm
commitment on December 31, 2013?
A. P18,112.50 gain
B. P18,112.50 loss
C. P37,800 loss
P37,800 gain
D.
PROBLEM 11
SBC Company bought merchandise for €625,000 from a French company on December 1, 2013.
Payment in Euros was due on February 28, 2014. On the same date, SBC entered into a 90-day
futures contract to buy €625,000 from Metro bank. Exchange rates for Euros on different dates
are as follows:
Dec. 1
Dec. 31
Feb. 28
Spot rate
P61.55
P62.85
P62.05
30-day futures
P62.45
P62.65
P63.35
60-day futures
P61.95
P62.35
P62.75
90-day futures
P60.75
P62.75
P63.55
How much is the foreign exchange gain/loss on the forward contract on February 28, 2014?
A. P500,000 loss
B. P187,500 loss
C. P187,500 gain
D. P500,000 gain
PROBLEM 12
GV Company anticipates the price of cement will increase the coming months. Therefore, it
decides to purchase call options on cement as a price-risk hedging device to hedge the expected
increase in prices on a forecasted purchase of cement. On December 1, 2013, GV purchased call
options for 1,200 sacks of cement at P165 per sack at a premium of P5 per sack, with a March
31, 2014 call date. The following is the pricing information for the term of the call:
Date
Market Price
Fair Value of Option
Contract
December 1, 2013
P165
December 31, 2013
P168
P7,500
March 31, 2014
P172
On March 31, 2014, GV exercised the option and acquired 1,300 sacks of cement. On May 15,
2014, GV sold all the sacks of cement for P176 per sack.
How much is the net income in 2014?
A. P13,600
B. P9,700
C. P7,600
D. P1,400
PROBLEM 13
On July 1, 2013, Peru Company purchased 1,750 shares of Lima Corp. common stock at a cost
of P75 per share and classified it as an available for sale security. On October 1, Peru Company
purchased an at-the –money put option on Lima Corp. at a premium of P24,500 with a strike
price P115 per share and an expiration date of April 2014. Peru Company specifies that only the
intrinsic value of the option is to be used to measure effectiveness. The following shows the fair
value of the hedged item and the hedging instrument.
10/1/13
12/31/13
3/3/14
4/17/14
Lima’s share price
P115
P103
P95
P95
Intrinsic value
0
P21,000
P35,000
P35,000
Time value
P24,500
P15,050
P3,710
0
Fair value
P24,500
P36,050
P38,710
P35,000
What is the cumulative effect on retained earnings of the hedge and sale?
A. P10,500
B. P70,000
C. P45,500
D. P80,500
PROBLEM 14
TRANS Corp. owns a subsidiary in Singapore whose statement of financial position in
Singapore Dollars for the last two years follow:
December 31, 2012 December 31, 2013
Assets
Cash and cash equivalents
S$ 450,000
S$
375,000
Receivables
1,837,000
2,212,500
Inventory
2,400,000
2,550,000
PPE, net
3,825,000
3,450,000
Total Assets
S$ 8,512,500
S$ 8,587,500
Liabilities and Equity
Accounts Payable
S$
825,000
S$
1,125,000
Long-term debt
Common stock
Retained earnings
Total Liabilities and Equity
Relevant exchange rates are:
January 1, 2012
December 31, 2012
December 31, 2013
Average 2012
September 12, 2012
4,837,500
1,725,000
1,125,000
S$ 8,512,500
4,275,000
1,725,000
1,462,500
S$ 8,587,500
S$ 1 = P 45
S$ 1 = P 42.50
S$ 1 = P 47.50
S$ 1 = P 43.75
S$ 1 = P40
TRANS Corp. formed the subsidiary on January 1, 2012. Income of the subsidiary was earned
evenly throughout the years and the subsidiary declared dividends worth S$75,000 on September
12, 2012 and none were declared during 2013.
How much is the cumulative translation adjustment for 2013?
A. P9,093,750 B. P8,531,250
C. P15,093,750
D. P13,125,000
JOINT ARRANGEMENTS (IFRS 11)
PROBLEM 1
GX Builders Corp. and JQ Progress Co. are two companies whose business are the construction
of many types of public and private construction services. They set up a contractual arrangement
to work together for the purpose of fulfilling a contract with the government for the construction
of a motorway between two cities for P144 million fixed price contract.
The contractual arrangement determines the participation shares of GX and JQ and establishes:
 Joint control of the arrangement
 The rights to all assets needed to undertake the activities of the arrangement are shared by the
parties on the basis of their participation shares in the arrangement.
 The parties have joint responsibility for all operating and financial obligations relating to the
activities of the arrangement on the basis of their participation shares in the arrangement; and
 The profit and loss resulting from the activities of the arrangement is shared by GX and JQ
on the basis of their participation shares in the arrangement.
In 2013, in accordance with the agreement between GX and JQ:
 GX and JQ each used their own equipment and employees in the construction activity
 GX constructed three bridges needed to cross rivers on the route at a cost of P48 million
 JQ constructed all of the other elements of the motorway at a cost of P60 million.
 GX and JQ shares equally in the P144 million jointly invoiced to and received from the
government.
1. What is the gross profit of the joint arrangement?
A. P48 million
B. P84 million
C. P36 million
D. P24 million
2. What is the gross profit earned by GX in 2013?
A. P36 million
B. P84 million
C. P24 million
D. P12 million
PROBLEM 2
Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity
DP) for the purpose of acquiring and operating a shopping centre. The contractual arrangement
between the parties establishes joint control of the activities that are conducted by entity DP. The
main feature of entity DP’s legal form is that the entity, not the parties, has rights to the assets
and obligations for the liabilities relating to the arrangement. These activities include the rental
of the retail units, managing the car park, maintaining the centre and its equipment, such as lifts,
and building the reputation and customer base for the centre as a whole.
The terms of the contractual arrangement are such that:
 Entity DP owns the shopping centre. The contractual arrangement does not specify that the
parties have rights to the shopping centre.
 The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to pay
any of its liabilities, the liability of each to any third party will be limited to the parties
unpaid contribution.
 The parties have the right to sell or pledge their interests in entity DP
 Each party receives a share of the income from the shopping centre (rental income net of
operating costs) in accordance with its interests in entity DP.
Transactions of the contractual arrangement for 2012 and 2013 follow:
2012
 RK and SV contributed P60 million each for a ½ interest in the net assets of Entity DP.
 Organization expenses incurred amounts to P600,000.
 Entity DP acquired land at a cost of P12 million.
 Constructed a building (shopping centre) at a cost of P90 million.
 Operating expenses for the year amounts to P6 million.
 Rental income collected from the tenants, P60 million
 Net income or loss is distributed to the venturers in accordance with their interest.
2013
 Operating expenses (including depreciation) incurred for the year, P21 million
 Rental income collected for the year, P72 million
 Each venture receives a share of the income or loss from rental income net of the operating
expenses.
1. What is the interest of RK Developers in the joint venture as of December 31, 2012?
A. P84 million
B. P86.7 million
C. P90 million
D. P120 million
2. What is the net income (loss) of entity DP on December 31, 2013?
A. P51 million
B. P72 million
C. P93 million
D. P63 million
3. What is the interest of SV Holdings in the joint arrangement as of December 31, 2013?
A. P112.2 million
B. P87 million
C. P60 million
D. P84 million
*** END ***
Solutions:
1. Business Combination – acquisition
BUSINESS
COMBINATION - ACQUISITION.xlsx
2. Business Combination – subsequent
BUSINESS COMBI SUBSEQUENT.xlsx
3. NGAs and NPOs
NGAs and
NPOs.xlsx
4. Partnership
PARTNERSHIP
FORMATION.xlsx
5. FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS
FOREX _
DERIVATIVES + JOINT VENTURES.xlsx